Tag: drug law

New Cosmetic Regulatory Requirements: What Cosmetic Manufacturers Need to Know

On December 29, 2022, President Biden signed into law the “Modernization of Cosmetic Regulation Act of 2022,”1 which requires increased Food and Drug Administration (FDA) oversight of cosmetics and the ingredients in them. This GT Alert outlines the law’s key provisions, including timelines for FDA actions and enforcement. The law creates new requirements that may generate increased consumer litigation. This GT Alert summarizes the Act’s provisions and does not constitute legal advice. Many provisions are subject to regulatory implementation by a date provided for in the Act.

The new law also includes amendments modifying other FDA requirements. In particular, the law modifies the law as to issues such as improvements and innovations in drug manufacturing, reauthorization of key FDA programs such as the Humanitarian Device Exemption Incentive, the Best Pharmaceuticals for Children Program, and Reauthorization of Orphan Drug Grants. There are also modifications to biologics and drugs, as well as modifications of the Save Medical Device amendments. For information on the potential litigation impacts of the new law, please see this GT Alert published by the Pharmaceutical, Medical Device & Health Care Litigation Practice.

Modernization of Cosmetic Regulation Act of 2022 (MoCRA)

MoCRA, the new cosmetic regulation law, establishes a process, similar to those for other FDA-regulated products, that ensures the cosmetic manufacturers provide assurances that the cosmetic products are safe. This GT Alert provides general information on these new requirements, with effective dates for certain regulatory and other requirements. The law establishes obligations on the “responsible person” that is, the manufacturer, packer, or distributor of a cosmetic and those whose name appears on the products label.

MoCRA is only applicable to importers and entities that manufacture or process cosmetic products. It does not apply to the following entities if they do not import, manufacturer, or process cosmetics: beauty salons; cosmetic product retailers; distribution facilities; pharmacies; hospitals; physicians offices; health care clinics; public health agencies and other nonprofit entities; entities that provide complimentary cosmetic products; trade shows and others giving free samples; entities that are only doing research; and entities that prepare labels, relabel, package, repackage, hold, and/or distribute cosmetic products.

Key Terms

Good Manufacturing Practices: The secretary of the Department of Health and Human Services (HHS) (through the FDA) will propose and finalize regulations to establish good manufacturing practices. The key is to ensure that products are not adulterated and will allow FDA to inspect records to ensure compliance. The proposed rulemaking shall be no later than two years after date of enactment (December 29, 2022) with final regulations no later than three years after date of enactment (December 29, 2022).

Adverse Events: Any health-related event associated with the use of a cosmetic product.

Serious Adverse Event: Any event that is a result of death, life-threatening experience; inpatient hospitalization; persistent or significant disability or incapacity; a congenital anomaly or birth defect; and infection or significant disfigurement OR requires, based on reasonable medical judgment, a medical or surgical intervention to prevent an outcome described in the first definition of serious adverse event.

Process for Reporting Adverse Events: In compliance with the HHS secretary’s regulations, the responsible person shall file a report within 15 days and may supplement the report within one year. A serious adverse event report is similar to other safety reports and can include a statement released to the public (without any personal health information). The HHS secretary may exempt certain reports that do not involve a significant public health issue. Records must be kept by the responsible person for six years; three years for small businesses. There is a Rule of Construction that the submission of any report shall not be construed as an admission that the cosmetic product involved, caused, or contributed to the relevant adverse event.

  • Fragrance and Flavor Ingredients: If an ingredient(s) has caused or contributed to a serious adverse event, the HHS secretary may request a list of such ingredients, and such list must be provided within 30 days of the request.

  • Safety Substantiation: Records must be maintained that demonstrates adequate substantiation of the safety of the cosmetic product. Adequate substantiation means tests, studies, or other evidence to support a reasonable certainty that the product is safe.

Inspection: The responsible person shall permit an officer or HHS employee (with credentials) to have access to inspect records, manufacturing and other issues.

