cannabis wine california litigation right to farm

California, like other states, has a Right to Farm Act that is intended to protect agricultural activity, and many counties have their own local right to farm ordinances as well. California’s Right to Farm Act provides:

“No agricultural activity, operation, or facility, or appurtenances thereof, conducted or maintained for commercial purposes, and in a manner consistent with proper and accepted customs and standards, as established and followed by similar agricultural operations in the same locality, shall be or become a nuisance, private or public, due to any changed condition in or about the locality, after it has been in operation for more than three years if it was not a nuisance at the time it began.”

The intent of these types of laws is to protect farmers who use accepted and standard farming practices from nuisance lawsuits in certain circumstances. In California, at the state level, cannabis cultivation is not considered “agricultural” such that it would be eligible for protection under the Right to Farm Act. But in some counties, local ordinances do define cannabis cultivation as agricultural activity, giving cannabis cultivators protection under local right to farm ordinances.

Tensions arise, however, where the standards for things like pesticides are very different for cannabis versus other agricultural products like wine grapes. Many pesticides that are legal for use on vineyards are not legal for use on cannabis. This is when pesticide drift, which refers to the “airborne movement of pesticides from an area of application to any unintended site,” becomes a major issue.

There is case law addressing the issue of pesticide drift in California, and one such relevant case involving a farmer of organic dill whose crop became contaminated through pesticide drift from a nearby brussels sprouts farm, found that the organic dill farmer did have legal recourse against the Brussels sprouts farmer, even though the pesticides were legally applied.

The defendant Brussels sprouts farmer argued that because it had not run afoul of state law, the plaintiff did not have the right to sue. But the court held that the defendant could in fact be held liable for tainting the plaintiff’s organic crops. The defendant of course argued that this would “impose a serious burden and concern to the industry.”

But the issue becomes even more sensitive when 1) cannabis cultivators are held to extremely high standards in terms of pesticide restrictions and 2) they are operating near vineyards that have been in the same location, using the same accepted best practices for pesticide application for many years. Pesticide drift from these vineyards has the potential to taint valuable cannabis crops rendering them unviable.

And this is exactly what is happening in some areas like Santa Barbara County. In June, the operators of the Fiddlestix Vineyard in the Santa Rita Hills learned that the fungicide they had been spraying on their grapes for decades could be drifting onto a nearby cannabis farm. The vineyard has now started using a “more expensive and far less effective spray on the grapevines that are nearest to the cannabis farm” while the county investigates. Some vineyard owners have complained that Santa Barbara County in particular has been “too permissive” toward cannabis cultivation operators.

Ultimately, in counties that are licensing cannabis cultivators, growers of all sorts of agricultural products will need to learn to coexist. But the issue of pesticide drift and the implications of right to farm laws seem to be more issues in a long list that regulators didn’t adequately anticipate at the outset of regulation. Our hope is that these disputes will resolve amicably, and we will be following them closely.

idaho cannabis litigation

Regular readers know that we are in the midst of presenting a 50-state series analyzing how each state treats hemp-derived cannabidiol (“Hemp CBD”). Recently we covered Idaho, which we neatly summarized as “probably the worst state in the country to get caught with hemp.” The article explains why this is so in detail.  Among the reasons is that last winter the Idaho State Police seized a shipment of 13,000 pounds of hemp which was being transported across Idaho from Oregon to Colorado. (See here.) The case has received considerable attention from the press and the hemp industry. Indeed, the American Trade Association of Cannabis and Hemp filed amicus briefs in both the federal district court and the Ninth Circuit in support of the owner of the hemp.

The Ninth Circuit sends hemp owner to Idaho state court on the basis of the Younger abstention doctrine.

The seizure led to a federal lawsuit by the owner of the seized load. Big Sky Scientific, LLC v. Jan M. Bennetts, No. 1:19-cv-00040-REB (D. Idaho).  Big Sky sought a declaration that (i) the cargo is industrial hemp under provisions of the 2018 Farm Bill, (ii) hemp is not a controlled substance under federal law, and (iii) Idaho cannot interfere with the interstate transportation of hemp.

Big Sky also quickly moved for a preliminary injunction asking the federal court to compel the Idaho State Police (“ISP”) to return the hemp. Big Sky contended the cargo was deteriorating and losing its value as it sat in ISP’s possession. Meanwhile, ISP filed a state-court complaint in rem for forfeiture of the hemp under Idaho state law.

In considering the motion, the federal district court directed the parties to address “whether the Court has jurisdictional authority to compel the relinquishment of property seized in connection with a state criminal case.” ISP drew upon the Younger abstention doctrine to argue the federal court lacked jurisdiction and ought to abstain from exercising jurisdiction over Big Sky’s request for equitable relief.

The federal court denied the motion for a preliminary injunction and ruled that it need not decide the abstention question. Big Sky appealed the denial to the Ninth Circuit, wherein ISP argued the district court abused its discretion by not abstaining pursuant to Younger.

