Why Leafly Sued New York [and What It Means for Cannabis E-commerce]

Leafly is a leading cannabis technology platform that’s gained notoriety for dispensary advertising and e-commerce. The company describes itself as “the world’s most trusted destination to discover cannabis products and order them from legal, licensed retailers.”

On Leafly, consumers can research dispensaries, browse menus, purchase products, and read real-life customer reviews. It’s massively popular with both customers and dispensaries and holds a wealth of cannabis information with 5,000 strains in its database. It’s also one of the leading platforms for dispensaries to advertise on. That’s where the trouble arose.

Back in September, the Office of Cannabis Management (OCM) revealed new regulations for governing the state’s nascent industry which included a ban on third-party marketing. This ban is not technically new, as it’s been a part of the regulations since 2021 when the MRTA passed, but with dispensaries opening across the state, Leafly is taking action now.

Leafly is claiming that the ban harms small businesses and consumers, stating they “hamstring the industry and restrict retailers’ ability to market and promote products.” The suit alleges that “the marketing bans are arbitrary, capricious and inconsistent with the MRTA. [They are also] unconstitutionally vague and violate the right to free speech.” This language around unconstitutionality and free speech has been cited in other lawsuits against the OCM.

The OCM can’t seem to catch a break. In addition to the other outstanding lawsuits against the office, Leafly filed this one in early September. The New York attorney general agreed with the OCM to stay enforcement of this regulation but was overruled by a judge who granted Leafly an exemption. This exemption makes Leafly the only third-party platform currently allowed to host cannabis advertising in the state.

The OCM then tried to get the case moved to federal court in October, but it was remanded back to state court after the judge decided the case did not meet the right criteria. When the suit was first filed most experts alleged that it would be quickly settled, but the case is now looking like it will be yet another drawn-out fight for the OCM.

The issue at heart here is a business’ right to advertise versus compliance regulations needed to govern an industry. As an e-commerce platform, Leafly found themselves in the middle of this issue.

Advertising is one of the trickiest areas of compliance for a cannabis business to navigate. Regulations are historically strict — just look at the Canadian industry, where logos and branding of any kind are not allowed on product packages.

Remaining in compliance with local, state, and federal regulations is an ongoing task for any canna-business owner. Coupled with a limited marketing budget, it’s easy to see how restrictive advertising bans can undercut a business already strapped for cash and time.

This is not the first case brought against the OCM, but it is the first case of its kind in the state which means this ruling could set precedence.

The OCM has a duty to enforce compliance with the rules and they aim to protect minors from excessive cannabis advertising. However not being able to advertise puts a burden on cannabis businesses, who want to use their small marketing budgets in the most effective way possible. Canna-business owners may want Leafly to prevail, but the OCM is already struggling with public scrutiny due to the delayed roll-out of legal cannabis and the other ongoing lawsuits.

However Leafly’s experience with regulatory oversight turns out to inform both the future of other online cannabis businesses in New York and cannabis marketing regulations.

Compliance is not the only risk that cannabis e-commerce platforms must navigate. There are the typical business risks like general liability and cyber liability, but there’s also industry-heightened risks, like product liability.

These risks can be mitigated with a comprehensive suite of cannabis insurance policies. (and yes, there’s a policy for compliance.) No two companies are exactly alike, but there are a few policies that e-commerce brands should have, including:

General liability insurance

General liability insurance, or “all-risk” coverage, protects your business from primary risks. This includes any claim arising from a harmful incident that took place within your dispensary premises.

Cyber liability insurance

The average cost of a data breach as of 2022 was $4.3 million, which explains why 60% of businesses fail within one year of cybersecurity breaches. Whether a data breach happens because of inadequate cyber security or due to an employee’s mistake, vicious cyber criminals do everything to break a business.

Product liability insurance

Cannabis dispensaries sell tangible products that can constantly be subjected to product liability claims. This puts dispensaries in a constant risky state, making product liability insurance a must-have for every dispensary owner.

In this instance, Leafly is suing NY. But in other situations, having the right insurance policies in place can actually help e-commerce businesses avoid legal action.

So how can e-commerce platforms protect their operations from legal action? Following best practices for compliance, risk assessment, and operational success is no guarantee, but it’s a good place to start.

Rigorous compliance protocols should be a standard part of doing business for cannabis e-commerce platforms. While these businesses are not plant-touching, they deal heavily with cannabis products and are still subject to strict rules and regulations around cannabis advertising.

A comprehensive risk management plan helps any business take stock of exposures from all sides. Creating this plan may feel superfluous for an already-strapped business owner, but you can’t manage risks you’re not aware of. Use our 5-step risk management plan as a starting point, and engage legal counsel as needed to complete it.

Protecting your cannabis company can seem confusing; however, we’re a full-service insurance brokerage working with carriers worldwide to offer you the best coverage possible. We’re here to help! Please reach out to us today by emailing [email protected] or calling 646-854-1093 for a customized letter of commitment or learning more about your cannabis insurance options.