Cannabis Case Summaries

Pay those employees, non-exempt and otherwise.

I recently wrote about a case in the Tenth Circuit, Kenney v. Helix TCS, Inc., where the Court of Appeals is asked to decide if the Federal Labor Standards act (FLSA) provides wage and hour protection to employees of cannabis businesses. That case hasn’t seen much movement since I wrote about it, but its decision could have a significant impact on a case recently filed in Federal District Court in Oregon.

Michael Garity has filed a state and FLSA wage and hour claim against his former employer, WRD Investments LLC (“WRD Investments”). According to the complaint, Mr. Garity was hired by WRD Investments to provide expertise and labor in support of WRD Investments’ marijuana grow near Junction City, Oregon.

Mr. Garity alleges he was a “non-exempt” employee for WRD Investments. His status as a non-exempt employee would have required WRD Investments to pay Mr. Garity at least minimum wage for all hours worked and overtime rates for all hours worked over 40 hours per week. In the complaint, Mr. Garity alleges that between March 2016 through May 2017 he may have worked approximately 2500 hours without any compensation. He further alleges that he frequently worked over 40 hours per week without overtime pay.

Mr. Garity’s complaints do not stop there. Mr. Garity also alleges that WRD Investments failed to provide him with itemized statement of pay and failed to establishe regular pay days in violation of Oregon laws. The Complaint also states Mr. Garity incurred expenses on behalf of WRD Investments such as using his personal vehicle to conduct WRD Investment business without reimbursement from WRD Investments.

Mr. Garity’s complaint requests actual damages for unpaid minimum wage and overtime compensation plus an equal amount as liquidated damages and reimbursement for business related expenses, penalty wages under Oregon wage and hour laws, and attorney fees and costs. Mr. Garity’s complaint does not lay out a number, but based on my calculations WRD Investments could be on the hook for around $40,000 related to the FLSA claims alone. Should this matter proceed far into litigation, WRD Investments could also be on the hook for attorney fees which could eventually surpass the $40,000 number.

The Kenney case mentioned at the beginning of this post may have significant impact on Mr. Garity’s claims. Mr. Garity’s case is filed in a Ninth Circuit district court and nothing binds a Ninth Circuit court to follow a decision from the Tenth Circuit. However, the Ninth Circuit district court could be persuaded by the Tenth Circuit Court of Appeals decision and decide to follow its precedent. Alternatively, it could choose to ignore the precedent and decide to create its own path. Either way, it will be very interesting to see the legal arguments that are made in Mr. Garity’s case regarding whether the FLSA protects marijuana employees.

Regardless, a good lesson can be gleaned from Mr. Garity’s complaint. First, be sure you are properly classifying your employees as exempt or non-exempt. Second, and perhaps even more importantly, ensure that you are properly paying your employees. If you are ever concerned you are in violation of wage and hour laws, its always a good idea to have a cannabis employment law attorney review your payment procedures. It may cost some money up front but will likely save you much, much more in the long run.

cannabis management company 280EOn December 20th, U.S. Tax Court issued its opinion in Alternative Health Care Advocates et al. v. Commissioner of Internal Revenue. The long opinion details various issues related to the specific case, but we will concentrate on one relatively small piece of it. How would the Tax Court treat income paid from a marijuana retailer to a management services company for that retailer?

In this case, Alternative Health Care Advocates provided medical marijuana to individuals in California under California law. Another company, Wellness Management Group, Inc., provided management services to Alternative Health Advocates. These services included hiring employees and managing HR for those employees, paying wages for those employees, paying advertising expenses, paying rent, etc. Wellness did not provide services of that nature or any nature to any other business entity. Wellness made money by collecting fees for its services from Alternative Health Care Advocates.

