Tag: Marijuana

State AGs Want Role in Regulation of CBD-Containing Products

Many, including state regulators, are closely watching the U.S. Food and Drug Administration (FDA) as it works through the challenges associated with regulating cannabidiol (CBD) products.  Under the Federal Food, Drug and Cosmetic Act (FD&C Act), CBD cannot lawfully be added to a food or marketed as a dietary supplement; however, industry has been pressuring the Agency to create a pathway for the lawful use of CBD in food and dietary supplements through either an exception by regulation to the FD&C Act or through a nonenforcement policy.

As previously reported on this blog, FDA held a public meeting on May 31, 2019 to obtain scientific data and information about the safety of FDA-regulated products containing cannabis or cannabis-derived compounds.  The Agency has made clear that outstanding questions related to the safety of CBD products must first be addressed before a regulatory framework can be established for lawfully marketing foods and dietary supplements containing CBD.

In response to FDA’s request for safety data and information, on July 16, 2019, a coalition of 37 Attorneys Generals submitted a letter to FDA, urging the Agency to cooperate with the states to protect consumer from false advertising and potential harms to their health from products containing cannabis or cannabis-derived compounds, including CBD.  The letter also urged the Agency to develop ongoing assessments of potential risk and benefits of these products, including how they interact with other dietary or pharmaceutical products.  Ultimately, the letter requests that FDA “ensure that states maintain a role as regulators in this emerging market.”

 

© 2019 Keller and Heckman LLP
Article by Food and Drug Law practice group at Keller and Heckman LLP.
For more on cannabidiol (CBD) regulation see the National Law Review Biotech, Food & Drug page.

Hawaii Decriminalizes Possession of Small Amounts of Marijuana

On July 9, 2019, Hawaii became the 26th state to decriminalize possession of small amounts of marijuana. HB 1383 (the “Law”), which became law when Governor David Ige allowed the veto deadline to pass without signing or striking down the bill, decriminalizes the possession of up to three grams of marijuana. It will go into effect on January 11, 2020.

Under the Law, those caught with up to three grams of marijuana will no longer face jail time but will still face a fine of $130. This is the smallest amount of marijuana that any state has decriminalized so far. Currently, possession of any amount of cannabis is punishable by up to 30 days in jail, a criminal record, and a $1,000 fine.

The Law also provides for the expungement “of criminal records pertaining solely to the possession of three grams or less of marijuana.” The state has amended its expungement statute in order to reflect this change, noting that courts must grant an expungement order, provided the individual is not facing any other criminal charges, and provided that the amount of marijuana possessed was three grams or less.

The Law establishes a “Marijuana Evaluation Task Force,” in an effort to examine other states’ laws, penalties and outcomes related to the decriminalization and legalization of marijuana. The task force, which will be active until June 30, 2021, will make recommendations on further changing marijuana laws in Hawaii.

The Law does not provide employment protections for recreational users, nor does it modify Hawaii’s Medical Use of Cannabis Law, which was amended last year in part to form a working group to evaluate potential discrimination against medical cannabis users and the employment protections made available in other states.

Employers and health care professionals should be ready to handle issues that arise with the potential conflict between state and federal law in devising compliance programs, both in terms of reporting and human resources issues, including practices and policies addressing drug use and drug testing. States continue to consider – and pass – legislation to decriminalize and legalize cannabis (both medicinal and recreational), and we are slowly marching toward 50-state legalization. All organizations – and particularly those with multi-state operations – should review and evaluate their current policies with respect to marijuana use by employees and patients.

This post was written with assistance from Radhika Gupta, a 2019 Summer Associate at Epstein Becker Green.

 

©2019 Epstein Becker & Green, P.C. All rights reserved.
For more on marijuana deregulation, please see the Biotech, Food & Drug law page on the National Law Review.

