Category: Cannabis

Feeling Thirsty? Wall Street, Industry Giants Stir Renewed Interest in the CBD-Beverage Market

For several years, industry giants such as Coca-Cola, PepsiCo, and Anheuser-Busch have made waves announcing future plans to explore the CBD-beverage market. And last week, Nasdaq published an article on the future of investment opportunities in cannabis-infused drinks. Perhaps most notable from the article was Nasdaq’s expected valuation for the CBD beverage market — a staggering $1.4 billion by 2023.

While it is true that certain investors are seeing green in the CBD-beverage market, the space is still plagued by a landmine of legal uncertainty and questions. Hemp-derived CBD was legalized at the federal level by the Agriculture Improvement Act of 2018, also known as the Farm Bill. However, as we previously discussed, the FDA and FTC have overlapping enforcement authority over the marketing of CBD products, which can include anything from food products to dietary supplements to beverages with CBD added. And as recently as November 16, 2021, the FDA reiterated that its approach to regulating the CBD industry will be same as it has been  — a regulatory minefield. The acting Deputy Center Director for Regulatory Policy at the FDA’s Center for Drug Evaluation and Research recently emphasized the agency’s position that it needs additional CBD research and safety data before it will consider CBD for uses beyond prescription drugs, including usage as a food or beverage additive or dietary supplement.

Companies marketing CBD beverages should take careful steps to ensure compliance with the FDA’s labeling requirements and guidance regarding CBD products. Unless and until the FDA provides further guidance, we can expect the back-and-forth game to continue with CBD companies entering the beverage space and the FDA initiating periodic enforcement actions. At a minimum, CBD companies entering the beverage space should refrain from making health claims, such as a product “can prevent, treat, or cure” a disease, as these claims are ripe for FDA enforcement actions. We provided several marketing dos and don’ts in a previous blog post that apply with equal force to the CBD beverage industry.

With industry experts claiming that the “best way to consume cannabinoids is through a beverage,” and Nasdaq reporting on the investment opportunities that surround CBD beverages, it is no surprise that CBD beverages are exploding in popularity.

This article was written by Rachel Sodee and Richard Swor of Bradley Arant Boult Cummings law firm. For more articles about CBD products, please click here.

Mississippi Enacts Medical Marijuana Law

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:

  1. 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;
  2. 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;
  3. Employers are not prohibited from establishing or enforcing a drug testing policy;
  4. Employers may discipline employees who use medical cannabis in the workplace or who work while under the influence of medical cannabis.
  5. 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;
  6. 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;
  7. 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;
  8. 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.;
  9. 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;
  10. 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;
  11. The law prohibits smoking and vaping medical cannabis in a public place or in a motor vehicle;
  12. 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,
  13. 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.

Article By Kathryn J. Russo of Jackson Lewis P.C.

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

Jackson Lewis P.C. © 2022

Cannabis and District Courts: Are Those Courthouse Doors Closed Too?

We have written many times over the past few years about how the bankruptcy courts are off-limits to state-legalized cannabis businesses.  This past year brought no new relief to the cannabis industry, and the doors to the bankruptcy courts remain shut.  Are the other federal courts off-limits as well?  A recent district court decision from the Southern District of California sheds some light on this issue, and indicates that the district courts are at least partially open to participants in legal cannabis businesses.

Factual Background

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.

Article By Mark A. Salzberg of Squire Patton Boggs (US) LLP

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

© Copyright 2022 Squire Patton Boggs (US) LLP

Tribal Cannabis Tourism and Current Status of Federal Legislation Impacting the Cannabis Industry

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:

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 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.

Article By Robert A. Conrad and Laura E. Jones of Van Ness Feldman LLP

For more biotech, food, and drug legal news, click here to visit the National Law Review.

© 2021 Van Ness Feldman LLP

Same As It Ever Was: FDA Reiterates That CBD Cannot Be Included in Food or Dietary Supplements

While we enter a new season this week, the same cannot be said for the FDA which, on November 16, reiterated that its approach to regulating the cannabidiol (CBD) industry will be “the same as it ever was”—a regulatory minefield. Grail Sipes, acting Deputy Center Director for Regulatory Policy at the FDA’s Center for Drug Evaluation and Research, emphasized the agency’s position that it needs additional CBD research and safety data before the agency will consider CBD for uses beyond prescription drugs, including usage as a food additive or dietary supplement. This, she said, is because “clear answers to many important questions are still lacking, such as what adverse reactions may be associated with CBD from hemp-derived products and what risks are associated with the long term use of these products.”