In a short, unpublished opinion issued on September 4, 2019, the Ninth Circuit agreed with ISP and reversed the district court’s decision not to apply Younger abstention. The decision was based, in part, on ISP’s representation at oral argument that (i) Idaho will immediately move to lift the stay in the in rem forfeiture action, and (ii) the assumption that the Idaho state court would proceed expeditiously with the in rem action, including Big Sky’s challenge to Idaho’s interpretation of the 2018 Farm Bill.

In plain terms: the Ninth Circuit ruled that the federal district court should refrain from exercising jurisdiction over Big Sky’s case because doing so may interfere with the ongoing proceedings in Idaho state court. (Feel free to email me for a copy of the opinion.)

What is Younger abstention?

The Younger abstention doctrine is named after the Supreme Court’s 1971 decision in Younger v. Harris which held that federal courts may not enjoin state court criminal proceedings. At heart the Younger abstention doctrine arises from our system of federalism and its separation of powers. States are independent sovereigns (as are Indian tribes in many respects) and most abstention doctrines proceed from this understanding. Since 1971, federal courts have applied the principles of Younger to proceedings far beyond the criminal context. Generally speaking, the doctrine operates to prevent federal courts from enjoining pending state court proceedings.

The doctrine is controversial in several respects for reasons we won’t get into here. (See Federal Jurisdiction by Erwin Chemerinsky for a thorough analysis). Other abstention doctrines include Colorado River abstention – which is concerned with avoiding duplicative litigation; the Rooker-Feldman doctrine – which concerns federal court review of state court decisions; Pullman abstention – which concerns refraining from deciding questions based on unclear state law; and Burford abstention – which concerns deferring review of complex state administrative procedures.

For now, I’ll briefly explain the elements of Younger abstention and turn to the implications of the Ninth Circuit’s decision. As the Court explained, “Younger abstention is appropriate when (1) there is an ongoing state judicial proceeding; (2) the proceeding implicates important state interests; (3) there is an adequate opportunity in the state proceedings to raise constitutional challenges; and (4) the requested relief seeks to enjoin or has the practical effect of enjoining the ongoing state judicial proceeding.”

In Big Sky, the Ninth Circuit found these elements met because of the pending in rem forfeiture proceeding in Idaho state court in which Big Sky may raise its federal claims. Although the state courts had stayed that action, ISP’s promise to move to lift that stay, and the “assumption” the state court would proceed to resolve that action expeditiously and permit Big Sky to raise its constitutional challenges led the Ninth Circuit to conclude Younger abstention was appropriate.

What are the implications of the Ninth Circuit’s ruling in Big Sky for shipping Hemp-CBD across state lines?

The Ninth Circuit’s decision has several immediate consequences relevant to anyone operating in the Hemp-CBD marketplace:

1)            Big Sky (and others) who have Hemp-CBD shipments seized in Idaho may ending up winding their way through state court and the state court appellate process (this is less than ideal);

2)            Other states that take a dim view of hemp (we are looking at you, South Dakota) may see this as a template for seizing Hemp-CBD shipments and keeping related proceedings out of federal court (though South Dakota is in the Eighth Circuit so not bound to follow the Ninth);

3)            Trucking and shipping companies may decline to offer Hemp-CBD shipping services because of the potential of seizure;

4)            The risk and costs of shipping Hemp-CBD ought to be addressed in your contracts – as we have said before – and you should consider spelling shipping routes to lessen the risk of seizure;

5)            Ensure that your Hemp-CBD shipments and shippers have the proper manifests and other chain-of-custody documents; and

6)            Finally, if one of your Hemp-CBD shipments is seized by law enforcement, act quickly with your litigation attorneys to commence a federal court action and be prepared to make sophisticated jurisdictional arguments.

For now, it may be best to stay away from Idaho.

indiana hemp cbd cannabis

The Agriculture Improvement Act of 2018 (“2018 Farm Bill”) legalized hemp by removing the crop and its derivatives from the definition of marijuana under the Controlled Substances Act (“CSA”) and by providing a detailed framework for the cultivation of hemp. The 2018 Farm Bill gives the US Department of Agriculture (“USDA”) regulatory authority over hemp cultivation at the federal level. In turn, states have the option to maintain primary regulatory authority over the crop cultivated within their borders by submitting a plan to the USDA.

This federal and state interplay has resulted in many legislative and regulatory changes at the state level. Indeed, most states have introduced (and adopted) bills that would authorize the commercial production of hemp within their borders. A smaller but growing number of states also regulate the sale of products derived from hemp.

In light of these legislative changes, we are presenting a 50-state series analyzing how each jurisdiction treats hemp-derived cannabidiol (“Hemp CBD”). Each Sunday, we summarize a new state in alphabetical order. Today, we turn to Indiana.

The Office of Indiana State Chemist (“OISC”) regulates hemp cultivation activities. Currently, the OISC is allowing applications for hemp researchers but expects to allow commercial cultivation applications in 2020 (absent a change in applicable laws or regulations) in light of the 2018 Farm Bill’s allowance of hemp production programs and a series of laws and regulations in Indiana. Pursuant to these OISC FAQs, the final rules for the 2020 application process are still being worked out, and the state hopes that the first round of commercial hemp crops will be planted next year. The FAQs also state that hemp seeds can be imported from other states and that the license types that will eventually be issued will be for Growers, Handlers, and Researchers.

