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USDA Releases Reports on Economic Impact Analysis of the U.S. Biobased Products Industry and on Hemp Research and Innovation

On March 8, 2024, the U.S. Department of Agriculture honored the second annual National Biobased Products Day, “a celebration to raise public awareness of biobased products, their benefits and their contributions to the U.S. economy and rural communities.” USDA states that as part of its activities to honor National Biobased Products Day, it released two reports:

Economic Impact Analysis of the U.S. Biobased Products Industry

USDA states that its commissioned report “An Economic Impact Analysis of the U.S. Biobased Products Industry: 2023 Update,” shows that, based on data from 2021, the biobased products industry has grown nationwide despite the impacts of the global COVID-19 pandemic. According to USDA, key report findings include:

Biobased products, a segment of the bioeconomy, contributed $489 billion to the U.S. economy in 2021, up from $464 billion in 2020. This is an increase of $25 billion — a 5.1 percent increase;
The biobased products sector, and the jobs it supports, are shown to impact every state in the nation, not just the states where agriculture is the main industry; and
The use of biobased products reduces the consumption of petroleum equivalents. In 2017, oil displacement was estimated to be as much as 9.4 million barrels of oil equivalents. In 2021, the displacement grew to 10.7 million barrels of oil equivalents.

USDA notes that the findings span seven major sectors representing the bioeconomy: Agriculture and Forestry; Biobased Chemicals; Biobased Plastic Bottles and Packaging; Biorefining; Enzymes; Forest Products; and Textiles. The 2023 Update is the sixth volume in a series of reports tracking the impact of the biobased product industry on the U.S. economy.

Hemp Research and Innovation

USDA also released its “Hemp Research Needs Roadmap,” which reflects stakeholder input in identifying the hemp industry’s greatest research needs: breeding and genetics, best practices for production, biomanufacturing for end uses, and transparency and consistency. According to USDA, these priority research areas “cut across the entire hemp supply chain and are vital to bolstering hemp industry research.” USDA notes that growing demand for biobased products, like those from hemp, “creates potential for added-value use in food, feed, fiber and other industrial products that can improve the livelihoods of U.S. producers and offer consumers alternative biobased products.”

USDA also announced a $10 million National Institute of Food and Agriculture investment to Oregon State University’s Global Hemp Innovation Center. USDA states that the Center will work with 13 Native American Tribes to spur economic development in the western United States by developing manufacturing capabilities for materials and products made from hemp.

Navigating Hemp THC Beverages

Nonalcoholic beverages infused with delta-9 tetrahydrocannabinol (THC) derived from hemp (aka intoxicating hemp beverages) are becoming increasingly popular for consumers looking for an alternative to alcohol.

With major alcohol retailers like Total Wine entering the cannabis space, alcohol beverage producers may be looking for opportunities to leverage their existing experience in manufacturing, marketing and distributing alcohol beverages towards the emerging intoxicating hemp beverage market. While intoxicating hemp beverages are arguably legal pursuant to the Agriculture Improvement Act of 2018 (2018 Farm Bill), risks remain under federal and state food and drug laws. Accordingly, beverage producers looking to enter this emerging market should become familiar with the ambiguities involved.

Federal Treatment of Intoxicating Hemp Beverages

The 2018 Farm Bill removed hemp, defined as cannabis (Cannabis sativa L.) and derivatives of cannabis with extremely low concentrations of delta-9 THC (specifically, no more than 0.3 percent THC on a dry weight basis), from the definition of “marijuana” in the Controlled Substances Act. The federal government defines hemp as “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.” Accordingly, products that meet the definition of “hemp” may be marketed and sold in the United States and are no longer classified under federal law as illegal drugs.

How Is Hemp Regulated?

Under the 2018 Farm Bill, the US Department of Agriculture (USDA) has been assigned to regulate hemp production.

However, any hemp-derived foods, including beverages, are subject to regulation by the US Food & Drug Administration (FDA) under the Food, Drug, and Cosmetics Act (FDCA). While the FDA has largely avoided enforcement actions against such products, focusing most of its efforts on products making unsubstantiated medical and therapeutic claims, it has clearly concluded that it is a prohibited act under federal law to introduce any food in the market to which THC or cannabidiol (CBD) has been added. Therefore, the risk of federal enforcement remains until the agency changes its stance towards THC as a beverage additive.

State Regulation

While the federal government has been inactive in this space, the legal status of intoxicating hemp beverage products varies significantly by state. On the one hand, several states, including Minnesota, have expressly legalized the inclusion of hemp-derived cannabinoids in beverage products, with clear regulations regarding testing, labeling, advertising and more. On the other hand, some states have legalized hemp beverage products but lack a robust regulatory framework – leading to a mostly unregulated, laissez-faire market.