Under Section 280E of the Internal Revenue Code, businesses that are engaged in trafficking controlled substances cannot take regular business deductions, so they end up paying taxes on their gross receipts less their allowed cost of goods sold (COGS). If an expense doesn’t fit into the category of COGS, a company that is considered to be “trafficking” would have to pay taxes as if the expense hadn’t been incurred in the first place. This is how the effective tax rate for marijuana businesses can be outrageously high.

Marijuana businesses set up management companies for a few reasons. Tax avoidance under 280E can be one of them, but trying to set up a management company structure to avoid 280E-related tax problems can be complex and can backfire. Instead, most of the value of the management company model comes from the ability of the management company to get banking and enter into regular electronic transactions with third parties, including running payroll services.

But the model backfires if the management company is considered to be trafficking, because a management company introduces new transactions to the system involving the same pot of money. Imagine that a marijuana retail company generates $1 million and has $500,000 in 280E non-deductible expenses. That company standing alone would pay tax on the full $1 million. Now imagine that a management company is set up to handle the $500,000 in expenses and charges the marijuana company $500,000 to do so. The marijuana company now has $1 million in revenue and a non-deductible $500,000 bill to the management company and pays taxes on $1 million. The management company receives $500,000 from the marijuana company and pays salary and other expenses that also equal $500,000. If the management company is treated like any other business, the transaction is a wash and ends the same way as if there were no management company. If the management company is deemed to be “trafficking” however, then the marijuana business will find itself paying tax on both entities for the same revenue. The $500,000 paid to the management company ends up being taxed twice.

Unfortunately, the Tax Court decided that Wellness’s management activities were “trafficking” as much as Alternative Health Care Advocates’ activities were. In response to the taxpayers’ arguments that disallowing the 280E deductions for both businesses was inequitable, the Tax Court simply stated that the tax consequences were a direct result of the organizational structure the taxpayers put together.

Here are the takeaways for existing businesses, especially management companies. First, it’s worth noting that this case will likely be appealed, so keep an eye on that. Second, businesses have to plan their transactions involving management companies as if management company revenue is subject to 280E. Some management companies that offer broader services to a variety of different businesses may have some additional arguments that they are not engaged in “trafficking.” But if your management company is just a stand-in for your operating marijuana company, the Tax Court has indicated that it will approve of the IRS considering you to be trafficking as well. This case is one more reminder that Section 280E presents an ever-present obstacle to the ongoing health of marijuana businesses. Advocates must continue to concentrate their efforts to finally get Congress to repeal Section 280E.

fourth circuit marijuana illegal search
Nice work by the court!

The Fourth Circuit Court of Appeals ruled last week that finding marijuana stems in a trash bag does not permit the police to search the house for evidence of a crime. From a legal standpoint this case has interesting implications on when, where, and what police can search. From a more practical perspective, it shows the courts, along with the majority of America, are accepting that marijuana is not a dangerous substance.

The case, United State v. Tyrone Lyles, saw Mr. Lyles accused of possessing firearms as a convicted felon. The police of Prince George County (in Maryland, right outside of Washington, D.C.) were investigating Mr. Lyles in an unrelated case. They searched four trash bags on a curb near his house and found three marijuana stems. Based on the marijuana stems, the police obtained a search warrant for Mr. Lyle’s house. In the application for the search warrant the police stated they had found the marijuana stems, rolling papers and based on this believed that there were “controlled dangerous substances, Marijuana, and handguns being stored, used and/or sold” at Mr. Lyles home.

Based on this information, the police were granted a broad warrant and allowed to search Mr. Lyles home in total. The police, during the search, found four handguns, ammunition, marijuana, and drug paraphernalia, in Mr. Lyle’s house. Mr. Lyle asked that the evidence found in his home be suppressed because there was not sufficient evidence to search his home based on the discovery of three marijuana stems in his trash.

