The facts of Indian Hills Holdings, LLC v. Frye are relatively straightforward. Plaintiff Indian Hills Holdings (“IHH”), Construction & Design Professional Corp. (“CDP”) and its principal Christopher Frye (“Frye” and, together with CDP, the “Defendants”) entered into a contract whereby IHH paid Defendants to purchase Cultivation “Adult” Extreme Cubes (the “Cubes”). Defendants in turn contracted with ICT Centurion Investments, LLC (“ICT”) to purchase the Cubes. The Cubes were marketed as a “fully integrated growing container system” used in indoor cannabis cultivation. When ICT sold the Cubes to another party, Defendants were unable to deliver the Cubes to IHH. Defendants refused to return the money, and IHH sued, asserting breach of contract, unjust enrichment and fraud claims.
A default judgment was entered against CDP for failing to respond to IHH’s complaint. Frye, however, filed a motion to dismiss the complaint, arguing in part that IHH did not have standing to bring its claims. Noting that Frye only “cursorily” raised the standing issue and that the “issue is a complex one”, the court reframed Frye’s argument as follows:
The contract is illegal under the Controlled Substances Act, 21 U.S.C. §§ 801, et seq.(the “CSA”);
Federal district courts will not enforce contracts that violate federal law;
Because federal district courts will not enforce contracts that violate federal law, IHH lacks an “actionable injury”; and
Because IHH lacks an actionable injury, the district court does not have subject matter jurisdiction.
Legal Analysis
The court began its analysis by considering whether the parties’ contract violated the CSA. Section 863(a) of the CSA makes it unlawful to sell or offer for sale “drug paraphernalia,” which is defined to include “any equipment, product, or material of any kind which is primarily intended or designed for use in manufacturing … a controlled substance.” Because the Cubes are used to grow cannabis, and because cannabis is a controlled substance, the sale of the Cubes would seemingly violate section 863(a) of the CSA. However, the CSA contains an exemption, whereby section 863 does not apply to any person authorized by state law to manufacture, possess or distribute drug paraphernalia. California allows the manufacturing of drug paraphernalia, which would include the Cubes. As a result, the court wrote that the contract “may fall within the CSA exemption.” Additionally, the court noted that the U.S. Department of Justice has declined to enforce the CSA’s prohibition on the sale of marijuana when the marijuana is bought or sold in accordance with state law. For these reasons, the court concluded that enforcing the parties’ contract would likely neither violate the CSA nor public policy.
While the contract may be legal, the court still had to consider whether assuming jurisdiction over the dispute would result in a violation of federal law. After all, federal courts will not assume jurisdiction over a dispute where the court will be required to order a legal violation. The question therefore became whether a plausible remedy existed for IHH that would not require the court to order such a legal violation. The court held that it could fashion a remedy without violating the law by simply awarding IHH monetary damages. A judgment for money damages, unlike an award of specific performance, would not result in IHH obtaining the Cubes and growing cannabis. Instead, the result would be a return of the monies paid by IHH to Defendants for the Cubes. The court’s ruling was consistent with prior cases involving state-legalized cannabis business, where the courts found ways to provide relief without violating the CSA. E.g., Polk v. Gontmakher, 2021 U.S. Dist. LEXIS 53569 (W.D. Wash. Mar. 22, 2021) (noting that “recent case law involving cannabis-related business contracts does not espouse an absolute bar to the enforcement of such contracts”); Mann v. Gullickson, 2016 U.S. Dist. LEXIS 152125 (N.D. Cal. Nov. 2, 2016) (court may consider breach of contract claim arising from sale of cannabis business when “it is possible for the court to enforce [the] contract in a way that does not require illegal conduct”).
Takeaways
As the legalized cannabis industry continues to grow and develop, market participants will undoubtedly need access to courts. The bankruptcy courts remain off-limit, thus requiring distressed cannabis businesses and their creditors to turn to state-law insolvency proceedings (e.g., assignments for the benefit of creditors; receiverships). To those in the industry, it may be a welcome relief to know that at least some federal district courts have made themselves available to these parties and that these courts thus far have shown a willingness to adjudicate disputes arising from the cannabis industry. However, any party seeking their day in federal court needs to ensure that they are not asking the court to grant relief that would violate federal law, including the CSA. This means that while money damages should be available, specific performance of the contract is likely off the table.
As Tribes expand their economic endeavors into the cannabis industry, the growth of cannabis tourism is a natural development. Below, we offer details on how cannabis tourism could support Tribal governments’ economic development efforts. We also provide an update on the status of pending federal legislation that could bring positive impacts to the cannabis industry.
Cannabis Tourism
With the pandemic continuing to take a toll on the tourism industry, many U.S. states and territories are exploring ways to help that industry recover. One potential savior for tourism is cannabis. As states went into varying levels of lockdown in early 2020, businesses deemed “nonessential,” including recreational facilities, gyms, bars, restaurants, etc. were forced to shut down. However, early into lockdown, cannabis was deemed “essential” in California, a designation other states with functional cannabis markets quickly adopted. In total, nearly 30 states, along with the District of Columbia and Puerto Rico, deemed cannabis businesses essential. This triggered some major changes in the industry, including:
Aiding in the de-stigmatization of cannabis among consumers;
Allowing cannabis businesses to take advantage of mandated business-friendly safety measures such as curbside pickup and home delivery; and
Allowing physicians to prescribe medical marijuana through online appointments, making it easier for patients to obtain medical marijuana cards.
With all of these changes, cannabis tourism has developed into a potentially rewarding industry that Tribal governments might be able to cultivate as part of efforts to recover economic losses suffered by their tourism and other businesses
What is Cannabis Tourism?
Cannabis tourism is most generally characterized as a destination-based industry that attracts tourists because cannabis is legal in that location. But the industry can take many forms. For example, tourists might visit a dispensary to learn more about the development of cannabis crops, stay at a “bud and breakfast,” tour a cannabis farm or growing facility, or dine at a restaurant with cannabis-infused dishes. Cannabis tourism can also have a positive knock-on effect for many other Tribal businesses.
How can Tribes Participate?
Interested Tribes can create specific cannabis-centered tourist destinations. One example is opening a farm or growing facility that is similar to a wine vineyard, where consumers can tour the facility and sample the products. This concept would serve multiple functions in that the farm would supply dispensaries while providing a tourism destination that would benefit hotels, restaurants, and the local economy.
Another route is to add cannabis tourism into existing tourism infrastructure. Tribes can take advantage of their land base and natural resources by offering cannabis hikes or camping expeditions, where participants are able to experience nature while partaking. Tribes with resort properties can offer CBD-infused massages at their spa, include CBD and hemp products at their gift shops, or offer travel packages designed for cannabis tourists. The idea behind this approach is to utilize the Tribe’s existing tourism infrastructure to provide new cannabis tourism options.
Federal Cannabis Legislation Update
The following is an update on pending federal legislation that would impact the cannabis industry. Summaries of previous cannabis legislative developments are provided in past articles..
The Cannabis Administration and Opportunity Act, S. ___ has not yet been introduced in the Senate. The bill would completely remove cannabis from the controlled substances list under the Controlled Substances Act and would allow states to implement their own laws regarding cannabis without fear of federal intervention. Senators Schumer, Booker, and Wyden published a discussion draft of the legislation on July 14, 2021, and the deadline for public comments was September 1, 2021. Once the legislation is finalized it will be referred to committee for continued review and revision.
The MORE Act of 2021, H.R. 3617, was introduced in the House of Representatives on May 28, 2021. The Act would end the criminalization of cannabis at the federal level retroactively and going forward. Federal cannabis arrests, charges, and convictions would be automatically expunged at no cost to the individual. Under the MORE Act, individual states would determine whether to criminalize cannabis. The Act would also create the Office of Cannabis Justice to oversee the social equity provisions in the law. The Act has been referred to several House subcommittees and was most recently marked up by the House Judiciary Committee on September 30, 2021.
The Democrats control both the House and the Senate (with Vice President Harris acting as the tie-breaking vote in the 50-50 Senate) but passing any cannabis legislation in the current Congress might prove difficult. The filibuster rules require 60 votes for a bill to pass the Senate, so any cannabis legislation would need relatively strong bipartisan support.
The future of federal cannabis law remains unclear, but Tribes interested in the cannabis industry can start taking steps now to establish the necessary framework to support this new area of Tribal economic enterprise.
While the world has been hunkered down at home, participating in Zoom calls and getting jobs done from kitchen tables and home offices across the country, the legal industry has continued to innovate, respond and move forward, even during these troubled times.
Read on for a sampling of legal industry changes from May 2020.
Hiring and Law Firm Moves
Last week, Perkins Coie announced that Jill Louis joined the Corporate & Securities practice as a partner in the Dallas office, in a move that further augments their capabilities in the Lone Star state. Randy Bridgeman, the co-chair of Perkins Coie’s Corporate & Securities practice praised Louis’s entrepreneurial spirit and her in house and leadership experience. He says, “Jill’s background in M&A and representing private equity-backed healthcare, infrastructure, and technology companies will be highly valuable to our clients across Texas and beyond.”