Perhaps surprisingly, Indiana has some of the most robust Hemp CBD requirements of any U.S. state. Indiana’s legislature passed SB-52, allowing the sales of FDA-approved Hemp CBD products, or “low THC hemp extract” that complies with Indiana law effective in 2018. These requirements are broad and require independent lab testing with a passing certificate of analysis, and require products to have comprehensive labels with scannable QR codes linking to even more comprehensive information.

SB-52 doesn’t list each and every kind of Hemp CBD product that may be sold, but subsequent legislation has clarified the state’s position on certain products. Earlier this year, the state passed SB-516, which among other things, makes clear that smokable hemp isn’t a permitted product in Indiana. “Smokable hemp” is defined broadly and arguably includes both flower products and vape products.

Stay tuned to the Canna Law Blog for developments on hemp and Hemp CBD in Indiana. For previous coverage in this series, check out the links below.

bankruptcy cannabis marijuana

As most of us know, bankruptcy is just not an option for the cannabis industry or those even affiliated with it. To date, courts have generally ruled that debtors who work in the cannabis industry or derive meaningful income from cannabis activity (directly or indirectly) cannot use bankruptcy. This is in response to the U.S. Trustee’s office practice of filing motions to dismiss bankruptcy cases where the debtor has a direct or tangential connection to the cannabis industry.

While its availability has been litigated here and there (see here, for our last case study), it’s likely that the demand for such an option will increase as the market continues to grow. In the latest and greatest, and perhaps in response to the rising demand, the Ninth Circuit Court of Appeals shed some hope for the future.  Garvin v. Cook Investments NW involved five real estate holding companies that filed Chapter 11 reorganizations in Washington. One of those five debtors leased property to a company that used the land to grow cannabis in compliance with Washington state law. After filing for bankruptcy, the debtor-landlord continued to accept rent from the cannabis business.

The debtor-landlord proposed a plan of reorganization that would pay off its debts, which included some of the rent received from the cannabis business. The U.S. trustee objected, and the debtor-landlord reformulated its plan by removing all references to use of the rent proceeds. The debtor-landlord specifically noted that it would earn enough revenue from other sources to pay its creditors. However, the debtor-landlord admitted it would continue accepting rent from the cannabis tenant because the tenant had the right to remain in possession of the premises so long as it continued paying rent, and it had showed no interest in abandoning that right.

A company that seeks relief under Chapter 11 of the Bankruptcy Code is entitled to confirm a plan of reorganization if it meets certain conditions. The U.S. Trustee objected to plan confirmation, arguing that under 11 U.S.C.A. § 1129(a)(3), “[t]he court shall confirm a plan only if all of the following requirements are met … [t]he plan has been proposed in good faith and not by any means forbidden by law.” The U.S. Trustee essentially argued that the debtor-landlord could not meet this standard if it continued to rent property to a tenant engaged in the cannabis business because the debtor-landlord was deriving income (rent) from an illegal enterprise. This argument historically has prevailed.

The Ninth Circuit didn’t agree with the U.S. Trustee, however, and confirmed the plan of reorganization. In reaching its conclusion, the Court held that it was not faced with a conflict between federal and state drug law but, rather, a straightforward question of statutory interpretation. In their opinion, Section 1129(a)(3) didn’t mean it could reject a plan of reorganization if the underlying components of the plan were unlawful; rather, the proposal itself would have had to been made in an illegal manner (such as fraud, duress, etc.). The Court explained that Section 1129(a)(3) “directs bankruptcy courts to police the means of a reorganization plan’s proposal, not its substantive provisions.” Under that analysis, the plan of reorganization was not proposed by any means forbidden by law and had to stand.

While the Ninth Circuit’s opinion now suggests that the courts may be more willing to allow debtors involved with the industry to enter the bankruptcy courts, the real implications for the industry remain unclear. Notably, an even more recent decision from the Eastern District of Michigan took exactly the opposite approach: it not only dismissed the cannabis-related bankruptcy case, but expressly rejected the Ninth Circuit’s ruling. Only time will tell, but given the growing amount of power and support for the industry, we’re sure that future decisions will provide answers sooner than later.

cannabis branding trademark

Earlier this summer, the United States Patent and Trademark Office (USPTO) announced that as of August 3, 2019, all foreign-domiciled trademark applicants, registrants, and parties to Trademark Trial and Appeal Board (TTAB) proceedings must be represented by an attorney who is licensed to practice in the United States. This will apply to all trademark applicants, registrants, and parties whose permanent legal residence or principal place of business is outside the United States. These parties must all utilize a U.S.-licensed attorney to represent them in all USPTO trademark matters.

In addition, the USPTO will require that all U.S.-licensed attorneys who represent anyone before the USPTO in trademark matters must confirm that they are an active member in good standing of their bar, and must provide their bar membership information. According to the director of the USPTO, Andrei Iancu:

Businesses rely on the U.S. trademark register to make important legal decisions about their brands. In order to maintain the accuracy and integrity of the register, for the benefit of all its users, the USPTO must have the appropriate tools to enforce compliance by all applicants and registrants. This rule is a significant step in combatting fraudulent submissions.”