Registration and Product Listing: Cosmetic manufacturers must submit a registration no later than ONE YEAR AFTER ENACTMENT (December 29, 2022). New facilities must register within 60 days (or 60 days after deadline). Renewal is every two years. Updates or changes must be submitted within 60 days of the change. The content of the information required for registration is outlined in the law. The registering company must also list all cosmetic products it imports, manufactures, or processes and include product category or categories, list of ingredients (fragrances, flavors, or colors), and product listing number (if previously assigned). Flexibility is given to the listing of multiple products with identical formulations or those that differ only to colors, fragrances, flavors, or quantity. Annual updates are to be submitted. FDA will withhold confidential information included in a listing when a request for information is filed.

The HHS secretary may suspend a cosmetic entity’s registration if there is a reasonable probability that a product is causing serious adverse health or deaths, and the secretary has reasonable belief that other products made or processes may also be affected and for which health concerns are raised about the products manufactured. Notice of suspension is to be provided and an opportunity within five days to provide corrective action; or a hearing may be held. The secretary may conclude (a) the suspension remains necessary or (b) the registrant must submit a corrective action plan to demonstrate remediation of the problem conditions. The plan will be reviewed not later than 14 business days or such other time agreed upon by the parties. If the secretary vacates the suspension, FDA will then reinstate the registration. If the facility is suspended, no person shall introduce or deliver in the United States cosmetic products from such facility. The secretary can only delegate this authority to the FDA Commissioner.

Labeling: Each cosmetic product shall have a label that includes a domestic address, domestic phone number, or electronic contact information. In addition, the following applies to labeling.

  • Fragrance Allergens: The responsible person shall identify on the label each fragrance allergen included. The secretary shall propose a rule on June 29, 2024 (18 months after date of enactment) and final rule 180 days after the public comment period closes. The secretary shall consider international, state, and local requirements for allergen disclosure and threshold amount levels.

  • Cosmetic Products for Professional Use: A professional is an individual licensed by a state authority to practice in the field of cosmetology, nail care, barbering, or esthetics.

  • Professional Use Labeling: A cosmetic product introduced into interstate commerce and intended to be used only by a professional shall bear a label that contains a clear and prominent statement that the product shall be administered for use only by a licensed professional; and is in conformity with the requirements for cosmetics labeling.

Records: Records are to be available to authorized personnel to examine products if there is reason to believe a cosmetic product is adulterated or an ingredient could cause harm or run afoul of other standards. The authorized personnel must provide written notice to have access to records at a reasonable time to determine whether the product poses a threat. The records to be reviewed do not include recipes or formulas for cosmetics, financial data, pricing data, personnel data (except qualifications) research data (other than safety substantiation) or sales data (other than shipment data regarding sales).

  • Rule of Construction: Nothing in this section shall be construed to limit the secretary’s ability to inspect records or require establishment and maintenance of records under any other provision of the law.

Mandatory Recall Authority: If the secretary determines there is a reasonable probability that a cosmetic is adulterated or misbranded and the use or exposure will cause serious adverse health consequences or death, the secretary shall provide the cosmetic manufacturer an opportunity to voluntarily cease distribution and recall such article. If the entity refuses or does not recall the cosmetic within the time and manner prescribed, the secretary may order that the product not be distributed.

  • Hearing: A hearing may be held, no later than 10 days after the date of issuance. A process for resolution is provided by the law to either recall the product and cease distribution based on evidence provided or permit the product to continue distribution. Notice to affected individuals may be required.

  • Public Notification: If a recall is required, a press release is to be published, and alerts and public notices are to be issued, as appropriate. The materials must include the name of the cosmetic; a description of the risk; to the extent practicable, information for consumers about similar cosmetics that are not affected by the recall and ensure publication on the FDA website of the image of the cosmetic. The secretary can only delegate this authority to the Commissioner of the FDA.