The Fourth Circuit agreed. The court, in its decision, first reiterated the fact that police have the right to search trash that that has been left at the curb and that evidence found in trash can be used to support a warrant to search other premises. The Fourth Circuit recognized, that while the police can search trash, that there is limitations to what can be presumed from the discovery of the evidence in the trash. Focusing on the facts from Mr. Lyles’s case, the Fourth Circuit determined there was simply too little marijuana found in the trash to presume that Mr. Lyle had more marijuana in his home. The Fourth Circuit agreed with Mr. Lyles that the tiny quantity of discarded residue gave no indication of how long ago marijuana may have been consumed in Mr. Lyle’s home.

So what does this mean? The police used marijuana as an excuse to search Mr. Lyle’s house for evidence of crimes related to marijuana, money laundering, and hand guns. The Fourth Circuit essentially said the police cannot presume that someone has committed crimes related to controlled substances or to other crimes when a small amount of the substance has been found in the trash. This is important because in other cases, the Fourth Circuit has determined that evidence of a controlled substance in someone’s trash is sufficient for a warrant to search that person’s house. Perhaps the distinction here is that such a small amount was found, or perhaps it is evidence that the federal courts are no longer considering marijuana a dangerous drug that is evidence of other crimes (what if they had found a small amount of heroin?).

It will be interesting to see if any of the other federal circuits follow the Fourth Circuit’s helpful precedent, or if prosecutors decide to appeal this decision to the Supreme Court.

class action marijuana cannabisMedMen, a popular California cannabis retail company, has been hit with a class action lawsuit from former employees. Class action lawsuits are no joke. These lawsuits involve a few plaintiffs suing on behalf of multiple similarly situated plaintiffs. The claims, money, and other associated costs add up very fast.

In MedMen’s case, two former employees, Chelsea Medlock and Anthony Torres, allege that MedMen failed to pay them for all hours worked, failed to pay overtime wages, failed to provide mandatory meal and rest breaks, and failed to keep accurate records of employees hours worked. Medlock and Torres worsened the blow by bringing the lawsuit as a class action on behalf of all MedMen employees (current and former) from the last four years. If the class is “certified” by the Superior Court of the State of California, where it was filed, the class of plaintiffs could include thousands of employees.

Specifically, Medlock and Torres allege MedMen required them to perform work “off-the-clock” for which they received no pay. Medlock and Torres are seeking minimum wage, liquidated damages, interest and attorney fees for the unpaid time. Although Medlock and Torres have not made specific allegations in the complaint, Starbucks was recently ordered to pay an employee $102.67 for the time the employee spent locking up the store and setting alarms, without compensation. While this amount may seem small, if Medlock and Torres get their class certified, MedMen could be paying out a similar amount or something much greater, to thousands of employees.

Medlock and Torres also allege in their lawsuit that MedMen failed to pay employees required overtime wages. In California, employers must pay overtime rates to non-exempt employees who work in excess of eight hours per day. Medlock and Torres also allege they either were not provided the required meal and rest periods, or were not paid for the meal periods they had to work during. Medlock and Torres have not identified specific dates these alleged violations occurred, but if done over a significant period of time, the back wages and penalities owed will add up quickly.

In addition to their claims relating to their wages, the plaintiffs allege they were not provided accurate wage and hour statements as required by the California Labor Code and failed to provide accurate payroll records. Failure to provide accurate wage and hour statements can result in a penalty of up to $4,000 per employee.

Finally, Medlock and Torres allege that MedMen failed to timely issue final paychecks. Failure to issue final paychecks can result in penalty wages of up to thirty days of pay at the employee regular rate of pay.

In short, Medlock and Torres’s claims are numerous and serious. If they have merit, MedMen will have to pay pack wages and may be hit with treble damages, attorney fees, and interest. Of more important, if the class is certified, MedMen will have to pay those types of damages to potentially every employee they employed in California over the last four years.

