While that is good news for patients seeking treatment for issues like chronic pain, medical cannabis laws can cause a major headache for employers. The federal law known as the Controlled Substances Act (CSA) classifies cannabis as a Schedule I substance, meaning that under federal law, it is not currently authorized for medical treatment anywhere in the United States and is not considered safe for use even under medical supervision. So, what happens when an employee is injured at work, is eligible for workers’ compensation, and is prescribed medical cannabis to treat their work-related injury in a state that authorizes medical cannabis?
Employers are faced with a tricky dilemma: They can reimburse the employee’s medical cannabis as a reasonable medical expense and risk violating the federal prohibition against aiding and abetting the possession of cannabis. Or, they can refuse to reimburse the otherwise reasonable medical expense and risk violating the state’s workers’ compensation law.
Usually, where it is impossible for an employer to comply with both state and federal law, federal law wins—a legal concept called conflict preemption. Unfortunately for employers, however, clarity on this issue will have to wait—the U.S. Supreme Court recently declined two requests to review state supreme court cases on this issue and definitively decide whether the CSA preempts state workers’ compensation laws that require reimbursement of medical cannabis. In the absence of federal guidance, national employers with workers in different states must follow the decisions of the handful of state courts that have taken up the question. The state courts who have decided the issue have come to inconsistent conclusions—thus, whether an employer should reimburse medical cannabis will vary depending on the state where the employee is injured.
For example, in Maine and Minnesota, both states’ highest courts have concluded that employers are not required to pay for their injured employees’ medical cannabis. These courts reasoned that employers would face liability under the CSA for aiding and abetting the purchase of a controlled substance. The employer, if reimbursing employees for using medical cannabis, would knowingly subsidize the employee’s purchase of marijuana in direct violation of federal law. However, in such a case, the employer would also violate state law for refusing to reimburse the employee’s reasonable medical expenses. Deeming it impossible for the employer to comply with both laws, these states’ courts concluded that the federal prohibition on cannabis preempts the state workers’ compensation laws.
States such as New Jersey have gone the other way, requiring employers to reimburse employee’s medical cannabis. The New Jersey Supreme Court concluded that there was no conflict between the prohibitions of the CSA and the demands of the New Jersey workers’ compensation law. Thus, the federal law did not preempt New Jersey’s state law, and employers were required to comply by reimbursing medical cannabis as a reasonable reimbursement.
Meanwhile, Massachusetts followed Maine and Minnesota’s approach, but did so based on its own medical marijuana statute, not the CSA. The Massachusetts law explicitly exempts health insurance providers or any government agency or authority from the reimbursement requirement because doing so violates federal law.
Given this patchwork of state decisions, employers should be cautious in determining whether to approve or deny medical cannabis as a reasonable medical expense under state workers’ compensation laws. While the answer is relatively clear (for now) in the states discussed above, there are still over 30 states with medical cannabis programs that have not addressed this issue. It is important to note that many state medical cannabis laws include provisions like Massachusetts that exempt employers from reimbursing employees for cannabis—a clear indicator that these laws were designed with federal prohibitions in mind. But these provisions are not necessarily determinative—New Jersey’s medical cannabis law has a similar provision, yet New Jersey employers are still required to reimburse for medical cannabis.
The bottom line is that federal CSA violations can be hefty, including a mandatory $1,000 fine, possible incarceration of up to one year, and possibly more if “aggravating factors” are found, such as prior convictions. Employers should therefore pay careful attention to their respective state medical cannabis laws, workers’ compensation laws, as well as the CSA and consult with counsel to determine the best approach in their particular jurisdiction. It is likely that more of these cases will be brought in the future, so be sure to check back for further developments in this evolving area of law.
As of July 1, 2022, unregulated intoxicating THC products derived from hemp have been legalized in Minnesota, apparently as the result of confusion by state legislators about the new law’s actual effect. Although the express intent of the statute is to allow the sale of products that contain so-called “non-intoxicating cannabinoids” to consumers in Minnesota, the new law contains a massive loophole that effectively legalizes all forms of THC sold in edible products at levels that intoxicate with only a bare minimum of regulatory oversight.
This surely cannot have been the goal of many Minnesota legislators who voted for the bill. In fact, the Minneapolis Star Tribune has reported that at least one senator in the state’s Republican-controlled Senate confirmed that he did not realize that the new law would legalize edible products with all forms of THC.
The Loophole
The new law changes section 151.72 of the Minnesota Statutes by defining “non-intoxicating cannabinoid” as “substances extracted from certified hemp plants that do not produce intoxicating effects when consumed by any route of administration.” The bill then incongruously allows for cannabinoid edible products to be sold to consumers in the state so long as the product contains no more than 0.3 percent of any THC and no more than 5 mg of any THC in a single serving, or more than a total of 50 mg of any THC per package.
Most states are now being forced to grapple with how to respond effectively to the problem of unregulated intoxicating hemp cannabinoids being sold openly and online. Edible products with intoxicating levels of hemp-derived delta-8 THC, delta-9 THC, delta-10 THC and THC-O Acetate are sold widely as legal and less-expensive alternatives to regulated marijuana products. States have employed various strategies to, by varying degrees, limit, regulate or prohibit intoxicating hemp cannabinoids, and lawsuits on the subject have been initiated in several states.
No state has created a loophole quite like what exists in Minnesota’s new law. Although Minnesota seeks, at least nominally, to only allow the sale of products that contain “non-intoxicating cannabinoids,” food and beverages that contain less than 0.3 percent THC concentration may nevertheless be intoxicating due to the large amounts that may be consumed easily.
To illustrate the problem of hemp products that contain less than 0.3 percent delta-9 THC concentration but are nevertheless intoxicating, consider this:
A typical energy bar of 60 grams would be allowed to have up to 180 mg THC if limited to 0.3 percent THC concentration by weight.
Regulated cannabis edible products, by comparison, typically may be sold only in a serving size of no more than 10 mg, with a limit of up to 100 mg per package.
A four-gram hemp gummy product, however, could have 10 mg of THC and still fall below the allowable concentration threshold.
Minnesota’s new law allows up to 5 mg THC per serving and 50 mg THC per package.
