Cannabis Case Summaries

cannabis 280E marijuana taxOn June 13, the U.S. Tax Court issued an opinion regarding the application of IRC §280E. In Alterman v Commissioner of Internal Revenue (“Alterman“) the Court held, yet again, that IRC §280E operates to disallow a cannabis businesses’ tax deductions. A few days later, the Court also issued Loughman vs. Commissioner of Internal Revenue (“Loughman“). In that case, the Court held that IRC §280E disallowed the deduction of wages paid to S Corporation shareholders. The disappointing but predictable outcomes in these cases highlight the need for Congress to repeal or modify IRC §280E.

By now, the destructive force of IRC §280E is well known. IRC §280E disallows deductions and credits to a business trafficking in a controlled substance. One exception is cost of goods sold (“COGS”). Other than a 2015 IRS General Counsel memorandum, the IRS has not offered much guidance regarding the application of IRC §280E. With this gap in IRS guidance, it is the courts that have outlined the (fairly narrow) parameters of IRC §280E.

Reading the IRS guidance and court rulings together, it is clear that selling or growing cannabis is always considered trafficking and expenses related to such activity are disallowed. A cannabis business can deduct all expenses related to a separate trade or business. A court is more likely to accept a separate business activity if that business can operate independently of a cannabis business.

Alterman

Alterman does not offer broad guidance regarding IRC §280E. In part, this is because the Court issued a Memoranda opinion.  A Memoranda opinion does not set a precedent for taxpayers; however, they are useful to illustrate how the Court may analyze the law.

Laurel Alterman and William Gibson operated a Colorado medical marijuana grow and dispensary. These taxpayers also sold cannabis paraphernalia, hats and shirts. The Court held that the sale of paraphernalia, hats and shirts was not a separate trade or business primarily due to the lack of records. Accordingly, costs associated with these activities were not deductible under IRC §280E.

In addition, the Court determined that certain costs were not allowable as COGS because of insufficient records, which should be a lesson to any cannabis business owner: It’s not enough to have potentially deductible costs, if you don’t keep records! Interestingly, the opinion uncharacteristically discusses, in detail, the records available, only to hold that those records were insufficient. (Court cases that disallow deductions because of poor recordkeeping typically do not discuss in detail, the records examined.)

Because of the fact-specific nature of this case, Alterman offers little guidance to cannabis businesses other than recordkeeping must be sufficient to support deductions.

Loughman

In Loughman, the Court did not address the issue of record keeping or substantiation. Instead, the Court addressed the issue of double taxation of income because of IRC §280E. And the Court concluded that double taxation is allowed.

Jesse and Desa Loughman were licensed in Colorado to grow and sell cannabis through a Colorado corporation, Colorado Alternative Health Care (“CAHC”). The Loughmans were the sole shareholders of CAHC and elected to be treated as an S Corporation for federal tax purposes.

An S corporation is not subject to tax; instead shareholders are taxed on S Corporation income at the individual level. Special rules treat S Corporation shareholder/officers as employees and require the S Corporation to pay them a reasonable wage. Under ordinary circumstances, an S Corporation deducts shareholder/officer wages; the shareholder/officer then pays income tax on the wages. The S Corporation’s deduction of wages prevents double taxation.

In this case, the IRS applied IRC §280E and disallowed CAHC’s deduction for wages paid to the Loughmans. Consequently, the amount of S Corporation income passed through to the Loughmans increased. The result is that the Loughmans wages are taxed twice — first as an employee and then as S Corporation shareholders.

The Court rejected the argument that IRC§280E discriminates against S Corporation shareholders operating a cannabis business. The Court reasoned that wage payments to a third-party performing the same services as the Loughmans would not be deductible under IRC §280E. Accordingly, the amount of pass through income to the Loughmans would not change: IRC §280E applies equally to increase S Corporation income, regardless of who receives wages. Furthermore, the Court noted that the taxpayer did not have to, but chose to, elect S Corporation status for their cannabis business.

As in Alterman, the Court issued a memorandum opinion. Accordingly, the Court’s determination only applies to the Loughmans and does not set precedent. Nonetheless, the Court highlighted a serious disadvantage to operating a cannabis business through an S Corporation– namely, double taxation.

The STATES Act

So where does that leave us? These cases highlight the dire need for a legislative fix of IRC §280E. On June 7, 2018, Senators Gardner and Warren introduced the Strengthening the Tenth Amendment Through Entrusting States Act (The “STATES Act”). The STATES Act exempts persons from the Controlled Substances Act, so long as they are acting in compliance with a state’s cannabis law. Specifically, under the STATES Act, the production or sale of cannabis in a cannabis legal state “shall not constitute trafficking”. Because IRC §280E applies to a trade or business that consists of trafficking, the STATES Act would effectively eliminate the impact of IRC §280E.