Cannabis companies are growing. With growing businesses come more employees. More employees means a higher chance of litigation. For these reasons, if you are ever unsure whether your employment practices are compliant with state and federal law, it is best to have a cannabis employment attorney evaluate and provide advice. You may be able to stave off litigation, or, if you are hit with a lawsuit, you’ll have procedures in place to adequately fight it before it gets too far.

marijuana montana employmentMedical marijuana is legal in Montana. Unfortunately, that does not prevent local employers from terminating workers for legal, off-work use of marijuana in the state.

In 2010, while already employed by Charter Communications, LLC, Lance Carlson was issued a medical marijuana card under Montana Medical Marijuana Act to treat chronic low back and stomach pain. The medical marijuana card allowed Mr. Carlson to legally use marijuana to treat the conditions. In 2016, Mr. Carlson was involved in a work-related motor-vehicle accident. A urinalysis that followed the accident tested positive for THC. Mr. Carlson was promptly terminated as a result of the drug test.

Mr. Carlson initially brought suit against his former employer in Montana state court, alleging the former employer had wrongfully terminated him in violation of the Discrimination Under the Montana Human Rights Act— specifically, that his employer had discriminated against him because of a disability. The case was removed to Federal District Court. Charter Communications quickly moved for a motion to dismiss arguing that the Montana Marijuana Act allowed them to terminate Mr. Carlson for his medical marijuana use. Mr. Carlson appealed the decision to the Ninth Circuit.

The Ninth Circuit, in an unpublished opinion, upheld the district court’s dismissal. The Ninth Circuit specifically relied on the carve-out of Montana’s medical marijuana act that states employers are allowed to prohibit employees from using marijuana. Mr. Carlson challenged that exact regulation as unconstitutional. However, the Ninth Circuit determined it was constitutional because it was “rationally related to Montana’s legitimate state interest in providing careful regulation of access to an otherwise illegal substance for the limited use by persons for whom there is little or no other effective alternative…”

Given the general trend for acceptance of marijuana, the Ninth Circuit decision is disappointing, even though it is unpublished and therefore sets no legal precedent. However, the problem does not generally lie with the Ninth Circuit, but instead with Montana’s state law. Now is the time to lobby Montana officials to have the Montana Medical Marijuana Act revised to protect employee’s off-work medical marijuana use.

Montana is not alone in allowing employers to terminate employee for their legal off-work use of marijuana. Oregon, similarly, has a statute that does not require employers to accommodate employees’ off-work use of medical marijuana. Way back in 2010, the Oregon Supreme Court ruled that the statute prohibiting disability discrimination in employment does not protect medical marijuana users. Washington’s laws do not require employers to accommodate employee’s medical marijuana use either. Colorado, another state on the forefront of adult use legalization, still allows employers to terminate employees for medical marijuana use, too.

While Oregon and California have struggled to pass legislation protecting employee’s off-work medical marijuana use, other states have managed. These laws typically create a carve-out for employers who contract with the federal government and therefore are required to have a drug-free workplace. Federal legislators also have recently introduced legislation  to protect off-work marijuana use. Currently the bipartisan bill is stalled in the Oversight and Government Reform Committee.

I suspect eventually the states discussed in this blog post will catch up with the changing of the times, but until then, be aware that many states allow employers to terminate employees for their legal use of marijuana—medical or otherwise.

Editor’s Note: This blog post first ran on December 6. We are re-publishing it here because a platform glitch erased the initial publication.

asset forfeiture fine cannabis marijuana

We have handled a number of excessive fines cases on behalf of clients who’ve had their property seized, or threatened to be seized by the government. For some background on this, see our blog posts here and here.

The United States Constitution provides that excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted. U.S. Const., Amdt. 8. The Excessive Fines Clause “limits the government’s power to extract payments, whether in cash or in kind, ‘as punishment for some offense.’” Austin v. United States, 509 U.S. 602, 609-10 (1993). That constitutional protection applies in cannabis cases, just like everywhere else.