The intoxicating potential here is evident. One need only consume two servings to ingest the same amount of THC allowed in a standard regulated marijuana product serving. Ingesting 50 mg of THC will heavily intoxicate all but the most jaded stoner. Nowhere in the new law, however, is there any requirement to warn that the cannabis edible product may cause intoxication when consumed as suggested.
The Goal Informs the Solution
States should focus on the goal of prohibiting or properly regulating intoxicating hemp products that are currently sold as an unregulated and less-expensive alternative to regulated cannabis. We have previously warned that any state that decides to allow hemp-derived THC in edible products must necessarily grapple with tricky questions over how to regulate maximum serving size, active cannabinoid concentration per serving size, the number of servings per container, consumer warnings and similar questions to mitigate the risk to public health and safety. Cannabis and hemp industry leaders have likewise warned against “percentage” thresholds of cannabinoids as an appropriate measure for foods and beverages for the reasons described above.
In comparison to Minnesota, other states are proceeding in a more cautious manner. California’s recent Assembly Bill 45, for example, draws attention to the above-mentioned issues but acknowledges that more study is needed by the California Department of Public Health (CDPH) before implementing regulations are issued. The bill provides that CDPH “may regulate and restrict the cap on extract and may cap the amount of total THC concentration at the product level based on the product form, volume, number of servings, ratio of cannabinoids to THC in the product, or other factors, as needed.”
Analysis
Exacerbating the problem is the fact that product contamination, label inaccuracies and outright fraud are pervasive within the hemp cannabinoid market. Products often are marketed with misleading or false claims, and many fail to incorporate any explicit warning of intoxicating effects. Because the Minnesota statute incorrectly assumes that consumers will not become intoxicated from compliant cannabis edible products, no such warnings are mandated. This is a mistake.
It appears that better education around hemp-derived edible products could have led to more thoughtful legislation in Minnesota. This example may nevertheless provide a learning opportunity for other states that are studying how to regulate intoxicating hemp products.
But one legitimate question we’re often asked is what we think the cannabis market will look like in Mississippi. And, more specifically, whether Mississippi’s new medical cannabis regime will be similar to the one in Oklahoma.
It’s a loaded question, and one we suspect many questioners don’t fully appreciate. On the one hand, Oklahoma’s medical cannabis program has been compared to the Wild West. At last count, there were more medical cannabis dispensaries than liquor stores or supermarkets in the state. Many have concluded that this is a bad thing and/or that the program is a failure. Others have deemed the program a triumph of capitalism, a survival-of-the-fittest trial where only the “best” will survive.
As is often the case, we think the answer is probably somewhere in the middle.
On the one hand, the obvious and primary similarity between the programs is the absence of an expressed cap on the number of licenses available. While most states limit the number of licenses available, neither Oklahoma nor Mississippi does so. Many believe this feature will lead to Mississippi following the lead of Oklahoma in terms of the proliferation of dispensaries throughout the Magnolia State.
On the other hand, there are a number of differences between the two states and their statutes that indicate to us that Mississippi’s regime will differ in several important ways – ways we are seeing play out now. First, while the license fee for a dispensary in Oklahoma is $2,500, the fee in Mississippi is $25,000, 10 times the amount. And that amount is owed annually and is in addition to the initial $15,000 application fee. As a practical matter, and for better or worse, this feature alone should significantly cull the number of dispensaries because it provides a substantial barrier to entry into the industry.
Second, there may be significantly fewer locations available to open a dispensary in Mississippi than one would expect due to several geographic-limiting features of the law. Initially, localities have until May 3 to opt out of the medical cannabis regime, and several cities have already done so. Also, dispensaries cannot be located within 1,000 feet of any church, school, or daycare facility. For those unfamiliar with Mississippi, it may be tough to find anywhere in the state that isn’t within 1,000 feet of a church. Even more, the law forbids one dispensary from being within 1,500 feet from another dispensary, and dispensaries are only permissible in commercially zoned areas.
Third, the cannabis industry examining the Mississippi market will have the benefit of having lived through the Oklahoma experience. This is likely to minimize the “goldrush” mentality seen in Oklahoma’s early days. Instead, look for larger players to let the dust settle and come in looking to acquire operators who proved successful breaking out of the initial melee.
Conclusion
It seems possible that, at least in the early years, the Mississippi medical cannabis regime may more closely resemble Oklahoma than a state like Florida with strict limitations on the number of licenses. But our prediction is that certain aspects of Mississippi law and culture will lead to less of a free-for-all at the outset, hopefully leading to a more efficient and more orderly transition to a rational cannabis market in Mississippi.
Hope soared with the possibility of federal cannabis reform in 2021. And for good reason – the induction of a new, more liberal administration, rapid state-level legalization, broad support by Americans,[1] and growing bipartisan backing led many to believe that 2021 was going to be the year where federal decriminalization of cannabis would become a reality. But, as 2021 continued on, optimism dwindled as any advancement in federal cannabis reform was hobbled by the inability of Congress to agree on the appropriate level of reform and the proper mechanics for passage. Specifically, tension rose amongst the elected Democrats on whether to support incremental reform (like access to banks or removal of cannabis from the list of Schedule 1 drugs) or comprehensive legalization with provisions to address social inequities stemming from the legacy of the War on Drugs. And so 2021 came to an end, and the cannabis industry saw yet another year of failed meaningful change on the federal level.
Still, momentum for reform has not been lost. If anything, last year saw more bills introduced into Congress (including two new federal legalization proposals) than ever before – clearly indicating its import to our nation’s leaders. Justice Clarence Thomas from the Supreme Court even subtly advised Congress to address legalization, noting that the Federal Government’s current “half in, half out regime” on cannabis strained the principles of federalism.
And so, as we move forward in 2022 with hope, we review the bills before Congress and their progresses to assess which of these may have some traction for passage during this upcoming year.