  • Rule of Construction: Nothing in this section shall affect the authority of the secretary to request or participate in a voluntary recall or to issue an order to cease distribution or to recall under any other provision of this chapter.

Small Businesses: Responsible persons and owners and operators of facilities whose gross annual sales in the United States of cosmetic products for the previous three-year period is less than $1,000,000 shall be considered small business and not subject to Good Manufacturing Practices, registration, and listing requirements.

  • Exemptions: The small business exceptions do NOT apply to (1) cosmetic products that contact the mucus membrane of the eye under conditions of use that are customary or usual; (2) products that are injected; (3) products that are intended for internal use; or (4) products that are intended to alter appearance for more than 24 hours under conditions of use that are customary or usual, and removal by the consumer is not a part of such conditions of use that are customary or usual.

Preemption. No state or political subdivision of a state may establish any law, regulation, order, or other requirement for cosmetics that is different for registration and product listing, good manufacturing practice, records, recalls, adverse event reporting or safety substantiation. Nothing prevents any state from prohibiting the use of an ingredient in a cosmetic product, or continuing requirement of any state in effect at time of enactment.

  • Savings Clause: Nothing in the amendments shall be construed to modify, preempt, or displace any action for damages or the liability of any person under the law of any state, whether statutory or based in common law.

Talc-containing cosmetics: The HHS secretary shall propose regulations one year after December 29, 2022 and finalize the rules 180 days after the comment period to establish testing for detecting asbestos in talc products.

(1) Not later than one year after date of enactment of this act, the secretary shall promulgate proposed regulations to establish and require standardized testing methods for detecting and identifying asbestos in talc-containing cometic products and

(2) Not later than 180 days after the date on which the public comment period on the proposed regulations closes, the secretary shall issue such final regulations.

PFAS in Cosmetic. The HHS secretary shall assess the use of perfluoroalkyl and polyfluoroalkyl substances (PFAS) in cosmetic products and the scientific evidence regarding the safety in cosmetic products, including risks. The secretary may consult with the National Center for Toxicological Research. Report must be issued not later than three years after enactment summarizing the results of the assessment conducted.

Sense of the Congress on animal testing: It is the sense of the Congress that animal testing should not be used for the purposes of safety testing on cosmetic products and should be phased out except for appropriate allowances.

Funding: $14,200,000 for 2023, 25,960,000 for 2024, and $41,890,000 for 2025-2027 have been identified for these activities. The new law provides no industry user fees.

FOOTNOTES

1 This legislation was included in H.R. 2617, the “Consolidated Appropriations Act, 2023,” as part of a year-end bill.

Article By Nancy E. Taylor and Eleanor (Miki) A. Kolton of Greenberg Traurig, LLP

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

©2022 Greenberg Traurig, LLP. All rights reserved.

BREAKING NEWS: Biden to Pardon Federal Marijuana Possession Convictions

In a historic move, today, President Joe Biden announced a three-step program to bring broad changes to federal cannabis policy. As an initial step towards reform, President Biden will pardon all federal offenders convicted of simple marijuana possession. According to administration officials, the pardons will be issued through an administration process overseen by the Department of Justice. Those eligible for the pardons will receive documentation showing they were officially forgiven for their crime.

“No one should be in jail just for using or possessing marijuana,” Biden said in a video announcing his executive actions. “It’s legal in many states, and criminal records for marijuana possession have led to needless barriers to employment, housing, and educational opportunities. And that’s before you address the racial disparities around who suffers the consequences. While white and Black and brown people use marijuana at similar rates, Black and brown people are arrested, prosecuted, and convicted at disproportionate rates.”

“Too many lives have been upended because of our failed approach to marijuana. It’s time that we right these wrongs,” the President said.

As a second step in the program, Biden also encouraged Governors to take similar steps to pardon state simple cannabis possession charges.