So why should industry stakeholders care about the FDA’s opinion anyway? Wasn’t hemp-derived CBD legalized at the federal level by the Agriculture Improvement Act of 2018, also known as the Farm Bill?

Yes, but as we discussed in a previous blog post, the FDA and FTC have overlapping enforcement authority over CBD marketing, with the FDA having primary authority over labeling. The FDA has previously issued guidance stating that CBD can be used as an ingredient in cosmetics so long as it does not cause the product to be “adulterated or misbranded.” However, a product containing CBD cannot be marketed as a drug absent FDA approval—a lengthy and costly process. Companies marketing CBD products must therefore ensure compliance with the FDA’s labeling requirements and guidance regarding CBD products.

The FDA has not been shy to issue warning letters to CBD companies that fail to heed the agency’s labeling requirements and guidance. Starting in April 2019, the FDA (together with the FTC) began issuing warning letters to companies marketing CBD products as treatments and cures for a variety of diseases and illnesses. Those agencies continued to issue warning letters for marketing and labeling violations throughout 2019, largely for improper health-based claims about CBD products (those letters are described in more detail here and here). The most recent iteration came in 2021 when the agencies issued two warning letters to companies selling over-the-counter (OTC) drugs for pain relief that contained CBD. Sipes made clear the FDA will continue to monitor the CBD marketplace and issue warning letters to companies making improper health claims in her November 16 comments.

Given these comments, we can expect the cat-and-mouse game between federal regulators and CBD companies that push the marketing envelope to continue. To mitigate the risk of falling within the FDA’s crosshairs, CBD companies must ensure compliance with the various state and federal regulations governing the labeling and advertising of their products. We provided several marketing dos and don’ts in a previous blog post. But given the FDA’s unchanging position, the biggest takeaway remains the same: don’t make claims that a CBD product “can prevent, treat, or cure” or a disease.

Article By Rachel L. Sodée and J. Hunter Robinson of Bradley Arant Boult Cummings LLP

For more news on biotech, food, and drug law, click here to visit the National Law Review.

© 2021 Bradley Arant Boult Cummings LLP

POT HOLE: Cannabis Companies Getting Caught in the Mini-TCPA Trap

One of the biggest TCPA trends earlier in the year was the onslaught of suits against cannabis companies related to marketing texts.

After my big interview with the National Cannabis Industry Association, those filings went down as dispensary TCPA awareness went up. (You’re welcome.)

But the trend of high dollar TCPA class suits against pot dealers seems to have moved South for the winter–down to the Sunshine State.

We’ve picked up a few new recent filings brought under the Florida Telephone Solicitation Act (Mini-TCPA). The suits allege that the blast text platforms used to send marketing texts meet the state’s extremely broad definition of an autodialer and require express written consent (which is allegedly missing).

For instance in the latest suit filed earlier today, the allegations focus on the automatic selection and dialing of numbers: Defendant utilized a computer software system that automatically selected and dialed Plaintiff’s and the Class members’ telephone numbers.

Notably this suit appears to be brought against a cannabis delivery platform and not an actual dispensary.

Read all about it here: Herban Delivery

Per usual the suit seeks to represent all individuals receiving similar messages in the state of Florida. It is brought by the folks at Shamis and Gentile who file a lot of these things.

© Copyright 2021 Squire Patton Boggs (US) LLP

Article By Eric J. Troutman of Squire Patton Boggs (US) LLP

For more articles on the TCPA, visit the NLR Communications, Media & Internet section.

For Cannabis Dispensaries, Ounce of Prevention Worth More than Pound of Cure

Imagine facing the prospect of a crippling class action lawsuit and having to engage in costly discovery to disprove the claims, even where clear evidence of innocence is presented at the pleading stage.  For one cannabis dispensary, this wasn’t merely a thought exercise, it was reality.  In Montanez v. Future Vision Brain Bank, LLC, 2021 WL 1697928 (D.Colo. 2021) plaintiff filed a putative class action against Future Vision Brain Bank (“Future Vision”) alleging that the company had violated the Telephone Consumer Protection Act (TCPA) by sending numerous telemarketing text messages to plaintiff’s cellphone using an Automatic Telephone Dialing System (ATDS).