Secure and Fair Enforcement (“SAFE”) Banking Act of 2021[2]
Considered modest reform, the SAFE Banking Act of 2021 mainly focused on granting cannabis-related businesses access to federally-backed financial institutions. The bill was introduced early in 2021,[3] and passed in the U.S. House of Representatives on April 20, 2021 by a vote of 321 to 101. At the time of the House’s passage, many believed the SAFE Banking Act of 2021 would easily move its way through the Senate, due – in part – to its demonstrated bipartisan appeal with 106 Republican votes in the House. Congressman Ed Pearlman, one of its drafters, even remarked:
After years of bringing up this issue, I’m thrilled to see overwhelming support for this bipartisan, commonsense legislation in the U.S. House once again. I feel optimistic about the path forward for the SAFE Banking Act and, more broadly, reforms to our federal cannabis laws.[4]
However, after its passage in the House, the SAFE Banking Act of 2021 languished in the Senate’s Committee on Banking, Housing and Urban Affairs. Momentum for the bill slowed, with those opposing it campaigning for more comprehensive legalization. In late September 2021, fervor for the SAFE Banking Act of 2021 arose again when the House passed, by voice vote, an amendment to the National Defense Authorization Act for Fiscal Year 2022 (“NDAA”) to add the SAFE Banking Act of 2021. Many hoped that by couching the SAFE Banking Act of 2021 in the NDAA, it would make it easier to pass through the Senate. On November 23, 2021, 4 Senators[5] penned a letter to the Senate’s Armed Services Committee urging them to retain the SAFE Banking Act of 2021 in the NDAA. Despite these efforts, the SAFE Banking Act of 2021 was stripped from the NDAA on December 10, 2021 – stalling its progress once more.
The Marijuana Opportunity Reinvestment & Expungement (“MORE”) Act
The MORE Act is the oldest comprehensive legislative proposal. It was passed in the House in December 2020, during a lame-duck session, but never made any headway in the Senate.[6] On May 28, 2021, Representative Jerrold Nadler reintroduced the MORE Act into the House and much of its substance provided the legislative stepping stones for the Cannabis Administrative and Opportunity Act (“CAO”).
The MORE Act aimed to end criminalization of cannabis by removing it from the list of controlled substances, eliminate related past criminal penalties and convictions, and provide essential criminal justice reform, social justice and economic development for those affected by the War on Drugs. The MORE Act also would tax cannabis products starting at 5% to 8% (increasing by 1% over 5 years) to help fund social reform projects, make Small Business Administration loans and services available to cannabis-related businesses, and prohibit denial of federal public benefits (like housing) and protections under immigration law on the basis of cannabis-related conduct or conviction.
After sitting in the House Judiciary Committee, the bill was finally approved in the Committee on September 30, 2021, with 2 Republican Representatives voting yes. This act sent the measure to the House floor for another vote before it could make its way to the Senate.
The Cannabis Administrative and Opportunity Act
Embracing the MORE Act’s goals for comprehensive reform, Senate Majority Leader Chuck Schumer (along with Senators Cory Booker and Ron Wyden) introduced the long awaited draft of the CAO into the Senate on July 14, 2021. Considered a historic and ambitious bill, the CAO aimed to implement a full-scale federal scheme for cannabis reform that reaches beyond just decriminalization. It hopes to provide restorative measures “to lift up people and communities who were unfairly targeted in the War on Drugs.”[7] Specifically, the CAO seeks to do the following:
Decriminalize cannabis by removing it from the Controlled Substances Act and automatically expunge any arrests and convictions for non-violent federal cannabis offenses;
Transfer primary agency jurisdiction over cannabis to the Food and Drug Administration (“FDA”), the Alcohol and Tobacco Tax and Trade Bureau (“TTB”), and the Bureau of Alcohol, Tobacco and Firearms (“ATF”) so that cannabis can be federally regulated similar to alcohol and tobacco;
Establish a Center for Cannabis Products responsible for regulating the “cannabis aspect of all products containing cannabis,” and implementing requirements related to cannabis products (g., good manufacturing practice, product standards, product labeling, product distribution and recall, etc.) within the FDA;
Mandate federal research and studies regarding the impact of cannabis (including any benefits and/or impairments) on the human brain and health conditions and its impact on drivers under its influence;
Permit movement of cannabis products through channels of interstate commerce;
Establish Opportunity Trust Fund Programs funded by federal cannabis tax revenue to restore and reinvest in communities greatly impacted by the War on Drugs (including funds for job training, reentry services, legal aid, and youth recreation/mentoring programs) and to help level the playing field by granting entrepreneurs of color access to the cannabis industry through small business loans;
Prohibit denial of federal benefits or immigration protection due to a past cannabis-related offense; and
Impose federal excise tax on sale of cannabis products, starting at 10% and increasing up to 25% in a span of 5 years, with certain favorable tax credit for cannabis producers with less than $20 million sales.
Though the CAO has lofty goals, it does not force states to legalize cannabis, emphasizing the integrity of state-specific cannabis law.
As a draft bill, the CAO was subject to a review period in which its authors requested public comments by September 1, 2021. At the expiration of this review period, the drafters of the bill received numerous comments from both supporters and those criticizing the CAO as overly ambitious and a big-government approach. In particular, many critics take issue with the bill’s tax structure, calling the imposition of an ultimate 25% federal excise tax burdensome. Indeed, the CAO – as it stands – implements the highest tax structure for cannabis products of all the bills proposed in 2021. Many allege that the high federal tax in addition to any state-imposed tax could promote the illicit cannabis market rather than encourage business owners to engage legally. Additionally, the high federal tax could force states to reduce their own tax requirements, negatively affecting their own ability to fund state-run social equity and education initiatives.
For now, the public comments have been taken under advisement as the cannabis industry waits to see what the drafters decide to incorporate. Once formally filed, the CAO will be sent to a committee for continued discussions and revisions before it can be advanced to the Senate floor for a vote.
The States Reform Act
The States Reform Act (“SRA”) is the latest comprehensive reform bill led by Republican Representative Nancy Mace and introduced in the House in November 15, 2021. Like the MORE Act and the CAO, the SRA also seeks to decriminalize cannabis and provides retroactive expungement for non-violent federal cannabis offense, except for any person involved in a drug cartel. However, the SRA differentiates itself by limiting federal social equity reform programs. Instead, the SRA vests the authority to determine what level of cannabis reform, including outright prohibition, in the individual states. States will also retain authority to regulate the use, distribution, sale and manufacturing of cannabis, with some general federal oversight by the FDA, TTB, ATF and the Department of Agriculture. Specifically, the SRA aims to regulate cannabis like alcohol (and alcohol alone) – another substantial difference from the CAO. The SRA permits each state to determine the appropriate age limit for purchase of cannabis products, but incentivizes states to implement a 21+ limit by eliminating funding for highways for any state with an age limit of under 21 years of age and prohibiting advertisements directed at any person under the age of 21. The bill also seeks to provide veterans with access to medical cannabis without fear of discrimination or denial of Veteran Affairs benefits. The SRA also generally requires that medical cannabis be permitted for treatment of arthritis, cancer and chronic pain. Similar to the CAO, the SRA will also allow the interstate cannabis transportation.