Further, many states fall into a grey area when it comes to the legality of such products. Some of these states have legalized hemp along the lines of the 2018 Farm Bill but have not officially opined on whether it can be added to beverage products, while others do not mention hemp products at all. A subset of states has expressly legalized hemp in beverages, as long as it complies with federal guidance, which currently does not affirmatively allow hemp to be used as a beverage additive.

One of the most extreme measures taken by state officials to ban hemp from beverage products is currently underway in South Carolina. The state’s Department of Health and Environmental Control (DHEC) recently issued a letter to the hemp industry warning that certain hemp products are not approved to be added to beverage products, including delta-9 THC.

In its letter, the DHEC also ruled that labels and packaging may not contain references to “THC,” “CBD” or “delta-9” products, or isolates, as this implies the product is no longer a food item but is a drug and is unlawful.

This new guidance is far from outlawing cannabinoids in beverages, but it affects a growing industry that has already been promoting intoxicating hemp beverages in the state. Indeed, some beverage manufacturers in South Carolina have been forced to halt production, citing confusion over the new labeling and packaging requirements. This demonstrates how the legal landscape around intoxicating hemp beverages can change rapidly.

Finally, it is important to note that even states that expressly allow and regulate THC-infused beverage products fall into a grey area when we consider the current state of federal regulations. Until Congress acts or the FDA changes its stance towards THC as a beverage additive, we will continue seeing a patchwork of different approaches.

Cannabis Rescheduling: HHS Findings and Legal Implications

On August 29, 2023, the U.S. Department of Health and Human Services (HHS) made a groundbreaking recommendation to the Drug Enforcement Administration (DEA) – that cannabis should be rescheduled from Schedule I to Schedule III under the Controlled Substances Act (CSA). This recommendation was made pursuant to President Biden’s request that the Secretary of HHS and the Attorney General initiate a process to review how cannabis is scheduled under federal law. In recent days, the unredacted 252-page analysis supporting the August recommendation was released pursuant to a Freedom of Information Act request. While the DEA is presently reviewing HHS’s recommendation and has final authority to schedule a drug under the CSA, it is ultimately bound by HHS’s recommendations on scientific and medical matters.

Why does this matter? Cannabis1 has been a Schedule I substance since the CSA was enacted in 1971. Substances are controlled under the CSA by placement on one of five lists, Schedules I through V. Schedule I controlled substances are subject to the most stringent controls and have no current accepted medical use. As a result, it is illegal under federal law to produce, dispense, or possess cannabis except in the context of federally approved scientific studies. Violations may result in large fines and imprisonment, including mandatory minimum sentences. Comparatively, Schedule III substances are considered to have less abuse potential than Schedule I and II substances, and have a currently accepted medical use in the United States.

In recent years, nearly all the states within the U.S. have revised their laws to permit medical cannabis use. And 24 states, as well as the District of Columbia, have eliminated certain criminal penalties for recreational cannabis use by adults. However, under the U.S. Constitution’s Supremacy Clause, federal law takes precedence over conflicting state laws. Thus, states cannot actually legalize cannabis use without congressional or executive action, and all unauthorized activities under Schedule I involving cannabis are federal crimes anywhere in the United States.2

Notable Findings in HHS’s Recommendation

For HHS to recommend that the DEA change cannabis from Schedule I to Schedule III, HHS had to make three specific findings: 1) cannabis has a lower potential for abuse than the drugs or other substances in Schedules I and II; 2) cannabis has a currently accepted medical use in treatment in the U.S.; and 3) abuse of cannabis may lead to moderate or low physical dependence or high psychological dependence. HHS considered eight factors to make those findings, some of which include: cannabis’s actual or relative potential for abuse; the state of current scientific knowledge regarding the drug; the scope, duration, and significance of abuse; and what, if any, risk there is to public health. The unredacted analysis provides further insight into HHS’s determination to make the forementioned findings.

CANNABIS HAS A POTENTIAL FOR ABUSE LESS THAN THE DRUGS OR OTHER SUBSTANCES IN SCHEDULES I AND II.