Future Vision moved to dismiss, contending that plaintiff lacked standing to bring the suit and that the complaint failed to state a claim, in any event.  As to its first defense, Future Vision asserted that plaintiff failed to allege an injury-in-fact because she had provided prior consent to receive text messages and she had not adequately plead the existence of an ATDS.  Second, defendant argued that even if plaintiff had standing, the failure to plausibly allege the use of an ATDS warranted dismissal of the claims.

To establish its first defense, Future Vision submitted an affidavit from its digital systems engineer, which included screenshots showing that plaintiff had enrolled in defendant’s customer loyalty program and that when she did so, she provided her phone number and authorized communication through text message.  The parties marshaled competing authorities from the Third, Eighth, and Ninth circuits on the question whether consent is properly an issue of the merits or jurisdiction.  Citing Tenth Circuit precedent, however, the court reasoned that because resolution of the jurisdictional question (standing) requires resolution of an aspect of the substantive claim (consent), the issue should be resolved under Rule 12(b)(6).  And because defendant moved only to dismiss the issue under Rule 12(b)(1), the court denied the motion to dismiss on the issue of standing as to consent.

The court reached a similar conclusion with respect to defendant’s ATDS defense, even though it was asserted under both Rule 12(b)(1) and Rule 12(b)(6).  An ATDS is defined by the TCPA as “equipment which has the capacity (a) to store or produce telephone numbers to be called, using a random or sequential number generator; and (b) to dial such numbers.” 47 U.S.C. § 227(a)(1).  As we have previously discussed, the Supreme Court’s recent decision in Facebook v. Duguid clarified that unless the dialing equipment uses a random or sequential number generator, businesses will not be required to obtain prior written consent from the consumer before contacting them. 141 S.Ct. 1163 (2021).  Under the Supreme Court’s recent interpretation, equipment that merely dials from a list, and does not incorporate the use of a random or sequential telephone number generator is not bound by the TCPA’s requirements to obtain prior express consent before making calls or sending text messages using an ATDS.

Under the Supreme Court’s recent interpretation, equipment that merely dials from a list, and does not incorporate the use of a random or sequential telephone number generator is not bound by the TCPA’s requirements to obtain prior express consent before making calls or sending text messages using an ATDS.

Despite the clarity of this precedent, the court determined that it was not dispositive at the pleading stage.  “While the Supreme Court’s decision elucidates the definition of an ATDS,” the court stated, “that holding will prove far more relevant on a future motion for summary judgment than it does now.  At this stage, the Court must take all well-pleaded facts as true and cannot consider outside evidence without converting the Motion into a motion for summary judgment.”  The court then went on to find that plaintiff had plausibly alleged the use of an ATDS.  Specifically, plaintiff alleged that defendant utilized a messaging platform that allowed the transmission of thousands of text messages without human involvement.  And defendant relied on the platform’s ability to store telephone numbers, generate sequential numbers, dial numbers in a sequential order, and dial numbers without human intervention.

This case demonstrates that although many may have viewed Facebook as a decisive victory for cannabis companies that use automated equipment to make calls or send text messages, the district court’s decision here indicates that Facebook may not always be sufficient to protect defendants at the pleading stage.  This is because where a TCPA class action is filed is as important as what is alleged.  Had this case been brought within the Third or Eighth Circuits, where courts have found consent relevant to the standing inquiry, the outcome likely would have been different.  Unless and until the Supreme Court resolves the growing circuit split on this issue, cannabis companies that use any type of automated dialing system should consult with competent legal counsel to design and implement mitigation strategies, including (i) help identifying known litigators and serial plaintiffs, (ii) scrubbing numbers against the Do Not Call registry, (iii) checking for reassigned numbers, (iv) drafting arbitration provisions and class action waivers; (v) crafting strategic forum selection and choice of law clauses; and (vi) developing compliance programs to minimize risk to the company.

Copyright © 2021 Womble Bond Dickinson (US) LLP All Rights Reserved.

Article By Dwayne D. Sam of Womble Bond Dickinson (US) LLP

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

California Breaks New Ground With OCal: Answers to Key Questions About “Comparable-to-Organic” Cannabis

California’s comparable-to-organic “OCal” certification program for cannabis and nonmanufactured cannabis products officially went into effect on July 14, 2021.  The OCal program represents a new branch of state cannabis regulation, but remains firmly rooted in existing state and federal organics standards and procedures.  Its goal is to “assure consumers” that certified OCal products “meet a consistent standard comparable to standards met by products sold, labeled, or represented as organic.”