Notably, the SRA provides the lowest tax structure for cannabis products in comparison to other reform proposals, with the proposed imposition of a single tax rate of 3% that cannot be increased for at least 10 years. Revenues from the tax would be used to support SBA programs for cannabis businesses, law enforcement initiatives including reentry programs, and veteran mental health programs.
Given its recency, little is known about the bill’s reception in the House and any progress that has been made. However, the SRA does carry potential bipartisan appeal, particularly because it is sponsored by 4 Republican Representatives. Additionally, it is anticipated that the Congressional Republicans will appreciate the SRA’s straight forward tax structure capped at a low rate for at least 10 years and its stance on states’ sovereignty regarding cannabis reform. The real issue for the SRA is its lack of restorative justice and social equity efforts, which may be its death knell in the current Democrat-controlled House.
Implications for 2022
There are now 4 bills (3 with comprehensive legislation) circulating Capitol Hill that could provide much needed cannabis reform in 2022. Congress will likely continue debating, revising and attempting to compromise on the terms in the MORE Act, the CAO and the SRA. Potentially, if the 3 comprehensive bills remain on the discussion table, they will compete with one another, potentially dividing the Legislators’ support. Congress should thus focus on forging a compromise or middle ground on these reforms to increase bipartisan support and avoid competing and inconsistent bills floating around, resulting in another year of unwanted (and unnecessary) deadlock. Indeed, the CAO could be an example of such needed compromise – especially if the drafters seriously heed the criticisms and comments provided during the bill’s review period and consider incorporating certain bipartisan elements of the SRA, like a more stream-lined and lower rate tax structure. With that said, the status of these cannabis reform bills, particularly the CAO and the MORE Act, face potential change should this year’s mid-term elections change the makeup of who controls the Senate, House or both.
Regardless, until Congress can iron out the kinks on comprehensive cannabis reform, the SAFE Banking Act of 2021 remains a practical law to pass in the interim. The SAFE Banking Act of 2021 is currently the least controversial of all the cannabis-reform bills, has substantial bipartisan appeal, and will provide immediate financial resources and relief to the largely cash-based cannabis industry. Though a small reform, it is still a necessary one that is long overdue. The SAFE Banking Act of 2021 (and its predecessors) has already made its way through the House 6 times, proving that federal lawmakers believe it will help cannabis businessmen. It may not resolve the issue of prohibition on cannabis, but its passage will likely be a great victory for the cannabis industry, signal federal de-stigmatization of cannabis, promote public safety by discouraging participation in the illicit cannabis market, and help cannabis-related businesses comply with tax laws.
Mississippi Governor Tate Reeves signed legislation legalizing medical cannabis on February 2, 2022. Known as the “Mississippi Medical Cannabis Act”, the law permits the use of medical cannabis to treat certain debilitating medical conditions including cancer, Parkinson’s disease, Huntington’s disease, muscular dystrophy, HIV/AIDS, hepatitis, ALS, Crohn’s disease, ulcerative colitis, sickle-cell anemia, Alzheimer’s disease, dementia, post-traumatic stress disorder, autism, cachexia or wasting syndrome, chronic pain, severe or intractable nausea, seizures, severe and persistent muscle spasms, among others. The law was effective immediately upon signing by the Governor, although medical cannabis will not become available for months.
Medical cannabis products will include cannabis flower, cannabis extracts, edible cannabis products, beverages, topical products, ointments, oils, tinctures and suppositories.
The medical cannabis law contains many favorable provisions for employers. Specifically:
Employers are not required to permit or accommodate the medical use of medical cannabis, or to modify any job or working conditions or any employee who engages in the medical use of cannabis, or seeks to engage in the medical use of cannabis;
Employers are not prohibited from refusing to hire, discharging, disciplining, or otherwise taking adverse employment action against an individual with respect to hiring, discharging, tenure, terms, conditions or privileges of employment as a result, in whole or in part, of that individual’s medical use of medical cannabis, regardless of the individual’s impairment or lack of impairment resulting from the medical use of medical cannabis;
Employers are not prohibited from establishing or enforcing a drug testing policy;
Employers may discipline employees who use medical cannabis in the workplace or who work while under the influence of medical cannabis.
The law does not interfere with, impair or impede any federal requirements or regulations such as the U.S. Department of Transportation’s drug and alcohol testing regulations;
The law does not permit, authorize or establish an individual’s right to commence or undertake any legal action against an employer for refusing to hire, discharging, disciplining or otherwise taking an adverse employment action against an individual with respect to hiring, discharging, tenure, terms, conditions or privileges or employment due to the individual’s medical use of medical cannabis;
Employers and their workers’ compensation carriers are not required to pay for or to reimburse an individual for the costs associated with the medical use of cannabis;
The law does not affect, alter or otherwise impact the workers’ compensation premium discount available to employers who establish a drug-free workplace program in accordance with Miss. Code Section 71-3-201 et seq.;
The law does not affect, alter or otherwise impact an employer’s right to deny or establish legal defenses to the payment of workers’ compensation benefits to an employee on the basis of a positive drug test or refusal to submit to or cooperate with a drug test, as provided under Miss. Code Sections 71-3-7 and 71-3-121;
The law does not authorize an individual to act with negligence, gross negligence, recklessness, in breach of any applicable professional or occupational standard of care, or to effect an intentional wrong, as a result, in whole or in part, of that individual’s medical use of medical cannabis;
The law prohibits smoking and vaping medical cannabis in a public place or in a motor vehicle;
The law prohibits operating, navigating, or being in actual physical control of any motor vehicle, aircraft, train, motor boat or other conveyance in a manner that would violate state or federal law as a result, in whole or in part, of that individual’s medical use of medical cannabis; and,
The law does not create a private right of action by an employee against an employer.
Mississippi employers should review the law to determine whether any revisions to drug and alcohol testing policies or other workplace policies will be necessary.
