A Litigious Niche: Analyzing the STIIIZY Lawsuits & What They Mean for Your Cannabis Business

While STIIIZY has built a dominant market presence, its sprawling litigation history serves as a cautionary tale of the friction between high-speed growth and high-stakes oversight. By examining these three pillars of risk, we can see how operational gaps in a “startup” culture quickly transform into massive enterprise liabilities.

The Biggest Threat: Product Liability and Failure to Warn

One of the biggest concerns that opponents of legal cannabis raised was targeting children, and STIIIZY has found itself at the center of the controversy. The cannabis giant has faced multiple lawsuits alleging that they have been targeting minors with their packaging and that STIIIZY’s vape products are highly potent and caused Cannabis-Induced Psychosis (CIP) in high schoolers.

There are several bases for these suits. The first and largest are several product liability claims around STIIIZY’s cannabis products, including that STIIIZY pods cause cannabis-induced psychosis and failure to warn consumers of potential negative health risks from continued use of high-potency cannabis products.

Additionally, this STIIIZY lawsuit alleges negligence on the company’s part in targeting minors with deceptive marketing practices. Perhaps the most potentially damaging claim is fraudulent concealment—that STIIIZY knew there were health risks associated with their cannabis products and ignored them, to the detriment of consumers.

Cannabis Use & Cannabis-Induced Psychosis

While cannabis induced psychosis is still a poorly understood diagnosis, it is thought to be a severe mental illness that causes lasting mental health issues and health risks from continued use of high-potency THC products, like STIIIZY vape products.

If marijuana brand STIIIZY is found to have engaged in deceptive marketing tactics or targeting minors with their cannabis products, it will be a devastating blow for the multistate operator.

The Compliance Trap: Mislabeling and Deceptive Marketing in Hemp Products

The STIIIZY hemp lawsuit is a class action lawsuit, filed by consumers in Illinois, alleging that STIIIZY’s D-8 THC hemp products contained in excess of the 0.3% THC legal limit set by the Farm Bill—sometimes up to 200% more THC than is allowed in hemp products. The lawsuit alleges that STIIIZY pods were intentionally mislabeled on the packages to engage in deceptive marketing to sell cannabis products with fewer regulations.

The basis for the STIIIZY hemp lawsuit is violations of the Consumer Fraud and Deceptive Business Practices Act. In addition to fraudulent behavior, mislabeling packaging puts people at health risks, and fails to adequately warn consumers of what’s in the STIIIZY products they’re consuming. This case highlights the risks of operating in the legally ambiguous hemp market.

STIIIZY claims that the plaintiffs did not test the products in question and has requested that this case be dismissed.

Lawsuits from Inside: Corporate and Employment Disputes

Yet another STIIIZY lawsuit comes from inside the company.

STIIIZY’s record of alleged labor law violations date back to 2022, when an employee filed a suit alleging that STIIIZY denied employees breaks, both 10-minute rests and meal breaks, as well as failed to pay out for overtime and business expenses. The suit also alleged that STIIIZY required employees to complete off-the-clock work before their shifts started. The outcome of this case has not been publicized.

But clearly, the risk didn’t sink in. Another STIIIzy lawsuit was filed in 2024, alleging (again) unpaid overtime and inaccurate wage statements.

The risk of litigation isn’t just external; rapidly growing companies without strong corporate governance or a culture of compliance create internal vulnerabilities by ignoring regulations.

While the STIIIZY cases seem like an outlier of litigious intent, they’re also indicators of several systematic triggers that all businesses in the cannabis industry face.

The 280E Effect

Regulatory Uncertainty & Fragmentation: Federal law conflicts with state law in every state that has a recreational or medical program, creating a massive amount of confusion. Combine that with the burden of IRS Tax Code 280E, and you have a perfect storm of bureaucratic hardships that push companies towards risky behaviors, like cutting costs through cutting corners.

Product Efficacy and Safety

Every state sets its own testing standards. This lack of unification means that contamination claims, including pesticides and heavy metals, as well as potency inflation claims, proliferate, creating a pipeline that feeds into product liability lawsuits.

Capital Constraints and Poor Governance

With limited access to traditional banking services, cannabis companies are forced to rely on private equity financing and complex early-stage partnership agreements, which can lead to bitter contract disputes from partners and shareholders down the line.