Jill B. Louis Perkins Coie
Louis has experience working with public and private companies in mergers and acquisitions, franchise transactions, corporate governance matters and working in industries including retail, technology and healthcare. She has worked with large and small companies, from startups to Fortune 50 corporations, and has worked both in house and in private practice during her career. Dean Harvey, the Dallas office managing partner, says, “Jill’s arrival aligns with our ongoing strategy of expanding our corporate offering in Dallas to support our growing technology and privacy capabilities.”
Up in the northeast, Pierce Atwoodadded bankruptcy and creditors’ rights attorney Alex F. Mattera to the firm’s Boston office. Mattera focuses his practice on creditor and debtor rights, commercial bankruptcy, bankruptcy litigation and insolvency. He represents secured creditors, focusing on the collection and workouts of defaulted and troubled loans, creditors’ committees, debtors, trustees and other parties involved in bankruptcy.
“Alex’s expertise in bankruptcy and creditors’ rights matters, particularly his loan workout experience, will really help us serve our lending and business clients. This is the third major recession Alex has been through,” said Pierce Atwood Business Practice Group Chair Keith J. Cunningham. “That kind of experience is so valuable in times like these. We couldn’t be happier to welcome him to the firm.”
Mattera has presented and sat on panels for the American Bankruptcy Institute, as well as Massachusetts Continuing Education and the Boston Bar Association.
“Alex’s expertise in workouts and collections will provide the firm even greater depth on the backend of loan transactions as we continue to provide a comprehensive suite of services to creditors and banks,” said Bruce I. Miller, Pierce Atwood’s real estate lending partner.
Devon Williams Ward and Smith
With an eye to the future and succession planning, North Carolina firm Ward and Smithelected labor and employment attorney Devon Williams as the firm’s co-managing director elect. Williams will assume the new role at the end of 2020. She will serve alongside Brad Evans, who has served as the Ward and Smith’s managing director since 2017. Williams is preceded in the co-managing director position by Ken Wooten, who is retiring from Ward and Smith at the end of this year.
“Succession planning is essential to all businesses, including our own, and choosing a strong leader enables seamless continuity in client service, and maintains stability within the firm,” Wooten said. “I think it says a lot about our firm that we’re selecting a millennial leader to take us into the next decade. Devon will bring a unique, and much needed perspective to the perennial concerns of a fully-engaged law firm.”
Since joining Ward and Smith in 2012, Williams has led the firm’s Labor and Employment Section and co-chaired the Raleigh Geographic Team.
“I’m grateful for and enthusiastic about the opportunity to build upon the legacy the firm has experienced under Ken’s leadership while working in tandem with Brad to continue our efforts to innovate efficient legal solutions for our clients, and attract and retain top-tier talent,” Williams said.
As co-managing director of Ward and Smith, Williams will maintain her labor and employment practice, where she advises employers on wage and hour issues, federal contractor compliance, prevention of employment discrimination, employee discipline and retaliation and harassment claims.
Life sciences attorney Frank Rahmani joined Sidley Austin as a partner in the firm’s Palo Alto, Calif., corporate practice, and will be a member of the Global Life Sciences practice. Ramani counsels CEOs, boards of directors, founders and investors on financings and public offerings, strategic collaborations, licensing matters, technology acquisition and spin-off transactions.
“Frank has a well-earned reputation as a trusted adviser, which is built on enduring relationships and breadth of experience representing high-growth, cutting edge life sciences and technology companies and investors at all stages,” said Martin Wellington, managing partner of Sidley Austin’s Palo Alto office. “He has great energy, a high-quality practice and a clear vision for growth that aligns with ours. Frank’s arrival signifies our strategy to build out Sidley’s presence in Northern California.”
Gitter joined Womble Bond Dickinson in 1962, when Womble had about a dozen attorneys. Gitter was the lead attorney in over one thousand cases filed in North Carolina state and federal courts between 1964 and 2009. Many lawyers who are now partners with the firm tried their first cases with Gitter, including Gemma Saluta, Murray Greason, Rachel Keen, Jim Morgan, Rick Rice, Bill Raper, Ellen Gregg, Alison Bost, Brad Wood and Chris Geis.
Gitter was inducted as a fellow in the American College of Trial Lawyers in 1982, and served as an Advocate in the American Board of Trial Advocates. He loved legal research and the law, but his interests also included coaching the Tiny Demons Pop Warner football team and his work at the Children’s Center, a facility devoted to the education and care of children with chronic health issues. He put himself through law school in part with his work as a night radio deejay on the campus radio station, employing his trademark sign-off at the end of the night: “Remember never to buy bad dreams.”
Gitter is survived by his wife of 32 years, Sandy; three children, Alison, Kent, and Ryne; two step-children, Wendy and Rob; multiple grandchildren and one great-grandchild.
Law Firm Innovation, Awards and Accomplishments
Redgrave LLP, a law firm focused on information governance and eDiscovery law, formed a Restructuring Discovery Team, working closely with law firms and advisors on litigation readiness and discovery for all types of restructurings. The Redgrave team handles data collection, preservation and review efforts during pre-petition and after a bankruptcy has been filed.
“We are proud to be the nation’s leading eDiscovery law firm, and we are very excited to formalize our experience in restructuring discovery,” said Redgrave partner Christine Payne, head of the firm’s restructuring team. “Many people do not realize how different discovery can be in the restructuring and bankruptcy contexts, as opposed to typical civil litigation. There is significant client need in this area, and we want to support that.”
IP Stars covers IP practice areas in over 70 jurisdictions, making it one of the most comprehensive guides in the industry.
In a decision that could provide a roadmap for local Marijuana dispensaries, A Kutak Rock team including litigation partners Andrew King and Fred Davis, and intellectual property counsel Sara Gillette representing Conway, Arkansas-based Harvest Cannabis Dispensary (“Harvest”) secured a preliminary injunction in a trademark dispute. Natural State Wellness Dispensary, LLC (“NSW”), and Natural State Enterprises, LLC, were using the name “Harvest” in for cannabis facilities across Arkansas, something the preliminary injunction now prohibits.
After an evidentiary hearing conducted over Zoom, Circuit judge Susan Weaver rejected the argument that The NSW Entities were authorized to use the name “Harvest” through their connection with Arizona-based Harvest Health & Recreation, Inc, a company using the Harvest mark in Arizona, Pennsylvania and Florida prior to the opening of the Arkansas Harvest dispensary. The court looked at precedent set by the USPTO and other federal courts, indicating products containing more than 0.3% THC are illegal under the Controlled Substances Act and therefore do not enjoy Trademark rights under the Lanham Act. Furthermore, Harvest adopted its name in 2017 and opened its facility in October of 2019, providing the dispensary with state-law trademark rights in Arkansas.
Kutak Rock partner Andrew King: “The Faulkner County outcome is the first of its kind, where a local cannabis dispensary prevailed under state trademark law against a multi-state operator for which federal trademark protection is unavailable. This outcome could provide a road map for local cannabis companies in states where cannabis has been legalized.”
Law Firm and Legal industry Response to COVID-19: A Sampling
COVID-19 has upended business as usual across the country; injecting terms like “flatten the curve”; “PPE” and “Contract Tracing” into everyday conversation. The National Law Review has covered some of the steps firms and other legal industry groups have taken to have a positive impact during these challenging times. For example, DLA Piper has signed on to the Ascend’s Five Point Action program, demonstrating a dedication to mitigating the disparate impact of COVID-19 on minority communities. Additionally, to broaden the reach of Coronavirus information and regulatory developments, Cornerstone Research worked with Stanford University to provide a database of legal articles and memos. Below are some more instances of law firms and other legal industry groups taking steps to mitigate the negative impact of COVID-19.
Mintz Law Firm provided pro bono counsel to Partners in Health (“PIH”), a Boston global health nonprofit, helping with the development of the Massachusetts COVID-19 Community Tracing Collaborative (“CTC”). The CTC is an initiative that works with PIH, the Massachusetts COVID-19 Command Center, Commonwealth Health Insurance Connector Authority and Massachusetts Department of Public Health to train, hire and deploy workers who will work with individuals exposed to Coronavirus. This veritable army of “contact tracers” will provide individuals with information about the virus, social support to facilitate self-isolation or quarantine, and provide appropriate next steps so individuals can stay healthy and protect their families; ultimately enhancing the Commonwealth’s ability to respond to COVID-19. Dr. Joia Mukherjee, PIH’s chief medical officer, says on contact tracing:
Access to this information helps contacts to know how to protect their loved ones, and to get tested or cared for themselves,” she said. “Without knowing our own status, without being able to specifically protect our loved ones, we are all living in the dark. (And) we know that there is significant anxiety in this darkness.
An interdisciplinary group of Mintz attorneys worked with PIH to facilitate this partnership on a pro-bono basis, helping this critical work get off the ground. Attorneys involved were Dianne Bourque and Ellen Janos, Members in Mintz’s Health Practice, Elissa Flynn-Poppey, Chair of the Government Law Practice, Julie Korostoff Chair of the firm’s IT Transactions & Outsourcing Practice, Andrew Matzkin, a Member in the firm’s Employment practice, and Corporate Associate Daniel Marden.
