Potter v. PotNetwork Holdings: Settlement, Fees, and Aftermath

The Potter v. PotNetwork Holdings settlement resolved a 2019 class action alleging that Diamond CBD products contained less cannabidiol than their labels claimed. Signed on August 17, 2020, the deal gave eligible customers $10 vouchers redeemable on the Diamond CBD website, paid the named plaintiff $5,000, and paid her attorneys $200,000 in installments running through January 2023. The defendants admitted no wrongdoing, and the case was dismissed with prejudice.¹

The unusual feature of the deal was how the attorneys’ fees were secured: with a convertible promissory note backed by PotNetwork’s publicly traded common stock, which the law firm could convert into shares if the company missed a payment.

What the Lawsuit Claimed

Kathryn Potter filed the complaint on September 27, 2019 in the U.S. District Court for the Southern District of Florida against PotNetwork Holdings, Diamond CBD, and First Capital Venture Co. She had spent $119.97 on Diamond CBD products and alleged the CBD content fell well short of what the labels promised.²

Three products were at issue: Chill Gummies Watermelon Slices (labeled 150 mg), Unflavored Diamond CBD Oil (labeled 550 mg), and Diamond CBD Infused Gummy Worms (labeled 75 mg).¹ Potter brought claims under the Florida Deceptive and Unfair Trade Practices Act and for unjust enrichment, seeking to represent a nationwide class of buyers.³ In March 2020 the court dismissed her injunctive-relief and non-purchased-product claims for lack of standing but let the FDUTPA, unjust enrichment, and breach of express warranty claims proceed. The parties then went to mediation.²

What the Settlement Provided

The settlement had four moving parts.¹

Diamond CBD agreed to email a $10 voucher to each eligible class member. Eligibility ran to customers who bought one of the three targeted products between January 1, 2015 and July 15, 2020. The vouchers had no expiration date and no usage restrictions on the Diamond CBD website.
The defendants were to pay Kathryn Potter $5,000 by August 15, 2020.
The defendants agreed to pay $200,000 in attorneys’ fees to Potter’s counsel, Kopelowitz Ostrow P.A. of Fort Lauderdale, in 30 installments between August 2020 and January 2023. The schedule opened with a $10,000 installment and continued with monthly payments of $5,000 or $7,500.
The defendants had to submit quarterly reports confirming voucher usage and, on request, provide documentation verifying that products contained the ingredient levels stated on their labels.

The terms were designated confidential, with carve-outs for legal and financial advisors and for legally required filings. Those SEC filing exceptions are what put the agreement on the public record.¹

How the Attorneys’ Fees Were Backed by Stock

To guarantee the $200,000 fee obligation, the defendants executed a convertible promissory note and directed PotNetwork Holdings to reserve shares of its common stock (ticker POTN) with the company’s transfer agent.⁴

The conversion feature worked as a backstop. If the defendants missed an installment and failed to cure within three days, Kopelowitz Ostrow could ask the transfer agent to convert the outstanding balance into POTN shares. The share count was calculated by dividing the amount due by the seven-day average closing price of POTN immediately before the conversion request.¹

Two guardrails limited how much stock the firm could hold or dump. Conversions were capped at 4.999% of outstanding shares if PotNetwork was an SEC reporting issuer, or 9.999% if it was not. Any shares received could be sold on the open market, but not below 90% of the five-day volume-weighted average price.⁴

What Became of the Company

PotNetwork Holdings stopped filing periodic reports after its annual report for the period ending December 31, 2020, which reported net income of $5,584,669.⁵ In February 2022, the board and majority stockholders approved a name change to Diamond Wellness Holdings, Inc., effective June 15, 2022.⁶

The SEC sent a delinquency letter that went unheeded and, on April 20, 2023, opened administrative proceedings against Diamond Wellness Holdings for failing to file any periodic reports since 2020, in violation of Section 13(a) of the Securities Exchange Act.⁵ The company submitted an offer of settlement without admitting or denying the findings. On June 8, 2023 the SEC accepted it and revoked the registration of all classes of the company’s securities effective the next day.⁷ The company is no longer publicly traded and is listed as out of business.⁸

1
SEC.gov. PotNetwork Holdings Settlement Agreement Exhibit
2
GovInfo. Potter v. PotNetwork Holdings, Order on Motion to Dismiss
3
Truth in Advertising. Potter v. PotNetwork Holdings Class Action Complaint
4
Justia Contracts. Potter v. PotNetwork Holdings Settlement Agreement
5
SEC.gov. Diamond Wellness Holdings, Order Instituting Administrative Proceedings
6
SEC.gov. PotNetwork Holdings Schedule 14C Information Statement
7
SEC.gov. In the Matter of Diamond Wellness Holdings, SEC Administrative Order
8
PitchBook. PotNetwork Holdings Company Profile