It is likely that requiring a U.S.-licensed attorney in all trademark matters will also streamline the prosecution process, and will ensure that applicants are represented by a party who is familiar with U.S. trademark law. This will hopefully result in an improvement to the quality of trademark application submissions. This rule change should come as no surprise to those practicing in the space, since many other countries require a domestic attorney to represent foreign applicants.

Beginning August 3rd, pursuant to this rule, Canadian patent agents are no longer be authorized to represent Canadian trademark applicants, registrants, or parties before the USPTO in trademark matters. However, Canadian trademark attorneys and agents will continue, if eligible, to be recognized as able to represent their Canadian clients, although the USPTO will correspond only with the appointed U.S.-licensed attorney.

This change is significant for foreign companies looking to protect their brands, and we recommend speaking with a U.S.-based trademark attorney now to prepare for this transition.

This rule change will impact foreign cannabis companies seeking to protect their marks in the United States, where trademark protection for cannabis-related marks is extremely limited. Utilizing a foreign filing as the basis for your U.S. application where that foreign registration encompasses goods or services that are illegal in the U.S. won’t fly, and so foreign companies must strategize as to what goods and services they can legally sell and protect in the United States. A U.S. trademark attorney with experience in the cannabis space can help foreign countries develop an intellectual protection strategy for the U.S., and can help secure trademark protection to the extent possible.

Even if your foreign company filed its trademark applications prior to the rule change, you will need a U.S.-licensed attorney to handle all future correspondence with the USPTO. Now that this rule change is in effect, all foreign cannabis companies seeking or holding trademark protection in the U.S. should secure an experienced U.S. trademark attorney to facilitate the trademark prosecution process.

donald trump cannabis

Over the course of of ten weeks, we recently ran a series of blog posts that take a close look at the Democratic Party candidates for President in 2020. We examined each candidate’s historic approach to marijuana law and policy, and we also canvassed their current respective stances on marijuana.

In all, we covered Joe BidenBernie SandersKamala Harris, Elizabeth WarrenPete ButtigiegCorey BookerBeto O’RourkeAndrew YangAmy Klobuchar and Julián Castro. Today, we conclude by turning our focus on the President of the United States and presumptive Republican Party nominee, Donald Trump.

Grade: D+

Stance on marijuana: Donald Trump’s stance on marijuana is unclear. He has expressed support for medical marijuana as well as for allowing states to decide whether to legalize or not. As president, however, his rhetoric and actions have flip-flopped.

History with marijuana legislation: During his 2016 presidential campaign,Trump asserted that, as president, he would allow states to choose whether to legalize marijuana without interference from the federal government.

After his election, however, Trump’s position completely reversed. In 2017, then-Attorney General Jeff Sessions rescinded the Cole Memo, an Obama-era policy of not interfering with states who have legalized marijuana. Trump’s Press Secretary at the time, Sean Spicer, then implied that there would be a crackdown on legalization states. Sessions, however, did not specifically order law enforcement to direct more resources toward enforcing marijuana laws.

In April, Trump said that he would probably sign the bi-partisan STATES Act, a bill that would amend the Controlled Substance Act to allow states to legalize marijuana. Under Trump, current Attorney General William Barr, while not necessarily pro-legalization, has said that he wants Congress to approve legislation that would end the conflict between federal and state laws surrounding marijuana. As the 2020 election draws nearer, the Trump administration’s support of pro-legalization legislation is likely a strategic move considering that the majority of Americans support legalizing marijuana.

Though Trump has supported the STATES Act, he has not advocated for legalizing marijuana. Marijuana does not appear on his website or social media. Recently, Trump has asserted that, if reelected, he would allow states to legalize without federal interference. Unfortunately, he has not said he would reschedule marijuana. Even if states can legalize marijuana, marijuana’s status as a schedule I drug is a substantial barrier to research and prevents veterans from being able to get their medical marijuana prescriptions through the VA.

More broadly, Trump has perpetuated the War on Drugs, a campaign which has imprisoned countless Americans on drug charges (including convictions for marijuana) and fueled violent drug cartels over the past few decades. In 2017, Trump complimented Philippine President Rodrigo Duterte on his policy of extrajudicial killing of drug users. This year, Trump pressured Mexico to bolster their military efforts to stop drug trafficking by threatening to impose tariffs on the country. He justifies his border wall as a way to stop drugs from entering the US, despite the fact that most drugs are trafficked into the US through legal ports.

Over the past few decades, multiple studies have concluded that military intervention is ineffective in stopping the drug trade. Crackdown efforts instead end up increasing the value of drugs (because the stakes for trafficking them are higher) and in turn fuel drug cartels. Simply put, the drug trade will continue as long as there exists a demand for drugs in America.

Though Trump has allocated funds for addiction treatment programs, it is nowhere near adequate to address America’s opioid epidemic.