On Wednesday, the United States Supreme Court heard oral arguments in the case of Timbs v. Indiana regarding whether the Eighth Amendment’s Excessive Fines Clause is incorporated against the States under the Fourteenth Amendment. The case involves the forfeiture of petitioner’s land rover as punishment for selling heroin. The Indiana Court of Appeal held that the forfeiture of the land rover was grossly disproportionate to the gravity of the offense. The Indiana Supreme Court reversed and concluded that because states are not subject to the Excessive Fines Clause, the forfeiture was not unconstitutional.

The predicted outcome is that the United States Supreme Court will apply the Excessive Fines Clause against the states. The Timbs decision will have nationwide impacts for those accused of drug crimes and other offenses, and will be an important check on the government’s power to interfere with private property. That would be great news for the cannabis industry.

As stated in the petitioner’s opening brief:

“The right to be free from excessive fines is fundamental and applies to the States. The power to fine is—and has always been—a formidable one. And unlike every other form of punishment, fines and forfeitures are a source of revenue for the government, making them uniquely prone to abuse. The accompanying risk to life, liberty, and property is very real. “[I]n a free government,” after all, “almost all other rights would become utterly worthless, if the government possessed an uncontrollable power over the private fortune of every citizen.” 3 Joseph Story, Commentaries on the Constitution of the United States § 1784, 661 (1833).”

It’s a compelling argument, and you can read the full brief here.

We will be monitoring this case and will provide an update once the decision is published.

USPS industrial hemp delivery litigation
If only it were so simple!

In January 2018, the United States Postal Service (USPS) seized a package in Denver, Colorado sent by KAB, LLC, a registered, Colorado industrial hemp cultivator. The package contained 1170 grams of cannabidiol (CBD) powder, derived from industrial hemp. KAB appealed USPS’s decision, arguing that the powder was not a controlled substance and therefore should not have been withheld. Administrative Law Judge (ALJ) James G. Bilbert oversaw the appeal and wrote an opinion in favor of KAB.

In his opinion, the ALJ considered whether CBD grown and cultivated from industrial hemp, in line with Section 7606 of the Agriculture Act of 2014 (Farm Bill) was nonmailable as a Schedule I controlled substance. The ALJ observed that marijuana is classified as a Schedule I substance under the Controlled Substances Act (CSA) and that “CBD that is a derivative of the marijuana plant, as defined under the CSA, is non-mailable.” The ALJ quoted USPS, Publication 52, Hazardous, Restricted, and Perishable Mail § 453.31 (Aug. 2017) stating that “[i]f the distribution of a controlled substance is unlawful under [the CSA or related regulation] than the mailing of the substance is also unlawful under 18 USC § 1716.”

The ALJ’s analysis then turned to the Farm Bill, reciting well-known § 7606, which establishes the following:

  • Notwithstanding the CSA, a state department of agriculture may cultivate industrial hemp if it is grown for the purpose of research conducted under an agricultural pilot program and is permitted by state law.
  • Industrial hemp means the plant cannabis sativa L. and any part of such plant, whether growing or not, with less than .3% THC on a dry weight basis.

The ALJ identified that the Farm Bill and the CSA appear to be in conflict. The CSA broadly defines marijuana to include nearly all parts of the cannabis plant. In turn, the Farm Bill defines industrial hemp as all parts of the cannabis plant as well. The difference? The .3% threshold. The ALJ determined that that the Farm Bill “draw a clear and distinct difference by delineating that the plant with less than 0.3% THC concentration is industrial hemp.”

The ALJ considered the DEA’s much-maligned Statement of Principles on Industrial Hemp, which reiterated the DEA’s position that the sale and transport of industrial hemp across state lines was prohibited. The ALJ didn’t put much weight into the Statement, writing that based on an “amicus brief filed by members of Congress in a recent Ninth Circuit matter, and in correspondence from members of Congress to agency officials, the [Statement’s’ legitimacy as a valid interpretation of the Agriculture Act of 2014 was strongly criticized.”