Protecting Your Brand and Trademarks in the Cannabis Space Following the 2018 Farm Bill

The 2018 Farm Bill [1] relaxed restrictions covering hemp-based cannabis products, and it is causing a shift in business strategies in the industry. Instead of a full prohibition of trademark registrations covering cannabis goods or services, a narrow range of filings is now permitted, so long as they conform to the requirements of the Farm Bill and the latest USPTO guidelines. While the regulatory framework is still being developed, cannabis-related business owners who could not previously receive federal trademark protection are now reconsidering their trademark strategies.

The principal change from the 2018 Farm Bill is that while all cannabis products derived from marijuana are still prohibited by federal law under the Controlled Substances Act (CSA), those derived from hemp are now permitted, albeit still tightly regulated. Hemp-based cannabis products are defined as those that contain no more than 0.3 percent THC, the primary active ingredient in marijuana. Accordingly, certain products and services derived from hemp are now legal under federal law, and the USPTO has published guidelines that allow narrow federal trademark registrations covering them.

The USPTO had previously refused any trademark application that covered cannabis products or services. In response, many businesses have filed state-law trademark applications in jurisdictions in which marijuana has been legalized, although this provides only limited protection. Businesses have also tried to circumvent the federal prohibition by filing for goods and services tangentially related to marijuana or cannabis, such as apothecary or pharmacy services for medical marijuana, or services for the provision of information and/or advocacy for cannabis and its uses. The policy at the federal level is still to refuse these applications that cover goods and services that are legal on their face but are in fact related to marijuana. But that policy is now moot for certain hemp-related applications that conform to the new guidelines.

Even for applicants that have succeeded in registering trademarks for cannabis-based products under facially legal goods and services descriptions, attempts to enforce these marks can be hollow. During the course of litigation, it may become clear that the activities of the trademark owner are not permitted under federal law. These registrations are still valuable to block other filers as well as to signal that a business is adopting and is willing to enforce a particular mark, but the new USPTO regulations can provide substantially more protection to businesses that sell qualifying hemp-related products or services.

Under the new USPTO guidelines, marks covering hemp-based cannabis products and services are permitted to be registered as long as they contain no more than 0.3 percent THC and are otherwise legal under federal law. Accordingly, there are certain exceptions and requirements, which include the following:

  • The 2018 Farm Bill left jurisdictional responsibility for regulating certain products to the FDA. As of now, the FDA does not permit cannabidiol (CBD) to be sold in food or drug products. Accordingly, registrations for marks that cover “foods, beverages, dietary supplements, or pet treats containing CBD” are still prohibited. This restriction applies only to CBD at this point. Other non-CBD hemp-based food or drug products would be permitted registration so long as they conform to the applicable FDA guidelines. Also, CBD products that are not a food or drug may still be permitted registration as long as they do not fall under the FDA’s jurisdiction or are not otherwise prohibited by other federal laws.  See USPTO Examination Guide 1-19.
  • For marks covering cultivation and other services related to hemp-based products, applications will be examined not only for compliance with applicable USPTO requirements but also for compliance with the 2018 Farm Bill and applicable state laws. Applicants must show that they have an applicable state license to provide their services, as not all states follow the 2018 Farm Bill’s guidance for hemp products, and in many states, these products are still illegal for commercial purposes or highly restricted.[2]

The new guidelines also allow for applicants to amend pending applications covering cannabis products to conform to the new requirements. To do so, the applicant must limit the list of goods and services to products that contain no more than 0.3 percent THC and submit any required documents showing that the goods and services covered are legal. The application’s filing date would also be amended to coincide with the legalization of hemp-based products, and the USPTO would conduct a new search of the register for prior marks to account for the later filing date.