In his favor, Trump signed “The First Step Act” into law which, among other things, will reduce the minimum sentences for certain non-violent drug crimes. Current Attorney General Barr also seems more open to criminal justice reform than Sessions (a shift from the “tough on crime” stance he maintained in the 90s as Attorney General for President George H.W. Bush). His administration, however, is yet to acknowledge the criminalization of marijuana (and, more broadly, the War on Drugs) as a criminal justice issue. People of color are disproportionately arrested for marijuana, despite similar rates of marijuana use across racial groups. Marijuana must be legalized across all 50 states in order to stop the perpetuation of racism in our justice system.

Conclusion: Donald Trump receives a “D+” grade because his administration rescinded the Cole Memo and called for a crackdown on legalization states and because he broke his campaign promise to let states decide whether or not to legalize. More generally, his promise to let states choose whether to legalize would still leave marijuana illegal at the federal level. His inconsistency on cannabis is the biggest issue. He will say one thing and then do something completely different. His actions often do not match his words.

california hemp social equity

As states across the country develop regulated cannabis programs, more and more are incorporating social equity programs. Illinois’ new adult-use cannabis law, for example, made waves for its broad social equity program. Here in California, cannabis social equity is not a central part of the state-level regulations, but many of the larger cities throughout the state have adopted and are in the process of implementing comprehensive social equity programs: for example, Los Angeles, San Francisco, and Long Beach. Others will probably follow in the future.

But the same isn’t really true for California hemp or hemp-derived cannabidiol (“Hemp CBD”). California hasn’t really made any progress on adopting hemp social equity programs, probably because of the murky legality of hemp to start. Most Hemp CBD products are “illegal” according to the California Department of Public Health, and . AB-228—the bill that may change that, if it ever moves forward—won’t really do anything to create any kind of social equity benefits for Hemp CBD manufacturers or sellers. California’s existing hemp cultivation law—the California Industrial Hemp Farming Act (or “CIHFA”, which I’ve written about here)—is half a decade old and essentially is limited to regulating very limited aspects of cultivation.

The CIHFA is not really geared towards the easy creation of a social equity program for hemp farmers. It doesn’t necessarily require city or county permitting, but instead requires that commercial cultivators file simple registration forms with county agricultural commissioners and pay a pretty nominal fee. This is in contrast to the state’s cannabis law—the Medicinal and Adult Use Cannabis Regulation and Safety Act and its corresponding regulations (or “MAUCRSA”)—which requires local approval and thus creates the opportunity for cities to fill the gap with their own individualized social equity programs. Because there’s currently not an equivalent licensing program for hemp, and because the state laws on point don’t address social equity, we just aren’t seeing that happen.

Moreover, a possible amendment to the CIHFA (SB-153) will actually hurt the chances of the state getting a social equity program that looks anything like cannabis social equity programs. One of the current provisions of SB-153 states:

Any person convicted of a felony relating to a controlled substance under state or federal law before, on, or after January 1, 2020, shall be ineligible, during the 10-year period following the date of the conviction, to participate in the industrial hemp program.

This provision is a bit vague and we don’t yet know how it will be implemented—for example, what the state means by “participation” is not yet clear so we don’t know if that would bar someone from being an owner of a hemp farm, or even being employed by one. It is also similar to exclusionary language found in the federal 2018 Farm Bill, which bars “any person convicted of a felony relating to a controlled substance under State or Federal law.”

We wrote about the discriminatory impact of that language here. Under the similar SB-153 language, if someone had a controlled substances conviction—likely even a cannabis conviction anywhere in the U.S.—within 10 years of attempting to participate in the industrial hemp program, they would be ineligible. This is anathema to social equity programs which in many cases will give assistance to persons were convicted for possession of controlled substances (i.e., Los Angeles’ program). The upshot is that if a locality were to adopt a social equity program, it may not be able to use prior convictions as a basis for eligibility and would have to design it a lot differently.

At the end of the day,  it’s too early to tell whether the state will bring social equity to hemp. We’ll report back on any updates to this, so stay tuned to the Canna Law Blog.

marijuana business investor question

As veteran marijuana business owners (and virtually every other type of industry owners) know, there may come a point in time in the business when you are sitting across the table from someone who is offering to put money into your business. They may be your prospective business partner. They may be your close friends or family members. They may be friends of friends. They may be a private equity group, angel investors, or venture capitalists. Many of your closest family and friends have been close to you during your business growth. The ones who trust you because they have a close personal connection probably will not ask too many prying questions because they are investing in your strength, tenacity, and vision, not primarily in the strength of your business prospects. There are several right ways and many wrong ways to accept money from outside financiers for your business, but this post is not about how to do a securities offering the right way. (See here and here for some prior posts on that topic.) This post is about preparing yourself as the business owner for the types of questions you should expect to receive when you are discussing your business with potential investors.

All savvy investors are savvy because they are experienced. When we are feeling especially erudite, we may call them “sophisticated investors.” We call investors with a lot of assets “accredited investors,” which does not necessarily mean they are sophisticated, though many are. While sophisticated investors will not know everything about every product in every business market, they know the fundamentals of a good business. Many investors, especially in the venture capital and private equity world, have owned businesses. And they will be able to determine whether your cannabis business venture is worth investing in, regardless of whether you are primarily involved in cultivation, processing, manufacturing, R&D, distributing, or selling retail marijuana products. Prospective investors are literally everywhere: in your community, in your state, and in larger national and international markets. The U.S. has been and will continue to be the safest place to earn a good return without introducing unnecessary risks. Prospective investors are looking for a good return in a good business, and yours may be it, depending on how well you address the types of concerns below.