As more cannabis businesses are audited, expect more cases like Loughman and Alterman to move through the system. In addition, expect similar results on similar facts, unless Congress finally takes action. The STATES Act would do a lot of good for the industry, and eliminating the oppressive impact of IRC §280E is high on the list.

We’ve written (and talked) extensively about the dos and don’ts of filing cannabis-related state and federal trademarks, and we all know by now that you cannot obtain a federal trademark registration for goods or services that are not lawful pursuant to federal law. But I’ve heard a lot of creative arguments in this space, and have had many clients indicate an interest in challenging the status quo at the United States Patent and Trademark Office (USPTO).

Unfortunately (or fortunately, depending on how you look at it), the Trademark Trial and Appeals Board (TTAB) has handed down numerous opinions of precedent that lay forth the USPTO’s position on the “lawful use in commerce” requirement in detail. In this post, I thought it would be useful to breakdown the TTAB’s analysis on this issue via their In re PharmaCann LLC opinion, which was issued in June of 2017.

marijuana cannabis trademark
No lawful use in commerce = no trademark.

In the PharmaCann case, the Applicant sought registration of two trademarks: PHARMACANN and PHARMACANNIS, both for “retail store services featuring medical marijuana,” in International Class 35, and “dispensing of pharmaceuticals featuring medical marijuana,” in International Class 44. The Examining Attorney refused registration of both marks pursuant to Sections 1 and 45 of the Trademark Act, 15 U.S.C. §§ 1051 and 1127, on the ground that Applicant could not allege a bona fide intent to make lawful use of the marks in commerce because the services identified involved the distribution and dispensing of cannabis, which is a controlled substance whose distribution and dispensing are illegal under the federal Controlled Substances Act (CSA), 21 U.S.C. §§ 801 et seq..

In its opinion, the TTAB pointed out that it has “consistently held that, to qualify for a federal … registration, the use of a mark in commerce must be ‘lawful’.” In re JJ206, LLC, 120 USPQ2d 1568, 1569 (TTAB 2016) (affirming refusal to register POWERED BY JUJU and JUJU JOINTS for cannabis vaporizing and delivery services for lack of lawful use in commerce). The TTAB further elaborated that for a mark to be eligible for federal registration, “any goods or services for which the mark is used must not be illegal under federal law.” In re Brown, 119 USPQ2d 1350, 1351 (TTAB 2016). And even if an Applicant files on an intent-to-use basis (meaning they intend to use the mark in commerce in the near future but have not done so yet), if the identified goods or services with which the mark is intended to be used are illegal under federal law, “the applicant cannot use its mark in lawful commerce, as it is a legal impossibility for the applicant to have the requisite bona fide intent to use the mark.” JJ206, 120 USPQ2d at 1569.

In general, registration will not be refused for lack of lawful use in commerce unless either “(1) a violation of federal law is indicated by the application or other evidence …, or (2) when the applicant’s application-related activities involve a per se violation of a federal law.” Brown, 119 USPQ2d at 1351. In the case at hand, the TTAB deemed the Applicant’s marijuana distribution and dispensing activities to be a per se violation of the CSA. The analysis here was pretty straightforward, where the CSA prohibits, among other things, manufacturing, distributing, or dispensing controlled substances (21 U.S.C. § 841(a)(1)), and where marijuana is a Schedule I controlled substance under the CSA. 21 U.S.C. § 812(c) Schedule I (c)(10).

The Applicant here made two arguments in opposition to the TTAB’s position. The first argument was that “[s]ince 2009 the Department of Justice has consistently refused to treat medical marijuana as an illegal drug by consistently refusing to enforce the Controlled Substances Act against it.” In making its argument regarding the federal government’s lack of enforcement against medical marijuana businesses operating in compliance with state law, the Applicant relied on the (now rescinded) Cole Memorandum. But the TTAB clarified that it had previously decided in JJ206 that the Cole Memorandum “provides no support for the registration of a trademark used on goods whose sale is illegal under federal law,” and that this determination applied with equal force to the Applicant in this case’s intended use of its marks for distributing and dispensing medical marijuana.

The Applicant’s second, and more novel, argument was that “Congress has taken the same position as the Department of Justice,” because in the Consolidated and Further Continuing Appropriations Act of 2015 (as renewed in the Consolidated Appropriations Act of 2016, subsequent continuing resolutions, and in the Consolidated Appropriations Act of 2017), Congress has prohibited the Department of Justice from utilizing funds to prevent states that have legalized medical marijuana from implementing their own state laws authorizing the use, distribution, possession, or cultivation of medical marijuana. The Applicant’s argument was that Congress’ decision not to fund the DOJ to enforce the CSA against medical marijuana, “it would make no sense and serve no purpose for the Board to take a different position…”.