The OCal program raises a variety questions for cultivators, distributors, certifying agents and consumers.  We provide answers to six of those questions here.

What’s the difference between “OCal” and Organic?

Most OCal requirements will be very familiar to California organic producers, as the program generally follows the National Organics Program (NOP) in its substantive requirements, and the California Organics Program (COP) in enforcement provisions.  Of course, the United States Department of Agriculture (USDA) cannot expand organics certification to cannabis without authorization—and legalization.  So until Congress takes action, it falls on states to take the initiative.

Both OCal and NOP require certified operations, including certified cultivators and distributors, to develop and update a “system plan” that documents many practices and procedures required for both programs, including:

  • Tillage and cultivation practices that maintain or improve the physical, chemical, and biological condition of soil and minimize soil erosion
  • Crop rotations, cover crops, intercropping, alley cropping, hedgerows or the application of plant and animal materials
  • Plant and animal management to maintain or improve soil organic matter content, biological diversity, nutrient cycling, and microbial activity, including through composting
  • Crop health enhancements, including selection of plant species and varieties with regard to suitability to site-specific conditions and resistance to prevalent pests, weeds, and diseases
  • Pest control through introduction of predators and parasites, habitat maintenance, and weed control through mowing, grazing, and mulching

Land to be used for OCal or organic cultivation must not have any prohibited substances for three years prior to certification.  Certified operations must use their own seeds and planting stock, or seeds and planting stock from an OCal or organic certified nursery (subject to limited exceptions for availability).  Both organic and OCal operations must implement measures to prevent any commingling of certified and non-certified products, and to prevent contact operations and products with prohibited substances.  OCal regulations incorporate the “National List of Allowed and Prohibited Substances” (7 C.F.R. §§ 205.601, 205.602), which applies to organic products certified through the NOP.

Under the original OCal authorizing legislation, the Medicinal and Adult-Use Cannabis Regulation and Safety Act, the OCal program would have been eliminated if and when cannabis became eligible for NOP certification.  That sunset provision was removed in 2019 by Assembly Bill (AB) 97.  Under current law, parallel certifications of cannabis as “OCal” and of other crops as Organic will be the standard in California for the foreseeable future.

Will Container-Grown Cannabis be Eligible for OCal Certification?

California Department of Food and Agriculture (CDFA) guidance expressly allows OCal certification of plants grown in container systems, including hydroponic systems, so long as they comply with regulations.  This comports with current USDA interpretation of federal organics regulations.  Currently, a challenge to organic certification for “soil-less” crops is pending[1] before the U.S. Court of Appeals for the Ninth Circuit.  Because most OCal statutes and regulations mirror their federal model, including provisions that require soil management and enhancement, a ruling that ends organic certification for hydroponic and other soil-less crops could also raise doubt about OCal eligibility for container-grown cannabis.  For example, both the NOP and the OCal program require production practices that “maintain or improve the natural resources of the operation, including “ soil, water, wetlands, woodlands, and wildlife,” and require “cultural, biological, and mechanical practices that foster cycling of resources, promote ecological balance, and conserve biodiversity.”

What about products that include cannabis, can they be OCal certified?

The OCal program under the CDFA will only apply to “non-manufactured” cannabis products, defined as products containing only one ingredient: cannabis.  Only limited processing, including drying, curing, grading, trimming, rolling, and packaging, is allowed.  AB 97 required the California Department of Public Health (CDPH) to create an OCal certification program for manufactured cannabis products, which include edibles, concentrates and topicals.  No rulemaking has been initiated as of July 2021.

Who is in charge of OCal certification and compliance?

In order to qualify for and maintain a licensed, OCal-certified operation, cultivators and distributors will need to meet requirements implemented by at least three entities: the CDFA, certifying agents, and the newly-created California Department of Cannabis Control (DCC).  The DCC took over cannabis licensing in 2020, taking on responsibilities previously held by the CDFA.  The OCal program was not included within its scope of authority, however.  Under the current statutory scheme, cultivators and distributors seeking OCal certification will need to maintain compliance with regulations administered by both state agencies.