1.     Does Your Management Team Know What They Are Doing?

Sophisticated investors are really not that different from your parents or grandparents. Your family and friends believe in you and invest in your business because they know you. Your prospective investors who do not know you need to understand both the human side of you and your business acumen. If you convince them that you know your market, your niche within that market, and that you are committed to doing what you know or can reasonably develop through talent acquisition, they will trust that you will take care of their money as if they were your family or friend. This is the ultimate test of your fiduciary duties to your investors – proving that you can keep both the duty of care (make sound business judgments) and the duty of loyalty (put the business’ interest above your own). Your temperament will also matter. If you are a jerk to work with and they can sense that, it may not kill the investment opportunity, but it might.

2.     Do You Understand the Financials of Your Business?

This is not a legal issue, but it is an extremely important issue because your investors are probably well versed in business finance. If your bookkeeping skills are atrocious because you are a DIY kind of person or your bookkeeper does not have good organizational skills; if your financial statements are incomplete, inaccurate, or just plain wrong; or if your Quickbooks accounts have not been closed out every month, no sophisticated investor will touch your business until you get it all cleaned up. Why not? Your financials are the easiest way for someone to understand your business at a glance.

If your financial inputs are sloppy, then your outputs are unreliable, giving your prospective investors no real metrics to compare your business to other businesses they have invested in or are considering. If you do not have good financial statements, there is zero chance that you really understand your market or can plan for future growth because you also have no good data from which to base your business decisions. You need to know your key business metrics (KPIs = key performance indicators) so you can explain to your potential investors exactly what great things you want to accomplish with their investment in your company. If you just need money because “cash flow is tight”, you will walk away with zero investment dollars.

3.     Do You Understand Your Business Risks?

Your prospective investors will want to know that you are aware of your business risks. Do not shy away from giving your cold-blooded appraisal of your business, your employees, your business partners, your products, your weaknesses, and your acknowledgment that even though you believe in your company and will work relentlessly, success is never certain. Litigation lawyers love undisclosed or underrated risks, uncertainty, and ambiguity in investment relationships and contracts because this environment creates a cornucopia of ways for them to sue your company on behalf of your disgruntled investor, even if they are (were) your close friends.

Good transaction or “deal” lawyers want to make sure you think through every possible risk of your cannabis business before you start hinting to anyone that you might want to take on investors. You need to learn to think like a paranoid lawyer who sees risks everywhere. Remember that not all risks are created equal. A great transaction lawyer will help you see your risks, evaluate them, and weigh them according to their relative likelihood to arise in your business.

4.     Do You Have Your Owner Relationships Soundly Grounded in a Written Contract?

One of the worst things you can do is start a business and never get around to putting key relationships in writing. I see this way too often in the cannabis world in businesses with two or more partners. Either everything was done on a handshake or the operating agreement or shareholder agreement is not good, does not reflect reality, or is just plain wrong.

Recently, I reviewed a contract for some LLC owners who used an agreement intended for a partnership. That was a huge problem because it gave all of the LLC owners equal rights, which is appropriate in some scenarios but not in others. That is one of the reasons why today we almost never form partnerships but instead use LLCs and other vehicles. Get your ownership agreements in place and discuss the difficult “what if” scenarios now during your business honeymoon phase. If prospective investors catch wind that you and your business partners are not in sync on all issues, they will not be willing to invest.

Take heart that very few businesses who are preparing to take on investors have everything in perfect form. As business owners you always have two or three or ten times more things to do than you have time to do, even if you have trusted and competent people working with you in your business. The best thing you can do is keep a running list of potential due diligence items (see here and here) and work through your list with competent professionals.

For years now, I’ve seen and analyzed many different cannabis business relationships across the industry spectrum. Specifically, many proposed and draft agreements have come across my desk detailing the contractual relationships between a variety of parties in the cannabis industry for various purposes–from investors, ancillary services providers, and licensees to intellectual property holding companies, equipment lessors, and lenders (and more). Altogether, I’ve seen lots of different contractual and corporate set ups within a variety of cannabis-friendly states. California, though. takes the cake on the most bizarre and legally questionable cannabis business relationships and contract structures; and that makes sense as California cannabis continues to emerge (sort of slowly) from a gray medical market.

Ultimately, when you think of California’s cannabis marketplace at this point, you can harken back to Rod Serling saying:

You’re moving into a land of both shadow and substance, of things and ideas. You’ve just crossed over into … the Twilight Zone.”

I recently wrote about all the bad behavior that still occurs in California (even with licensing in play) and also about the top 5 most dangerous cannabis contracts in this state, but this post is dedicated to those contractual and corporate relationships and structures I’ve seen most recently in the Golden State that keep coming up again and again. These arrangements either skirt the cannabis rules completely, or make zero sense from a contract and/or corporate governance standpoint. So, if you’re seeing these agreements and structures in the marketplace and scratching your head, you’re not alone.