The facts of Indian Hills Holdings, LLC v. Frye are relatively straightforward. Plaintiff Indian Hills Holdings (“IHH”), Construction & Design Professional Corp. (“CDP”) and its principal Christopher Frye (“Frye” and, together with CDP, the “Defendants”) entered into a contract whereby IHH paid Defendants to purchase Cultivation “Adult” Extreme Cubes (the “Cubes”). Defendants in turn contracted with ICT Centurion Investments, LLC (“ICT”) to purchase the Cubes. The Cubes were marketed as a “fully integrated growing container system” used in indoor cannabis cultivation. When ICT sold the Cubes to another party, Defendants were unable to deliver the Cubes to IHH. Defendants refused to return the money, and IHH sued, asserting breach of contract, unjust enrichment and fraud claims.
A default judgment was entered against CDP for failing to respond to IHH’s complaint. Frye, however, filed a motion to dismiss the complaint, arguing in part that IHH did not have standing to bring its claims. Noting that Frye only “cursorily” raised the standing issue and that the “issue is a complex one”, the court reframed Frye’s argument as follows:
The contract is illegal under the Controlled Substances Act, 21 U.S.C. §§ 801, et seq.(the “CSA”);
Federal district courts will not enforce contracts that violate federal law;
Because federal district courts will not enforce contracts that violate federal law, IHH lacks an “actionable injury”; and
Because IHH lacks an actionable injury, the district court does not have subject matter jurisdiction.
Legal Analysis
The court began its analysis by considering whether the parties’ contract violated the CSA. Section 863(a) of the CSA makes it unlawful to sell or offer for sale “drug paraphernalia,” which is defined to include “any equipment, product, or material of any kind which is primarily intended or designed for use in manufacturing … a controlled substance.” Because the Cubes are used to grow cannabis, and because cannabis is a controlled substance, the sale of the Cubes would seemingly violate section 863(a) of the CSA. However, the CSA contains an exemption, whereby section 863 does not apply to any person authorized by state law to manufacture, possess or distribute drug paraphernalia. California allows the manufacturing of drug paraphernalia, which would include the Cubes. As a result, the court wrote that the contract “may fall within the CSA exemption.” Additionally, the court noted that the U.S. Department of Justice has declined to enforce the CSA’s prohibition on the sale of marijuana when the marijuana is bought or sold in accordance with state law. For these reasons, the court concluded that enforcing the parties’ contract would likely neither violate the CSA nor public policy.
While the contract may be legal, the court still had to consider whether assuming jurisdiction over the dispute would result in a violation of federal law. After all, federal courts will not assume jurisdiction over a dispute where the court will be required to order a legal violation. The question therefore became whether a plausible remedy existed for IHH that would not require the court to order such a legal violation. The court held that it could fashion a remedy without violating the law by simply awarding IHH monetary damages. A judgment for money damages, unlike an award of specific performance, would not result in IHH obtaining the Cubes and growing cannabis. Instead, the result would be a return of the monies paid by IHH to Defendants for the Cubes. The court’s ruling was consistent with prior cases involving state-legalized cannabis business, where the courts found ways to provide relief without violating the CSA. E.g., Polk v. Gontmakher, 2021 U.S. Dist. LEXIS 53569 (W.D. Wash. Mar. 22, 2021) (noting that “recent case law involving cannabis-related business contracts does not espouse an absolute bar to the enforcement of such contracts”); Mann v. Gullickson, 2016 U.S. Dist. LEXIS 152125 (N.D. Cal. Nov. 2, 2016) (court may consider breach of contract claim arising from sale of cannabis business when “it is possible for the court to enforce [the] contract in a way that does not require illegal conduct”).
Takeaways
As the legalized cannabis industry continues to grow and develop, market participants will undoubtedly need access to courts. The bankruptcy courts remain off-limit, thus requiring distressed cannabis businesses and their creditors to turn to state-law insolvency proceedings (e.g., assignments for the benefit of creditors; receiverships). To those in the industry, it may be a welcome relief to know that at least some federal district courts have made themselves available to these parties and that these courts thus far have shown a willingness to adjudicate disputes arising from the cannabis industry. However, any party seeking their day in federal court needs to ensure that they are not asking the court to grant relief that would violate federal law, including the CSA. This means that while money damages should be available, specific performance of the contract is likely off the table.
As Tribes expand their economic endeavors into the cannabis industry, the growth of cannabis tourism is a natural development. Below, we offer details on how cannabis tourism could support Tribal governments’ economic development efforts. We also provide an update on the status of pending federal legislation that could bring positive impacts to the cannabis industry.
Cannabis Tourism
With the pandemic continuing to take a toll on the tourism industry, many U.S. states and territories are exploring ways to help that industry recover. One potential savior for tourism is cannabis. As states went into varying levels of lockdown in early 2020, businesses deemed “nonessential,” including recreational facilities, gyms, bars, restaurants, etc. were forced to shut down. However, early into lockdown, cannabis was deemed “essential” in California, a designation other states with functional cannabis markets quickly adopted. In total, nearly 30 states, along with the District of Columbia and Puerto Rico, deemed cannabis businesses essential. This triggered some major changes in the industry, including:
Aiding in the de-stigmatization of cannabis among consumers;
Allowing cannabis businesses to take advantage of mandated business-friendly safety measures such as curbside pickup and home delivery; and
Allowing physicians to prescribe medical marijuana through online appointments, making it easier for patients to obtain medical marijuana cards.
With all of these changes, cannabis tourism has developed into a potentially rewarding industry that Tribal governments might be able to cultivate as part of efforts to recover economic losses suffered by their tourism and other businesses
What is Cannabis Tourism?
Cannabis tourism is most generally characterized as a destination-based industry that attracts tourists because cannabis is legal in that location. But the industry can take many forms. For example, tourists might visit a dispensary to learn more about the development of cannabis crops, stay at a “bud and breakfast,” tour a cannabis farm or growing facility, or dine at a restaurant with cannabis-infused dishes. Cannabis tourism can also have a positive knock-on effect for many other Tribal businesses.
How can Tribes Participate?
Interested Tribes can create specific cannabis-centered tourist destinations. One example is opening a farm or growing facility that is similar to a wine vineyard, where consumers can tour the facility and sample the products. This concept would serve multiple functions in that the farm would supply dispensaries while providing a tourism destination that would benefit hotels, restaurants, and the local economy.
