In a 72-page complaint filed Tuesday in San Francisco County Superior Court, plaintiff Herban Industries claims that Eaze set up a system “designed to conceal the true nature” of cannabis purchases in order to allow customers to pay with credit or debit cards. The ability to accept cards gave Eaze a tremendous advantage over competitors, says Herban, which filed the suit under California’s unfair competition law.
“Eaze’s rapid growth and dominant position are a result of the market advantage it has gained by flouting criminal laws prohibiting wire and bank fraud,” the lawsuit alleges. “To increase sales on its platform, Eaze enabled the option to complete cannabis purchases by credit and debit card, even though credit and debit card companies prohibit the use of their products and services for cannabis- and marijuana-related transactions.”
To avoid the activity being flagged as cannabis-related, the suit claims, “Eaze conspires to disguise the cannabis transactions as transactions for dog toys, dive gear, carbonated drinks, drone components, and face creams, among other things.”
The plaintiff in the lawsuit, Herban Industries, is an Oakland, CA–based cannabis company owned by DionyMed, a multistate cannabis brand headquartered in Toronto. The company is asking the court to stop Eaze from continuing the alleged practice.
In a statement to Leafly, Eaze denied the claims and suggested that the lawsuit was motivated by a desire by DionyMed to disrupt Eaze’s business and gain a competitive advantage of its own.
“This lawsuit is a thinly-veiled attempt by publicly traded Canadian company [DionyMed] to gain an advantage through litigation, prop up their failing stock price, and publicize their new delivery platform,” said Elizabeth Ashford, Eaze’s senior director of corporate communications. “The allegations are false and their attempts to hide their true motives are obvious.”
A Messy Breakup
DionyMed and Eaze used to be partners, but the two broke ties earlier this year when DionyMed decided to stop using Eaze to fulfill delivery orders. DionyMed “could not confirm that the processing procedure [used by Eaze] meets California regulatory requirements,” journalist Debra Borchardt reported in April, noted that the company said it was going to invest in its own delivery service, called Chill.
Eaze replied at the time by stressing that it does not process payments.
“As a technology platform that enables licensed cannabis retailers to fulfill on-demand delivery to consumers, Eaze does not process payments,” the company said. “We believe we and our licensed retail partners are compliant with all CA regulations.”
In its complaint filed this week, plaintiff Herban Industries claims Eaze used shell companies and other methods to prevent third-party payment processors from recognizing that the transactions were cannabis-related:
Eaze has directed and coordinated a scheme to send proceeds for credit and debit card transactions on the Eaze Platform for cannabis out of the United States, convert them into euros, and return them to United States banks in foreign currency in a manner designed to conceal the true nature of the underlying transactions. Senior Eaze personnel were and are directly involved with this process, and facilitated it in numerous ways, including by conveying communications and directions […], transmitting the credit and debit card settlement statements to the dispensaries that reflected the currency conversions and settlement dates, pressuring the dispensaries to continue accepting the credit and debit card payments despite their objections based on promises Eaze had made to its processor, and directing the dispensaries to create invoices to match the payments.
“The complaint alleges Eaze’s processing of debit and credit cards is fraudulent and illegal, and gives Eaze an unfair competitive advantage over Chill and other compliant operators,” DionyMed CEO Edward Fields said in a statement provided to Leafly. “We are completely committed to operating in a compliant way and it’s important there’s a level playing field for all participants in the cannabis ecosystem. We also believe investors have to have a reasonable expectation that all participants are subject to the same rules. Regulators, especially in California, cannot afford to put investor capital at risk by allowing illicit operators to break the law.”
Eaze’s spokesperson declined further public comment.