The Rise of the Plaintiffs’ Bar

The cannabis industry has its own version of an ambulance-chasing attorney, pushing the view that cannabis is the new opioids, a dangerous, high-profile substance that ratchets up the intensity of lawsuits.

Some lawsuit factors are out of a company’s control. Leaders would be best served by focusing on a number of factors that remain firmly within the scope of a company’s control.

Compliance as a Central Profit Center

Compliance is black and white; pay the cost of compliance proactively, or pay a heftier fine later. Being proactive about legal compliance is one of the best ways for a cannabis company to avoid a lawsuit landmine. When viewed through the lens of risk mitigation rather than overhead costs, compliance becomes easier to integrate.

Consider hiring a Chief Compliance Officer (CCO) who reports directly to the top to oversee compliance in all aspects of the business. Additionally, every cannabis company should have rigorous and detailed Standard Operating Procedures (SOPs) for every stage of the process, particularly for testing validation as a legal safeguard.

Advertising and Marketing Integrity

One of the most hotly debated aspects of the STIIIZY cases is their alleged marketing to minors. This is a risk cannabis companies simply cannot afford to take. Every company must adhere to strict packaging policies that adhere to youth-prevention standards. This includes not ripping off established brands of candies and cookies in an effort to differentiate your product. Stand on your own excellence.

Potency inflation is also at the center of STIIIZY’s lawsuits. There can be zero tolerance for potency inflation in the cannabis industry, including misrepresenting how much THC a hemp product contains. The hemp industry is not a get out of jail free card; if a product crosses the legal threshold for THC content, it must be labeled and treated as marijuana, not hemp.

Internal HR and Corporate Governance

Being good to your employees isn’t a silver bullet for cannabis companies; it’s foundational to business success across all industries. While employee discounts and rewards are subject to each company, there can be no uncertainty around labor compliance.

Employees must be allowed and encouraged to take their legally-mandated breaks for rest and meals, and under no circumstances should be encouraged to work during these. A proactive workforce audit can be helpful in identifying gaps in compliance to labor laws.

Additionally, employment contracts should be set up with clear language and the potential of dispute resolution in mind, such as mandatory arbitration to internally solve a problem.

What insurance policies do you need in place in order to protect your assets when litigation strikes? Let’s explore a few vital policies and the customization they require to properly protect the cannabis industry.

As always, this list is meant to be a guide—a starting point to building a robust umbrella of insurance coverage. All policies should be discussed with a cannabis insurance broker for the most comprehensive protection.

Product Liability Insurance

Much of the STIIIZY lawsuits, including the STIIIZY class action lawsuit, stem from product liability claims.

This policy is absolutely vital for all product-touching cannabis businesses in every stage of the supply chain. However, many general product liability policies have a blanket exclusion on federally illegal substances. In order for a product liability policy to provide adequate protection, it must explicitly include cannabis operations—which is why working with a specialized broker is so vital.

Additionally, this policy must have sufficient limits for product defects (at least $1 million) as well as failure-to-warn claims.

D&O (Directors & Officers) Coverage

If STIIIZY’s board members had their personal assets at risk every time a lawsuit was filed, it would be nearly impossible to keep the company staffed and running. That’s where D&O insurance comes in.

If you have board members or C-suite officers, your company needs D&O coverage to protect the personal assets of executives against lawsuits stemming from shareholders, investors, or corporate governance claims.

General Liability and Property

While these policies are foundational to any insurance umbrella, it must be customized for the right coverage: physical premises risks and crop loss, without any endorsements that call out “controlled substances.”

Litigation may be an unfortunate cost of doing business, but the STIIIZY lawsuits show that some costs are manageable while others are simply part of existing in the cannabis industry. Litigation stemming from claims of cannabis induced psychosis or mislabeling can be avoided completely, with the proper safeguards and procedures.

If companies take away anything from the STIIIZY lawsuits, it should be that proactive risk management and a robust umbrella of insurance are not optional or luxuries—they are non-negotiable requirements for survival in this industry.

Risk management and insurance are vital safety nets for cannabis companies, providing bottom-line protection for the people who have invested everything into this turbulent and often litigious industry. But in the same breath, many lawsuits regarding cannabis use are completely avoidable if companies put compliance at the forefront of their mission.

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 email info@alpharoot.com or calling 646-854-1093 for a customized letter or learning more about your cannabis insurance options.