Disgruntled employees, customers, or even competitors can damage any organization’s reputation. But for cannabis businesses, principals accused of misconduct also face crippling fines, licensing concerns, and potential jail time. Fortunately, there are a variety of practical, low-cost preventive measures available to reduce the risk of harm.
What qualifies as business defamation?
False statements that ruin a business’s reputation or cause significant financial harm fall under business defamation. The statements must be presented as fact to a third party, such as law enforcement or a journalist, to be considered defamatory.
Notable incidents of business defamation in the cannabis industry
Business defamation can come from any number of sources, including competitors and disgruntled customers. In the cannabis industry, there have been several notable examples of defamation that came from former disgruntled employees, highlighting the importance of proper employee-employer behavior and relations.
Care By Design
The highly publicized police and DEA raid of California’s Care By Design in 2016 — and seizure of its cash, equipment, and paperwork — outraged the entire cannabis community.
Care By Design (then also known as CBD Guild) has a stellar reputation for transparency and regulatory compliance. It is among California’s most respected medical marijuana operations, and, just prior to the raid, had been educating regulatory agencies and legislative offices as they drafted California’s proposed recreational regulations.
The cannabis community rallied behind CBD Guild owner Dennis Hunter, who, in connection with the raid, was arrested on felony charges for allegedly manufacturing a controlled substance by butane extraction. Bail was initially set at $5 million, an abnormally high amount. Hunter was ultimately exonerated after an investigation revealed that the allegations had been fabricated by a disgruntled former employee. The case was settled in 2018.
Vireo Health
Vireo Health also found itself subject to a criminal investigation in 2015, resulting in charges that were dropped in 2019. According to these allegations, the company used one of its armored vehicles to illegally transport approximately $500,000 worth of cannabis oil from Minnesota to New York to meet New York’s production deadline and save the company from financial ruin.
Vireo Health is one of New York’s earliest licensed medical cannabis organizations and also owns MinnMed, one of the first licensed medical cannabis organizations in Minnesota.
Vireo Health’s management denied the allegations, issuing a statement that inventory discrepancies were due to inadequate tracking software designed for dried flower, not plant extracts, which led to confusion regarding destination labeling. (More than 400 industry professionals have signed a petition calling for improvements to this tracking software.)
Vireo Health stated that any excess Minnesota product had been destroyed, not transferred, and that the armored car was moved to New York for security reasons. The company also stated that Vireo Health is “financially sound,” and that there was no inventory shortage in New York.
As with Care By Design, the allegations against Vireo Health were spurred by a disgruntled former employee, who had also tampered with laboratory equipment and threatened further harm prior to his departure.
Steel, Wright, Gray
Plant-touching entities are not the only cannabis businesses where disgruntled former employees have spurred defamation litigation. In October of 2023, Steel, Wright, Gray, a law firm that was involved in the Arkansas medical cannabis industry, filed a defamation suit against a former law partner and several dispensary owners.
The defamation suit was filed in response to a fraud and malpractice lawsuit. Dispensary groups filed the lawsuit against the firm regarding the creation of ownership groups in the lucrative cannabis dispensary business. The lawsuit alleged that Nate Steel and Alex Gray manufactured local ownership groups to obtain medical cannabis licenses. Steel, Wright, Gray denied the allegations. Marshall Wright, a former Steel, Wright, and Gray partner, was a member of one of the plaintiff dispensary groups.
Wright’s dispensary group owned two medical cannabis operations in Arkansas, but alleged that they had little control over them. The group became “adverse” to the management company running their dispensaries and hired Gray and Steel to find a buyer. Eventually, they hired a different attorney. Then, allegedly, Wright and other members of the dispensary group defamed and disparaged Steel and Gray to clients and other professionals in the cannabis industry, leading to the loss of at least one client. The case has since been dismissed.