“Mintz is pleased to have been able to assist PIH in its efforts to change the course of COVID-19 in the Commonwealth,” said Mintz Member Ellen Janos. “It has been deeply rewarding to work on such a critically important project.”
Another group working to mitigate the negative impact of COVID-19 is the Diverse Attorney Pipeline Program(“DAPP”), a group with a mission to diversify the legal profession by expanding opportunities for women of color law students to secure summer positions at law firms and corporations following their first year of law school, an activity that greatly increases the likelihood of an offer of paid employment after graduation. DAPP was founded by Tiffany Harper and Chastity Boyce, both women of color who graduated from law school during the previous recession, and are passionate about mitigating the negative effects on women attorneys of color.
Recognizing the disruption that COVID-19 has had on everyone, and specifically law firm internships, DAPP is launching a fund and fellowship for students who are unable to complete their law firm internships this year. Started with seed money from the organization, DAPP has a goal of 100,000 to fund this program, and is requesting support from law firms, corporations, bar associations, and other nonprofit organizations in the form of earmarked donations.
“As law firms and businesses are forced to cut their summer internship programs, we hope they’ll consider contributing to this fund to support our work of infusing the pipeline to the legal profession with talented, highly qualified women of color in order to address the dismal statistics surrounding the number of women of color who are hired, retained and promoted at large law firms across the nation,” said Harper.
Students who receive the stipend will receive financial support as well as intensive professional development; involving volunteer legal work to facilitate skill development and meaningful training for participants. Additionally, the awardees will be matched with lawyer mentors, be provided with professional development and coaching.
“This is not a time to give up on diversity and inclusion efforts; it’s a time to refocus our efforts on preparing the next generation of lawyers for the challenges they’ll face in a diverse, global marketplace,” added Boyce.
Starting May 10, 2020, New York City employers may not require prospective employees to submit to testing for the presence of marijuana or tetrahydrocannabinols (or THC, the main psychoactive component of marijuana) in an individual’s system as a condition of employment. Currently, neither New York state nor New York City have any general ban on drug testing during employment.
The long-awaited ban, which was passed in April 2019 and is included as an amendment to the New York City Human Rights Law, outlines several exceptions based on the employer’s industry and the prospective position. These include, for example, police or peace officers, positions requiring a commercial driver’s license or those governed by Department of Transportation regulations, positions subject to testing under federal or state regulations or grant conditions, and positions requiring the supervision or care of children, medical patients or vulnerable persons. The new law also exempts positions that will be subject to a collective bargaining agreement that already addresses pre-employment drug testing for those prospective employees. The amendment also includes an exception for positions with the potential to impact the health or safety of employees or the public as identified by the New York City Commission.
In March 2020, the New York City Human Rights Commission issued proposed rules, which include proposed categories for safety sensitive roles, including positions that require regularly working on an active construction site, or power or gas utility lines, positions regularly operating heavy machinery, positions in which an employee operates a motor vehicle on an approximately daily basis, or positions in which impairment would pose an immediate risk of death or serious physical harm to the employee or others. The public comment period for the proposed rules has passed, but the expected finalizations of these rules has been delayed as a result of the COVID-19 pandemic.
The amendment bans only pre-employment testing for marijuana; it does not address testing for any other substance or mid-employment marijuana testing. However, all New York state employers should be mindful of the potential application of the New York medical marijuana law and applicable employment-related protections, including its relation to disability protections and accommodations under antidiscrimination laws.
Failure to adhere to the new ban on pre-employment screening can result in civil penalties up to $250,000 as well as consequential and punitive damages and attorneys’ fees.
Employers in New York City should review their existing drug-testing policies to confirm that they are in compliance with the new law, as well as contact their testing vendors to ensure any pre-employment tests comply with the new law.
As shelter in place orders were rolled out in California, many businesses transitioned their workforce to remote work for the first time. Employers had to determine how to track hours worked or what qualified as a business expense. However, other unique questions arise with a remote workforce, such as how to handle employees using marijuana while working from home.
Over a decade ago, when California passed the Compassionate Use Act, an employee questioned an employer’s right to prohibit marijuana use. The California Supreme Court in Ross v. Ragingwire held the employer need not accommodate medicinal marijuana use, irrespective of the Compassionate Use Act of 1996. Ross reasoned that since the California Fair Employment and Housing Act (FEHA) does not require employers to accommodate illegal drug use, the employer could lawfully deny employment to individuals using medical marijuana, which remains illegal under federal law.
More recently, in 2016 California legalized marijuana for recreational use, which further complicated employee marijuana use at work. Despite the change in marijuana’s legal status, the law reiterated that an employer could have a policy against the use of drugs while working or at the workplace.
While the law permits employers to prohibit drug use at work, now a large portion of workers are working remotely, Unfortunately, the lines for employees may be blurred since they are in their own homes (and many people seem to need a little extra help getting through this pandemic).
Employers should remind employees that during working hours, the expectation is that employees will comply with all policies of the company, including drug and alcohol policies. If the company does not have a drug and alcohol policy, it may want to include information prohibiting the use of drugs and alcohol while performing work in a remote work agreement or work from home policy.
If a manager or supervisor suspects that an employee is using marijuana or other drugs while performing work for the company, the supervisor should be instructed to reiterate the company’s policies.
The more difficult aspect of a remote workplace is handling an employee who is clearly under the influence while working, such as appearing intoxicated at a video conference. In California, an employer can only request an employee undergo a drug test under limited circumstances, including if there is reasonable suspicion that the employee is under the influence. While there may be sufficient evidence to request a drug test, due to concerns surrounding COVID-19 including overwhelmed medical providers, an employer will need to more carefully consider whether to insist an employee submit to a drug test at this time. Similarly, as some employers are actually hiring new employees during COVID-19, they too may wish to consider whether to postpone typical post-offer, pre-hire drug tests until the current health crisis has calmed down. Of course, drug tests are still necessary for employees in safety-sensitive positions, but they typically are not working remotely.
If an employee voluntarily requests leave for drug rehabilitation, assuming the employer’s workforce is over 25 employees, the employer should grant the leave pursuant to California Labor Code Section 1025, unless the leave would result in an undue hardship. Other leaves may also apply, so employers should consult with their Jackson Lewis attorney. However, of note, all the new COVID-19 California Paid Sick Leaves are limited to either actual COVID-19 diagnosis or exposure, caring for family, or childcare issues only. As such there will be no need to grant paid sick leave to an employee who claims pandemic stress-induced drug use.
Employers should also be cautious that they are not overstepping into trying to control an employee’s lawful off-duty activities. This may include, for instance, seeing social media posts from employees using marijuana at home. Unless it’s clear from the post that the marijuana usage occurred during working hours, employers should refrain from taking any action.
On Feb. 10, 2020, as West Virginia companies were finalizing applications for medical marijuana permits, President Donald J. Trump made statements that caused several companies to reconsider filing. President Trump said he is “empowered to ignore the congressionally approved medical cannabis rider [to the Omnibus Spending Bill], stating that the administration ‘will treat this provision consistent with the president’s constitutional responsibility to faithfully execute the laws of the United States.’”[1]
Both existing medical marijuana companies and those interested in applying for permits want to know whether this assertion of power would be justified and if it would affect their ability to do business going forward. That is: Has the executive branch been empowered to ignore the congressional spending power given to Congress in the Constitution? If so, from where does that power derive? Further, when two Congressional Acts conflict, what is the executive “empowered” to do, if anything?
Under Article II, Section 3, of the Constitution, “The executive power shall be vested in a president . . . [who] shall take care that the laws be faithfully executed.”[2] By assigning the executive power to see that laws be “faithfully executed” and assigning Congress with “all legislative powers” granted by the Constitution, the founders limited the executive to only enforce the laws promulgated by Congress.[3] Thus, the executive branch is given limited power, which “must stem either from an act of Congress or from the Constitution itself.”[4] Under the Controlled Substances Act (CSA), Congress has given the executive expressed power to enforce the laws identified under the CSA. This power, however, is limited to Congressional authority. Thus, the power can be suppressed or eradicated by Congress at will. When this occurs, the executive has little to no ability to enforce the law.[5]
In 1970, Congress enacted the CSA to regulate specific drugs deemed at risk of abuse and dependence.[6] Since then, cannabis has been declared by Congress to be a Schedule I drug, meaning there is no acceptable medical use, establishing its outright ban. To support the banning of cannabis, Congress asserted, “Controlled substances [like cannabis] have a substantial and detrimental effect on the health and general welfare of the American people.” Until 2014, Congress supported the full enforcement of the CSA through Omnibus Spending Bills.
However, in 2014, in public law No. 113-235, Section 38, in the Rohrabacher-Farr Amendment, Congress expressed its will to limit the DOJ’s (executive’s) power to enforce the CSA by restricting the DOJ’s use of congressionally approved funds therein. Specifically, the amendment prevented funds made available under the spending bill “to be used to prevent [32 States and the District of Columbia] from implementing their own state laws that authorize the use, distribution, possession, or cultivation of medical marijuana.” In so doing, Congress effectively removed the DOJ’s power to enforce the CSA against state legal entities.