And as the last step in this program, President Biden directed the Department of Health and Human Services and Attorney General Merrick Garland to “expeditiously” review the cannabis’s status as a Schedule I controlled drug pursuant to the federal Controlled Substances Act.

Article By Sarah A. K. Blitz and Whitney Hodges of Sheppard, Mullin, Richter & Hampton LLP

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

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.

DOT Proposes New Guidance For Medical Examiners To Address CBD Use By Commercial Motor Vehicle Drivers

The U.S. Department of Transportation, Federal Motor Carrier Safety Administration (FMCSA) published a proposed draft Medical Examiner’s Handbook (MEH), including updates to the Medical Advisory Criteria, in the Federal Register on August 16, 2022.  The FMCSA’s regulations provide the basic driver physical qualification standards for commercial motor vehicle (CMV) drivers, in 49 CFR 391.41 through 391.49. DOT Medical Examiners currently make physical qualification determinations on a case-by-case basis and may consider guidance to assist with making those determinations.

FMCSA stated that the goal of the updated MEH and related Medical Advisory Criteria is to provide information about regulatory requirements and guidance for Medical Examiners to consider when making physical qualification determinations in conjunction with established best medical practices. The revised Medical Advisory Criteria, in addition to being included in the MEH, would also be published in Appendix A to 49 CFR part 391. The final version of the criteria would be identical in both publications. FMCSA is proposing to update both the MEH and Medical Advisory Criteria and seeks public comment on these documents until September 30, 2022.  The draft MEH may be viewed here.

Use of CBD with 0.3% THC or Less Is Not Automatically Disqualifying

Under FMCSA regulation 49 CFR 391.41(b)(12)(i), CMV drivers are not permitted to be physically qualified when using Schedule I drugs under any circumstances. The federal Controlled Substances Act lists marijuana, including marijuana extracts containing greater than 0.3% delta-9-tetrahydrocannabinol (THC), as Schedule I drugs and substances. A driver who uses marijuana cannot be physically qualified even if marijuana is legal in the State where the driver resides for recreational or medical use.

However, under current federal law cannabidiol (CBD) products containing less than 0.3% THC are not considered Schedule I substances; therefore, their use by a CMV driver is not grounds to automatically preclude physical qualification of the driver under §391.41(b)(12)(i).

FMCSA emphasized that the U.S. Food and Drug Administration (FDA) does not currently determine or certify the levels of THC in products that contain CBD, so there is no federal oversight to ensure that the labels on CBD products that claim to contain less than 0.3% of THC are accurate. Therefore, drivers who use these products are doing so at their own risk.

FMCSA now proposes that each driver should be evaluated on a case-by-case basis and encourages Medical Examiners to take a comprehensive approach to medical certification and to consider any additional relevant health information or evaluations that may objectively support the medical certification decision. Medical Examiners may request that drivers obtain and provide the results of a non-DOT drug test during the medical certification process, if it is deemed to be helpful in determining whether a driver is using a prohibited substance, such as a CBD product that contains more than 0.3% THC.

This guidance does not impact FMCSA’s drug and alcohol testing regulations.  Use of a CBD product does not excuse a positive marijuana drug test result.

Use of Suboxone and Similar Drugs Is Not Automatically Disqualifying

FMCSA received a large number of inquiries related to Suboxone (a Schedule III drug under federal law, meaning that it has a lower potential for abuse than Schedule I and II drugs).  Treatment with Suboxone and other drugs that contain buprenorphine and naloxone, as well as methadone, are not identified in the FMCSA regulations as precluding medical certification for operating a CMV. FMCSA relies on the Medical Examiner to evaluate and determine whether a driver treated with Suboxone singularly or in combination with other medications should be issued a medical certificate. The Medical Examiner should obtain the opinion of the prescribing licensed medical practitioner who is familiar with the driver’s health history as to whether treatment with Suboxone will or will not adversely affect the driver’s ability to safely operate a CMV. The final medical certification determination, however, rests with the Medical Examiner who is familiar with the duties, responsibilities, and physical and mental demands of CMV driving and non-driving tasks.