Under the new regulations, cannabis businesses should consult a trademark attorney to consider their options to protect their trademarks on a federal level. Although the law is in flux and uncertainty abounds, there are several points from a trademark-filing strategy perspective to keep in mind when considering filings under the new guidelines:

  • The new, narrow USPTO guidelines will not be helpful to every business operating in the cannabis space. Businesses that will be helped either already offer or are considering offering hemp-derived goods and services that contain less than 0.3 percent THC, goods that do not constitute food or drug products that contain CBD, and goods that are not otherwise in conflict with FDA or other federal laws or guidelines.
  • A large number of trademark applications will likely be filed for hemp-based products soon, regardless of their applicants’ qualifications. Businesses should explore their options and file quickly, and keep in mind that it will be difficult to show prior use to oppose a third-party filer, as any such use was likely illegal under federal law.
  • Because the USPTO can suspend applications for good cause, it is logical to expect the USPTO to grant suspensions of applications while applicants are in the process of obtaining a license to cultivate hemp-based products.
  • Creating even more uncertainty, the 2018 Farm Bill has directed the U.S. Department of Agriculture (USDA) to derive regulations for hemp-related activities that fall outside of the FDA’s jurisdiction. The USPTO is expected to quickly adopt new guidelines to conform to the USDA.
  • Narrowing an existing application to conform to the new requirements will significantly narrow the filing. After such an amendment, the application cannot be amended back to cover the previous broader range of goods and/or services. If an applicant anticipates a change in law and can draw out the application process to wait for such a change, it may be advisable to file a new application that conforms to the new guidelines rather than amending the old one. The applicant can then keep the broader application alive to preserve their options.
  • In some cases, existing registrations may have made it through the examination process, even if they cover goods and services that were prohibited under federal law at the time of filing. If this is a possibility, businesses should consider their options for re-filing based on the new guidelines which on their face do not apply to amending existing registrations.

The new marijuana legalization framework being put in place state by state, most recently in Illinois, has raised more questions than answers in the state-regulatory sphere. However, until now, the federal guidelines were clear, as all cannabis-related products were prohibited under federal law. After the passage of the 2018 Farm Bill, this is no longer the case. As the law in the cannabis sphere unfolds, businesses should work closely with a trademark attorney to explore options for protecting their valuable brands.

© 2019 Dinsmore & Shohl LLP. All rights reserved.
More on Cannabis & Marijuana law developments on the National Law Review Biotech, Food & Drug law page.

Historic Vote in Congress Aims to Protect State Cannabis Programs

By a vote of 267 to 165, the United States House of Representatives (the “House”) passed a bipartisan amendment protecting state cannabis programs and its users from federal prosecution.

Named after its co-founder, Representative Earl Blumenauer (D-OR), the Blumenauer amendment explicitly prohibits the United States Department of Justice (the “USDOJ”) from utilizing federal tax monies to enforce the federal prohibition of marijuana in states that have legalized cannabis.

The Blumenauer amendment constitutes a significant diversion from prior Congressional action on state cannabis programs.  Since 2014, Congress has enacted similar appropriations riders which only protected state medical cannabis programs.  The Blumenauer amendment, however, protects all state cannabis programs.  Thus, for the first time, the House has passed an amendment protecting the recreational consumption of cannabis.

Regarding funding, the USDOJ is simply no different than any other federal agency.  Without proper funding, an agency cannot enforce or otherwise impose its mandate on behalf of the federal government.  Thus, for all intents and purposes, the Blumenauer amendment validates state cannabis programs and protects those operating under them.

While the Blumenauer amendment still requires passage through the Senate and President Trump’s signature, the House’s actions are a historic step forward for the federal legalization of cannabis in the United States.

© Steptoe & Johnson PLLC. All Rights Reserved.
This post was written by Ryan D. Ewing and Joshua L. Jarrell of Steptoe & Johnson PLLC.
For more on marijuana laws see the National Law Review page on Biotech, Food & Drugs.

Mixed Results for Employers on Marijuana – Two Federal Courts Refuse to Find State Marijuana Laws Preempted by Federal Law

Two recent federal cases illustrate why employers – even federal contractors – must be cognizant of relevant state-law pronouncements regarding the use of marijuana (i.e., cannabis) by employees. While one case found in favor of the employer, and the other in favor of the employee, these decisions have emphasized that state law protections for users of medical marijuana are not preempted by federal laws such as the Drug-Free Workplace Act (DFWA). Employers must craft a thoughtful and considered approach to marijuana in the workplace, and in most cases should not take a zero-tolerance approach to marijuana.

