What happened

HEXO (NYSE:HEXO) and Organigram Holdings (NASDAQ:OGI) both declined more steeply than the overall stock market on Friday (in excess of 3% in both cases).

What seems to have triggered this sell-off is a new class action lawsuit that hit the headlines that day, in which HEXO and Organigram -- among other Canadian marijuana companies -- were named as defendants.

Gavel with marijuana leaf.

Image source: Getty Images.

So what

The suit, brought by a woman named Lisa Marie Langevin, alleges that these companies sold cannabis products that contained significantly different levels of THC or cannabidiol (CBD) than advertised on their labels. Some of these products had far higher levels than indicated, or had lost potency due to being stored in containers made of plastic (which supposedly affect potency due to degradation or absorption).

The lawsuit considers all Canadians who bought medical marijuana products from HEXO, Organigram, and 13 other businesses in the sector, including Aurora Cannabis and Tilray, between June 16, 2010 and the present day to be potential members of the class.

Langevin's lawyers are asking for 500 million Canadian dollars ($368 million) in compensation. She claims that a cannabis oil product she bought in February 2020 had no effect after she consumed it.

Now what

CA$500 million isn't a huge amount when spread over 15 businesses, but every financial hit is damaging in the cash- and profitability-strapped cannabis sector. This is particularly true of relatively smaller operators like HEXO and Organigram, which are already skating on thin financial ice.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.