The TTAB, however, found this second argument equally lacking, and relied on United States v. McIntosh (833 F.3d 1163, 1169-70 (9th Cir. 2016)) for its analysis. In that case, the court concluded that the Appropriations Acts and the Rohrabacher-Farr Amendment did not make medical marijuana legal under the CSA. The TTAB applied that conclusion to the case at hand and rejected the Applicant’s argument.

These TTAB opinions are instructive in that they give us a clear view into how the USPTO is lawful use in commerce requirement; although the legal status of cannabis and particularly the federal government’s enforcement efforts remain murky, so long as marijuana remains a Schedule I controlled substance, federal trademark protection will not be available.

For other posts on cannabis trademarks, check out the following:

marijuana cannabis supreme court
Nice work by the Court.

Back in December, we wrote about Murphy v. NCAA (“Murphy”), a case where the State of New Jersey challenged a federal law that bans states from allowing sports gambling. We explained that this case has important implications for state-legal marijuana programs, because it asks whether the Constitution’s anti-commandeering doctrine prevents the federal government from forcing states to ban certain activities. The case took a long and winding path, but on Monday, the U.S. Supreme Court ruled by an impressive 7-2 margin that federal prohibition did not preempt the state’s gambling laws. This is great news for cannabis.

We have argued on this blog that applicable law prohibits the feds from shutting down state cannabis programs. In support of this argument, we have observed that the Tenth Amendment of the Constitution (the source of the anti-commandeering doctrine), coupled with the express, anti-preemption language of the federal Controlled Substances Act, grants the states ample authority to run cannabis programs. Given the precedent established in Murphy on Monday, it is hard to imagine any other outcome if the feds were attempt to enjoin (shut down) a state licensing program for marijuana.

In reaching its opinion, the majority acknowledged that the question of whether to legalize sports gambling “is a controversial one” that “requires an important policy choice.” But that choice, the majority continued, “is not ours to make. Congress can regulate sports gambling directly, but if it elects not to do so, each State is free to act on its own.” It is hard not to see parallels with marijuana legislation there. Along those lines, the Court also observed that:

“The legalization of sports gambling is a controversial subject. Supporters argue that legalization will produce revenue for the States and critically weaken illegal sports betting operations, which are often run by organized crime. Opponents contend that legalizing sports gambling will hook the young on gambling, encourage people of modest means to squander their savings and earnings…”

Substitute “marijuana” for “sports gambling” and you have an almost perfect distillation of the broad policy arguments made by pro- and anti-cannabis prohibition camps. Because of these striking parallels, supporters of cannabis filed an amicus brief in support of the State of New Jersey. In addition, litigants in the Supreme Court’s most notable marijuana case to date, Gonzales v. Raich, were quick to opine that Murphy is easily distinguished from the former case, which dealt only with the federal government’s ability to enforce federal laws within state borders, and not with the feds’ ability to require states to pull state laws off the books.

For cannabis advocates, Murphy is an especially fun case, because it originally was brought by former New Jersey Governor Chris Christie, and the case was known as Christie v. NCAA before Phil Murphy became the state’s governor. Christie, of course, is known for his repeated attacks against state legalization of marijuana, and his disregard of states’ rights in that context. Today, however, he is applauding the Murphy decision and the “rights of states and their people to make their own decisions.” Go figure!

In any case, anyone in favor of states’ rights, including the right to ignore retrograde federal laws around marijuana prohibition, should be excited about the Supreme Court’s decision in Murphy. It stands as the latest in a string of promising federal developments signaling the end of cannabis prohibition. Hopefully, the end is finally near.

employment cannabis marijuana
Equal pay is not only the right thing to do, it’s required by the law.

Equal pay legislation is sweeping the country. Oregon, Washington, and California all have equal pay legislation on the books that directly affects cannabis businesses. These equal pay laws require employers to pay employees the same amount for substantially similar work and prohibit employers from basing salaries on employee’s sex. Oregon and California’s laws, in specific, prohibit employers from asking applicants about their past salaries. With the cannabis industry growing so quickly, it is only a matter of time before employers start tripping on these new laws.

Following the trend of these state laws, a recent 9th Circuit Court of Appeals decision similarly expanded the federal Equal Pay Act to prohibit employers from basing an employee’s pay on past salaries and likely prohibit employers from asking about past salaries.  This decision applies to businesses, included, licensed cannabis businesses, in California, Washington, Nevada, Arizona, Oregon, Alaska, Hawaii, Idaho, and Montana. The ruling is especially significant in California and Oregon because employers can now be in violation of both the state law prohibiting questions about past salary and the federal Equal Pay Act.

The 9th Circuit’s decision comes from a case called Rizo v. Yovino. The plaintiff, Aileen Rizo, was hired by Fresno County office of Education in 2009. The County set Rizo’s salary at 5% more than she had been receiving at her previous positions. The County did not consider Rizo’s qualifications when setting her salary. A few years later Rizo learned she was making less money than her male colleague who was performing similar work. Rizo brought an Equal Pay Act violation against the County.