Another route is to add cannabis tourism into existing tourism infrastructure. Tribes can take advantage of their land base and natural resources by offering cannabis hikes or camping expeditions, where participants are able to experience nature while partaking. Tribes with resort properties can offer CBD-infused massages at their spa, include CBD and hemp products at their gift shops, or offer travel packages designed for cannabis tourists. The idea behind this approach is to utilize the Tribe’s existing tourism infrastructure to provide new cannabis tourism options.
Federal Cannabis Legislation Update
The following is an update on pending federal legislation that would impact the cannabis industry. Summaries of previous cannabis legislative developments are provided in past articles..
The Cannabis Administration and Opportunity Act, S. ___ has not yet been introduced in the Senate. The bill would completely remove cannabis from the controlled substances list under the Controlled Substances Act and would allow states to implement their own laws regarding cannabis without fear of federal intervention. Senators Schumer, Booker, and Wyden published a discussion draft of the legislation on July 14, 2021, and the deadline for public comments was September 1, 2021. Once the legislation is finalized it will be referred to committee for continued review and revision.
The MORE Act of 2021, H.R. 3617, was introduced in the House of Representatives on May 28, 2021. The Act would end the criminalization of cannabis at the federal level retroactively and going forward. Federal cannabis arrests, charges, and convictions would be automatically expunged at no cost to the individual. Under the MORE Act, individual states would determine whether to criminalize cannabis. The Act would also create the Office of Cannabis Justice to oversee the social equity provisions in the law. The Act has been referred to several House subcommittees and was most recently marked up by the House Judiciary Committee on September 30, 2021.
The Democrats control both the House and the Senate (with Vice President Harris acting as the tie-breaking vote in the 50-50 Senate) but passing any cannabis legislation in the current Congress might prove difficult. The filibuster rules require 60 votes for a bill to pass the Senate, so any cannabis legislation would need relatively strong bipartisan support.
The future of federal cannabis law remains unclear, but Tribes interested in the cannabis industry can start taking steps now to establish the necessary framework to support this new area of Tribal economic enterprise.
While the world has been hunkered down at home, participating in Zoom calls and getting jobs done from kitchen tables and home offices across the country, the legal industry has continued to innovate, respond and move forward, even during these troubled times.
Read on for a sampling of legal industry changes from May 2020.
Hiring and Law Firm Moves
Last week, Perkins Coie announced that Jill Louis joined the Corporate & Securities practice as a partner in the Dallas office, in a move that further augments their capabilities in the Lone Star state. Randy Bridgeman, the co-chair of Perkins Coie’s Corporate & Securities practice praised Louis’s entrepreneurial spirit and her in house and leadership experience. He says, “Jill’s background in M&A and representing private equity-backed healthcare, infrastructure, and technology companies will be highly valuable to our clients across Texas and beyond.”
Jill B. Louis Perkins Coie
Louis has experience working with public and private companies in mergers and acquisitions, franchise transactions, corporate governance matters and working in industries including retail, technology and healthcare. She has worked with large and small companies, from startups to Fortune 50 corporations, and has worked both in house and in private practice during her career. Dean Harvey, the Dallas office managing partner, says, “Jill’s arrival aligns with our ongoing strategy of expanding our corporate offering in Dallas to support our growing technology and privacy capabilities.”
Up in the northeast, Pierce Atwoodadded bankruptcy and creditors’ rights attorney Alex F. Mattera to the firm’s Boston office. Mattera focuses his practice on creditor and debtor rights, commercial bankruptcy, bankruptcy litigation and insolvency. He represents secured creditors, focusing on the collection and workouts of defaulted and troubled loans, creditors’ committees, debtors, trustees and other parties involved in bankruptcy.
“Alex’s expertise in bankruptcy and creditors’ rights matters, particularly his loan workout experience, will really help us serve our lending and business clients. This is the third major recession Alex has been through,” said Pierce Atwood Business Practice Group Chair Keith J. Cunningham. “That kind of experience is so valuable in times like these. We couldn’t be happier to welcome him to the firm.”
Mattera has presented and sat on panels for the American Bankruptcy Institute, as well as Massachusetts Continuing Education and the Boston Bar Association.
“Alex’s expertise in workouts and collections will provide the firm even greater depth on the backend of loan transactions as we continue to provide a comprehensive suite of services to creditors and banks,” said Bruce I. Miller, Pierce Atwood’s real estate lending partner.
Devon Williams Ward and Smith
With an eye to the future and succession planning, North Carolina firm Ward and Smithelected labor and employment attorney Devon Williams as the firm’s co-managing director elect. Williams will assume the new role at the end of 2020. She will serve alongside Brad Evans, who has served as the Ward and Smith’s managing director since 2017. Williams is preceded in the co-managing director position by Ken Wooten, who is retiring from Ward and Smith at the end of this year.
“Succession planning is essential to all businesses, including our own, and choosing a strong leader enables seamless continuity in client service, and maintains stability within the firm,” Wooten said. “I think it says a lot about our firm that we’re selecting a millennial leader to take us into the next decade. Devon will bring a unique, and much needed perspective to the perennial concerns of a fully-engaged law firm.”
Since joining Ward and Smith in 2012, Williams has led the firm’s Labor and Employment Section and co-chaired the Raleigh Geographic Team.
“I’m grateful for and enthusiastic about the opportunity to build upon the legacy the firm has experienced under Ken’s leadership while working in tandem with Brad to continue our efforts to innovate efficient legal solutions for our clients, and attract and retain top-tier talent,” Williams said.
As co-managing director of Ward and Smith, Williams will maintain her labor and employment practice, where she advises employers on wage and hour issues, federal contractor compliance, prevention of employment discrimination, employee discipline and retaliation and harassment claims.
Life sciences attorney Frank Rahmani joined Sidley Austin as a partner in the firm’s Palo Alto, Calif., corporate practice, and will be a member of the Global Life Sciences practice. Ramani counsels CEOs, boards of directors, founders and investors on financings and public offerings, strategic collaborations, licensing matters, technology acquisition and spin-off transactions.