Ninth Circuit Finds in Favor of Employer Who Discharged Employee for Positive Drug Test

In Carlson v. Charter Communication, LLC, the Ninth Circuit affirmed the dismissal of a lawsuit brought by an employee who alleged discrimination under the Montana Medical Marijuana Act (MMA) because he was discharged for testing positive for marijuana use. The plaintiff, a medical marijuana cardholder under Montana state law, tested positive for THC (a cannabinoid) after an accident in a company-owned vehicle. His employer, a federal contractor required to comply with the DFWA, terminated his employment because the positive test result violated its employment policy.

The District Court of Montana held that the employer was within its rights to discharge the plaintiff because (1) the DFWA preempts the MMA on the issue of whether a federal contractor can employ a medical marijuana user; and (2) the MMA does not provide employment protections to medical marijuana cardholders. Indeed, the MMA specifically states that employers are not required to accommodate the use of medical marijuana, and the Act does not permit a cause of action against an employer for wrongful discharge or discrimination. The Ninth Circuit rejected this rationale. Because the MMA does not prevent employers from prohibiting employees from using marijuana and does not permit employees for suing for discrimination or wrongful termination, the Ninth Circuit held that the MMA does not preclude federal contractors from complying with the DFWA and thus found no conflict.

The plaintiff asserted that the provisions of the MMA exempting employers from accommodating registered users and prohibiting such users from bringing wrongful discharge or discrimination lawsuits against employers are unconstitutional and sought certification of the question to the Montana Supreme Court. The Ninth Circuit rejected this request because, it determined, the Montana Supreme Court already decided the issue. The MMA and the specific sections challenged by the plaintiff appropriately balance Montana’s legitimate state interest in regulating access to a controlled substance while avoiding entanglement with federal law, which classifies the substance as illegal.

Plaintiff Wins Summary Judgment Against Employer That Rescinded Job Offer Due to Positive Test

If federal law does not preempt state law on the issue of marijuana, then in certain states – like Connecticut – employers will be more susceptible to discrimination claims from marijuana users. In Noffsinger v. SSC Niantic Operating Company, the District of Connecticut granted summary judgment to a plaintiff-employee of Bride Brook Nursing & Rehabilitation Center who used medical marijuana to treat post-traumatic stress disorder (“PTSD”) and whose offer was rescinded for testing positive for THC during a post-offer drug screen. Plaintiff filed a discrimination claim under the Connecticut Palliative Use of Marijuana Act (“PUMA”), which makes it illegal for an employer to refuse to hire a person or discharge, penalize, or threaten an employee “solely on the basis of such person’s or employee’s status as a qualifying patient or primary caregiver.”

We covered a previous decision in this case, in which the court held that PUMA is not preempted by the federal Controlled Substance Act (“CSA”), the Americans with Disabilities Act, or the Food, Drug & Cosmetic Act (“FDCA”). The decision was notable then for being the first federal decision to hold that the CSA does not preempt a state medical marijuana law’s anti-discrimination provision, a departure from a previous federal decision in New Mexico.

In this recent decision, the District Court again considered whether PUMA was preempted by federal law. In ruling for the Plaintiff, the court rejected Bride Brook’s argument that its practices fall within an exception to PUMA’s anti-discrimination provision because they are “required by federal law or required to obtain federal funding.” Bride Brook argued that in order to comply with DFWA, which requires federal contractors to make a good faith effort to maintain a drug-free workplace, it could not hire plaintiff because of her failed pre-employment drug-test. The court was not persuaded, concluding that the DFWA does not require drug testing, nor does it prohibit federal contractors from employing people who use illegal drugs outside the workplace. The court noted that simply because Bride Brook’s zero-tolerance policy went beyond the requirements of the DFWA does not mean that hiring the plaintiff would violate the Act.