In a lengthy decision, the 9th Circuit held that:

“prior salary alone or in combination with other factors cannot justify a wage differential. To hold otherwise—to allow employers to capitalize on the persistence of the wage gap and perpetuate that gap ad infinitum—would be contrary to the text and history of the Equal Pay Act, and would vitiate the very purpose for which the Act stands.”

The court also stated the decision did not bar an employer learning of a past salary:

“we do not decide whether or under what circumstances past salary may play a role in the course of an individualized salary negotiation. We prefer to reserve all questions relating to individualized negotiations for decision in subsequent cases.”

What does this cryptic language mean? It means that it is probably okay for employers to ask applicants what those applicants expect to be paid, and it likely allows the employer to negotiate a salary based on the applicant’s prior salary if the employee has volunteered this information.

So in light of this ruling, what should employers do? Employers should carefully examine their pay practices. Specifically, employers should work with counsel and conduct a pay audit to determine if there are compensation gaps, the reason for the gaps, and if the gaps are not justifiable under the state and federal equal pay acts, adjust the employees’ wages accordingly. Note that under the federal Equal Pay Act and in light of the 9th Circuit’s Ruling, if you have current employees whose wages are based on previous salaries, you could be found in violation of the Equal Pay Act.

Employers should also carefully review job applications and interview procedures. The safest way to move forward is to eliminate application questions requesting past salary or wage history. Employers should also avoid questions during interviews regarding past salary history. It is okay to ask applicants what they expect to be paid, but avoid questions surrounding their past wages.

Cannabis businesses are in a unique position to get this right. Recreational cannabis is still new, and practices are still being established and refined. For cannabis start-ups, now is the time to ensure the practices you have in place comply with the law. Consult with counsel to provide a plan to pay employees or to review your current practices. For well-established cannabis businesses, it’s never too late to have an audit done or to reevaluate your practices. The more employees you employ, the more important it is to ensure compliance to avoid expensive litigation down the road.

CBD hemp extract
The law on CBD is still a maze.

If you were hoping for some clarity as to the legality of industrial hemp and cannabidiol (CBD) derived from industrial hemp, I have some (mostly) bad news.

On Monday, the US Court of Appeals for the Ninth Circuit denied a lawsuit challenging the Drug Enforcement Administration’s (DEA) controversial Marihuana Extracts Rule. In Hemp Industries Assoc. v. DEA, the petitioners and other industry groups challenged the DEA’s rule creating a new drug code number for “”Marihuana Extracts” which is defined to include any extract “containing one or more cannabinoids that has been derived from any plant of the genus Cannabis.” This rule is so broadly drafted that it seems to prohibit extracts from parts of the cannabis plant that are legal or at least unregulated under federal law. Petitioners requested the Court clarify or strike down the DEA’s land-grab rule.

The Court denied both requests. Rather than diving into the substance of the petitioners’ complaint, the Court dismissed the action on largely procedural grounds, as we recently predicted it would. First, the court pointed to the fact that the petitioners failed to make an argument to the DEA while it was accepting comments on the Marihuana Extract Rule and are therefore barred from raising those issues before the Court. The petitioners claimed that another commenter raised their concerns by submitting a question as to whether the rule would cover “100% pure Cannabidiol by itself with nothing else?” But the Court determined the DEA considered this comment and altered the rule to clarify that it covered all cannabinoids. The Court also determined that several of the petitioners’ other arguments were waived for failure to raise the issue during the DEA’s notice and comment period.

The Court did determine that the petitioners’ argument that the Marihuana Extract Rule conflicted with 7606 of the 2014 US Farm Bill (the “Farm Bill”) was not waived, because Congress passed that law after the notice and comment period ended. The Farm Bill allows states to grow “Industrial Hemp” defined as having less than 0.3% THC on a dry weight basis in states that have implement agricultural pilot hemp programs. However, the Court determined that the argument failed on the merits. The Court found that the Farm Bill “contemplates potential conflict between the Controlled Substances Act [CSA] and preempts it. The Final Rule therefore, does not violate the [Farm Bill].” To the positive, the Court is stating that when the Industrial Hemp portions of the Farm Bill conflict with the CSA, the Farm Bill prevails.

This decision makes it clear that the Marihuana Extract Rule is unfortunately still valid, meaning that any products extracted from marijuana is still illegal under federal law, which has long been the case according to the DEA. The great unknown is how this ruling will be interpreted. It’s possible that the ruling could have a chilling effect on the growing CBD industry, by emboldening the DEA to actively pursue products that contain CBD. On this point, it’s important to note that Congress has limited the DEA’s ability to use federal funds “to prohibit the transportation, processing, sale, or use of industrial hemp” grown in accordance with the 2014 Farm Bill. However, it can be difficult to prove where a product containing CBD was derived and the DEA may try to push its boundaries in light of the decision. Therefore, it’s important that companies who are distributing CBD verify that it was derived from a legal source and are prepared to prove it.

