California Central District Dismisses Alleged Injury Class Action Against Canadian Cannabis Manufacturer – Corporate and Commercial Law

United States: California Central District Dismisses Alleged Injury Class Action Against Canadian Cannabis Manufacturer

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On December 8, 2021, Judge Philip S. Gutierrez of the United States District Court for the Central District of California, with prejudice, dismissed a lawsuit against a Canadian cannabis manufacturer (the “Company”), alleging that the Company had failed to disclosed important information. on its facilities in Colombia and its transactions with other companies in violation of Sections 10 (b) and 20 (a) of the Securities Exchange Act of 1934.
In re Pharmacielo Ltd. Dry. Litigation., n ° 20-2182-PSG (CD Cal. December 8, 2021). The complainants – whose complaint has already been dismissed – have amended their complaint to strengthen their claims based on an assortment of statements from the company regarding its facilities and expansion plans which the complainants say were designed to inflate artificially the price of the shares of the company. The Court dismissed the amended complaint for failure to invoke falsity or materiality and did so with prejudice because any amendments would be in vain due to their “unsuccessful attempt to remedy” the shortcomings of the previous complaint.

The complainants’ allegations were based on several statements by the company between June 2019 and March 2020 regarding: (i) the soil quality of the company’s property in Colombia (the “property” which housed a cannabis cultivation facility, and the Company’s characterization of this facility and the plans for the facility; (ii) transactions with third parties which ultimately did not materialize as the Company announced; and (iii) the unsuccessful attempt to Company to enter the cannabis market in Peru.

The Court dismissed the allegations for want of allegations of materiality or falsity, and further noted that the complainants had not alleged any new facts in the amended complaint and instead added largely irrelevant facts, relied on on vague references and repeated arguments that the Court had already rejected when rejecting the preliminary complaint.

Alleged inaccuracies and omissions regarding ownership: The Court dismissed the claims based on the Company’s statements regarding the Property.
First of all, the plaintiffs asserted that the company’s announcement that the property “produces[ed] some of the purest cannabis in the world, “”[w]with fertile soil, perfect equatorial sunshine and cutting-edge science and technology “was wrong because the property was” far from perfect “, partially located on a floodplain and contaminated with mold. But, according to the court , the complainants did not allege how these issues impacted the company’s operations, in particular because the company only produced cannabis extract oil, and not raw cannabis crops ( which could potentially be affected by the floodplain and contaminant issues), and the plaintiffs have not made any claims to suggest that the issues with the property had an impact on the company’s end product. Second,the plaintiffs alleged that the company’s statement that it was “successfully expanding its operations in Colombia and increasing its capacity”, based in part on the construction of a new research, technology and processing center on the property of ‘by the end of 2019 was wrong as construction faced significant delays. The court ruled that the statements regarding planned construction dates were not actionable because they were forward-looking statements of corporate optimism.
Third, the plaintiffs asserted that the Company’s statement that the facility on the property was its “primary” facility was substantially misleading because that facility was in fact the “only” facility in use. The Court disagreed, finding that the plaintiffs had not alleged that the distinction between “principal” and “only” was important and that it would have changed the opinion of a reasonable investor on the value of the society.

Alleged inaccuracies and omissions regarding third party transactions: The Court also dismissed the claims based on the Company’s statements relating to two agreements with third parties. First of all, the complainants alleged that the company’s failure to disclose that an agreement with a third-party multi-state distributor was a related party transaction was in itself a material omission. The court rejected the argument because the plaintiffs did not cite the authority that the non-disclosure of a related party transaction was in itselfliable to action and also noted that the plaintiffs did not allege that the transaction was a related party transaction under Canadian law which governed the company’s disclosure obligations.
Second, the complainants alleged that the Company had misled investors into believing that an agreement with a third party distributor was a “significant opportunity” to enter the German market when this third party was “almost insolvent and led by a CEO with a track record of running businesses in the field, “and the agreement ultimately did not result in the benefits the company announced of bringing the company’s products to Germany. Dismissing claims based on both third party agreements at issue, the Court held that the allegations that an agreement did not go as planned were insufficient to demonstrate a material inaccuracy or omission.

Alleged omissions regarding entry into the Peruvian market: Finally, the complainants alleged that the company’s statement that it had “laid the groundwork” and “looked forward to expanding its presence throughout Latin America” ​​was false because the company had failed to meet the bidding process to supply medical cannabis to Peru and knew he would lose his bid. The Court rejected this argument because the plaintiffs did not allege how “the loss of an offer in Peru made it deceptive [the
Company’s] optimistic statements about current or future expansion in Latin America. “

Because the Court held that any amendment would be futile based on the substance and nature of the claimants’ amended claims, the Court dismissed the action with prejudice.

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