In addition to the question of enforcement authority by the executive, there are also questions regarding whether Congress was endowed with the power to regulate the cultivation, processing, or sale of drugs generally. In our limited federal government model, in order for Congress to create a law, it must have been given the power to act by the Constitution.[7] There are two essential constitutional provisions typically relied upon to justify the vast majority of our laws, which are both found in Article I, Section 8 of the Constitution.[8] The first is the power to tax and spend for the “general welfare” of the people. The other is the power to regulate interstate commerce. The founders feared the power to tax and spend for the general welfare had the potential to be broadly construed, and they discussed at length how the General Welfare Clause should be interpreted narrowly.[9]
In other words, absent an enumerated power listed in Article I, Section 8 or an amendment to the Constitution, Congress has no constitutional power to act. Some contemporary examples highlight the means by which Congress has been able to regulate such vices when there is no enumerated constitutional power to do so. For example, when Congress outlawed the sale of alcohol during the prohibition era, it could not do so based on the language of the Constitution. Rather, Congress had to amend the Constitution with the ratification of the 18th Amendment in 1919. Congress had no such constitutional authority to ban alcohol; it had to create a new power to enact prohibition. Likewise, when the federal government wanted to enact a federal minimum drinking age of 21, it knew it could not create a law mandating the restriction, because no such constitutional power exists. Rather, Congress used the General Welfare Clause by conditioning receipt of federal highway funds on a state’s adoption of the 21-year age limit.[10] Congress did not create a national drinking age; it just provided a carrot to trigger state compliance.[11]
Despite this legislative history, the Supreme Court found Congress has the authority to enact the CSA pursuant to the Commerce Clause.[12] Specifically, in Raich, California’s Compassionate Use Act authorized limited marijuana use for medicinal purposes, and respondents Raich and Monson, who were California residents, both used doctor-recommended marijuana for serious medical conditions.[13] After federal Drug Enforcement Administration (DEA) agents seized and destroyed all six of Monson’s cannabis plants, respondents brought this action seeking injunctive and declaratory relief prohibiting the enforcement of the federal CSA to the extent it prevented them from possessing, obtaining, or manufacturing cannabis for their personal medical use.[14] Respondents argued enforcing the CSA against them would violate the Commerce Clause and other constitutional provisions.[15] The district court denied the respondents’ motion for a preliminary injunction, but the Ninth Circuit reversed, finding they had “demonstrated a strong likelihood of success on the claim that the CSA is an unconstitutional exercise of Congress’ Commerce Clause authority” as applied to the intrastate, noncommercial cultivation and possession of cannabis for personal medical purposes.[16] On review, the Supreme Court vacated the Ninth Circuit and reinstated the district court’s ruling.[17] It held Congress was acting within its Commerce Clause power in enacting the CSA.[18] Whether that holding would be revisited is a question many are currently asking.
[2] The Constitution enumerates few powers to the executive. These include: power to veto bills passed by Congress—art. I, § 7, cls. 2 & 3; power to write checks pursuant appropriations made by law—art. I, § 9; military power as commander in chief—art. II, § 2, cl. 1; pardon power—Id.; power to make treaties, with advice and consent of the Senate—art. II, §2, cl. 2; power to nominate ambassadors, federal judges, and other public officers, with advice and consent of the senate—Id.; power to make recess appointments—art. II, § 2, cl. 3; and power to convene and adjourn both houses of Congress—art. II, § 3. The Constitution also imposes duties on the president, which the president has power to implement. These include: duty to preserve, protect and defend the Constitution—art. II, § 1; duty to advise Congress on the state of the union—art. II, § 3; duty to receive ambassadors and other public ministers—Id.; duty to faithfully execute the law passed by Congress—Id.; and duty to commission officers of the United States—id.
[3] See Youngstown Sheet & Tube Co. v. Sawyer, 343 U.S. 579, 587-588 (1952).
[4] Id. at 585.
[5] See id., at 602 (Frankfurter, J. concurring) (stating that “[i]t cannot be contended that the president would have had power” when “Congress explicitly negated such authority in formal legislation.” Thus, “Congress has expressed its will to withhold power from the president”).
[6] Joanna R. Lampe, Cong. Research Serv., R45948, The Controlled Substances Act (CSA): A Legal Overview for the 116th Congress Summary (2019).
[7] Andrew Nolan, et al., Cong. Research Serv., R45323, Federalism-Based Limitations on Congressional Power: An Overview 4 (2018).
[8] The specific provisions stated within U.S. Const. art. I. § 8 are: “The Congress shall have power To lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defence and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States;” and “to regulate commerce with foreign nations, and among the several states, and with the Indian Tribes[.]”
[9] Prior to the ratification of the Constitution, Alexander Hamilton, largely known as the leading advocate for a strong federal government, provided that “[t]his specification of particulars [the 18 enumerated powers of Article I, Section 8] evidently excludes all pretension to a general legislative authority, because an affirmative grant of special powers would be absurd as well as useless if a general authority was intended.”[9]The Federalist 83 (Alexander Hamilton) (emphasis added); later Hamilton would take a more expansive view on the clause. See Hamilton, Alexander, (5 December 1791) “Report on Manufactures” The Papers of Alexander Hamilton (ed. by H.C. Syrett et al.; New York and London: Columbia University Press, 1961–79).James Madison, another key Federalist, said if Congress could do anything it wanted to promote the general welfare, then it “would be a metamorphosis of the Constitution into a character which there is a host of proofs was not contemplated by its creators.”[9] Letter from James Madison to James Robertson, Jr., (20 April 1831), National Archives, Founders Online,https://founders.archives.gov/documents/Madison/99-02-02-2332 (last updated September 29, 2019).
[9] See South Dakota v. Dole, 483 U.S. 203, 211-12 (1987).
[10] See id.
[11] Something to consider today is Congress’ recent act to raise the federal age of tobacco use to 21. Rather than attempting to connect the minimum age to a constitutional authority like the prior examples, it appears Congress outright mandated it to the states. This demonstrates that, over time, Congress feels it has gotten stronger as constitutional protections have weakened.
So, what now for employers in Illinois? May they tell workers who get stoned on a break that they must leave the workplace? Can they still maintain a drug-free workplace? Can they still do drug testing? The answer to all three questions is yes; however, as explained below, there are important steps that an employer must take should it decide to discipline an employee. While there will be much to work out as Illinois navigates its new cannabis laws, employers may maintain the same standards at work that they had before the law became effective. But they need to know and follow the new law’s requirements.
Parameters of the New Law
On January 1, 2020, the Cannabis Regulation Tax Act (CRTA), 410 Ill. Comp. Stat. Ann. 705/10 et seq., became law, permitting personal and recreational cannabis use for all individuals 21 years of age or older. Under the CRTA, Illinois residents may possess 30 grams of cannabis flower, 500 milligrams of a THC-infused cannabis product and 5 grams of cannabis concentrate for personal use.
The CRTA will not be interpreted to diminish workplace (includes buildings, real property and parking lots under control of the employer and used by the employee to perform job duties) safety. The act identifies and allows employers to adopt certain cannabis policies relating to use, consumption, storage and impairment to further protect employee safety, such as:
Employers are allowed to adopt a reasonable zero-tolerance policy for its employees or require a drug-free workplace.
Employers are permitted to adopt employment policies relating to drug testing, smoking, consuming, storing and using cannabis while an employee is at the workplace, performing job duties or on call.
Employers may prohibit an employee from using cannabis or from being under the influence of cannabis while at the workplace, performing job duties or on call.
Employers may undertake disciplinary measures or terminate an employee’s employment for violating a reasonable workplace drug policy.
A Fine Line
One of the trickier aspects for Illinois employers will be making a determination of when an employee is impaired or under the influence of cannabis. The law provides that an employer can express a “good faith belief” that the employee manifests certain articulable symptoms that decrease or diminish the employee’s job performance and responsibilities. The CTRA identifies a number of symptoms an employer may consider in finding an employee is impaired or under the influence, such as “symptoms of the employee’s speech, physical dexterity, agility, coordination, demeanor, irrational or unusual behavior, or negligence or carelessness in operating equipment or machinery; disregard for the safety of employee or others, involvement in any accident that results in serious damage to equipment or other property; disruption of a production of manufacturing process; or carelessness that results in any injury to the employee or others.”
When an employer takes any action against an employee for being under the influence of cannabis, the CTRA requires that an employee be provided a reasonable opportunity to challenge the basis of an employer’s determination. Employers should notify an employee in writing of its determination and invite the employee to state their case as to why the employer’s determination may be incorrect before it takes an adverse action against the employee. All activity in the appeal process should be documented.
Employers’ Rights and Liability
Some good news for employers is that the CTRA does not create or imply a cause of action against an employer for the actions taken relating to an employer’s reasonable workplace drug policy. IL LEGIS 101-593 (2019), 2019 Ill. Legis. Serv. P.A. 101-593 (S.B. 1557) (WEST). Actions taken relating to an employer’s reasonable drug policy include subjecting an employee or applicant to a drug and/or alcohol test, nondiscriminatory random drug testing, disciplining employees, termination of employment or withdrawing an offer for employment because of a failed drug test. The amendments to the CTRA now expressly limit an employer’s liability for disciplining or terminating employment resulting from a failed drug test. Further, the amendments to the CTRA clarify and reinforce an employer’s ability to administer pre-employment and random drug testing policies.