To evaluate cannabis’s potential for abuse,3 HHS compared the harms associated with cannabis abuse to the harms associated with other substances, such as heroin (Schedule I), cocaine (Schedule II), and alcohol.4 HHS reported that evidence shows some individuals take cannabis in amounts sufficient to create a health hazard to themselves and the safety of other individuals and the community. However, HHS also reported evidence showing the vast majority of cannabis users are using cannabis in a manner that does not lead to dangerous outcomes for themselves or others. From 2015 to 2021, the utilization-adjusted rate of adverse outcomes involving cannabis was consistently lower than the respective utilization-adjusted rates of adverse outcomes involving heroin, cocaine, and other comparators. Further, cannabis was the lowest-ranking group for serious medical outcomes, including death. Overall, the data indicated that cannabis produced fewer negative outcomes than Schedule I, Schedule II drugs, and, in some cases, alcohol.

CANNABIS HAS A CURRENTLY ACCEPTED MEDICAL USE IN TREATMENT IN THE UNITED STATES

To determine whether cannabis has a currently accepted medical use (CAMU) in the U.S., HHS evaluated a two-part standard: 1) whether “[t]here exists widespread, current experience with medical use of the substance by [healthcare providers] operating in accordance with implemented jurisdiction-authorized programs, where medical use is recognized by entities that regulate the practice of medicine”; and 2) whether “[t]here exists some credible scientific support for at least one of the medical uses for which Part 1 is met.”

Under Part 1, HHS confirmed that more than 30,000 healthcare providers across 43 U.S. jurisdictions are authorized to recommend the medical use of cannabis for more than six million registered patients for at least 15 medical conditions. The Part 1 findings, therefore, supported an assessment under Part 2. Under Part 2, HHS reported that, based on the totality of the available data, there exists some credible scientific support for the medical use of cannabis. Specifically, credible scientific support described at least some therapeutic cannabis uses for anorexia related to a medical condition, nausea and vomiting (e.g., chemotherapy-induced), and pain.

Overall, while HHS reported that cannabis has a currently accepted medical use in the U.S., the Food and Drug Administration (FDA) underscored that such a finding does not mean that the FDA has approved cannabis as safe and effective for marketing as a drug in interstate commerce under the Federal Food, Drug, and Cosmetic Act.

ABUSE OF CANNABIS MAY LEAD TO MODERATE OR LOW PHYSICAL DEPENDENCE OR HIGH PSYCHOLOGICAL DEPENDENCE.

Lastly, HHS concluded that research indicated that chronic, but not acute, use of cannabis can produce both psychic and physical dependence in humans. However, while cannabis “can produce psychic dependence in some individuals,” HHS emphasized that “the likelihood of serious outcomes is low, suggesting that high psychological dependence does not occur in most individuals who use marijuana.”

Legal Ramifications of New Scheduling

Changing cannabis from Schedule I to Schedule III may potentially allow cannabis to be lawfully dispensed by prescription5 and states’ medical cannabis programs may now be able to comply with the CSA. However, it would not make state laws legalizing recreational cannabis use in compliance with federal law without other legal changes by Congress or the executive branch. Under the change, medical cannabis users may be eligible for public housing, immigrant and nonimmigrant visas, and the purchase and possession of firearms. They may also face fewer barriers to federal employment and eligibility to serve in the military. Researchers would face less regulatory controls, and the DEA would no longer set production quota limitations for cannabis. Because the prohibition on business deductions in Section 280E of the Internal Revenue Code only applies to Schedule I and II substances of the CSA, changing cannabis from Schedule I to Schedule III would allow cannabis businesses to deduct business expenses on federal tax filing.

Importantly, some criminal penalties for CSA violations depend on the schedule of the substance. Thus, if cannabis were to be reclassified as a Schedule III substance, some criminal penalties for CSA violations would no longer apply or be significantly reduced. However, CSA penalties that specifically apply to cannabis, such as quantity-based mandatory minimum sentences, would not change under a new rescheduling.

Many advocates consider HHS’s findings a step in the right direction. Specifically, supporters consider the findings further evidence that cannabis should be removed from the CSA altogether and regulated akin to tobacco and alcohol (referred to as descheduling). Given the momentum of cannabis legalization across U.S. states and breakthroughs in the medical and scientific advantages of cannabis, Congressional or Executive legalization, or – at very least – descheduling of cannabis may be on the horizon.

1 The CSA classifies the cannabis plant and its derivatives as “marijuana.” The CSA definition of marijuana excludes (1) products that meet the legal definition of hemp and (2) the mature stalks of the cannabis plant; the sterilized seeds of the plant; and fibers, oils, and other products made from the stalks and seeds.

2 Congress has granted the states some leeway in the distribution and use of medical marijuana by passing an appropriations rider preventing the Department of Justice from using taxpayer funds to prevent states from “implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.” Courts have interpreted this as a prohibition on federal prosecution of state-legal activities involving medical cannabis.