Certifying agents also play a key role in OCal implementation, as the entities that actually grant certification to cultivators and growers.  Private entities (non-profits or not-for-profit organizations) and local jurisdictions (counties and cities) are eligible to serve as certifying agents.  For accreditation, organizations demonstrate the knowledge, staff and operational competence to run a certification program; they may be accredited either through the CDFA or the NOP.  Registration requires annual reporting, including documentation of annual site inspections of all of all operations certified by the agent. Certifying agents are required to undergo regular performance evaluations and outside audits.

What does OCal certification mean for privacy and confidentiality?

OCal certified operations must allow certifying agents and CDFA officials to access and inspect facilities and records during business hours, and must also make all agricultural inputs, cannabis and cannabis waste accessible for examination and sampling.  They are subject to unannounced inspections, as well as mandatory annual reviews and periodic testing of pre-and post-harvest cannabis for pesticide residue.  Any application or drift of any prohibited substance onto an OCal facility must be reported immediately, as well as any change in operations that could affect compliance.  CDFA officials may inspect, audit, review or investigate a certified operation or a registered agent at any time, with or without prior notice.

While these requirements ensure transparency and support enforcement, OCal regulations require “strict confidentiality” for any business-related information concerning any certified operation.

How are OCal rules and regulations enforced?

The CDFA may suspend an operation for six months or more when it believes that it has violated or is not in compliance with OCal regulations.  It may also revoke the accreditation of a certified agent that fails to meet reporting obligations and other requirements.  The CDFA has authority to impose fines up to $17,952.00 per violation for labeling or selling a product “OCal” or “organic” not in compliance with regulations, and to $20,000.00 per violation for other willful violations.  Certifying agents are subject to at least six months’ suspension for failing to maintain accreditation requirements.  The CDFA will grant a hearing regarding any alleged violations, and enforcement actions may be appealed through an agency appeals process or in court.

FOOTNOTES

[1] Link to prior article on this topic here.

Article By Louise Dyble of Sheppard, Mullin, Richter & Hampton LLP

Fore more articles on cannabis, visit the NLR Biotech, Food, Drug section.

Justice Thomas Criticizes Federal Marijuana Policy, Questions Whether Prohibition Remains Necessary or Proper

U.S. Supreme Court Justice Clarence Thomas has issued an unexpected statement questioning whether the federal government’s continuing prohibition on marijuana is necessary or proper. His statement was made in conjunction with the denial of a writ of certiorari in the matter of Standing Akimbo LLC v. United States, which asked the court to address whether a medical marijuana dispensary could properly deduct ordinary business expenses in violation of section 280E of the federal tax code.

In his statement, Justice Thomas bluntly acknowledges that the reasoning behind the U.S. Supreme Court’s 2005 decision in Gonzales v. Raich ‒ which held that the power of Congress to regulate interstate commerce authorizes it to prohibit the local cultivation and use of marijuana ‒ has been “greatly undermined” by federal policies over the past 16 years. He characterized the federal government’s current approach as a contradictory and unstable “half-in, the half-out regime” that “strains basic principles of federalism and conceals traps for the unwary.”

Examples of the federal government’s mixed signals include the 2013 Cole Memorandum issued by the Department of Justice (DOJ) and Congress’s prohibition in place since 2015 that restricts the DOJ from spending funds to prevent states from implementing their own medical marijuana laws. These actions by the federal government have “broad ramifications” according to Justice Thomas, given that 36 states allow medical marijuana use and 18 of those states also allow adult use of cannabis.

Behind the Statement

In this environment, Justice Thomas rhetorically asks whether it is now reasonable for an ordinary person to think that the federal government “has retreated from its once absolute ban on marijuana,” and for cannabis business owners to think “that their intrastate marijuana operations will be treated like any other enterprise that is legal under state law.” He points out, however, that “legality under state law and the absence of federal criminal enforcement do not ensure equal treatment.”

Justice Thomas clearly is bothered by the strict enforcement of the federal tax code to the detriment of state-legal businesses and the simultaneous absence of federal enforcement in areas such as cultivation and distribution of marijuana that is legal under state law. He describes the federal government’s willingness to look the other way as “more episodic than coherent.” Justice Thomas identifies other harmful results caused by this schizophrenic federal approach, including federal prohibitions on financial institutions providing services to the cannabis industry, which has resulted in significant public safety issues, and civil lawsuits brought against individuals and businesses under the Racketeer Influenced and Corrupt Organizations (RICO) Act.