1.     Unlicensed companies operating under another company’s license.

The number of times I’ve seen a licensee allow an unlicensed business to operate within its premises is increasing rapidly in California. In most other states, the regulations make abundantly clear that any company engaged in commercial cannabis activity, no matter what, would require a cannabis license and that you cannot operate an unlicensed cannabis business within the licensed premises of another company. Not so here in California.

Whether it meant to do so or not, the Bureau of Cannabis Control (BCC) created a fairly confusing situation with the adoption of Rule 5032 where it mandates that all commercial cannabis activity can only occur between licensees but at the same time. In its Final Statement of Reasons, the BCC also states that unlicensed parties can have white label and/or intellectual property (IP) licensing relationships with licensees so long as those unlicensed parties are disclosed to the BCC as a financial interest holder. Some parties have taken this a step further to interpret this rule to mean that an unlicensed company, so long as it’s disclosed to the BCC in some capacity, can literally operate its own business within/under/through a licensed company, conducting commercial cannabis activity as if the unlicensed company owns the license. (And things become very confusing from a performance obligation perspective when one of these unlicensed companies is an equity owner in the licensed business, but is also acting as, let’s say, a management company of that licensed business at the same time).

These arrangements, of course, aggressively push boundaries and are untested with the BCC (let alone with local governments). Still, I’m seeing these proposed agreements between licensed and unlicensed parties more and more: unlicensed parties simply do not want to or cannot secure their own licenses, despite conducting all the regulated commercial cannabis activity. I have no doubt that once the BCC finally flips into enforcement mode that it will start really analyzing these relationships to determine who is actually conducting commercial cannabis activity in violation of the rules (probably lots of folks).

2.     Licensee contracts with unlicensed parties that operate at a licensed facility.  

These kinds of contracts become increasingly tricky because of number 1 above. If you’re a licensee and you’re being presented with a contract from an unlicensed party that’s operating within another company’s licensed premises, you need to proceed with extreme caution.  Even if an unlicensed company is disclosed under another licensee as an “owner” or a “financial interest holder,” that doesn’t mean that that company can start undertaking its own commercial cannabis activity carte blanche.

Recall, commercial cannabis activity can only be conducted between licensees. That’s not to say that an unlicensed company cannot assist a licensee with its commercial cannabis activity, but if that unlicensed company is inking its own contracts without any mention of the actual licensee under which it operates, you’re going to have significant regulatory issues in the future (not to mention murky issues around representations and warranties around compliance with the rules, fitness of product, recalls, etc.).

The common relationship I’m now seeing most often is where an unlicensed company is utilizing a cultivation or manufacturing facility and trying to directly contract with licensed distributors or retailers to get their own product to market (where that product, at the same time, will contain the cultivator’s or manufacturer’s information to satisfy the packaging and labeling rules, but will be co-branded with the unlicensed company’s information and intellectual property). Without more guidance from the BCC, it’s not difficult to determine that such a contract violates Rule 5032.

3.     IP licensing and white labeling. 

Thanks again to the BCC, IP licensing with cannabis licensees in California is not at all straightforward. While unlicensed companies can license their IP to cannabis licensees as long as those unlicensed companies are disclosed as financial interest holders, if they exercise too much direction, control, and/or management over the licensee relative to the IP, the unlicensed company may be considered an “owner” under BCC regulations; and that means disclosure of the unlicensed party and maximum scrutiny from the state.

Anyone who’s done an IP licensing agreement knows that the licensor typically gets substantial control over the use of the IP relative to the licensee, so already we potentially have a problem in California where preserving the integrity of the mark “too much” may make the licensor an “owner” of the cannabis licensee. The same issue may occur with white labeling, where too much control over formulations and product compilation could amount to unlawful “ownership” over the cannabis licensee.

I am positive that there are IP licensing and white label and supply agreements in California that have created secret owners all over the place because of the level of control in those agreements given to unlicensed parties. The BCC has very little guidance out about these relationships, so its scrutiny of these agreements will probably be on a case-by-case basis if and when such relationships are discovered.

4.     Disclosure issues.

Near as I can tell when talking to folks, most people still don’t understand or know the extent of owner and financial interest holder disclosures required by the State of California. What’s for sure, though, is that certain investors and financiers want to avoid these issues altogether if they can help it (which is easier said than done). In particular with the BCC, if you’re an owner that’s an entity, you are disclosing every single owner in that entity, even if they own under 20% of the entity.  This means you will disclose not only your equity owners at 20% or more AND all individuals in a control, direction, or management positions, but you’ll also disclose all of your financial interest holders (with very few exceptions) that are at 19% or less in equity. (And, yes, this includes disclosure of any investment funds or limited partners in a general partnership, and every person or entity within those structures, too, if you ask the BCC).

All of this is obviously extremely problematic for fundraising and M&A and many licensees do not realize that they’ll violate the rules if they fail to timely make these disclosures. Despite that fact, I see lots of transactions and cap tables from licensees where they realize only when it’s too late that they must make these robust owner and financial interest holder disclosures or face major rule violations. And many of those investment agreements and/or M&A transactions don’t even mention any kind of default or obligation around these disclosures — which is a massive drafting mistake.