The Steel, Wright, Gray matter highlights the kind of employee disputes that can create defamation litigation. Cannabis businesses must be wary of entering transactions without clarifying that all participants understand the terms of the agreement, even with their partners or employees. Otherwise, discontent with a deal could result in disparaging, or even defamatory, statements causing loss of business.
Trulieve
Trulieve Cannabis differs from the prior examples in that Trulieve alleged it was defamed by a political party rather than a disgruntled employee. However, this recent litigation illuminates a problem common to all defamation suits.
Trulieve, which has billed itself as the world’s largest cannabis retailer, filed a defamation lawsuit against the Florida Republican Party. The lawsuit came after Trulieve spent almost $144.5 million supporting a 2024 failed attempt to legalize adult-use cannabis in Florida. Trulieve alleged that state Republicans, along with two television stations, ran deceptive television marketing campaigns to trick voters into voting against adult-use cannabis. The suit was dismissed in March of 2025.
Interestingly, one of the allegedly defamatory statements made in these marketing campaigns mirrored statements made by pro-cannabis activists regarding perceived issues with the proposed program. This case illustrates the difficulty of proving that a statement is defamatory rather than simply negative.
How to minimize the risk of former employees defaming your business
As the saying goes, an ounce of prevention is worth a pound of cure. Among the myriad reasons to keep employees happy is to minimize any potential defamation-related issues stemming from a fallout with an employee. Here are some initiatives that any company should consider enacting.
Set up infrastructure for collecting employee feedback
Have a business culture that incentivizes participation and feedback from every employee. Learn to recognize disgruntled conduct, such as lack of motivation or passion, recent personal crises, or complaints by fellow employees. Document and address these complaints, and invite departing employees — those who quit or were terminated — to conduct exit interviews. At this interview, ask about:
- The employee’s experience with the company, including their reason for leaving
- What their new position offers that the old one did not
- Where they see room for improvement within the company
- Their comfort level in addressing problems at the company
- Why they would (or would not) recommend their prior position
- If there are any unresolved issues
A properly designed exit interview may allow you to anticipate false whistleblowing allegations and preserve an amicable relationship between employer and former employee.
Make it contractual
Another strategy is to enforce confidentiality agreements and require all employees to sign non-disparagement provisions. Such provisions are frequently included in employment, severance and settlement agreements, and in employee handbooks. A non-disparagement provision must be individualized, not boilerplate.
There are several provisions worthy of inclusion to ensure the maximum likelihood of enforceability.
- First, define “disparage” — a term that is open to interpretation — to include, among other things, “any negative statement, whether written or oral.” Providing such clarity may reduce the likelihood of any defense that a particular statement is not disparaging.
- Second, include a mechanism by which damages for breach of the non-disparagement provision may be calculated. Be sure to indicate that any amount set forth is a “reasonable estimate” of damages that may be suffered in the event of a breach, that the parties agree that the amount is “fair and reasonable,” and that the amount indicated “is not a penalty.”
- Third, include “carve-outs” to any non-disparagement provision which: (a) allow employees to speak candidly with agents of the SEC, FINRA and state securities and cannabis regulatory authorities; and (b) indicate that the provision is not intended to impose a “chilling effect” on employees’ rights to engage in concerted activity protected under the National Labor Relations Act — regardless as to whether the workplace is unionized. Such provisions are necessary to comply with federal law.
- Lastly, indicate that the non-disparagement provision constitutes a “material term” of the agreement, the absence of which would result in your refusal to enter into the agreement.
With these precautions, you may minimize your risk of becoming the next target of a bogus raid or public lawsuit.
Proper contracts can help prevent a messy business defamation incident
Business defamation can still cause irreparable harm to a company, even if it doesn’t get to the disastrous level of a DEA raid. While a number of parties may spread damaging rumors, the source most in your control is your workforce. By implementing the right clauses and provisions in your employee contracts and building a feedback-friendly culture, you can minimize the possibility of defamation harming your business. To guide you on the best practices on this and other employment matters, or for help building risk-reducing employee agreements, contact the experienced cannabis industry attorneys at Rudick Law Group.
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