State law enforcement agencies could also interpret this decision to crack down on CBD, especially in states that have not implemented Farm Bill hemp programs. These agencies are not limited by the budget provision that restricts the DEA enforcement activities. Although we have not heard any instances of state law enforcement cracking down on these sales, it is certainly possible that some will do so.

The Ninth Circuit could have used this as an opportunity to state explicitly that CBD derived from a legal source is also legal. Unfortunately, it did not. Because the Court did explicitly state that the Farm Bill preempts the CSA, though, the silver lining here is that Industrial Hemp, grown pursuant to the Farm Bill, is not illegal under the CSA according to the Ninth Circuit. In addition, shortly after the HIA filed its petition, the DEA made the following helpful clarifications: 

  • The “marihuana extract” definition does not include materials or products excluded from the definition of marijuana set forth in the CSA.
  • The rule includes only those extracts that fall within the CSA definition of marijuana.
  • If a product consists solely of parts of the cannabis plant excluded from the CSA definition of marijuana, such product is not considered “marihuana” or a “marihuana extract.”

Consistent with the Court’s ruling, this appears to exempt extracts that are derived from lawfully grown Industrial Hemp. It also exempts extracts derived from portions of the cannabis plant that are not included in the CSA’s definition of “marihuana”, which include the mature stalks and seeds incapable of germination.

All in all, this convoluted mess of marijuana, hemp, and CBD law could soon become much clearer if Mitch McConnell’s Hemp Farming Act of 2018 is passed. Stay tuned for more information on the ongoing saga of legal hemp and its derivatives.

marijuana employment litigation
Wage violations are often litigated, even with executive employees.

Are wage and hour claims against cannabis businesses on the rise in Oregon? It appears so. Last week we highlighted a wage claim filed against CNH Labs by a former employee. That post highlighted some of the consequences cannabis employers can face when they fail to pay employees. But what about liability for failure to pay executive employees, including employees who are still employed by the cannabis company? A wage claim filed by Sara Batterby against HFV Enterprises is a great example of the liability a marijuana company can face against its own president and executive employee.

Ms. Batterby is the president and an executive employee of HFV Enterprises, Inc. (“HFV”) an Oregon corporation formerly known as HiFi Farms, a prominent cannabis producer. Ms. Batterby’s position did not stop her from filing a wage claim against HFV  in Multnomah County. She alleges an employment contract required HFV to pay her $2,000 every two weeks beginning in October 2017. According to the complaint, HFV made one $2,000 payment but has since failed to pay her any wages. Ms. Batterby’s claim requests $46,000 in unpaid wages, 9% interest until the wages are paid, and attorney fees and costs. If this lawsuit goes for any length of time, the attorney fees will likely be much higher than the claim itself.

Ms. Batterby’s wage claim is brought under ORS 652.120, which requires employers to establish regular pay days not less than 35 days apart. Violation of ORS 652.120 is a Class A violation punishable by a fine of up to $2,000 for each violation. This means that each payday HFV missed could be punishable by a $2,000 fine.

Ms. Batterby’s claim is unusual not because she is an executive employee, but because of what it does not allege. For whatever reason, the lawsuit fails to request penalty wages under Oregon’s minimum wage statute, and it fails to bring a breach of contract claim. If this case is not settled quickly, it would not surprise us to see an amended complaint by Ms. Batterby, covering these standard claims.

As we discussed in our coverage of the CNH Labs case, employers are required to pay employees minimum wage. Because Ms. Batterby was not paid anything in violation of the minimum wage statute, she likely has a minimum wage claim. Had she requested penalty wages for the company’s failure to pay her minimum wage, she may have been entitled to an additional 30 days wages as a penalty wage. A month’s wages at $10.25 and hour amounts to something like $2,460.

Ms. Batterby also claims she had an employment contract with HFV Enterprises. She likely could have supplemented her wage claim with a breach of contract claim against HFV Enterprises. A breach of contract claim would provide similar relief to Ms. Batterby, including at least 9% interest on the unpaid amount and possibly more if the employment contract included a provision for interest on unpaid wages, as many employment contracts do.

Employees are an essential part of any successful marijuana business. With employees comes exposure to liability. Wage and hour claims can come from any employee at any level and the penalties will depend on the type of violation, as the HFV and CNH cases have shown. The best way to avoid wage and hour claims is to ensure employees are being paid according to state laws. If you aren’t sure, have an outside expert come in and review your practices, from your cannabis-specific employee handbook on down. And if your company does face a wage and hour claim, it’s best to hire an experienced employment attorney to defend the claims and reduce the exposure.

oregon employment marijuana
Failure to pay wages can cost you — a lot.