Justice Thomas concludes by noting that the federal government’s current approach to marijuana bears little resemblance to the uniform policy of prohibition upon which a closely divided Supreme Court based its decision in Raich 16 years ago. He warns that by allowing states to act as laboratories that try novel social and economic experiments, the federal government may no longer have authority to intrude on the states’ core police powers. “A prohibition on intrastate use or cultivation of marijuana may no longer be necessary or proper to support the Federal Government’s piecemeal approach.”

Marijuana Policy

Though Justice Thomas’ statement has no formal precedential value, it nevertheless represents the most explicit statement yet from a sitting – and conservative – Supreme Court Justice that questions the rationality of current federal marijuana policy. For court watchers, this represents a seismic shift on marijuana policy within the highest court of the land. Justice Thomas’s bold defense of federalism also should prove influential to members of the other branches of government who remain cautious on broad marijuana reform.

© 2021 Wilson Elser
For more articles on marijuana policies, visit the NLR Biotech, Food, Drug section.

How COVID Impacted Lease Agreements, Contracts, and Business Interruption Claims

To say that most businesses were not prepared for the COVID-19 (coronavirus) pandemic would be quite an understatement. Although several countries had lived through and learned from the SARS and swine flu outbreaks, nobody was really prepared for what 2020 had in store. U.S. citizens hadn’t lived through anything remotely similar since the 1918 Spanish flu pandemic.

From a legal perspective, the business world has learned a lot in a short period of time.  The many hurdles business owners dealt with since the pandemic began—and the lessons they learned—could help all businesses be more resilient in the future. At the same time, many mistakes were made and we should learn from them.

In this article, let’s take a look at how COVID-19 impacted commercial lease agreements and business interruption practices in particular.

Commercial lease agreements

During the COVID-19 pandemic, many businesses were unable to pay rent due to unexpected declines in revenue. As a result, many distressed commercial tenants wrote to their landlords requesting a temporary pause on rent payments. Eventually, the CDC announced a residential eviction moratorium that was most recently extended until March 31st, 2021.

Unfortunately, commercial tenants weren’t so lucky. Commercial lease agreements do not typically contain force majeure provisions, nor do they cover disasters such as a pandemic.

What is a force majeure provision?

“Force majeure” refers to a provision included in contracts that essentially removes liability in the occurrence of an event beyond the reasonable control of a party to the contract (e.g., natural and unavoidable catastrophes), and which prevents said party from performing its obligations under the contract.

In other words, a party’s ability to claim relief due to a force majeure event depends entirely on the express terms of their contract. As such, force majeure events must be specifically accounted for in the contract—which, again, is not typically the case with commercial lease agreements.

Keep in mind that simply having a force majeure provision in a contract may not be enough to excuse a contractual obligation. But as a preventative measure, it’s a good starting point.

Let’s bring this back to commercial lease agreements. Unless a temporary halt of rent payments is included in the contract, it’s entirely left to the discretion of the landlord. Demonstrating a history of making payments in full and on time and making a respectful, convincing request might go a long way (or it might not).

What are impossibility of performance and frustration of purpose doctrines?

Since the pandemic began, many attorneys have argued that New York laws excuse the payment of rent under COVID-19 conditions. Under the doctrine of impossibility of performance, a government-mandated lockdown, they argue, makes it impossible for many commercial tenants to pay rent.

The doctrine of frustration of purpose has also provided a legal basis to argue for pausing rent payments. As a result of unforeseen circumstances caused by the pandemic, most business owners are unable to:

Consequently, there may be a frustration of purpose of the commercial lease agreement, and a commercial tenant’s rent payments may potentially be excused.

The question of whether it is legally viable to halt rent payments under the doctrines of impossibility of performance or frustration of purpose will continue to be heavily litigated in commercial landlord-tenant disputes so long as COVID-19 persists.

Takeaway: Moving forward, businesses can negotiate with their landlords to include force majeure provisions or unforeseeable emergency language that allows them to temporarily pause rent payments should such situations arise. We are seeing landlords add arbitration provisions, which may not be the best idea for tenants or landlords.

Business contracts

As soon as government-mandated shutdowns went into effect, cash flows dried up. Many business owners began to question the viability of their companies, reviewing virtually all of their existing contracts and subscriptions in an effort to save money during these difficult times.