5.     Operating without a provisional license.

For some reason, some stakeholders are under the impression that they can continue to operate if they have local authorization but no state license. This is just dead wrong. And even if you have local authorization and have applied for an annual license in order to get a provisional license, you still cannot operate. Just standing in line for a provisional does not make you a legal operator. You have to have both local authorization and either a provisional or annual license. In doing diligence on certain operators, I’m continuing to see expired temporary licensees that don’t yet have provisional or annual licenses. To buyers and/or investors of cannabis companies in California, make sure that your target has both local authorization and a state license before pulling the trigger.

California cannabis has certain pitfalls that are unlike any other state due to the nascent nature of the licensed industry and ambiguities created by the regulators. Unfortunately, these pitfalls and ambiguities aren’t being addressed with additional guidance or even consistent BCC enforcement. In any event, proceed with caution out there and be sure to read the fine print in your proposed agreements and in the rules.

illinois hemp cannabis

The Agriculture Improvement Act of 2018 (“2018 Farm Bill”) legalized hemp by removing the crop and its derivatives from the definition of marijuana under the Controlled Substances Act (“CSA”) and by providing a detailed framework for the cultivation of hemp. The 2018 Farm Bill gives the US Department of Agriculture (“USDA”) regulatory authority over hemp cultivation at the federal level. In turn, states have the option to maintain primary regulatory authority over the crop cultivated within their borders by submitting a plan to the USDA. This federal and state interplay has resulted in many legislative and regulatory changes at the state level. Indeed, most states have introduced (and adopted) bills that would authorize the commercial production of hemp within their borders. A smaller but growing number of states also regulate the sale of products derived from hemp.

In light of these legislative changes, we are presenting a 50-state series analyzing how each jurisdiction treats hemp-derived cannabidiol (“Hemp CBD”). Each Sunday we will summarize a new state in alphabetical order. So far, we’ve covered Alabama, Alaska,  Arizona,  ArkansasCaliforniaColoradoConnecticutDelawareFlorida, GeorgiaHawaii and Idaho. Today we turn to Illinois.

Overview. Since 2016, Illinois has limited the cultivation of industrial hemp by the Illinois Department of Agriculture (“IDA”) and institutions of higher learning for research purposes only. However, on August 26, 2018, Governor Bruce Rauner signed SB 2298, which expanded the state’s industrial hemp regulations to cover commercial activity. SB 2298 updated Illinois’ industrial hemp laws to allow individuals and entities to cultivate hemp by registering with the IDA and removed industrial hemp from the definition of cannabis.

Earlier this year, the IDA adopted temporary rules under SB 2298. Under the rules, “Industrial Hemp” means

the plant Cannabis sativa L. and any part of that plant, whether growing or not, with a delta- tetrahydorcannabinol (THC) concentration of not more than 0.3% on a dry weight basis that has been cultivated under a license issued under the Act or is otherwise lawfully present in this State and includes any intermediate or finished product made or derived from industrial hemp.

Production of Hemp and Hemp-CBD Products. Pursuant to Illinois law, only licensed growers and processors may sell or transfer living hemp plants or viable hemp seeds to (1) other IDA licensees, or (2) others outside of Illinois so long as the sale is authorized by a state agency in the destination state.

The IDA also permits the sale and transfer of “stripped stalks, fiber, dried roots, nonviable seeds, seed oils, floral and plant extracts (excluding THC in excess of 0.3%) and other marketable hemp products to members of the general public, both within and outside the State of Illinois.” Note that neither the bill nor the IDA rules define “marketable hemp products.”

However, Section 25 of SB 2298 provides the following provision:

Nothing in this Act shall be construed to authorize any person to violate federal rules, regulations, or laws. If any part of this Act conflicts with a provision of the federal laws regarding industrial hemp, the federal provisions shall control to the extent of the conflict.

Accordingly, because there is no permissive language that allows for Hemp-CBD products and because of Section 25, the sale of these products is illegal at worst, and unregulated at best.

In addition, only registered processors can process Hemp-CBD grown under the program. However, nothing in SB 2298 nor the IDA rules expressly prohibit the introduction of hemp products lawfully processed under another state plan.

Possession. Pursuant to SB 2298, “[n]othing in this Act shall alter the legality of hemp or hemp products that are presently legal to possess or own.” Consequently, the possession of Hemp-CBD products seems limited to those approved by the FDA or that meet the standards set by IDA rules (i.e., containing no more than 0.3% THC and that satisfy other requirements).

Transportation. Only a licensed grower or registered processors may transport hemp so long as the hemp contains no more than 0.3% THC. Note that the IDA rules state that the transportation of Hemp-CBD products is not restricted after sold to a member of the public.

Marketing or Advertising Restrictions. As of the date of this post, the state has not enacted regulations governing the marketing or advertising of Hemp-CBD products.

Bottom Line. Although the production and sale of Hemp-CBD products isn’t clearly authorized or restricted, Illinois is authorizing the cultivation of the crop and has not taken any enforcement actions against these products. For these reasons, Illinois should be considered a hemp friendly state. That being said, there is a possibility that things may change upon the adoption of final rules by IDA.