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

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

Jackson Lewis P.C. © 2022

Beyond Meat Sued Over Protein Content Claims

  • A proposed consumer class action lawsuit was filed against Beyond Meat, Inc. on June 10, alleging that the plant-based meat manufacturer embellished the amount of protein contained in its line of plant-based sausages, breakfast patties, meatballs, ground beef, and chicken products.

  • In the complaint, plaintiff Mary Yoon alleges that Beyond Meat falsely labels and advertises its products as providing “equal or superior protein” to animal-derived meat. Her claim is based on the fact that “two different U.S. laboratories have independently and separately conducted testing on a wide range of Beyond Meat products. The test results were consistent with each other: the results of both tests show that Beyond Meat products contain significantly less protein than what is stated on the product packaging.”

  • Plaintiff Yoon alleges that Beyond Meat’s quantitative declaration of protein and percent Daily Value (%DV) are false and misleading because the quantitative amount was calculated using the nitrogen method. According to the complaint, “the nitrogen method is not the most accurate way to describe protein content” and that “[b]y law, Beyond Meat is required to use the PDCAAS calculation for the products rather than some other less-sophisticated method.”

  • In opposition to plaintiff Yoon’s claims, 21 CFR 101.9(c)(7) specifically provides for two different methods to determine protein values, including the nitrogen method. The FDA recently issued a clarifying Q&A supporting the use of either method to calculate protein content (i.e., nitrogen or PDCAAS), but noted that manufacturers are still obligated to include a %DV when protein claims are made and that %DV should be adjusted for protein quality.

Article By Food and Drug Law Practice Group at Keller and Heckman LLP

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

© 2022 Keller and Heckman LLP

Agriculture Groups Sue FDA on Chlorpyrifos Ban

  • As previously reported, the Environmental Protection Agency (EPA) published a final rule on August 30, 2021 that revoked all tolerances for the pesticide chemical chlorpyrifos on raw agricultural commodities; the rulemaking was driven by toxicity concerns, primarily concerning exposure in children. The tolerances are set to expire on February 28, 2022, effectively banning the use of chlorpyrifos on food crops. In light of the expiration, FDA published a guidance document to assist food producers and processors that handle foods which may contain chlorpyrifos restudies.
  • In October of 2021, agriculture stakeholders submitted formal written objections and a request to stay the tolerance revocations to EPA. More than 80 stakeholders signed the document, arguing that significant harms would result from banning chlorpyrifos and urging the agency to stay implementation of the rule until objections were formally addressed by EPA.
  • Agriculture stakeholder groups are now seeking a court injunction against EPA’s ban on chlorpyrifos. On February 10, 2022, agricultural trade groups representing thousands of members filed a lawsuit against EPA before the Eight Circuit Court of Appeals, alleging that the agency ignored its own scientific findings regarding 11 high-benefit and low-risk crop uses for chlorpyrifos and that the revocation will cause irreparable damage. It remains to be seen how EPA will respond to the lawsuit.

Article By Food and Drug Law Practice Group at Keller and Heckman LLP

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

© 2022 Keller and Heckman LLP

Federal Cannabis Reform – Is 2022 the Year?

Hope soared with the possibility of federal cannabis reform in 2021.  And for good reason –  the induction of a new, more liberal administration, rapid state-level legalization, broad support by Americans,[1] and growing bipartisan backing led many to believe that 2021 was going to be the year where federal decriminalization of cannabis would become a reality.  But, as 2021 continued on, optimism dwindled as any advancement in federal cannabis reform was hobbled by the inability of Congress to agree on the appropriate level of reform  and the proper mechanics for passage.  Specifically, tension rose amongst the elected Democrats on whether to support incremental reform (like access to banks or removal of cannabis from the list of Schedule 1 drugs) or comprehensive legalization with provisions to address social inequities stemming from the legacy of the War on Drugs.  And so 2021 came to an end, and the cannabis industry saw yet another year of failed meaningful change on the federal level.