The court also rejected Bride Brook’s argument that the federal False Claims Act (“FCA”) prohibits employers from hiring marijuana users because doing so would amount to defrauding the federal government. Because no federal law prohibits employers from hiring individuals who use medicinal marijuana outside of work, employers do not defraud the government by hiring those individuals.

Lastly, the court rejected the theory that PUMA only prohibits discrimination on the basis of one’s registered status and not the actual use of marijuana, as such a holding would undermine the very purpose for which the employee obtained the status.

What These Decisions Mean for Employers

These decisions are notable for the fact that the federal courts refused to find the state laws were preempted by federal law. Importantly, neither found that the DFWA preempts state law, which means that even federal contractors must be aware of and follow state law with respect to marijuana use by employees. Thus, in states in which employers may not discriminate against medical marijuana users – such as Connecticut – all employers must take care not to make adverse employment decisions based solely on off-duty marijuana use and, in certain states, must accommodate medical marijuana use. A majority of states and the District of Columbia now permit the use of medical marijuana; employers, including federal contractors, should be mindful of these statutes and consult with counsel to ensure their employment policies are compliant.

©2018 Epstein Becker & Green, P.C. All rights reserved.

This post was written by Nathaniel M. Glasser ofEpstein Becker & Green, P.C.

Massachusetts to Require CGL and PL Coverage for All “Marijuana Establishments”

In regulations finalized just before the March 15, 2018, deadline, the Massachusetts Cannabis Control Commission (CCC) has included a provision requiring the maintenance of liability insurance or an escrow account to cover potential liabilities. This applies to all Marijuana Establishments, which include marijuana cultivators, craft marijuana cooperatives, marijuana product manufacturers, marijuana retailers, independent testing laboratories, marijuana research facilities, marijuana transporters and “any other type of licensed marijuana-related businesses,” except for medical marijuana treatment centers, which are already subject to a comprehensive regulation scheme, including a similar requirement.

Provisions

Under the new regulations, Marijuana Establishments must obtain and maintain general liability coverage with minimum limits of at least $1 million per occurrence and $2 million aggregate, and product liability insurance coverage of $1 million per occurrence and $2 million aggregate, with a maximum deductible of $5,000 per occurrence. 935 CMR 500.105(10)(a).

In the event that a Marijuana Establishment is unable to obtain the required coverage, upon providing documentation of the unavailability of coverage, the requirement may be met by the deposit of $250,000, or some other amount approved by the CCC, into an escrow account. 935 CMR 500.105(10)(b).

Any new applicant will be required to provide a description of its plan to obtain the required insurance coverage or otherwise meet the requirements of this regulation as part of the application process. 935 CMR 101(c)(5).

This insurance requirement is one of several designed to ensure the financial responsibility of marijuana businesses in the Commonwealth, including a requirement that applicants detail the amounts and sources of capital resources available to them, and a requirement that a license applicant provide documentation of a bond or other resources held in an escrow account in an amount sufficient to adequately support the dismantling and winding down of a Marijuana Establishment pursuant to 935 CMR 500.101(1)(a).

Synopsis

The recreational marijuana business regulations were approved on March 9, 2018, after extensive hearings and public input. The regulations must be signed by the Secretary of the Commonwealth and published in the Massachusetts Register, which is expected to take place on March 23, 2018. The regulations become effective upon publication.

Massachusetts voters approved the legalization of recreational marijuana via ballot in November 2016. The CCC plans to begin accepting applications on April 1, 2018, and recreational marijuana sales are expected to begin on July 1, 2018. Existing medical marijuana treatment centers have been given priority for licensure in towns and cities where the number of licenses is limited, see MGL c. 94G, § 5(c), and already will have these coverages in place. However, as applications will be reviewed on a rolling basis, we would expect to see the number of businesses seeking this coverage only increasing.