“Frank has a well-earned reputation as a trusted adviser, which is built on enduring relationships and breadth of experience representing high-growth, cutting edge life sciences and technology companies and investors at all stages,” said Martin Wellington, managing partner of Sidley Austin’s Palo Alto office. “He has great energy, a high-quality practice and a clear vision for growth that aligns with ours. Frank’s arrival signifies our strategy to build out Sidley’s presence in Northern California.”
Gitter joined Womble Bond Dickinson in 1962, when Womble had about a dozen attorneys. Gitter was the lead attorney in over one thousand cases filed in North Carolina state and federal courts between 1964 and 2009. Many lawyers who are now partners with the firm tried their first cases with Gitter, including Gemma Saluta, Murray Greason, Rachel Keen, Jim Morgan, Rick Rice, Bill Raper, Ellen Gregg, Alison Bost, Brad Wood and Chris Geis.
Gitter was inducted as a fellow in the American College of Trial Lawyers in 1982, and served as an Advocate in the American Board of Trial Advocates. He loved legal research and the law, but his interests also included coaching the Tiny Demons Pop Warner football team and his work at the Children’s Center, a facility devoted to the education and care of children with chronic health issues. He put himself through law school in part with his work as a night radio deejay on the campus radio station, employing his trademark sign-off at the end of the night: “Remember never to buy bad dreams.”
Gitter is survived by his wife of 32 years, Sandy; three children, Alison, Kent, and Ryne; two step-children, Wendy and Rob; multiple grandchildren and one great-grandchild.
Law Firm Innovation, Awards and Accomplishments
Redgrave LLP, a law firm focused on information governance and eDiscovery law, formed a Restructuring Discovery Team, working closely with law firms and advisors on litigation readiness and discovery for all types of restructurings. The Redgrave team handles data collection, preservation and review efforts during pre-petition and after a bankruptcy has been filed.
“We are proud to be the nation’s leading eDiscovery law firm, and we are very excited to formalize our experience in restructuring discovery,” said Redgrave partner Christine Payne, head of the firm’s restructuring team. “Many people do not realize how different discovery can be in the restructuring and bankruptcy contexts, as opposed to typical civil litigation. There is significant client need in this area, and we want to support that.”
IP Stars covers IP practice areas in over 70 jurisdictions, making it one of the most comprehensive guides in the industry.
In a decision that could provide a roadmap for local Marijuana dispensaries, A Kutak Rock team including litigation partners Andrew King and Fred Davis, and intellectual property counsel Sara Gillette representing Conway, Arkansas-based Harvest Cannabis Dispensary (“Harvest”) secured a preliminary injunction in a trademark dispute. Natural State Wellness Dispensary, LLC (“NSW”), and Natural State Enterprises, LLC, were using the name “Harvest” in for cannabis facilities across Arkansas, something the preliminary injunction now prohibits.
After an evidentiary hearing conducted over Zoom, Circuit judge Susan Weaver rejected the argument that The NSW Entities were authorized to use the name “Harvest” through their connection with Arizona-based Harvest Health & Recreation, Inc, a company using the Harvest mark in Arizona, Pennsylvania and Florida prior to the opening of the Arkansas Harvest dispensary. The court looked at precedent set by the USPTO and other federal courts, indicating products containing more than 0.3% THC are illegal under the Controlled Substances Act and therefore do not enjoy Trademark rights under the Lanham Act. Furthermore, Harvest adopted its name in 2017 and opened its facility in October of 2019, providing the dispensary with state-law trademark rights in Arkansas.
Kutak Rock partner Andrew King: “The Faulkner County outcome is the first of its kind, where a local cannabis dispensary prevailed under state trademark law against a multi-state operator for which federal trademark protection is unavailable. This outcome could provide a road map for local cannabis companies in states where cannabis has been legalized.”
Law Firm and Legal industry Response to COVID-19: A Sampling
COVID-19 has upended business as usual across the country; injecting terms like “flatten the curve”; “PPE” and “Contract Tracing” into everyday conversation. The National Law Review has covered some of the steps firms and other legal industry groups have taken to have a positive impact during these challenging times. For example, DLA Piper has signed on to the Ascend’s Five Point Action program, demonstrating a dedication to mitigating the disparate impact of COVID-19 on minority communities. Additionally, to broaden the reach of Coronavirus information and regulatory developments, Cornerstone Research worked with Stanford University to provide a database of legal articles and memos. Below are some more instances of law firms and other legal industry groups taking steps to mitigate the negative impact of COVID-19.
Mintz Law Firm provided pro bono counsel to Partners in Health (“PIH”), a Boston global health nonprofit, helping with the development of the Massachusetts COVID-19 Community Tracing Collaborative (“CTC”). The CTC is an initiative that works with PIH, the Massachusetts COVID-19 Command Center, Commonwealth Health Insurance Connector Authority and Massachusetts Department of Public Health to train, hire and deploy workers who will work with individuals exposed to Coronavirus. This veritable army of “contact tracers” will provide individuals with information about the virus, social support to facilitate self-isolation or quarantine, and provide appropriate next steps so individuals can stay healthy and protect their families; ultimately enhancing the Commonwealth’s ability to respond to COVID-19. Dr. Joia Mukherjee, PIH’s chief medical officer, says on contact tracing:
Access to this information helps contacts to know how to protect their loved ones, and to get tested or cared for themselves,” she said. “Without knowing our own status, without being able to specifically protect our loved ones, we are all living in the dark. (And) we know that there is significant anxiety in this darkness.
An interdisciplinary group of Mintz attorneys worked with PIH to facilitate this partnership on a pro-bono basis, helping this critical work get off the ground. Attorneys involved were Dianne Bourque and Ellen Janos, Members in Mintz’s Health Practice, Elissa Flynn-Poppey, Chair of the Government Law Practice, Julie Korostoff Chair of the firm’s IT Transactions & Outsourcing Practice, Andrew Matzkin, a Member in the firm’s Employment practice, and Corporate Associate Daniel Marden.
“Mintz is pleased to have been able to assist PIH in its efforts to change the course of COVID-19 in the Commonwealth,” said Mintz Member Ellen Janos. “It has been deeply rewarding to work on such a critically important project.”
Another group working to mitigate the negative impact of COVID-19 is the Diverse Attorney Pipeline Program(“DAPP”), a group with a mission to diversify the legal profession by expanding opportunities for women of color law students to secure summer positions at law firms and corporations following their first year of law school, an activity that greatly increases the likelihood of an offer of paid employment after graduation. DAPP was founded by Tiffany Harper and Chastity Boyce, both women of color who graduated from law school during the previous recession, and are passionate about mitigating the negative effects on women attorneys of color.