Still, momentum for reform has not been lost.  If anything, last year saw more bills introduced into Congress (including two new federal legalization proposals) than ever before – clearly indicating its import to our nation’s leaders.  Justice Clarence Thomas from the Supreme Court even subtly advised Congress to address legalization, noting that the Federal Government’s current “half in, half out regime” on cannabis strained the principles of federalism.

And so, as we move forward in 2022 with hope, we review the bills before Congress and their progresses to assess which of these may have some traction for passage during this upcoming year.

Secure and Fair Enforcement (“SAFE”) Banking Act of 2021[2]

Considered modest reform, the SAFE Banking Act of 2021 mainly focused on granting cannabis-related businesses access to federally-backed financial institutions.  The bill was introduced early in 2021,[3] and passed in the U.S. House of Representatives on April 20, 2021 by a vote of 321 to 101.  At the time of the House’s passage, many believed the SAFE Banking Act of 2021 would easily move its way through the Senate, due – in part – to its demonstrated bipartisan appeal with 106 Republican votes in the House.  Congressman Ed Pearlman, one of its drafters, even remarked:

After years of bringing up this issue, I’m thrilled to see overwhelming support for this bipartisan, commonsense legislation in the U.S. House once again. I feel optimistic about the path forward for the SAFE Banking Act and, more broadly, reforms to our federal cannabis laws.[4]

However, after its passage in the House, the SAFE Banking Act of 2021 languished in the Senate’s Committee on Banking, Housing and Urban Affairs.  Momentum for the bill slowed, with those opposing it campaigning for more comprehensive legalization.  In late September 2021, fervor for the SAFE Banking Act of 2021 arose again when the House passed, by voice vote, an amendment to the National Defense Authorization Act for Fiscal Year 2022 (“NDAA”) to add the SAFE Banking Act of 2021.  Many hoped that by couching the SAFE Banking Act of 2021 in the NDAA, it would make it easier to pass through the Senate.  On November 23, 2021, 4 Senators[5] penned a letter to the Senate’s Armed Services Committee urging them to retain the SAFE Banking Act of 2021 in the NDAA.  Despite these efforts, the SAFE Banking Act of 2021 was stripped from the NDAA on December 10, 2021 – stalling its progress once more.

The Marijuana Opportunity Reinvestment & Expungement (“MORE”) Act

The MORE Act is the oldest comprehensive legislative proposal.  It was passed in the House in December 2020, during a lame-duck session, but never made any headway in the Senate.[6]  On May 28, 2021, Representative Jerrold Nadler reintroduced the MORE Act into the House and much of its substance provided the legislative stepping stones for the Cannabis Administrative and Opportunity Act (“CAO”).

The MORE Act aimed to end criminalization of cannabis by removing it from the list of controlled  substances, eliminate related past criminal penalties and convictions, and provide essential criminal justice reform, social justice and economic development for those affected by the War on Drugs.  The MORE Act also would tax cannabis products starting at 5% to 8% (increasing by 1% over 5 years) to help fund social reform projects, make Small Business Administration loans and services available to cannabis-related businesses, and prohibit denial of federal public benefits (like housing) and protections under immigration law on the basis of cannabis-related conduct or conviction.

After sitting in the House Judiciary Committee, the bill was finally approved in the Committee on September 30, 2021, with 2 Republican Representatives voting yes.  This act sent the measure to the House floor for another vote before it could make its way to the Senate.