We get a lot of questions regarding how to pay employees and the consequences of failing to do so properly. With a few exceptions, if you hire someone to work for your cannabis business, you need to pay them at least minimum wage. Failure to pay employees or to provide required meal and rest breaks can come with hefty fines and civil penalties in Oregon. A recent case filed against an Oregon marijuana company is a great example of the potential liability your business could face for failing to pay employees.

In a complaint filed in Lane County, Kenneth Meek contends his employer, cannabis company CNH Labs, LLC, failed to pay him any wages. According to the lawsuit, Mr. Meek started working for CNH Labs in October 2016 prior to CNH Labs being licensed by the OLCC. The parties had an agreement that Mr. Meek would be paid $1,000 per week once CNH Labs was licensed. According to Mr. Meek, CNH Labs did not start paying him upon licensure and did not intend to pay him until CNH Labs was profitable. Mr. Meek’s employment with CNH Labs ended in December 2017 and he subsequently sent CNH Labs a letter demanding payment of the wages. Ultimately, Mr. Meek filed suit against CNH Labs for $65,000 plus interest and attorney fees.

Unfortunately, this type of fact pattern is not terribly uncommon in the cannabis industry, but it brings up two very important points:

  1. In Oregon, employees cannot waive their right to minimum wage. Meaning, even if your employee agrees to receive an amount less than minimum wage (or as in Mr. Meek’s case, no wage at all), the employee can still bring a wage claim later. Thus, the agreement Mr. Meek admits he struck with his employer should not hurt his case, assuming the allegations are true.
  2. Mr. Meek’s complaint requests the unpaid wages and penalties under Oregon Wage and Hour Statutes. In Oregon, the penalty for failing to pay an employee is the employee’s regular rate of pay for eight hours a day for up to 30 days. In Mr. Meek’s case this is equal to approximately $4,000. If he prevails, the employer may also be required to pay Mr. Meek’s attorney fees. That fact alone may be a strong incentive for CH Labs to settle right away:  in a case like this, attorney fees will exceed the $65,000 claimed by Mr. Meeks, if the case goes to trial.

Whatever happens with this lawsuit, it’s worth noting that Mr. Meek’s complaint may also result in a Bureau of Labor and Industries (“BOLI”) investigation into CNH Lab’s employment practices. BOLI has the power to investigate employers to determine if they are in compliant with Oregon wage and hour laws. Even if Mr. Meek’s claims do not have merit, BOLI may choose to start an investigation into CNH Lab’s employment practices, an uncomfortable prospect for any business. If BOLI determines there is a violation, it can issue civil penalties up to $1,000 for each violation.

Mr. Meek’s case is a good example of the penalties for failing to correctly pay employees. The bottom line is, make sure you are properly paying your employees and complying with wage and hour laws. If in doubt, it’s never a bad idea to have an outside expert review your employment practices.

Defendants describe the lawsuit as an “attempt to put some shiny federal lipstick on an otherwise quite beleaguered pig of a state-law nuisance claim.”

We’ve previously discussed a RICO case that is slowly worming its way through federal court in Portland, Oregon. Styled as McCart v. Beddow et al., the case was filed by an attorney who is fed up with two neighboring cannabis grow operations next to her rural home. But rather than focusing solely on the allegedly troublesome cannabis producers, the McCart plaintiffs have filed suit against anyone even tangentially related to the producers’ business, including many dispensaries (“Dispensary Defendants”) that only purchased their product. We counted over 70 named defendants!

In our previous discussion, we suggested that the plaintiffs’ case against the Dispensary Defendants is fairly weak and our opinion hasn’t changed. Since we last checked in, the plaintiffs have filed a substantially expanded amended complaint, and numerous defendants have filed motions to dismiss. Although the Court won’t consider the motions to dismiss until January, it is worth checking in on the parties’ current positions. We are going to continue to focus on the Dispensary Defendants because there could be serious repercussions in the industry if the Dispensary Defendants are found liable even though they apparently didn’t have anything to do with the grow operation.

The Law

RICO law is complex, but as a general matter the RICO statutes allow a plaintiff to recover treble damages in a civil claim if the plaintiff can prove the following:

  • The existence of an “enterprise” affecting interstate or foreign commerce;
  • The specific defendant was employed by or associated with the enterprise;
  • The specific defendant conducted or participated in the conduct of the enterprise’s affairs;
  • The specific defendant’s participation was through a pattern of racketeering activity; and
  • Plaintiff’s business or property was injured by reason of defendant’s conducting or participating in the conduct of the enterprise’s affairs.

Of course, the devil is in the details, as the Dispensary Defendants point out in their motion to dismiss.

The Amended Complaint

The plaintiffs filed their amended complaint on September 1, which added 95 paragraphs onto their hefty original complaint. The amended complaint adds many new defendants, including employees at the farms and it alleges that nearly all of the defendants were exporting product out of Oregon.