Employers must be careful, however, to not take action against an employee when the use of cannabis is after work hours. The Right to Privacy in the Workplace Act was amended, effective January 1, 2020, 820 Ill. Comp. Stat. Ann. 55/5, to specifically prohibit employers from terminating employment because of an employee’s personal or recreational use of lawful products (including cannabis) outside of the workplace during nonworking, off-call hours. In the event an employee is disciplined or employment is terminated because of cannabis use outside of the workplace during off-duty hours, an employee may bring a discrimination cause of action under the Right to Privacy in the Workplace.
It is anticipated that there will be tension between individuals contesting an employer’s determination that he/she was impaired or under the influence of cannabis at the workplace with the contention that any use was during off-duty hours. For instance, what if an employee used cannabis four hours before starting a shift? The employee may claim protection under the Right to Privacy in the Workplace, whereas the employer may argue the employee was nonetheless under the influence in the workplace. This tension is exacerbated by the fact that there is currently no test to determine how recently an individual has used, consumed or smoked cannabis. Further, there is no test that determines how high or low cannabis levels are in an individual.
Illinois employers will need to understand and follow the CTRA laws and Right to Privacy in the Workplace laws. Employers should prepare specific written policies to address these new issues.
As early as September 23, 2019, the United States House of Representatives is expected to vote on the widely anticipated Secure and Fair Enforcement (SAFE) Banking Act. First introduced in both chambers of Congress in 2017, re-introduced in the House in March of 2019, and amended this past June, the SAFE Banking Act has garnered bipartisan support as a necessary solution to the dilemma created by conflicting federal and state cannabis law regimes, particularly as it relates to financial service providers.
According to a press release issued by the House Committee on Financial Services on March 26, 2019, committee chairwoman, Representative Maxine Waters (D-CA), remarked, the SAFE Banking Act “addresses an urgent public safety concern for legitimate businesses that currently have no recourse but to operate with just cash.” The Act joins the ranks of congressional efforts such as the Rohrabacher-Farr amendment to omnibus spending bills, Section 728 of the Consolidated Appropriations Act of 2019, the pending Blumenauer amendment, and proposed Strengthening the Tenth Amendment Through Entrusting States (STATES) Act—all of which seek to reconcile the federal government’s failure to enact comprehensive marijuana and, until recently, hemp policy despite widespread support on the state and local level. Status in the Senate is uncertain, as the chair of the Banking Committee has indicated an intent to poll those in Idaho, a state that has failed to legalize any form of cannabis, regarding the issue.
Today’s cannabis industry encompasses the growth, processing, distribution, and other ancillary services related to both hemp and marijuana. While hemp and marijuana are both derived from the plant Cannabis sativa L, they are legally distinguished on both a federal and state level by their THC content. As a result, marijuana remains a controlled substance under federal law, while hemp, boasting lower THC levels, is classified as an agricultural product within the purview of the United States Department of Agriculture (USDA). This federal distinction, however, has not prevented more than 40 states from legalizing marijuana for medical and/or recreational adult use. Unfortunately, the businesses that choose to take advantage of such progressive state marijuana laws must do so without the support of traditional financial institutions that businesses, particularly minority and women-owned, rely on to fund and protect their financial growth.
According to §4(a) of the bill’s text, the SAFE Banking Act will shield depository institutions that serve cannabis-related businesses from federal penalties in states and Indian country where “cultivation, production, manufacture, sale, transportation, display, dispensing, distribution, or purchase” of cannabis is legal. In particular, the Act will prohibit regulators from terminating or limiting deposit or share insurance of financial instruments because an institution’s client participates directly or indirectly in the cannabis industry. Regulators will also be prohibited from penalizing institutions for authorizing, processing, clearing, settling, billing, transferring, reconciling, or collecting payments for a legitimate cannabis-related business for payments made by any means, including a credit, debit, or other payment card, an account, check, or electronic funds transfer. Perhaps, most importantly, the Act will also require the Federal Financial Institutions Examination Council (FFIEC) to develop uniform guidance and examination procedures for depository institutions serving cannabis-related businesses.
For financial institutions and insurance providers operating in states where cannabis is legal, this creates an immense opportunity and incentive to assist industry participants as they strive to protect and invest their monetary assets without putting the institutions they rely on at risk of federal prosecution. However, because protections under the SAFE Banking Act only apply when legitimate cannabis-related businesses are involved, monitoring clients’ compliance with relevant state laws will be particularly important. In the absence of clear federal marijuana policy and official hemp regulations under the 2018 Farm Bill, in addition to constantly evolving state laws and regulations, this may prove especially challenging. As such, in anticipation of the Act’s passage, financial institutions should enlist the support of experienced legal counsel to ensure the necessary processes for monitoring clients’ compliance are in place. In addition, those seeking to benefit under the Act should still pay close attention to due diligence requirements promulgated by the Financial Crimes Enforcement Network (FinCEN), although many concerns should be alleviated by the Act’s prohibition on civil or criminal prosecution solely based on the provision of financial services or investing income derived from such services.
NOTE: Cannabis as defined under the Act only references marijuana. However, in practice, the bill’s passage should alleviate apprehension surrounding hemp, as many financial institutions and their affiliates have refrained from offering services to hemp businesses under the current financial legal framework, even in the wake of the 2018 Farm Bill and pending USDA regulations.
The hemp and cannabidiol (“CBD”) industries today face substantial uncertainty, and they lack clear Federal rules, regulations, and guidance within which governments and businesses can safely operate.
That dearth of guidance has, to some degree, left individual states to wrestle with how best to regulate and control the production and sale of hemp and hemp-derived products within their own borders. At the epicenter of this struggle to address and regulate hemp in North Carolina is “smokable hemp.”
Where Do Things Stand in North Carolina?
When we last commented on the state of legislative efforts in North Carolina, the House of Representatives – along with local and state law enforcement agencies and county district attorneys – were fighting hard to kill the smokable hemp market in our state. The proposal set forth in the current version of the NC Farm Act of 2019 (“SB 315”) seeks to immediately ban and reclassify smokable hemp as marijuana (the Senate version of the bill included a ban as well but on a much more delayed timeline), and to subject its cultivation, sale, possession, and consumption to the same criminal and civil penalties as those for marijuana. The arguments and justifications for this ban have shifted over time, but generally include: that failing to ban smokable hemp will create “de facto” marijuana legalization in our state; that hemp and marijuana are indistinguishable in appearance and smell; that law enforcement will lose probable cause for drug-related searches and seizures; and that they will have to purchase expensive equipment to perform THC analysis in crime labs; that they will have to retire or retrain drug-sniffing canines (yes – this is apparently more important to House Republicans than the livelihood of our farmers and citizens’ civil liberties); that officers will have to be retrained and assigned to other jobs within their departments; and a general unwillingness to police and enforce marijuana laws differently in the future.
Since then, additional changes have been made to SB 315 – none of which are industry-friendly – and the bill was passed and approved by the House by a vote of 63 to 48. Among other things, the revised House version of SB 315:
More broadly defines the technical definition of “smokable hemp” to mean all “harvested raw or dried hemp plant material, including hemp buds or hemp flowers, hemp cigars, and hemp cigarettes.” This overly broad, sweeping definition appears to cover and include the entire hemp plant once it is harvested.
Classifies smokable hemp as marijuana and criminalizes the manufacture, distribution, dispensing, delivery, sale, purchasing, or possession of smokable hemp in our state. Violations are punishable by civil and criminal penalties, including possible prosecution for a Class I felony.
Fortunately, SB 315 is not law. The North Carolina Department of Agriculture and the North Carolina Senate – especially Senator Brent Jackson – have continued to showcase their support for the hemp and CBD industries. Following its passage in the House, SB 315 was immediately referred to the Committee on Rules and Operations of the Senate, and there have been no indications so far that the bill will be considered for a concurrence vote this session – let alone be finalized, passed, and sent to Governor Cooper for signature or veto.
The Struggle is Real
North Carolina is not alone in its struggle. Other states are also considering – and some have passed – legislative bans that, in effect, criminalize the production, sale, transportation, and possession of smokable hemp. Indiana is one such state. In response to the Agriculture Improvement Act of 2018 (the “2018 Farm Bill”), Indiana enacted and signed into law Senate Enrolled Act No. 516 (“SEA 516”) on May 2, 2019.
SEA 516 adopted the 2018 Farm Bill’s definition of hemp. However, SEA 516 also criminalizes the manufacture, finance, delivery, and possession of smokable hemp, which it defines as “a product containing not more than three-tenths percent (0.3%) delta-9 tetrahydrocannabinol (THC), including precursors and derivatives of THC, in a form that allows THC to be introduced into the human body by inhalation of smoke.” The definition of smokable hemp in SEA 516 specifically includes “hemp bud” and “hemp flower.”
On June 28, 2019, a group of hemp industry plaintiffs filed suit (the “Indiana Lawsuit”) in the United States District Court for the Southern District of Indiana (the “Federal Court”), challenging the constitutionality of SEA 516’s smokable hemp provisions on the basis that they are preempted by federal law. Shortly thereafter, the plaintiffs moved for a preliminary injunction that would temporarily halt Indiana’s enforcement of the smokable hemp ban pending the outcome of the case. The State opposed that request, and the parties briefed their positions and presented their arguments to the Federal Court for consideration.