The Cannabis Administrative and Opportunity Act

Embracing the MORE Act’s goals for comprehensive reform, Senate Majority Leader Chuck Schumer (along with Senators Cory Booker  and Ron Wyden) introduced the long awaited draft of the CAO into the Senate on July 14, 2021.  Considered a historic and ambitious bill, the CAO aimed to implement a full-scale federal scheme for cannabis reform that reaches beyond just decriminalization.  It hopes to provide restorative measures “to lift up people and communities who were unfairly targeted in the War on Drugs.”[7] Specifically, the CAO seeks to do the following:

  • Decriminalize cannabis by removing it from the Controlled Substances Act and automatically expunge any arrests and convictions for non-violent federal cannabis offenses;
  • Transfer primary agency jurisdiction over cannabis to the Food and Drug Administration (“FDA”), the Alcohol and Tobacco Tax and Trade Bureau (“TTB”), and the Bureau of Alcohol, Tobacco and Firearms (“ATF”) so that cannabis can be federally regulated similar to alcohol and tobacco;
  • Establish a Center for Cannabis Products responsible for regulating the “cannabis aspect of all products containing cannabis,” and implementing requirements related to cannabis products (g., good manufacturing practice, product standards, product labeling, product distribution and recall, etc.) within the FDA;
  • Mandate federal research and studies regarding the impact of cannabis (including any benefits and/or impairments) on the human brain and health conditions and its impact on drivers under its influence;
  • Permit movement of cannabis products through channels of interstate commerce;
  • Establish Opportunity Trust Fund Programs funded by federal cannabis tax revenue to restore and reinvest in communities greatly impacted by the War on Drugs (including funds for job training, reentry services, legal aid, and youth recreation/mentoring programs) and to help level the playing field by granting entrepreneurs of color access to the cannabis industry through small business loans;
  • Prohibit denial of federal benefits or immigration protection due to a past cannabis-related offense; and
  • Impose federal excise tax on sale of cannabis products, starting at 10% and increasing up to 25% in a span of 5 years, with certain favorable tax credit for cannabis producers with less than $20 million sales.

Though the CAO has lofty goals, it does not force states to legalize cannabis, emphasizing the integrity of state-specific cannabis law.

As a draft bill, the CAO was subject to a review period in which its authors requested public comments by September 1, 2021.  At the expiration of this review period, the drafters of the bill received numerous comments from both supporters and those criticizing the CAO as overly ambitious and a big-government approach.  In particular, many critics take issue with the bill’s tax structure, calling the imposition of an ultimate 25% federal excise tax burdensome.  Indeed, the CAO – as it stands – implements the highest tax structure for cannabis products of all the bills proposed in 2021.  Many allege that the high federal tax in addition to any state-imposed tax could promote the illicit cannabis market rather than encourage business owners to engage legally.  Additionally, the high federal tax could force states to reduce their own tax requirements, negatively affecting their own ability to fund state-run social equity and education initiatives.

For now, the public comments have been taken under advisement as the cannabis industry waits to see what the drafters decide to incorporate.  Once formally filed, the CAO will be sent to a committee for continued discussions and revisions before it can be advanced to the Senate floor for a vote.

The States Reform Act

The States Reform Act (“SRA”) is the latest comprehensive reform bill led by Republican Representative Nancy Mace and introduced in the House in November 15, 2021.  Like the MORE Act and the CAO, the SRA also seeks to decriminalize cannabis and provides retroactive expungement for non-violent federal cannabis offense, except for any person involved in a drug cartel.  However, the SRA differentiates itself by limiting federal social equity reform programs.  Instead, the SRA vests the authority  to determine what level of cannabis reform, including outright prohibition, in the individual states.  States will also retain authority to regulate the use, distribution, sale and manufacturing of cannabis, with some general federal oversight by the FDA, TTB, ATF and the Department of Agriculture.  Specifically, the SRA aims to regulate cannabis like alcohol (and alcohol alone) – another substantial difference from the CAO.  The SRA permits each state to determine the appropriate age limit for purchase of cannabis products, but incentivizes states to implement a 21+ limit by eliminating funding for highways for any state with an age limit of under 21 years of age and prohibiting advertisements directed at any person under the age of 21.  The bill also seeks to provide veterans with access to medical cannabis without fear of discrimination or denial of Veteran Affairs benefits.  The SRA also generally requires that medical cannabis be permitted for treatment of arthritis, cancer and chronic pain.  Similar to the CAO, the SRA will also allow the interstate cannabis transportation.