Many B2B companies compromised and offered discounts to struggling clients because they couldn’t afford to lose their business.

Keep contract outlines

Business contracts can be long and overwhelming, but they are the legal roadmap for the structure of your relationship with the other party to the agreement. To help organize all the information in a contract, we recommend keeping a brief bullet-point outline for each one.

Each outline should include important information, such as:

Of course, not all contracts are created equal, so your outline should be tailored to the particular transaction in question.

If your business handles a number of contracts, we recommend having both physical and electronic copies of each contract. You should always have a copy of the fully signed contract handy.

Keep physical copies in a secure place where you can quickly refer to each contract (accordion folders are great for storage and organization). Electronic copies of fully signed contracts should be saved in password-protected files.

Know your doctrines

What if the COVID-19 pandemic is putting you at the brink of defaulting on your contract, there is no applicable force majeure provision, and the other party to the contract is not willing to renegotiate?

It may be time to see if the doctrines of impossibility, impracticability, or frustration of purpose can apply.

As we touched on above, the doctrine of impossibility of performance involves a situation where supervening circumstances make performance impossible. This doctrine is used as a defense against performing a contractual obligation (such as paying rent).

Under specific circumstances, this defense would be granted, and performance under a contract would be excused. For example, a painter would never be expected to finish painting a house that had just burned down.

The doctrine of impracticability of performance exists where there is “extreme, unreasonable, and unforeseeable hardship due to an unavoidable event or occurrence.” This is more than a mere change in the degree of difficulty or expense. It involves contractual obligations becoming excessively expensive, difficult to perform, or harmful.

The doctrine of frustration of purpose, which we touched on earlier, is another contract doctrine that might apply to you. Frustration of purpose requires the following:

Although the parameters are specific, this doctrine might be a better fit for your business than impossibility of performance or force majeure where performance or payment is not “impossible,” but circumstances still warrant relief from performance.

Takeaway: Every contract requires its own careful, individual analysis.

Business interruption insurance

Many businesses have been forced to shut down (either permanently or temporarily) due to the COVID-19 pandemic and the ensuing government shutdown orders. Consequently, many of those businesses have filed a claim with their insurance provider for business interruption coverage.

Business interruption insurance provides a business with the revenue the company would have earned had the disaster not occurred. Coverage is usually provided as part of a property insurance policy or as part of a package policy. Business interruption coverage compensates the business for lost income if a company had to vacate the property due to disaster-related damage covered under the property insurance policy.

Typically, direct physical loss or damage (like a natural disaster) would trigger business interruption coverage. Business interruption coverage can also be triggered due to the actions of civil authorities. Most business interruption coverage policies for the actions of civil authorities contain the same standard language.

What is a civil authority provision?

Civil authority provisions aim to have business interruption coverage apply when there is damage to the property of another business that causes civil authorities to prohibit access to the area where the insured’s property is located.

For example, let’s say an earthquake hit Times Square (an unlikely scenario), and authorities such as the mayor of New York City or the governor of New York State order Time Square to be closed off. This area might include businesses that would be impacted by such a civil authority order, even if those businesses sustained little to no damage.

However, most civil authority provisions also require that the civil authority order is in response to direct physical damage from a cause covered by the insurance policy. As a result, it is likely that insurance policy providers will deny most COVID-19 related business interruption claims.

An overwhelming majority of those denials are because of the lack of physical damage due to a covered cause.

Insured businesses might try to obtain business interruption coverage by arguing that COVID-19 itself caused physical damage by contaminating a property. Unfortunately, most insurance companies explicitly exempt coverage damage due to viruses and bacteria and disagree that COVID-19 causes actual physical damage.

However, filing a business claim could be advantageous. If there is ever a change of the laws that go back to the date of your claim, you could be retroactively covered.

Regardless, businesses continue to file business interruption claims. After all, if you fail to tender a claim in the allowed time period, you may lose your claim forever. Denial of claim reserves your right to an appeal in the near future.

Takeaway: Many insurance companies are being sued by business owners for denying business interruption insurance coverage. If the courts rule favorably regarding COVID-19 and physical loss or damage, businesses may be able to receive insurance coverage after an appeal.

© Copyright 2017 – 2021 Sinayskaya Yuniver P.C.

ARTICLE BY Irene Sinayskaya of Sinayskaya Yuniver, P.C.
For more articles on lease agreements, visit the NLRReal Estate section.