 

© 2018 Wilson Elser
This post was written by Kara Thorvaldsen of Wilson Elser.

War on Weed: AG Jeff Sessions Creates Reefer Madness

Attorney General Jeff Sessions has caused chaos in the marijuana industry and is forcing those who have made efforts to create legalized businesses in compliance with state laws to ponder whether their anticipated profits will go up in smoke. In a memo to all U.S. attorneys, Sessions rescinded Obama-era decrees that restrained prosecutors from enforcing federal drug laws in states that acted to legalize marijuana under their own laws. The decrees created an environment in which states felt they had the freedom to legalize marijuana without interference from federal authorities. Nonetheless, all aspects of the marijuana industry – for example, growing, manufacturing related products, distributing, advertising, and managing property used to grow, manufacture or distribute marijuana – have remained illegal. The updated guidance from Sessions now encourages federal prosecutors to resume enforcing these laws.

It is no coincidence that Sessions, a longtime opponent of the legalization of marijuana for recreational use, issued his guidance just days after California allowed recreational marijuana businesses to open their doors. Those who follow this issue know Sessions also has his sights set on enforcing federal drug laws against those engaged in the medical marijuana industry. Sessions requested Congress remove a budgetary provision currently prohibiting the Department of Justice (DOJ) from using funds to “prevent certain states ‘from implementing their own State laws that authorize the use, distribution, possession or cultivation of medical marijuana[.]’”[1]

This new guidance highlights the conflict that exists between federal law and the laws of state, local and tribal governments that have seemingly legalized marijuana both recreationally and medically. This should be cause for concern for those involved in the marijuana industry. Federal drug laws prevail over the comparable laws of states, cities and tribal communities; so, compliance with those laws is not a defense to the violation of federal laws prohibiting every aspect of the fast-growing marijuana industry. A key factor for its future is what happens to the Rohrabacher-Blumenauer Amendment, also known as the Rohrabacher-Farr Amendment, which prohibits the DOJ from spending federal funds to interfere with state medical marijuana laws. The law will expire on January 19 absent its annual re-authorization from Congress.

Ultimately, the manner in which the guidance from Sessions will be implemented by federal prosecutors around the country is uncertain. However, now that the prosecutors have the freedom and the instruction to enforce the drug laws against the marijuana industry, it is likely they will flex their muscles. This will result in substantially adverse legal and economic consequences for the businesses and individuals engaged in that industry. If you are concerned about the impact this new guidance may have on you, your business or an investment of yours, please contact your Dinsmore attorney. We have many attorneys experienced in this area, including multiple former federal prosecutors, who can assist you with your needs and concerns.

[1] Jeff Sessions’ letter regarding Department of Justice Appropriations is available at https://www.scribd.com/document/351079834/Sessions-Asks-Congress-To-Undo-Medical-Marijuana-Protections.

 

© 2017 Dinsmore & Shohl LLP. All rights reserved.
This post was written by Robert G. Marasco and Marisa K. Fenn of Dinsmore & Shohl LLP.

High Time for Massachusetts Employers to Consider a Marijuana Use Policy

All employers should maintain an employee handbook or similar policy statement that clearly sets out the employer’s position on drug and alcohol use. While federal laws relating to marijuana possession and use have not changed, many states have revised their statutes to legalize, decriminalize, or otherwise permit marijuana possession and use. This has caused some confusion for employers, who must balance the conflicting state and federal rules.

Over thirty states have enacted legislation allowing marijuana use in certain situations. In some states (California and Massachusetts, for example), medical and recreational use is permitted.  In many other states, such as Connecticut and Rhode Island, only medical use is permitted.  A number of states have also adopted legislation that specifically protects marijuana users from termination from employment based solely on a positive test for marijuana.