3 In its report, HHS defined “abuse” to mean the “intentional, non-therapeutic use of a drug to obtain a desired psychological or physiological effect.”

4 Alcohol is not a scheduled controlled substance, but was used as a comparison because of its extensive availability and use in the U.S., which is also observed for the nonmedical use of cannabis.

5 Although the FDA has approved some drugs derived from cannabis, cannabis is not presently an FDA-approved drug.

Blazing Trails: Exploring ESOPs in the Cannabis Industry

The budding cannabis industry, despite its rapid growth and gradual acceptance in recent years, still faces a major sustainability challenge: Cannabis businesses cannot deduct most ordinary business expenses. Under Internal Revenue Code Section 280E, no tax deduction or credit is allowed for amounts paid or incurred in carrying on a business if the business consists of trafficking in controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act) that are prohibited by federal law or the law of any state in which such trade or business is conducted. Since marijuana is a controlled substance, cannabis businesses face a particularly high tax burden. In this context, employee stock ownership plans (ESOPs) emerge as a strategic solution, offering a pathway for cannabis businesses to enhance their cash flows while also retaining and motivating their workforce.

UNDERSTANDING ESOPS

ESOPs are a type of tax-qualified retirement plan with assets held in a tax-exempt trust. If an ESOP is established for an S corporation and acquires all of the stock of the corporation, the ESOP will not be subject to federal income tax (or state income taxes in most states). With an S corporation, any income tax obligation passes through to the shareholder, and, in this case, the shareholder is a tax-exempt entity. ESOPs also provide a way for the owners to obtain liquidity, and they enable employees to become beneficial owners of the company. This is ordinarily achieved through the allocation of company shares to participants over the course of the repayment of a loan that finances the sale.

THE TAXING REALITY OF CODE SECTION 280E

Code Section 280E was initially introduced in the 1980s to prohibit businesses engaged in illegal drug trafficking from deducting ordinary business expenses. Despite the changing legal landscape of cannabis, with numerous states legalizing its use for medical and recreational purposes, Section 280E continues to prohibit federal tax deductions and credits for the business expenses of cannabis companies, including items such as rent and salaries. However, such businesses are generally permitted to deduct the cost of goods sold.

MITIGATING TAX LIABILITY

A 100% ESOP-owned S corporation in the cannabis industry holds a unique advantage in mitigating tax liability. Unlike traditional corporate structures, an ESOP-owned S corporation does not pay federal income tax, does not pay state income tax (in most states), and, perhaps most significantly, is not affected by the Code Section 280E restrictions on deductions and credits. Accordingly, the ESOP structure eliminates a significant expense for many cannabis companies and increases cash flow, allowing the company to reinvest its earnings into the business. This increase in resources can be used for any number of expenses, from growth and development of the business to repayment of its debts.

CONCLUSION

Although the cannabis industry is subject to a significant disadvantage under Code Section 280E with respect to tax deductions and credits, an ESOP offers an alternative that entirely mitigates this disadvantage. Furthermore, the ESOP provides liquidity for the selling shareholders and the opportunity to create an ownership culture among employees who will benefit from participating in a tax-qualified retirement plan.

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Ohio Legalizes Recreational Use of Marijuana

Earlier this month, Ohio joined the growing number of states to legalize the recreational use of marijuana. The new law, which becomes effective December 7, 2023, allows adults aged 21 and older to (within certain restrictions) use, possess, transfer without renumeration to another adult, grow, purchase, and transport marijuana without being subject to arrest, criminal prosecution, or civil penalties.

A natural question for Ohio employers is whether the new law impacts their drug-free or zero-tolerance workplace policies, e.g., can employment be denied or terminated due to a positive drug test? Although the governor has asked the legislature to make changes (not specifically focused on employer policies) to the new law before it takes effect, the new law expressly states that it does not:

Require employers to permit or accommodate an employee’s use, possession, or distribution of adult-use cannabis;
Prohibit employers from refusing to hire, discharging, disciplining, or otherwise taking adverse employment action against individuals with respect to hire, tenure, terms, conditions, or privileges of employment because of an individual’s use, possession, or distribution of cannabis that is otherwise in compliance with the law;
Prohibit employers from establishing and enforcing drug testing policies, drug-free workplace policies, or zero-tolerance drug policies;
Permit individuals to sue employers for refusing to hire, discharging, disciplining, discriminating, retaliating, or otherwise taking an adverse employment action against them with respect to hire, tenure, terms, conditions, or privileges of employment related to their use of cannabis; or
Affect the authority of the administrator of workers’ compensation to grant rebates or discounts on premium rates to employers that participate in a drug-free workplace program.