In broad terms, the plaintiffs’ claims against the Dispensary Defendants have not changed in that they still allege the following:

  1. The cannabis grow operation (“Marijuana Operation”) is an enterprise affecting interstate commerce, as defined in the RICO statutes;
  2. All of the defendants were associated with and conducted the Marijuana Operation’s affairs through racketeering activity;
  3. Plaintiffs suffered a variety of kinds of harm as a result of the Marijuana Operation:
    1. Physical Injury to Real Property: littering, driveway damage, tire tracks, damage to some trail cameras, and unreasonable use of easements.
    2. Diminution of Property Value: noise pollution, light pollution, vibration, odors, exhaust fumes.
    3. Personal Injuries: harassment and damage to plaintiffs’ use and quiet enjoyment of their property.

The Motions to Dismiss

Eighteen Dispensary Defendants joined together in a single motion asking the Court to throw out plaintiff’s entire case against them. Their motion is well worth the read, not least for its colorful language, such as the lipstick-on-a-pig quote below the pig picture above. The arguments in this motion fit into two general categories:

The Dispensary Defendants are not part of a racketeering enterprise.

To establish an “enterprise” exists for RICO purposes, plaintiffs must show there was an ongoing organization with a common purpose. Both of these elements get to the same idea: a criminal enterprise is a group of people all working together to enrich themselves. Courts have found “ongoing organizations” among disparate businesses when there are legitimate interconnections between the entities, such as similar ownership and overlap in personnel. Similarly, courts have found a common purpose where the alleged members are working to promote a single economic interest, and not where they are simply pursuing individual economic interests. There don’t appear to be any of these kinds of links in this case. The Dispensary Defendants appear to be owned, operated, and staffed by distinct individuals working towards their own individual business purposes. This ties back to our initial read of this case: mere supplier-purchaser relationships like these do not rise to the level of RICO enterprises.

In any event, plaintiffs need to establish that the Dispensary Defendants were associated with and conducted or participated in the enterprise. Yet plaintiffs have not alleged that the Dispensary Defendants had any say over the operation of the farms. Their case against the Dispensary Defendants will likely die here.

Plaintiffs’ alleged harms cannot be recovered as a matter of law.

Even assuming plaintiffs can get over the hurdle of establishing that the Dispensary Defendants directed the farms, plaintiffs still must establish that their specific harms are actionable. The Dispensary Defendants also seem to be on the right side of the law here, arguing that the alleged harms and the speculative claim that the value of plaintiffs’ home has decreased cannot form the basis of a RICO claim against any of the defendants and cannot form the basis of a state-law claim nuisance claim against the Dispensary Defendants, in particular.

The plaintiffs face a number of legal obstacles that seem insurmountable. First and foremost, Oregon has long since decided that it is in the best interests of the state to protect farming uses and it has decided to treat cannabis the same as any other farm crop. Accordingly, Oregon’s Right to Farm Act likely bars plaintiffs’ nuisance and trespass claims for damages based on odors, noise pollution, light pollution, vibrations, and smoke fumes. The Dispensary Defendants rely on ORS 30.936(1), which provides farmers in farming areas with immunity from suit for any trespass or nuisance claims, defined elsewhere as claims “based on noise, vibration, odors, smoke, dust, mist from irrigation, use of pesticides and use of crop production substances.” Since RICO case law suggests that harms to property interests should be determined by state law, plaintiffs’ diminution of value claims are likely dead on arrival.

In any event, plaintiffs’ specific diminution of value claims are likely too speculative. The Dispensary Defendants argue that a RICO plaintiff must plead and prove that plaintiff has suffered a “concrete financial loss” but that plaintiffs’ complaint only contains pure guesswork that the odors, etc. diminished the value of plaintiffs’ property. Even if the plaintiffs could plead a specific dollar amount of diminished value, Oregon law bars claims for diminution of property value if the nuisance can be stopped. In other words, if the harm would disappear if the grow operations shut down, plaintiffs cannot recover damages for loss of value. Instead, plaintiffs should be asking the court to shut down the grow operations, which would have little to no effect on the Dispensary Defendants.

Plaintiffs will also likely fail on their claims for loss of quiet enjoyment and harassment because personal injuries like these are not compensable under RICO.

We will have to wait until next year to find out if the Court agrees with the Dispensary Defendants but we predict vindication for the dispensaries. In fact, we predict the claims against all of the defendants will get tossed, except possibly some small state-law claims. It seems that if you are a good neighbor and you don’t set up your operations next door to property owned by a lawyer, then you’ll likely never be drawn into a mess like this.

Oregon cannabis Filing this in the odd news section: The Portland Tribune has reported that an Oregon dispensary owner has been fined $3,000 by Wood Village, Oregon for the mannequins he sets up on the sidewalk to advertise his cannabis. These blonde cannequins mannequins are animated and brandish “Got Chronic” signs at potential clients.