On September 13, 2019, the Federal Court granted the plaintiffs’ request for a preliminary injunction (the “Preliminary Order”)[1]. In doing so, at least for the time being, the Federal Court has prohibited the State of Indiana from enforcing the portions of SEA 516 that criminalize the manufacture, financing, delivery, or possession of smokable hemp. It is important to remember that the Preliminary Order is not a permanent or “final” injunction and the Indiana Lawsuit is still ongoing. But, the Preliminary Order is strongly worded and seems to forecast an ultimate outcome that favors the hemp and CBD industries.
How Does the Indiana Lawsuit Affect Us?
Just like Indiana’s SEA 516, North Carolina’s SB 315 adopts a definition of “smokable hemp” that differs from the definition of “hemp” set forth in the 2018 Farm Bill. SB 315 classifies smokable hemp as “marijuana,” and in doing so, attempts to criminalize the manufacture, distribution, dispensing, delivery, purchase, or possession of smokable hemp in North Carolina. These actions appear to be expressly preempted by Federal law. They also preclude the transportation of hemp or hemp products in or through North Carolina in direct contravention of the 2018 Farm Bill’s express prohibition on restricting the transportation of hemp and its derivatives in interstate commerce.
SB 315’s restrictions on smokable hemp also appear to violate conflict preemption principles. In the Preliminary Order, the Federal Court states that “the plain language of the 2018 Farm Bill, as well as statements from its legislative sponsors, reflect Congress’s intent to de-stigmatize and legalize all low-THC hemp, including its derivatives and extracts, and to treat hemp as a regulated agricultural commodity in the United States.” Provisions of law that seek to criminalize the manufacture, distribution, dispensing, delivery, purchasing, or possession of smokable hemp (including hemp bud and hemp flower) – “hemp derivatives of the kind specifically legalized under the 2018 Farm Bill – frustrates these congressional purposes and objectives.”
Further, the Preliminary Order indicates that the anti-preemption provision of the 2018 Farm Bill only applies to hemp production, which means that states can enforce laws “prohibiting the growing of hemp” within their borders. As noted by the Federal Court in its Preliminary Order, states (like, North Carolina) are free to place limits on the acreage that can be used to grow hemp within their borders or to dictate the type of seeds that can be used or planted by growers. But, states may not pass laws that interfere with the right to transport in interstate commerce hemp – including hemp derivatives like “hemp buds” and “hemp flower” – that has been lawfully produced. SB 315’s smokable hemp provisions, as they stand today, do just that.
The Preliminary Order also discredits many of the arguments raised to date by opponents of smokable hemp in North Carolina, including:
That there is no evidence that Congress ever contemplated, let alone had the intention of, legalizing smokable hemp with passage of the 2018 Farm Bill.
The Federal Court dismissed this argument by stating that “[t]he 2018 Farm Bill’s expansion of the federal definition of hemp and removal of all low-THC hemp from the federal list of controlled substances evinces a clear congressional objective to legalize all forms of low-THC hemp, including” smokable hemp. This analysis can be easily applied to arguments raised by House Republicans and law enforcement groups that, during the 2015 legislative session, our General Assembly never contemplated the legalization of smokable hemp when it passed the industrial hemp research pilot program authorizing legislation.
That legalization of smokable hemp (or a failure to re-criminalize smokable hemp) will create significant obstacles for law enforcement agencies to enforce and prosecute North Carolina’s laws against marijuana.
In response to nearly identical arguments and public policy considerations raised in the Indiana Lawsuit, the Federal Court recognized that “the fact that local law enforcement may need to adjust tactics and training in response to changes in federal law is not a sufficient basis for enacting unconstitutional legislation.”
So What Comes Next?
Industry advocates and opponents alike will continue to monitor the Indiana Lawsuit. With limited case law to rely upon, the Federal Court’s final decision, though non-binding, will likely have a ripple effect in North Carolina and other jurisdictions across the country. For now, our hope is that the North Carolina Senate will continue to refuse a concurrence vote on the House version of SB 315 – and, that the Preliminary Order will chill additional efforts (like those occurring in North Carolina) to classify “smokable hemp” as marijuana or to otherwise ban, restrict, or criminalize possession of the plant.
[1] C. Y. Wholesale, Inc. et al., v. Eric Holcomb, Governor, in his official capacity, et al., S.D. Ind., No. 1:19-cv-02659-SEB-TAB (Doc. 31) (September 13, 2019).
The cannabis industry is rapidly expanding in the United States, with multiple jurisdictions and corporations seeking to accommodate the evolving cannabis market. Carlton Fields attorneys Kevin McCoy and Jennifer Tschetter discuss the emergence of cannabis as a billion-dollar, mainstream industry; explore its impact on corporate clients; and analyze the ever-evolving legal landscape in this space.
Transcript:
Kevin: It’s an exciting day here at Carlton Fields. My name is Kevin McCoy. I am a trial lawyer here in the Tampa office of Carlton Fields with a background in commercial litigation, and today I’m going to be speaking with Jennifer Tschetter out of our Tallahassee office, who is the co-chair of our Cannabis taskforce, which is a very exciting area of the law and one that we are happy to be working in and learning about and helping clients with. So without further ado, welcome, Jennifer.
Jennifer: Thanks, Kevin.
Kevin: Thanks for making the time today. First of all, why don’t you give us a little background about you?
Jennifer: Sure. I’ve been practicing law about 18 years and during that time I spent 10 of them in public service, primarily at the Department of Health here in Florida.
Kevin: Wonderful. In the Department of Health, what were some of the areas that you touched upon in particular with respect to health issues, or have you been involved in the medical marijuana and the marijuana push here in Florida?
Jennifer: Yes, in fact, I was general counsel at the department when medical marijuana first came to this state. So, since the inception of the regulatory structure, I’ve either been intimately involved as a regulator, or since my move to private practice just a couple of years ago became more involved on the private side.
Kevin: Wow, so you’ve been in the front lines?
Jennifer: Yes.
Kevin: You’ve been in the front lines as the government has wrangled with this, I won’t say with the forbidden fruit anymore, because I don’t know that we’re in that land, but you’ve been fighting the fight for a while on both sides of the isle, I suppose?
Jennifer: Yes.
Kevin: So, you know, I use that term, the forbidden fruit, and it’s amazing to me, literally, that we are sitting here at a firm like Carlton Fields and we’re talking about Cannabis law, which, when I started here, I couldn’t have contemplated that that would be an area that we are growing and we are developing experience in and counseling clients on. But, it’s here. And, why don’t you talk to us a little bit about how here it is? I mean, in reality that this is no longer, you know, we don’t think of this anymore like this is two guys doing a drug deal in a parking lot, this is billion dollar industry. Is that fair to say?
Jennifer: Fair to say. So some of the things that I think are most interesting is to watch the evolution of this industry. If you’ve seen, I’m sure everybody has seen those maps, you know, that have varying colors of green based on, you know, are you a recreational state or a medical marijuana state, a low THC state and if you think about that 20 years ago there was one green state on that map and that was California and now you look at the states and there are only 3 that don’t have any color anymore. At least, in some form, 47 states have said you can use this on some level. Might be low THC. Might be full spectrum. Could be recreational. But, those types of statistics are interesting to me. The other ones that come to mind are 1 in 4 Americans right now live somewhere where purchasing recreational cannabis is legal. The farm bill’s delisting of hemp has opened another huge industry and they’re all derivatives of the cannabis plant which used to be forbidden.
Kevin: Let’s talk for a minute for those who are maybe new to this space, new to this industry, about that real distinction. Because that’s one that maybe I didn’t appreciate until recently. When we talk about cannabis, it’s easy to confuse some of the aspects of cannabis as it, as between marijuana or between CBD, which is all the rage of late. Can you just briefly give us an overview of the differences that happen between cannabis, between marijuana, between CBD? How does all that break down for somebody who’s really not deep in this space?
Jennifer: I’ll try. So, our definition in the United States of what constitutes the difference between hemp and marijuana, and they are both species of the same plant, cannabis. So they’re both cannabis, but what distinguishes them is their THC level and THC is the thing that most people think about as creating the euphoria typically associated with marijuana. In hemp, the THC level is .3% or less. If the cannabis plant, as it’s growing, has a THC level higher than .3%, it’s marijuana. So, that’s the distinction is the THC level in each.
Kevin: So, we’ve talked a little bit about some of the aspects that are happening and you talk about the delisting of hemp from the Controlled Substances Act. What has that or what have you observed the impact of that having as impacting some of the clients that we deal with in terms of, you know, these are corporate clients. These are big. They’re pharmaceutical. They are manufacturers. They are real businesses who are now looking at this. Can you just talk about what you’ve seen in industry as, for example, you mentioned CBD, as that has been delisted, or hemp I should say, has been delisted from a controlled substance.