Notably, the SRA provides the lowest tax structure for cannabis products in comparison to other reform proposals, with the proposed imposition of a single tax rate of 3% that cannot be increased for at least 10 years.  Revenues from the tax would be used to support SBA programs for cannabis businesses, law enforcement initiatives including reentry programs, and veteran mental health programs.

Given its recency, little is known about the bill’s reception in the House and any progress that has been made.  However, the SRA does carry potential bipartisan appeal, particularly because it is sponsored by 4 Republican Representatives.  Additionally, it is anticipated that the Congressional Republicans will appreciate the SRA’s straight forward tax structure capped at a low rate for at least 10 years and its stance on states’ sovereignty regarding cannabis reform.  The real issue for the SRA is its lack of restorative justice and social equity efforts, which may be its death knell in the current Democrat-controlled House.

Implications for 2022

There are now 4 bills (3 with comprehensive legislation) circulating Capitol Hill that could provide much needed cannabis reform in 2022.  Congress will likely continue debating, revising and attempting to compromise on the terms in the MORE Act, the CAO and the SRA.  Potentially, if the 3 comprehensive bills remain on the discussion table, they will compete with one another, potentially dividing the Legislators’ support.  Congress should thus focus on forging a compromise or middle ground on these reforms to increase bipartisan support and avoid competing and inconsistent bills floating around, resulting in another year of unwanted (and unnecessary) deadlock.  Indeed, the CAO could be an example of such needed compromise – especially if the drafters seriously heed the criticisms and comments provided during the bill’s review period and consider incorporating certain bipartisan elements of the SRA, like a more stream-lined and lower rate tax structure.  With that said, the status of these cannabis reform bills, particularly the CAO and the MORE Act, face potential change should this year’s mid-term elections change the makeup of who controls the Senate, House or both.

Regardless, until Congress can iron out the kinks on comprehensive cannabis reform, the SAFE Banking Act of 2021 remains a practical law to pass in the interim.  The SAFE Banking Act of 2021 is currently the least controversial of all the cannabis-reform bills, has substantial bipartisan appeal, and will provide immediate financial resources and relief to the largely cash-based cannabis industry.  Though a small reform, it is still a necessary one that is long overdue.  The SAFE Banking Act of 2021 (and its predecessors) has already made its way through the House 6 times, proving that federal lawmakers believe it will help cannabis businessmen.  It may not resolve the issue of prohibition on cannabis, but its passage will likely be a great victory for the cannabis industry, signal federal de-stigmatization of cannabis, promote public safety by discouraging participation in the illicit cannabis market, and help cannabis-related businesses comply with tax laws.

Footnotes

[1] https://news.gallup.com/poll/356939/support-legal-marijuana-holds-record…

[2] On February 4, 2022, the SAFE Banking Act passed again in the House – this time, as an included amendment to the America COMPLETES Act.

[3] The bill is the successor to the previously introduced SAFE Banking Act of 2019.  See https://www.cannabislawblog.com/2021/09/safe-banking-act-2021/

[4] https://perlmutter.house.gov/news/documentsingle.aspx?DocumentID=5486

[5] Gary Peters, Angus King, Kevin Cramer, and Mark Kelly

[6] https://www.cannabislawblog.com/2020/12/house-representatives-passes-bil…

[7] https://www.democrats.senate.gov/imo/media/doc/CAOA%20Detailed%20Summary

 

Article By Jennifer N. Le of Sheppard, Mullin, Richter & Hampton LLP

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

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.

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.

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