Recognizing the disruption that COVID-19 has had on everyone, and specifically law firm internships, DAPP is launching a fund and fellowship for students who are unable to complete their law firm internships this year. Started with seed money from the organization, DAPP has a goal of 100,000 to fund this program, and is requesting support from law firms, corporations, bar associations, and other nonprofit organizations in the form of earmarked donations.
“As law firms and businesses are forced to cut their summer internship programs, we hope they’ll consider contributing to this fund to support our work of infusing the pipeline to the legal profession with talented, highly qualified women of color in order to address the dismal statistics surrounding the number of women of color who are hired, retained and promoted at large law firms across the nation,” said Harper.
Students who receive the stipend will receive financial support as well as intensive professional development; involving volunteer legal work to facilitate skill development and meaningful training for participants. Additionally, the awardees will be matched with lawyer mentors, be provided with professional development and coaching.
“This is not a time to give up on diversity and inclusion efforts; it’s a time to refocus our efforts on preparing the next generation of lawyers for the challenges they’ll face in a diverse, global marketplace,” added Boyce.
Starting May 10, 2020, New York City employers may not require prospective employees to submit to testing for the presence of marijuana or tetrahydrocannabinols (or THC, the main psychoactive component of marijuana) in an individual’s system as a condition of employment. Currently, neither New York state nor New York City have any general ban on drug testing during employment.
The long-awaited ban, which was passed in April 2019 and is included as an amendment to the New York City Human Rights Law, outlines several exceptions based on the employer’s industry and the prospective position. These include, for example, police or peace officers, positions requiring a commercial driver’s license or those governed by Department of Transportation regulations, positions subject to testing under federal or state regulations or grant conditions, and positions requiring the supervision or care of children, medical patients or vulnerable persons. The new law also exempts positions that will be subject to a collective bargaining agreement that already addresses pre-employment drug testing for those prospective employees. The amendment also includes an exception for positions with the potential to impact the health or safety of employees or the public as identified by the New York City Commission.
In March 2020, the New York City Human Rights Commission issued proposed rules, which include proposed categories for safety sensitive roles, including positions that require regularly working on an active construction site, or power or gas utility lines, positions regularly operating heavy machinery, positions in which an employee operates a motor vehicle on an approximately daily basis, or positions in which impairment would pose an immediate risk of death or serious physical harm to the employee or others. The public comment period for the proposed rules has passed, but the expected finalizations of these rules has been delayed as a result of the COVID-19 pandemic.
The amendment bans only pre-employment testing for marijuana; it does not address testing for any other substance or mid-employment marijuana testing. However, all New York state employers should be mindful of the potential application of the New York medical marijuana law and applicable employment-related protections, including its relation to disability protections and accommodations under antidiscrimination laws.
Failure to adhere to the new ban on pre-employment screening can result in civil penalties up to $250,000 as well as consequential and punitive damages and attorneys’ fees.
Employers in New York City should review their existing drug-testing policies to confirm that they are in compliance with the new law, as well as contact their testing vendors to ensure any pre-employment tests comply with the new law.
As shelter in place orders were rolled out in California, many businesses transitioned their workforce to remote work for the first time. Employers had to determine how to track hours worked or what qualified as a business expense. However, other unique questions arise with a remote workforce, such as how to handle employees using marijuana while working from home.
Over a decade ago, when California passed the Compassionate Use Act, an employee questioned an employer’s right to prohibit marijuana use. The California Supreme Court in Ross v. Ragingwire held the employer need not accommodate medicinal marijuana use, irrespective of the Compassionate Use Act of 1996. Ross reasoned that since the California Fair Employment and Housing Act (FEHA) does not require employers to accommodate illegal drug use, the employer could lawfully deny employment to individuals using medical marijuana, which remains illegal under federal law.
More recently, in 2016 California legalized marijuana for recreational use, which further complicated employee marijuana use at work. Despite the change in marijuana’s legal status, the law reiterated that an employer could have a policy against the use of drugs while working or at the workplace.
While the law permits employers to prohibit drug use at work, now a large portion of workers are working remotely, Unfortunately, the lines for employees may be blurred since they are in their own homes (and many people seem to need a little extra help getting through this pandemic).
Employers should remind employees that during working hours, the expectation is that employees will comply with all policies of the company, including drug and alcohol policies. If the company does not have a drug and alcohol policy, it may want to include information prohibiting the use of drugs and alcohol while performing work in a remote work agreement or work from home policy.
If a manager or supervisor suspects that an employee is using marijuana or other drugs while performing work for the company, the supervisor should be instructed to reiterate the company’s policies.
The more difficult aspect of a remote workplace is handling an employee who is clearly under the influence while working, such as appearing intoxicated at a video conference. In California, an employer can only request an employee undergo a drug test under limited circumstances, including if there is reasonable suspicion that the employee is under the influence. While there may be sufficient evidence to request a drug test, due to concerns surrounding COVID-19 including overwhelmed medical providers, an employer will need to more carefully consider whether to insist an employee submit to a drug test at this time. Similarly, as some employers are actually hiring new employees during COVID-19, they too may wish to consider whether to postpone typical post-offer, pre-hire drug tests until the current health crisis has calmed down. Of course, drug tests are still necessary for employees in safety-sensitive positions, but they typically are not working remotely.
If an employee voluntarily requests leave for drug rehabilitation, assuming the employer’s workforce is over 25 employees, the employer should grant the leave pursuant to California Labor Code Section 1025, unless the leave would result in an undue hardship. Other leaves may also apply, so employers should consult with their Jackson Lewis attorney. However, of note, all the new COVID-19 California Paid Sick Leaves are limited to either actual COVID-19 diagnosis or exposure, caring for family, or childcare issues only. As such there will be no need to grant paid sick leave to an employee who claims pandemic stress-induced drug use.
Employers should also be cautious that they are not overstepping into trying to control an employee’s lawful off-duty activities. This may include, for instance, seeing social media posts from employees using marijuana at home. Unless it’s clear from the post that the marijuana usage occurred during working hours, employers should refrain from taking any action.
Mintz Law Firm