Jennifer: So, CBD, I think there’s a place to start. So, hemp has opened the opportunity, not only for industrial uses for hemp, but it has created another potentially billion dollar industry in this country with the passage of the farm bill in 2018. So, those billion dollar industries don’t come around very often and one aspect of it is the CBD industry. Because hemp is low in THC, one of the other cannabinoids that’s very popular is CBD, which has been documented to relieve stress, anxiety, improve depression and can also alleviate some joint aches when applied topically. So, CBD is in high demand around the country and when it is extracted from the hemp plant, it can be infused in a variety of products: shampoos, lotions, gummy bears, drops. So, that created an enormous industry, but for every business in this country, the potential to at least contemplate whether a CBD additive would be helpful for their product and understanding how to navigate this new regulatory structure that’s kind of emerging, if you do chose to that, has been challenging.
Kevin: You mentioned the word challenging. What are some of the challenges that you are seeing as clients are coming to you for guidance as they’re entering, let’s just call it, the broad umbrella of cannabis without getting into whether it’s marijuana or CBD based on the .3% that you just described. But, what are some of the top, if you had to give us the top five challenges that people are coming to you, businesses, I mean we’re not talking little players here, we’re talking about real corporate clients, they need help, what are the areas that are the hottest right now that you are seeing?
Jennifer: So, compliance is one and the unfortunate part about that, and the challenge that goes with that, is the shifting sand that is the regulatory structure. When hemp was, when cannabis, I’m sorry, was put on the controlled substance act in the 70’s, it stopped all research, it stopped all production of both hemp and marijuana in this country. Because of that, everyone is just now putting brand new regulatory structures in place and research is ongoing and that continued compliance, I think that that is the number one challenge for a business trying to get in this market right now is that you can get a snapshot from a law firm as to whether your business is in compliance today, but the law in North Carolina can change tomorrow. The law in California can change next week and it’s that ongoing uneasiness and being willing to move in that space aggressively despite the potential for the bottom dropping out at any given moment.
Kevin: It sounds like on the compliance piece then, what folks are facing in this industry is right now, it’s you know, technology as I’ve seen it on, in any number of areas, whether it’s a plant, whether it’s a new gadget, a widget, whatever it may be, technology always moves faster than the law and the law is slow to catch up and that’s not necessarily a bad thing because we rely on law. But right now, what we’re dealing with is a regulatory patchwork, if you will, where step over the line from state X to state Y, you could be facing very different types of regulations, whether it’s labeling, whether it’s requirements and sourcing. Can you just talk about some of the things you’re seeing in that regard? I mean, for example, you know I think to the bill that we just passed here in Florida, the hemp bill, and some of the things that, for example, you would see here in terms of a Florida based hemp business that stick out to you that maybe could differ from other states around the country.
Jennifer: So, I think every state is going to have, and this will be a challenging piece of it, different rules on how you can bring that product into the state. And so, the USDA has issued some guidance that said everybody get ready, the farm bill said you can move this from state to state. It’s now a legal agricultural commodity. That’s great, except it does have an impact on agriculture and so, every agriculture department around the country right now is trying to figure out how to protect its farmers. And so the rules on how you bring product into this state, I think, will be one of the first challenges. That’s a patchwork where if you don’t know the law, you might not know that you need to be escorted into the state by our department of agriculture after you have an inspection, and when you get here, your truck needs to be a closed truck…
Kevin: Mm-hmm.
Jennifer: …in order to move about the state of Florida. Those are the proposed regulations.
Kevin: Sure.
Jennifer: We’ll see where they end up. Those will vary by state and part of it is that, I know here in Florida, it’s a perfect example. We’re so sensitive to invasive species. When you look at the cannabis plant, what the plant researchers have told you is that it’s a more invasive species, hemp, cannabis that would include hemp. It’s a more invasive species on their scale from 1 to 25, then Kudzu.
Kevin: Mm-hmm.
Jennifer: So, that should give us all pause as to whether we should be too quick to move so quickly in a space and eager, because it can have lasting implications.
Kevin: You know, it’s funny that you bring up this patchwork and states putting in place these kind of regulations to, maybe, protect their own, if you will. I think the last time I had ever thought about the commerce clause of the constitution was about a week ago when you and I were comparing notes on, I’m not so sure if this particular regulation doesn’t cut too close on protecting, you know, interfering with that. So, what are some of the legal issues that businesses are looking at as cannabis the plant impacts them? I mean, I would have to imagine, you’re dealing now, not only as a business dealing in cannabis, but, I mean, it’s gotta impact employment policies. It’s gotta be impacting, I mean, it’s actually, not to overstate it, but it’s almost like, what is this not going to impact, you know, in terms of policies, in terms of industry? Talk to us about some of the things that businesses have to be looking out for in terms of regulatory patchwork and you can interpret that or answer that in whatever way you want, because it’s a very broad question. But, based on what you’re seeing and what people are coming to you with, what are some of those top items outside of, maybe, compliance or regulatory?
Jennifer: There isn’t an item.
Kevin: Yeah.
Jennifer: This industry will touch almost all practice groups in law firms. When you think about it, because it’s both medicine and something that people want to use for recreational pleasure, it’s different than other things. That’ll make its impact on schools and Girl Scout troops. I mean, they’re gonna have to deal with issues related to cannabis and figure out what they can and can’t do for people that either have a prescription to take this medication, or CBD products limited, they’re not high in THC, so those are, there’s not an industry that I can think of that won’t be impacted by this.
Kevin: I tell you what, I have to agree and I am not anywhere near as versed in this space as you are. Admittedly, I’m a newcomer to understanding this as an industry. But, in the short time that I’ve been working with clients in this space, I mean, I have seen this touch land use. I have seen it touch rewriting employee handbooks which we’ve had to do, you’ve got tax issues. You’ve got money transmitter issues. You’ve got, how, where’s… great your business is doing well, but where are you going to put all that money? You know, US banks are slowly coming around. I think, part of that is because they’re pushing Congress to give them the clearance that they want to be able to touch some of this money.
You mentioned the USDA. You’ve got ongoing issues with the FDA and what are they going to do? And I think they, you know, they have been studying this and rightly so, which is, which is their task to do but, industry is crying out for them to make a move, to take a stand or at least a position and I think that will help industry in terms of knowing the rules of the road because right now, tell me if you disagree but, it’s almost like we are in the wild West in some regard because people are trying to predict what the regulatory framework will be and they’re not going to stop business while they’re waiting on government. So, they’re trying to do the best they can. Is that consistent with what you’re seeing?
Jennifer: Yes, and also a lot of innovation. So, the sky is the limit. You know, I was telling someone the other day, think about how different this industry is than some other highly regulated industries. And I think part of that is the federal prohibition on it, which makes it confusing to talk about. There’s not that federal overlay that you see in some other industries which is why, for example, we maybe don’t see nicotine gummy bears and we don’t see other products that are innovative. I think that they can be helpful, enjoyable. Those are all good things and they’re all possible in this cannabis space.
Kevin: What other areas, you know, we talk, we think about this in terms of somebody who’s directly in this space in terms of you’re cultivating, in terms of you’re manufacturing or you’re distributing whatever that product may be, whether it’s biomass, whatever you’re doing, maybe textile, but, it seems like they’re, this is going to touch a lot of ancillary businesses too. So, for example, you know, you look at the Florida farm bill, you have to have an approved third party independent lab testing your batches of product. So, talk about some of the ancillary industries that you’ve been working with in that regard, and just, setting aside not actually being in directly in the space but maybe a secondary player and areas where you’ve been giving counsel and people have been coming to you for your knowledge.
Jennifer: Sure. The ancillary businesses that we work with most often are those that are directly related. I mean, they’re driven by the cannabis space. And you’re right; the independent testing labs are one of them. And so we work with them and, you know, try to set high standards for those labs whether it be through accreditation and then work with the regulators to put appropriate regulations in place. And I think that’s where when clients can be introduced as an asset, a subject matter expert. Who knows better how to test and what’s possible to test for in a parts per million or parts per billion than the lab folks? And that’s why it’s been a pleasure to represent them and learn a lot about that space.
Other ancillary businesses are the seed to sale tracker. So what some people might not know is that virtually every state that has put in place a medical marijuana program puts in a seed to sale tracking system, and that literally tags plants from the time that they are growing in a cultivation room and you track them with bar codes all the way through the production process so that when you’re all done you know exactly what product was made with that plant. And those type of tracking mechanisms are essential to prevent against diversion in states that don’t want to have a legal recreational adult use market yet. So, that’s another ancillary business that is all unto itself but, the technology and information technology that goes into that is highly complicated and sophisticated. I think you will see that on the hemp side as well. In that most, one of the greatest concerns in the hemp industry is, where are we growing this? And part of that is to understand just how far the reach will be. Can you cross pollinate an orange field 10 miles away or is it 5 miles away? We’re gonna just all learn together. I think it’s an orange grove, candidly. But, those are the things that I think will be interesting and those ancillary businesses are creatively looking for solutions.
There are also drone manufacturers that will be essential in the GIS mapping of hemp cultivation plots all over this country that will help us understand the impact on other crops and also be a tool for law enforcement because I think what can be confusing for people – we were talking about it before in interstate shipments – is that if you were to cut up, you know, grind up a batch of hemp and a batch of marijuana or you drive by a field of hemp the terpenes are the same and it will smell a lot like that smell that we all associate with adult use or recreational marijuana. And so, when you see a load of it coming over state lines, that’s confusing to law enforcement, and rightfully so. Rightfully so. I think that there’s a lot of entrepreneurs looking for innovative solutions to help regulators to help the industry do it better, do it faster. And this is an industry that seems receptive to all those things.