The town recently revised its sign code to prohibit Portable Signs, defined as “signs not permanently affixed to a building structure or the ground and designed to move from place to place except garage sale signs, special event signs, political signs, real estate signs or as otherwise provided in this Code . . .”

The owner sees the long list of exceptions as a clear sign that this ban is specifically targeted at his mannequins. After all, his dispensary is the only cannabusiness in town. He has also been fined under the new code for having a sign on the roof of his neighboring cupcake business.

Even if the ordinance isn’t specifically targeted at the mannequins, the ordinance is likely unconstitutional. Under first amendment jurisprudence, content-based regulation of speech is subject to “strict scrutiny,” that is, to survive, content-based regulations must 1) be passed to further a compelling government interest, and 2) be narrowly tailored to achieve that interest. In practice, strict scrutiny is a difficult hurdle to overcome.

In a recent case, the US Supreme Court struck down a similar city code governing outdoor signs. The offending ordinance identified various categories of signs “based on the type of information they convey, then subjects each category to different restrictions.” Sound familiar? The Supreme Court continues: “[A] municipal government vested with state authority, ‘has no power to restrict expression because of its message, its ideas, its subject matter, or its content . . . Content-based laws–those that target speech based on its communicative content–are presumptively unconstitutional and may be justified only if the government proves that they are narrowly tailored to serve compelling state interests.”

In one passage, the Supreme Court states “The restrictions in the Sign Code that apply to any given sign thus depend entirely on the communicative content of the sign. If a sign informs its reader of the time and place a book club will discuss John Locke’s Two Treatises of Government, that sign will be treated differently from a sign expressing the view that one should vote for one of Locke’s followers in an upcoming election . . . On its face, the Sign Code is a content-based regulation of speech.”

Let’s rewrite that passage with the facts at issue here: “The restrictions in the [Wood Village sign code] that apply to any given sign thus depend entirely on the communicative content of the sign. If a [portable] sign informs its reader [that a mannequin has “got chronic”], that sign will be treated differently from a sign [advertising a nearby garage sale] . . . On its face, the [Wood Village sign code] is a content-based regulation of speech.”

In this light, it is easy to see that the Wood Village ordinance will likely be struck down if the owner decides to take it up with the courts. We will have to see if the owner decides it is worth it.

Setting aside the specter of unconstitutionality, it is worth looking at whether state law prohibits the mannequins. The state is subject to the same restrictions on content-based regulations, so the Oregon Liquor Control Commission (“OLCC”) has issued loose cannabis advertising restrictions that seem designed to survive strict scrutiny. The OLCC’s stated goal is to prevent cannabis advertising that is attractive to minors, promotes excessive use, promotes illegal activity, or presents a significant risk to public health and safety. More specifically, cannabusinesses cannot advertise cannabis in any way.

  • That contains deceptive, false, or misleading statements;
  • That contains any content that targets minors, such as images of minors, cartoons, toys, etc.;
  • That encourages the transportation of cannabis across state lines;
  • That asserts that cannabis items are safe because they are regulated by the OLCC and have been tested by a lab;
  • That claims recreational cannabis has curative or therapeutic effects;
  • That displays the consumption of marijuana items;
  • That contains material that encourages excessive or rapid consumption; or
  • That contains material that encourages the use of marijuana because of its intoxicating effect.

These blonde got-chronic-bots don’t seem to fit neatly into any of these categories, so the mannequins are likely legal under state law. Accordingly, the owner may very well decide it is worth taking this dispute to the courtroom.

New York CannabisFormer NFL player Marvin Washington is one of five plaintiffs that have filed suit against Attorney General Jeff Sessions, the DOJ and the DEA. The lawsuit alleges that classifying cannabis as a schedule 1 controlled substance under the 1970 Controlled Substances Act (CSA) is so absurd as to be unconstitutional.

The plaintiffs have a point. Currently, cannabis is listed alongside heroin, ecstasy, and LSD as Schedule I drugs, which are defined as “drugs with no currently accepted medical use and a high potential for abuse.” When it comes to cannabis, no part of this definition is supported by the evidence. Currently, 29 states and the District of Columbia have legalized some form of medical cannabis use, and recent studies suggest cannabis actually helps get people off dangerous drugs, like cocaine, meth, and opioids (which are listed as less dangerous than cannabis).

Jeff Sessions and his drug zealot friends may honestly believe it when they say things like “[heroin is] only slightly less awful [than cannabis]” but believing in a fantasy doesn’t make it true. In any event, though it will be interesting to watch this lawsuit proceed, it seems unlikely it will be the vehicle that finally ends federal prohibition. Cannabis will eventually be legalized nationwide (we see that happening within five years), but it is a lot more likely to occur in voting booths than in a court.