In the end, the ALJ’s ruling turned on statutory interpretation, focusing on the use of “notwithstanding” in the Farm Bill:

By choosing to define industrial hemp based upon the concentration of THC in the plant Cannabis sativa L, Congress did not amend the CSA so much as carve out a clear exception for industrial hemp. The language “[n]otwithstanding the Controlled Substances Act” is particularly instructive in this regard. “The Supreme Court has indicated as a general proposition that statutory ‘notwithstanding’ clauses broadly sweep aside potentially conflicting laws.” United States v. Novak, 476 F.3d 1041, 1046 (9th Cir. 2007) (citing Cisneros v. Alpine Ridge Group, 508 U.S. 10, 18 (1993)) (“As we have noted previously in construing statutes, the use of such a ‘notwithstanding’ clause clearly signals the drafter’s intention that the provisions of the ‘notwithstanding’ section override conflicting provisions of any other section.”)[.]

The parties stipulated to the fact that KAB had a license to cultivate industrial hemp and used industrial hemp to create the CBD powder. KAB was registered with Colorado Department of Agriculture (CDA). Accompanying the package was “Industrial Hemp Inspection and Chain of Custody” paperwork from the CDA showing the powder was derived from a crop of industrial hemp with less than .3% THC. The CBD isolate also tested for low amounts of THC.

Given the evidence that the powder was made in compliance with the Farm Bill, the ALJ ruled it was mailable. In that sense, the ALJ came to the same determination as the Ninth Circuit earlier this year, when it opined that Congress intended to remove Farm Bill hemp from the strictures of the CSA.

The story of KAB, however, is a reminder that industrial hemp comes with risk. Even though the ALJ ultimately ruled in favor of KAB, the company still had to deal with the unwarranted seizure, business disruption and litigation. Let’s hope for a good Farm Bill soon!

FLSA cannabis marijuana employment

As we all know, cannabis remains a federally controlled substance, and therefore illegal at the federal level. However, most states have some form of legalization. I have always advised my cannabis business clients to comply with both state and federal laws when it comes to employment laws. It seems to be the safest bet to ensure cannabis companies are not sued by employees for violating federal laws, and it seems to be the smart move in terms of keeps the feds out of their state legalized cannabis businesses.

Recently, a lawsuit arose in the Tenth Circuit challenging whether the Federal Labor Standards Act (FLSA) was meant to provide wage and hour protection to employees of cannabis businesses. In Kenney v. Helix TCS, Inc., the Tenth Circuit will decide whether the FLSA applies to such businesses. The FLSA sets federal wage and hour requirements and sets the standards for when employers must pay employees overtime wages.

In the litigation at issue, Helix TCS, INC. (“Helix”) provides security services to cannabis businesses. Kenney, an employee of Helix, was classified as an exempt employee, meaning Helix did not pay him overtime pursuant to the requirements of the FLSA. Kenney brought suit against Helix claiming he was misclassified as exempt and should have been paid overtime.

Helix moved to dismiss the case, arguing that Kenney was not entitled to the protections of the FLSA because cannabis was entirely forbidden under the CSA. The district court denied the motion to dismiss but certified the ruling for immediate appeal to the Tenth Circuit Court of Appeals.

On Appeal, Helix contends that its employees are not entitled to the protections of the FLSA. Helix’s main argument is that all participants in state recreational marijuana industries assume the risk that their activities will subject them to federal criminal sanctions and therefore they are not entitled to benefits under federal law, and cannot expect federal court to aid their conduct. Essentially Helix is arguing that the federal government would be assisting employees in drug trafficking if they afforded the employees the protections of the FLSA.

It remains to be seen whether the Tenth Circuit will buy Helix’s argument (and whether any of Helix’s remaining employees will want to stick around, for that matter). Helix clearly has the means to fight Kenney’s allegations. Perhaps Helix’s costs will increase substantially if they must pay all security guards overtime and litigation makes sense for them. However, litigation is extremely expensive, and Helix will have to balance those two issues as it proceeds.