Massachusetts does not have such a statute. However, the Massachusetts Supreme Judicial Court recently issued a ruling that greatly complicates the issue of how to deal with an employee who is using marijuana. In Barbuto vs. Advantage Sales and Marketing (July 17, 2017), the SJC ruled that an employee who had been terminated as a result of a positive marijuana test could bring a claim for handicap discrimination under the Massachusetts anti-discrimination statute.  In Barbuto, the plaintiff was an employee of the defendant, who had a valid prescription for marijuana to help in treating Crohn’s disease.  After the employee was terminated because of a positive marijuana test, she brought a claim against the employer alleging, among other counts, a failure to provide a reasonable accommodation under the Massachusetts anti-discrimination statute.  The trial court dismissed all of the employee’s claims.  On appeal, the SJC upheld the trial court’s dismissal of most of the claims, but held that the employee could bring a claim under the anti-discrimination statute for disability discrimination and a failure to accommodate.  The SJC then reversed the dismissal of that count and sent the matter back to the trial court.

The SJC was careful to point out that employers could limit or defeat such claims by showing that allowing marijuana use would cause an undue hardship on an employer’s business, such as where the permitted use would conflict with other requirements like the Federal Drug Free Workplace Act. The SJC also clearly stated that Massachusetts law does not require any employer to permit on-site marijuana use as an employee accommodation. Even with those limitations, however, the Barbuto ruling does create some landmines for employers.  Massachusetts employers should become very familiar with the marijuana laws applicable in all states in which they have employees, and should enact employment policies consistent with those laws (which may differ significantly from state to state).  In addition, employers should consider and adopt (and consistently apply) policies that address how a positive test is handled (including addressing any reasonable accommodation issues).  For now, in Massachusetts, an employer will need to show how accommodating an employee’s medically prescribed marijuana use creates an undue hardship on the employer, and employers wishing to prohibit all marijuana use will need to be able to show this.

This post was written byMark J. Tarallo of Murtha Cullina.

Read more employment law news at the National Law Review.

Recreational Pot Comes to Nevada…But Why Are The Shelves Empty?

On July 1, 2017, Nevada became the fifth state in the United States to legalize the sale of recreational marijuana. The epicenter of “what happens here, stays here” tourism just added a new vice to its repertoire! So, what’s the problem?

Among other things, Nevada’s recreational marijuana dispensaries are facing the specter of empty shelves. Why? Because a wrinkle in the ballot measure that legalized recreational marijuana sales in Nevada gives licensed liquor wholesalers a temporary 18-month monopoly on marijuana distribution rights… “unless the [Nevada] Department [of Taxation] determines that an insufficient number of marijuana distributors will result from this limitation.” In order to fill its shelves, a Nevada-licensed recreational marijuana dispensary must use a licensed recreational marijuana distributor to transport the product from the cultivation facility to their stores (whereas dispensaries selling medical marijuana were allowed to move “medical-use” product from cultivation locations without an independent distribution network).

Despite efforts by marijuana dispensaries to stock up prior to July 1, overwhelming demand for recreational marijuana has resulted in dwindling supplies. And now, distributors are nowhere to be found. That is because very few liquor wholesalers have applied to become licensed marijuana distributors, and those that have made such application have failed to meet the requirements for licensure. The Nevada Department of Taxation (NDOT) reported that as of July 7, 2017, ZERO distribution licenses have been issued by NDOT.

Perhaps liquor wholesalers fear risking their federal alcohol permits issued by the Alcohol and Tobacco Tax and Trade Bureau? It would appear that marijuana distribution licenses would have to be issued to persons other than liquor wholesalers – however, nothing is that simple. A small group of liquor wholesalers, known as the Independent Alcohol Distributors of Nevada, sued and, on June 21, won a temporary injunction against NDOT to prevent marijuana distribution licenses from being issued to persons other than liquor wholesalers.

In response, on July 7, Governor Sandoval endorsed emergency regulations that would give NDOT the authority to determine whether there are a sufficient number of marijuana distributors to service the market – a determination that would allow NDOT to open up distributor licensing to those other than licensed liquor wholesalers. The emergency regulations will be considered by NDOT on July 13. Stay tuned.