Kevin: You know, you touch on a really interesting point. I went to one of the recent rule-making sessions here in Tampa that the Department of Agriculture put on. And there was a lot of discussion over the disposal requirement and the rule. And it actually surprisingly got a lot of pushback from the audience and a lot of questions about why would you impose these costs. And I actually thought the response from the folks from the Department of Agriculture sitting on the panels was encouraging because their response was, “Listen, there’s two paths here. If you get a crop of hemp that, we come out and we test it and it’s above .3% because of whatever factor happened, inadvertently it was too hot, who knows, you got bad seed. We can make that a law enforcement issue and now you have an entire acre or acreage of plant that is technically now illegal because of something that was out of your control. Or, what we have done is come up with this disposal plan that we’re still trying to flesh out but we can have a plan where we go, ‘This is no good. We’re going to give you the opportunity to dispose of it in the appropriate way.’ And then we don’t need to call law enforcement.” But, your comments trigger to me, what are you seeing in terms of the give and take of what’s happening or the receptiveness of regulators whether it’s federal or state to take input and be receptive to the idea that we’re going to work together on this. It’s not us versus you. It’s imperative to have relationships there and to be part of that discussion and sitting at that table having those conversations.
Jennifer: Both the Department of Health and the Department of Agriculture and Consumer Services are very partner oriented. They’re looking for solutions. I think you find that the law enforcement community as well, and everyone is trying their best to disseminate information. So State Attorney Dave Aronberg this week released some guidance that things that smell like marijuana anymore aren’t necessary probable cause for a search of a vehicle.
Kevin: Sure, yeah.
Jennifer: It might not be, because there is smokeable hemp on the streets in Florida. So, you can’t just smell a car and think you can search it. That was distributed widely. Generous of the law enforcement community to not limit it to one particular jurisdiction but instead to share it more broadly. They’re also looking for solutions that work for everyone. Everybody wants the bad actors out of the space, but everybody knows that most of the actors that are coming here are looking for an opportunity and mean to do it the right way. And I think the state of Florida has had a position for a long time – and I have not seen it change – that the goal is always compliance. It’s not punishment, but instead compliance is our goal.
So, that didn’t surprise me. I, too, was very pleased to hear that Ag had taken the position that even though it’s .5% THC, it’s still hemp. You’re just going to destroy it in accordance with your waste management plan.
Kevin: Right.
Jennifer: And that is a very generous interpretation and one that is very farmer-friendly.
Kevin: Well, you touch on an interesting topic. And I don’t think us sitting here talking about this topic in Florida we could get through this first podcast without talking about the situation of the grandmother over at Disney. But, to me what was encouraging out of that entire issue was somebody made a law enforcement decision on the street, but after, maybe there was some talking and some education back in the State Attorney’s office, about the direction. We were on the verge at that time of the hemp bill passing, which would, that same instance right now, assuming that bottle was oil that was .3% or less, that would have been a no probable cause. That would have been a no arrest. And, so it was encouraging, while probably maybe the lady who was arrested could disagree about the experience there, it was encouraging to see that law enforcement with, given a little more time, was already thinking about this. And I think that’s maybe part of the education component that’s gonna come across the board. It’s not just industry, but it’s law enforcement, it’s government, and it’s, let’s, let’s not consume resources here unnecessarily, unless, as you say, we’re focusing on some of the bad actors who may be ruining it for the rest of us, so to speak.
So, the next thing I want to talk about today, Jennifer, is where do you think the opportunity is? We’ve talked about some of the regulatory headwinds and we’ve talked about how businesses might be facing some of those, which can be bad or good depending on what side you’re on. As lawyers, we love, that’s where we make our money, navigating that for folks. But, talk about the opportunities that are there, the opportunities for those who want to get in the space and are new to the space or contemplating getting in the space, whether they’re investors, they’re business, they’re start-ups. What are you seeing based upon the practice that you’ve built around cannabis?
Jennifer: The farm bill definitely changed the field in that when clients call now and they want to get into this space, they want to do something because these are two new burgeoning billion dollar industries that don’t come along very often. How do I get in is usually the question. And what I’ve been telling everyone since passage of the farm bill, and in Florida specifically the passage of our state hemp bill, is hemp is the way to go. It’s an unlimited number of licenses as opposed to marijuana which is a very limited number of licenses. We started with five total in the entire state of Florida. Five licenses would be given out for 20 million people. That’s slowly growing, but still there’s only 22 companies that get to participate in that space. Contrast that with hemp where you can pick just a part of it and as many people as want to participate can. So, I think if there’s opportunities right now, it’s in the hemp space.
And there are corollaries between the two industries that if ever, if marijuana ever turns out to be a space where there are more opportunities – they either remove the vertical integration requirement from the license so that you could have one person licensed to grow and one person licensed to sell and another person licensed to process. That may happen in this state and that would create more opportunities. But until it does, there’s only a few licenses out there and you have to do everything in that chain.
The nice part about these two industries is that those overlaps both require processing to get finished product that patients want to use. Both require retail sales and how to market that product in compliance with FDA regulations on, you know, making sure that you don’t claim they have significant health effects. So there are a lot of overlaps that I think for someone that wants to get involved in the industry right now, what I’m counseling them is that start in the hemp space. That’s the place to be. There are no opportunities in Florida right now in the medical marijuana space unless you want to buy one of those licenses for a significant amount of money. And, that’s the only way to get in that space right now and probably the only way to be there for the foreseeable future. With the state of litigation on the medical marijuana side of the industry, I don’t anticipate that we’ll see any new licensees. Certainly not in 2019 and it will be a long way into 2020 before we get to that place. So, for folks that want to get in right now and do something, they should look at hemp as that opportunity.
On the investment side, that can vary. I think that depends upon the quality of the company.
And, I think, one of the things we haven’t touched on today but I think will root itself out eventually in these industries are things like pretenders and frauds and burgeoning industries can attract those kinds of people. So, I think that’s where due diligence is really important on the investment side: understanding the regulatory structures, understanding whether they are scaled up. They can tell you they want to put 100 dispensaries in a state, but if they have a 100,000 square foot cultivation facility, that’s probably not even possible. You could never stock the shelves. So, those are the things that I think due diligence will help investors, and that’s why they’re consulting people like you and me to talk through those issues. But, for investment, I think both spaces are good. For people that want to work, make money, and be a part of something new, I’d take a good look at hemp.
Kevin: That’s a fantastic insight. You know, and from what I’ve seen and just some of the market research and then in some of the other things that you can just find on the Internet, you know, you go back to where we started in the medical marijuana versus the hemp side, and then in terms of CBD, that whole dichotomy that’s happening there in terms of people who hear the word “cannabis” have always associated it with marijuana. And it’s, you know, I may or may not be interested in that, but the whole concept of the CBD space now is coming out where essentially, at least from the marketing standpoint, you can have the benefits of marijuana without the THC and without the high. And the market that I’m seeing in terms of opportunity – I think this is what you’re talking about, too, with hemp – is that this market’s gonna explode. I mean, because more people who would never even contemplate for whatever reason that they would ever touch a cannabis product are now saying, “What’s so bad about this one?” You know, “I can still function, I’m not gonna be a pothead, if you will. I’m just gonna take the benefits from this plant that have been forbidden maybe for no good reason, we’re coming to find out, for such a long time.” So, I’m glad to hear you talk about that as an opportunity because even beyond, you know, the CBD and the ingestible space or the topicals, you get into textiles, you get into manufacturing of ropes, and everything else that goes with it. And so…
Jennifer: Drywall, concrete, I mean, all those hemp-based products. I heard Ag say the other day there are 25,000 known hemp-based products ready to go as soon as we have enough hemp in this country. And when you talk about drywall that is mold and fire resistant and I think about that in beach houses, that’d be perfect, right? So, I’m really excited about the opportunities that this space presents. And hemp, I think, is the future.
Kevin: I tell you what. This entire industry, to me, is just so exciting because it’s new, it’s fresh, it’s one of those opportunities that in the law, to have something that is just so untamed come along, you don’t see that very often. And I don’t know about you, I had a great time today. I hope you would join me again because next time I would really like to get into some of the Florida-specific stuff we’re seeing, including you’ve talked about some of the appellate issues maybe that the Florida Supreme Court will be asked to weigh in on some stuff. So, will you join me again? Maybe we can try a next session?
Jennifer: Absolutely. And if it’s after August 8th, we should know more answers. So.
Kevin: Fantastic. And thank you, again. You are definitely very, very deep in this industry and I’ve learned a lot today, so thank you so much for joining us.
Jennifer: It was a pleasure. Thanks, Kevin.
Kevin: I also want to thank our audience for joining us today. We had a great time. We hope you did, too. We hope you will check out more about our practice at carltonfields.com. There you can find the landing page for the cannabis taskforce that Jennifer is the co-chair of and you can learn more about what we are doing in this space as it impacts businesses that are running throughout this industry.
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