In the meantime, best practices are to ensure your cannabis business is paying employees correctly under both state and federal wage and hour laws. If you pay your employees what they deserve, that alone may save you from a lawsuit. That sounds much better than fighting a wage and hour claim through the federal court of appeals.

federal court cannabis marijuana
Federal courts are finding ways to enforce cannabis contracts nationwide.

We’ve written previously about how courts, especially U.S. District Courts charged with applying and interpreting federal law, are wrestling with inconsistencies between state and federal law when it comes to state-legal cannabis. A little over a year ago, the emerging solution when it comes to enforceability of contracts involving cannabis was to apply the legal principle that “even where contracts concern illegal objects, where it is possible for a court to enforce a contract in a way that does not require illegal conduct, the court is not barred from according such relief.” Mann v. Gullickson (N.D. Cal. 2016). Fast forward to today, almost a year after California’s new cannabis regulations have been percolating into the world’s fifth largest economy, and that permissive, mostly hands-off approach to state cannabis contracts seems to have not only solidified, but appears to have been applied in other states that have recently legalized cannabis.

In an Oregon case, the plaintiff sought to recover economic damages in a personal injury case stemming the future earnings of a cannabis company. The defendant argued that because cannabis is federally illegal, the court cannot award future earnings from what amounts to an illegal business. In denying the defendant’s motion for summary judgment, the court found that “Marijuana’s legal status is unique. It is neither fully legal nor illegal. Because [plaintiff’s] family cannabis business is allegedly legal under Washington law, I conclude that . . . Plaintiff may recover economic damages based on projected profits from that business.” Tarr v. USF Reddaway, Inc. (D. Or. 2018). In so doing, the court also favorably cited a 2017 Oregon federal case holding that an employee of a marijuana testing laboratory could bring a claim under the federal Fair Labor Standards Act despite the federal illegality of marijuana. Id., citing Greenwood v. Green Leaf Lab LLC (D. Or. 2017). Key to both decisions was that in order to grant the requested remedies (allowance of future economic damages for personal injury; allowing a claim to proceed for violation of labor standards), the court did not need to order either party to directly violate the federal controlled substances laws that otherwise prohibit cannabis. Rather, the remedies were ancillary to the fact that the parties happened to be engaged in cannabis business activity.

In Nevada, a state that legalized cannabis in 2016, a plaintiff wanted to enforce certain promissory notes against a cannabis cultivation business. Some terms of the notes required defendants to use the loan money to pay off debtors and purchase certain real estate in Nevada—both things the court found to be lawful objects of a contract. Other terms of the notes, however, required the defendants to use some of the funds as operating capital in their cannabis business, and to grant the plaintiff a right of first refusal to purchase part of defendants’ business, both things the court found to be unenforceable because they would require defendants to violate federal law. The court, citing favorably to the Mann principle, found in favor of the plaintiff and denied the motion to dismiss, and noted that Nevada law allows courts to interpret contracts so as to sever unlawful or unenforceable provisions while retaining and enforcing the lawful parts. Bart Street III, Inc. v. ACC Enterprises, LLC, et al. (D. Nev. 2018). The significance of Bart Street is that the court expanded the use of the Mann decision, which merely dealt with nonpayment of promissory notes, and narrowly interpreted cannabis contracts so as to allow plaintiff to proceed in its suit to enforce the lawful terms, even where other terms clearly violated federal law and the contracts as a whole involved a federally illegal business purpose.