This post was written by  Kate C. Lowenhar-Fisher   Jennifer J. Gaynor   Jeffrey A. Silver and Gregory R. Gemignani  of Dickinson Wright PLLC.

RICO Madness: Marijuana Operations Face RICO Challenges in Federal Courts

Don’t look now cannabis businesses, but your neighbors may be raising a racket. A June decision by the 10th Circuit Court of Appeals in Denver may have opened the doors to new legal challenges to marijuana operations: civil suits under the Racketeer Influenced and Corrupt Organizations Act (RICO).

RICO was originally intended to go after the mafia and other organized crime, but its broad language means it can be applied in other settings. RICO allows a private citizen to sue “racketeers” for damage to business or property due to the racketeer’s illegal activities or activities that were conducted under his guidance. Since marijuana remains illegal under federal law, the production or distribution of marijuana is considered racketeering.

In this case, a Colorado couple claimed a neighboring marijuana operation was creating “noxious odors” that drifted onto their land allegedly causing the value of their property to drop. The Reillys contended that the odors coming from the marijuana facility adjacent to their land were a nuisance because it “interfered with their present use and enjoyment of the land” and caused a “diminution in its market value.” The Reillys (aided by Safe Streets Alliance, an anti-marijuana organization that was also party to the case) argued that any business engaged in the commercial cultivation and sale of recreational marijuana is a criminal enterprise for purposes of RICO, so they were entitled to relief under federal law.

The District Court in Colorado dismissed the suit for failure to state a claim under RICO.  The District Court stated that Reillys’ injury (the noxious odors and reduced market value) was “speculative” and that they failed to provide any concrete evidence that they had provided harm. The District Court ruled that a “clear and definite” showing of damages were necessary under RICO.

On appeal, the 10th Circuit’s three-judge panel reversed the District Court’s conclusion that the Reilly’s claim of damages was merely “speculative” and thus must be dismissed. Instead, the 10thCircuit held that by alleging that the Reillys’ property has been directly injured by their neighbors’ “odorous and publicly-operating criminal enterprise,” the Reillys properly stated a claim and the case can proceed.

The 10th Circuit ruling also went out of its way to explain that the defendants’ growing marijuana as alleged would meet the elements of a RICO claim. As alleged, defendants were (a) racketeering by growing marijuana, which remains illegal under federal law; (b) were an “association-in-fact enterprise”; (c) the defendants conducted the enterprise’s affairs; and (d) that this activity constituted a “pattern” of illegal acts that is the direct cause of the Reilly’s alleged damages. By providing such analysis, it may have provided a roadmap to future plaintiffs for RICO.

Anti-legalization advocates such as the Safe Streets Alliance are likely on the lookout for more RICO cases to bring against marijuana operators. They likely believe they have found a profitable way to improve litigation risks on marijuana companies even in the event of federal inaction on marijuana and state expansion. Not only are the RICO charges relatively easy to bring, but if successful, RICO plaintiffs can receive treble damages. Treble is lawyer-speak for triple, meaning that plaintiffs can receive up to three times the actual damages. Plaintiffs, if successful, are also eligible to have their attorney’s fees covered by the defendant and have the courts shut down the marijuana operation.

For marijuana operators around the country, now is the time to assess your liability and reduce litigation risk:

  • Review leases and other documents that may contain limitations as to what you can do on your property
  • Review local ordinances on noxious odors and other nuisance rules, as they could be the basis for a dispute
  • Be in strict compliance with any and all state laws related to cannabis
  • Avoid any public disputes that could raise attention to your company
  • Moreover, perhaps above all else, determine if you have any frustrated neighbors that anti-legalization advocates could target. If you have an ongoing dispute with a neighbor, attempt to resolve it amicably before it can rise to this level

RICO charges are challenging, but a prepared company can avoid the trouble before it starts.