The new law also provides that individuals terminated because of their cannabis use are considered to have been “discharged for just cause” for purposes of eligibility for unemployment benefits if their use violated an employer’s drug-free workplace policy, zero-tolerance policy, or other formal program or policy regulating cannabis use. Thus, the new law makes it clear that employers can still enforce their drug-free and zero-tolerance workplace policies. Ohio employers should consider advising employees that the new law will not impact the enforcement of such policies.

Ohio Votes for the Decriminalization of Marijuana

On November 7, 2023 Ohio voters approved the Issue 2 ballot initiative, which will make substantial revisions to Ohio’s cannabis laws[1] and make Ohio the 24th state[2] to legalize recreational marijuana. Issue 2 was introduced by the Coalition to Regulate Marijuana Like Alcohol which, according to the group, sought to legalize and regulate the cultivation, manufacturing, testing and sale of marijuana and marijuana products to adults and also legalize home grow for adults. Reports suggest over two million Ohioans voted to approve Issue 2, a relatively high turnout given 2023 was an off-year election.[3]

Passage of Issue 2 creates Chapter 3780 in the Ohio Revised Code, which makes several changes to how Ohio law addresses marijuana, including:

Empowering a division within the Ohio Department of Commerce to regulate, investigate and penalize cannabis operators and laboratories;
Legalizing and regulating the cultivation, manufacture, testing and sale of cannabis;
Decriminalizing the cultivation and growing of up to six plants per person and 12 plants per residence;
Permitting the sale of cannabis products in the form of plant material and seeds, live plants, clones, extracts, drops, lozenges, oils, tinctures, edibles, patches, smoking or combustible product, vaporization of product, beverages, pills, capsules, suppositories, oral pouches, oral strips, oral and topical sprays, salves, lotions or similar cosmetic products and inhalers;
Providing for a 10% adult use tax—which is separate from the sales tax—on the sale of cannabis, the proceeds of which will be deposited in the Adult Use Tax Fund and further distributed to four newly created funds:
- 36% to the Cannabis Social Equity and Jobs Fund
- 36% to the Host Community Cannabis Fund
- 25% to the Substance Abuse and Addiction Fund
- 3% to the Division of Cannabis Control and Tax Commissioner Fund;
Establishing the cannabis social equity and jobs program, which will focus on addressing historically disproportionate enforcement of marijuana-related laws through efforts such as licensing and financial assistance;
Authorizing landlords and employers to prohibit the use of cannabis in certain circumstances;
Creating a program for cannabis addiction services; and
Designating Franklin County, Ohio courts as the venue for any court actions related to Chapter 3780.

The law becomes effective 30 days after passage of Issue 2.

The passage of Issue 2 will not be a carte blanche to cultivate, sell and possess marijuana/cannabis. Criminal penalties will also be enforced, including minor misdemeanors for the use of cannabis in public areas, criminal sanctions for fraudulent purchase by those under 21 years old, application of O.R.C. § 4511.19 (“OMVI”) against persons operating a vehicle or bike while using or under the influence of cannabis and application of O.R.C. § 2925.11 (“Possession of controlled substances”) against anyone possessing a greater amount of cannabis than authorized.[4] Unless cannabis is reclassified as a Schedule I Controlled Substance, it remains illegal under federal law.

People and entities seeking to operate as a cultivation facility or adult use dispensary will be required to apply for, and be granted, a certificate of operation. Licensure will occur through the Ohio Department of Commerce.[5]

Legally, Issue 2 was an “initiated statute”[6] that amended the Ohio Revised Code rather than amending the Ohio Constitution,[7] meaning the Ohio General Assembly could pass laws to modify the changes implemented under the ballot initiative. As such, the regulatory details of the legalization and sale of marijuana in Ohio is far from set in stone.

Passage of Issue 2 presents a new and lucrative opportunity for Ohio entrepreneurs and businesses and Dinsmore attorneys have extensive experience in licensure and regulatory compliance of such facilities. If you have questions about applying for a certificate of operation, or whether your activities will comport with Ohio’s new laws, please contact a Dinsmore attorney.

[1] According to the ballot initiative text, “adult use cannabis, cannabis, and marijuana are all defined to mean marihuana” as defined in O.R.C. § 3179.01.

[2] The District of Columbia, Guam, and the Northern Mariana Islands have also legalized recreational marijuana.

[3] Final Issue 2 count available here.

[4] See O.R.C. §§ 3780.99(A)-(C), 3780.36(D)(1).

[5] O.R.C. § 3780.03.