Finally, in a Texas case applying the law of Illinois, a state that recently legalized medicinal cannabis, a plaintiff sought payment for certain promissory notes involving cannabis businesses, similar to the situations in Mann and Bart Street. The defendant raised the defense of illegality of the contracts as justification for not performing. The court, collecting cases from all over the country in support, found that the defense of illegality under federal contract law was more equitable than remedial, and more presumptive than absolute, instead requiring a balancing of factors such as “the avoidance of windfalls or forfeitures, deterrence of illegal conduct, and relative moral culpability.” Ginsburg v. ICC Holdings, LLC (N.D. Tex. 2017). The court also noted the importance of “creating stability in contract relations and preserving reasonable expectations” as counterbalances to the “costs in forgoing the additional deterrence of behavior forbidden by the statute” that renders the contract illegal. The court concluded that the defendant had not met the standard for a motion to dismiss if its sole argument was for illegality of purpose in the contracts. Ginsberg is remarkable in that the court continued the whittling down of federal law as an invalidating presence upon state contracts involving state-legal cannabis activity, and did so in a way that frames the decision as a culmination of established principles of contract law.

It remains to be seen what will become of the absolute federal illegality in cannabis, but in the meantime, federal courts continue to find ways around invalidating contracts simply because they happen to involve cannabis, and sometimes even when they include terms that require parties to violate federal law, so long as those provisions are severable.

marijuana cannabis employment discrimination
Nice job by the court.

As a general rule of thumb, employers are not allowed to discriminate against employees with disabilities. Both federal and state laws provide this protection. This means that an employer cannot take an adverse employment action against an employee because of the employee’s disability. Again, this is a “general” rule of thumb: In the cannabis context, things are always a bit different.

Some states have passed legislation protecting medical marijuana users off work marijuana use. Employers in those states cannot terminate an employee or refuse to hire an applicant because of their off-work medical marijuana use. Historically, however, the big problem with these laws is that state and federal courts have readily determined the Controlled Substance Act (CSA) preempts state law, and that employers may terminate medical marijuana patients for off-work use. Recently, for the first time, a federal court sided with an employee who brought a claim against her employer for termination for off-work use of marijuana.

According to the lawsuit filed in Connecticut, Katelin Noffsinger is a registered medical marijuana user. In 2016, Noffsinger applied for a job with Bride Brook Nursing & Rehabilitation (“Bride Brook”). Bride Brook offered her the job contingent on passing a pre-employment drug test. Noffsinger informed her potential employer that she was a medical marijuana patient and likely would not pass the drug test. Noffsinger took the drug test which confirmed the presence of THC. Bride Brook rescinded its job-offer. Noffsinger brought a claim against Bride Brook alleging Bridge Brook had violated the anti-discrimination provision of the Connecticut Palliative use of Marijuana Act (PUMA). Bride Brook attempted to dismiss the case, asserting the claim was preempted by the CSA, the Americans with Disabilities Act (ADA) and the Food, Drug and Cosmetic Act (FDCA).

The federal court first addressed the CSA preemption claim. The Court held that the CSA did not prohibit employers from employing marijuana users. Meaning, if state law prohibited employers from discriminating against medical marijuana users, it would control.

The Court next determined that the ADA did not preempt PUMA because the ADA explicitly allows employers to prohibit illegal drug use at the workplace but does not authorize employers to take adverse employment action based on drug use outside of the workplace. Finally, the Court determined the FDCA does not regulate employment and therefore was inapplicable in the current case.

The Court did not rule on the substance of Noffsinger’s claim–meaning it has not determined if Noffsinger was discriminated under PUMA. That decision is still pending a jury trial.

The Noffsinger case is important. It’s the first case of its kind to determine that marijuana’s illegality under federal law does not bar an employment claim based on state law. State courts, such as the Oregon Supreme Court, have expressly held that the CSA preempts state medical marijuana laws—meaning employers in the State of Oregon, for example, may still terminate an employee for off-work marijuana use.

The decision in the Noffsinger case is not binding in other jurisdictions, but it could indicate a significant shift in federal courts’ view on medical marijuana. Perhaps this court’s sound reasoning will influence other federal judges to provide equal protections to medical marijuana patients until marijuana is de- or rescheduled under the CSA.