[6] According to the Ohio Secretary of State, “initiated statutes” allow citizens to submit a proposed law to the people of Ohio for a statewide vote if that citizen feels that an issue is not addressed properly in the Ohio Revised Code.

[7] On November 7, Ohio also voted on amendment of the Ohio Constitution relating to abortion and other reproductive decisions

Article by Daniel S. Zinsmaster , Christopher B. Begin of Dinsmore & Shohl LLP

For more articles on Cannabis, visit the NLR Biotech, Food, Drug section.

Marijuana in the Manufacturing Workplace

The requirement to maintain a safe workplace often clashes with state and local laws that protect the rights of individuals who use marijuana while off-duty, creating unique challenges for manufacturing employers.

Manufacturing employers still may prohibit the use of marijuana at work, as well as marijuana impairment at work. But marijuana drug testing is complicated and controversial because of the legal protections for off-duty marijuana use in some states and cities, the legal protections for medical marijuana users in many jurisdictions, and because there are no drug tests that can detect current marijuana impairment or very recent use of marijuana.

Federal Law

Manufacturers no longer should defend “zero tolerance” marijuana drug testing policies. Previously, employers could argue that marijuana still is illegal under federal law or that the employer is a federal contractor that must comply with the federal Drug-Free Workplace Act. The federal government has not enforced the law that makes marijuana illegal for some time, and it has permitted states to create and enforce their own laws with respect to medical and recreational marijuana.

Some courts have recognized that the federal government is allowing state governments to regulate marijuana and, therefore, courts are enforcing state marijuana laws despite marijuana’s illegal status at the federal level. Courts also have rejected arguments that federal contractors “must follow federal law” because the federal Drug-Free Workplace Act does not require drug testing and does not permit employers to regulate off-duty conduct.

State Laws

At present, 39 states and the District of Columbia have medical marijuana laws, while 22 states and the District of Columbia have recreational marijuana laws (Maryland’s law will take effect in July and others will be enacted in the coming months). Many of these laws provide employment protections to applicants and employees. The variations in the laws make it difficult for multi-state manufacturers to have consistent marijuana policies in all locations.

What It Means for Employers

Due to the recent trend in some states to protect off-duty use of marijuana, and even prohibiting pre-employment marijuana testing, many manufacturers are discontinuing pre-employment marijuana testing, especially in states where marijuana is legal. Applicants often are surprised to learn that a positive marijuana drug test will lead to withdrawal of the job offer. If the positive marijuana drug test result is due to medical use (and there are no general off-duty protections in the state), manufacturers must be familiar with the applicable law.

Some states prohibit discrimination against medical marijuana users, while other states may allow an employer to take an adverse employment action if the job is considered “safety-sensitive,” i.e., a job with dangerous duties, as defined by applicable state law.

In certain other states where discrimination is prohibited and the manufacturing employer has safety concerns, the employer should engage in the “individualized assessment” and “direct threat analysis” required under state laws that mirror the federal Americans With Disabilities Act. This process includes discussions with the applicant and the applicant’s physician to assess the safety risk.

Reasonable suspicion marijuana testing is permissible in most states because impairment at work never is permitted. In states where off-duty marijuana use is protected, manufacturers should rely on the impaired behaviors when taking disciplinary action, rather than rely solely on the positive marijuana drug test result (assuming that testing for marijuana is permitted). This is because marijuana stays in the human body for a long time, so the positive drug test result is not conclusive proof that the employee was impaired at work. Manufacturers also should make sure that supervisors and managers are trained to observe and document reasonable suspicion determinations properly, as these documented observations will be key evidence in a potential lawsuit.

To make matters even more complicated, CBD (cannabidiol), “low THC,” and hemp products are being marketed and sold everywhere since Congress legalized hemp (having no more than 0.3 percent THC, the psychoactive component of marijuana) in 2018. Separate from marijuana laws, the use of “low THC” or CBD products is allowed in a number of states, usually for medical purposes, which means that manufacturing employers should tread carefully when an applicant or employee claims to use CBD products for medical reasons. While many CBD and hemp products are marketed as having little or no THC, these statements may not be true, because the U.S. Food and Drug Administration does not yet regulate them. These products may cause positive drug test results for marijuana. There has been an increase in lawsuits where former employees claim that their positive marijuana drug test results allegedly were caused by CBD products.

While it appears that marijuana eventually will be legalized at the federal level, manufacturers must ensure they are complying with all applicable laws. Manufacturing employers should:

Review drug and alcohol policies for compliance with applicable drug testing and marijuana laws;
Remove marijuana from the drug testing panel in locations where testing for marijuana is prohibited and locations where off-duty use is protected and consider removing it in other locations where it may be an obstacle in the hiring process;
Train Human Resources employees and other managers to engage in the interactive process with employees who use medical marijuana (or medical CBD products); and
Train supervisors to make appropriate and timely “reasonable suspicion” determinations.

For more cannabis legal news, click here to visit the National Law Review.

Blunt Rejection of Attorney Fees in Stipulated Dismissal

The US Court of Appeals for the Federal Circuit affirmed the rejection of attorney fees, finding that neither inequitable conduct nor a conflict of interest rendered the case exceptional given the limited factual record following a stipulated dismissal in a patent case. United Cannabis Corp. v. Pure Hemp Collective Inc., Case No. 22-1363 (Fed. Cir. May 8, 2023) (Lourie, Cunningham, Stark, JJ.).

United Cannabis Corporation (UCANN) sued Pure Hemp for patent infringement. After the litigation was stayed pending bankruptcy proceedings, the parties stipulated to the dismissal. Pure Hemp then sought attorney fees based on alleged inequitable conduct by UCANN during prosecution of the asserted patent due to nondisclosure of a prior art reference used in the patent’s specification and based on a purported conflict of interest by UCANN’s litigation counsel. The district court denied Pure Hemp’s request, finding that the case was not exceptional. Pure Hemp appealed.

Pure Hemp argued that the district court erred by (1) failing to find Pure Hemp to be the prevailing party in the litigation, (2) not concluding that the undisputed facts established inequitable conduct and (3) not recognizing that UCANN’s attorneys had a conflict of interest.

The Federal Circuit found that although the district court erred in not finding Pure Hemp to be the prevailing party, this was a harmless error. The Court explained that by fending off UCANN’s lawsuit with a stipulation dismissing UCANN’s claims with prejudice, Pure Hemp is a prevailing party under § 285. However, the Court concluded that this error was harmless because the district court ultimately concluded that this case was unexceptional.

The Federal Circuit found Pure Hemp’s arguments on inequitable conduct without merit. The Court explained that it had no findings to review because Pure Hemp voluntarily dismissed its inequitable conduct counterclaim and did not seek any post-dismissal inequitable conduct proceedings. Although Pure Hemp argued that it could prevail based on the undisputed facts in the record, the Court disagreed. It explained that even the limited record demonstrated at least a genuine dispute as to both the materiality and intent prongs of inequitable conduct and, therefore, the district court properly determined that Pure Hemp did not demonstrate that this case was exceptional.

The Federal Circuit also rejected Pure Hemp’s argument that copying and pasting portions from the prior art in the patent’s specification (but not disclosing the same prior art references) was inequitable conduct. The Court explained that unlike the nonbinding cases Pure Hemp relied on, the district court here did not find that the copied prior art was material, and the record gave no reason to disbelieve the explanation provided by UCANN’s prosecution counsel. The Court was also unpersuaded by Pure Hemp’s arguments to support inequitable conduct, explaining that the Court was not free to make its own findings on intent to deceive and materiality and, further, the district court was not required to provide its reasoning for its decision in attorney fee cases.

As to Pure Hemp’s argument that the case was exceptional because UCANN’s attorneys suffered from a conflict of interest, the Federal Circuit found that this argument was waived and, in any event, lacked merit because Pure Hemp presented no evidence to support the alleged conflict.

Finally, having sua sponte raised the issue of whether this was a frivolous appeal. The Federal Circuit determined that although it was “not pleased with how Pure Hemp has argued this appeal,” the appeal was nonetheless not frivolous because [Pure Hemp] properly argued that it was the prevailing party.

For more Intellectual Property Legal News, click here to visit the National Law Review.

Delaware Legalizes Recreational Marijuana

Delaware became the latest state to legalize recreational marijuana on April 23, 2023 when the state’s Governor failed to veto two bills that allow for the legalization of marijuana, effective immediately. Individuals who are 21 years of age and older may possess and use up to one ounce of marijuana. It will be taxed in a manner similar to alcohol.

The law provides that nothing in the law is “intended to impact or impose any requirement or restriction on employers with respect to terms and conditions of employment including but not limited to accommodation, policies or discipline.” This means that employers in Delaware do not have to permit marijuana use at work or during work time and still may drug test for marijuana and take disciplinary action for positive test results.

Employers should bear in mind, however, that the use of medical marijuana still is protected under Delaware law, as it has been since 2011. The new recreational marijuana law does not change the rights of users of medical marijuana. Specifically, the Delaware Medical Marijuana Act provides, in pertinent part, that “an employer may not discriminate against a person in hiring, termination, or any term or condition of employment . . . if the discrimination is based upon either of the following: a. [t]he person’s status as a cardholder; or b. [a] registered qualifying patient’s positive drug test for marijuana . . . unless the patient used, possessed or was impaired by marijuana on the premises of the place of employment or during his hours of employment.”

Delaware joins a growing list of states that have adult-use recreational marijuana laws. Employers should review their drug and alcohol policies frequently to ensure that they are complying with all applicable state and local marijuana laws.

For more Cannabis legal news, click here to visit the National Law Review

Tenth Circuit Declares No Remedy for Hemp Farmer Whose Federally Legal Plants Were Seized

In January, the United States Court of Appeals for the Tenth Circuit issued a published opinion in Serna v. Denver Police Department, No. 21-1446 (10th Cir. Jan. 24, 2023), upholding the dismissal of a hemp farmer’s lawsuit against local government officials in Colorado who confiscated his plants.

The farmer – Francisco Serna – brought suit under the Agriculture Improvement Act of 2018 (the “2018 Farm Bill”) which legalized hemp across the country and included limitations on states’ ability to prohibit the transportation of certain hemp plants and products across state lines. However, the three-judge panel concluded that no provision within the law allows for a private right of action by an individual to challenge instances of perceived unlawful governmental interference.

Serna grew hemp in Texas and intended to bring several plants home with him from Colorado. But when he attempted to get the plants – consisting of “plant clones or rooted clippings” – through Denver’s airport, a police officer confiscated them under a departmental policy to seize plants containing any discernible level of THC. Even though Serna had documentation showing that the plants’ THC level was beneath the limit authorized by the 2018 Farm Bill – and therefore compliant under federal law – the officer took the plants anyway.

Serna’s Legal Proceedings

Serna sued the Denver Police Department and the confiscating officer under Section 10114(b) of the 2018 Farm Bill, which prohibits states from interfering with interstate transport of hemp and products that comply with the law. Serna asserted that because his plants were complaint, the defendants violated the provision. However, a federal magistrate judge granted the defendants’ motion to dismiss, which the district court adopted.[1] Serna then appealed to the Tenth Circuit.

The Tenth Circuit also held that no private right of action existed for Serna to employ. The court’s conclusion rests on the determination that Congress did not intend that hemp farmers, like Serna, should constitute a protected class under the 2018 Farm Bill. Without that status, they cannot sue. The court focused on the plain language of Section 10114(b), reasoning that it “makes no mention of [a] purported class of licensed [hemp] farmers” and merely provides that “no state…shall prohibit the transportation or shipment of hemp” across its borders. Thus, the provision pertains only to “the person regulated rather than the individuals protected,” which is fatal to the private right of action inquiry. The court compared Section 10114(b) with other federal statutes that do create private rights of action, such as Title VI of the 1964 Civil Rights Act, which specifies that “[n]o person…shall…be subjected to discrimination.” 42 U.S.C. § 2000d.

Takeaways

The unfortunate result of this decision is that individuals who comply with the provisions of the 2018 Farm Bill during the course of their business operations cannot seek recourse from improper government meddling. As a result, the law is significantly less protective than anticipated. Rather than suing to protect their interests, entrepreneurs like Serna must instead depend upon other actors – perhaps state attorneys general – to pursue these types of cases. However, those non-stakeholders generally have less incentive to pursue lawsuits, particularly against peer law enforcement agencies, leaving hemp operators with no remedy to enforce their rights under the 2018 Farm Bill.

In a broader sense, the Serna case is a cautionary tale for those who expect federal descheduling of marijuana to resolve the regulatory complexities currently faced throughout the cannabis industry. If hemp operators working with products that are federally legal are unable to utilize the courts to challenge unlawful seizure of their products, then the effectiveness of federal legalization of cannabis may require an express private right of action.

Going forward, Serna has a limited period of time to request that the case be re-heard by the Tenth Circuit en banc (i.e., by the entire eleven-judge court) – otherwise, the three-judge panel’s opinion will remain the operative, binding outcome.

[1] The magistrate judge and the district judge differed on their bases for concluding that Serna could not sue under the 2018 Farm Bill. Specifically, the magistrate judge determined that Section 10114(b) neither created a private right of action nor a private remedy. The district judge, on the other hand, concluded that Congress did authorize a private right of action but no private remedy to enforce it was evident. This additional divergence is another example of how the 2018 Farm Bill is susceptible to conflicting interpretations, which will likely only increase going forward as other courts consider the issue.

Article By Emily M. Leongini, Shahiedah Shabazz, and Morgan R. Pankow of ArentFox Schiff LLP

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