Federal law and policy

cannabis marijuana intern
Is your “intern” really an intern?

A simple google search for “Cannabis Intern” turns up around 340,000 results. As an employment attorney, the word “intern” is a major red flag for me — right up there with “independent contractor.”  Why? Because “intern” positions are often misused and many businesses, even sophisticated ones, believe labeling someone an intern means you do not have to pay them.

Employers can—and in certain situations encouraged to—hire interns. Properly classified interns do not have to be paid minimum wage. Employers may have the best intentions hiring an unpaid or low-paid intern. They truly believe the worker will obtain important training and education from the position. That might even be true. But, if a person is providing a service for an employer and is not paid or is paid under minimum-wage, employers could be in a lot of trouble for violation of both state and minimum wage laws.

What makes an intern actually an intern rather than an employee of a company? The U.S. Department of Labor has a seven-part test for determining the status of interns . When evaluating the employment relationship between an employer and an intern a court will consider:

  1. How similar the training is to that which the worker would receive in an educational environment;
  2. The extent to which the training is tied to a formal education program with integrated coursework and academic credit;
  3. The extent to which the program accommodates academic commitments by corresponding to the academic calendar;
  4. The extent to which the internship’s duration is limited to the period of beneficial learning;
  5. The extent to which the internship complements rather than displaces the work of paid employees while providing significant education benefits;
  6. The interns are not necessarily entitled to a job at the conclusion of the training period; and
  7. The employer and the intern understand that the intern is not entitled to compensation for the time spent in training.

No single factor is determinative, but as you can tell there is a common theme of education. Typically, if the worker is receiving some sort of educational credit for the work, they are an intern. If the worker is improperly classified as an intern and has not been receiving pay, then wage and hour laws apply. As previously discussed, failing to pay minimum wage can come with hefty penalties.

If you’re considering hiring an “intern” for your marijuana business, its best to consult with an employment law expert beforehand to provide a legal analysis of whether the position is truly one fit for an intern. After all, even if a state agency considers the “intern” qualified to work in your marijuana business, that doesn’t necessarily mean you can have them work for free.

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:

“What do you do?”

When meeting someone for the first time this is a pretty standard ice-breaker. Usually the responses are pretty innocuous: “I’m in sales” or “I’m in IT”. But if you add “…in the cannabis industry” to those answers you’re bound to get a number of follow up questions. When I tell people that I advise businesses, investors, and ancillary service providers in the marijuana industry, without fail the first question that I get is “Aren’t you worried about the federal government?” I then go into discussion on the Rohrabacher-Blumenaur Amendment (formerly the Rohrabacher-Farr Amendment), the history of the Cole Memo (which although rescinded still plays an important role in banking), and the importance of complying with your state’s cannabis regulations. Lastly, I talk about the change in the national discussion and perception of the cannabis industry. Gone are the days of the “lazy stoner” stereotypes (although perhaps not for U.S. Attorney General Jeff Sessions). Instead we have sophisticated cannabis businesses providing products to a large and diverse section of America – with more and more states looking to legalize either medical or adult-use marijuana activities this year.

For those of us who follow cannabis bills in the U.S. Capitol and in our state legislative houses, it’s clear that there is momentum towards ending America’s shortsighted and draconian war on cannabis (we covered recent developments on the federal level here). While Republicans and Democrats in Congress can’t seem to agree on anything nowadays, support for individual states to regulate cannabis activities as they see fit for their constituents is one of the few areas where bipartisan support exists. Every day, more Republicans in Congress are signing on as sponsors to bills that will support the cannabis and hemp industries (we see you Mitch McConnell!). And now we can add to the list of cannabis supporting Republicans: President Donald Trump?

Could Trump actually point us in the right direction?

Just last week, the President, while boarding a helicopter for the G-7 summit in Canada, mentioned his support for what Senator Cory Gardner (R-CO) is doing. What exactly is Senator Gardner doing you ask? He, along with Senator Elizabeth Warren (D-MA), and Representatives David Joyce (R-OH) and Earl Blumenauer (D-OR), have introduced the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act. You’ll recall that Senator Gardner didn’t take too well to A.G. Sessions rescinding the Cole Memo, so he vowed to block all Department of Justice appointments in return. After meeting with the President, Sen. Gardner put an end to his blockade (which we covered, here) when the President assured him that “he will support a federalism-based legislative solution to fix this states’ rights issue once and for all.” At the time of the meeting there was no agreement as to what the “federalism-based legislative solution” would look like. Today there is. Here’s a list of what the STATES Act would and wouldn’t do:

  • It would amend the federal Controlled Substances Act (“CSA”) so that the CSA would not apply “to any person acting in compliance with state law relating to the manufacture, production, possession, distribution, dispensation, administration, or delivery of marihuana.”
  • It would also amend the CSA so that the same exclusion would apply to persons acting in compliance with the law of a federally recognized Indian tribe within its jurisdiction.
  • It would deschedule industrial hemp from the CSA entirely.
  • It would make access to banking easier for cannabis businesses as state legal cannabis sales and transactions would no longer be considered trafficking.
  • It would not change the law in states that continue to criminalize cannabis activities.
  • It would not apply to any of the other substances identified in the CSA.
  • It doesn’t guarantee that President Trump will keep his word.

That last point isn’t actually written into the bill, but it’s the 800-pound gorilla in the room that no one can ignore. The President, to be polite, has had a tenuous relationship with the truth and keeping his word, so it’s far from certain that he will throw his support behind the STATES Act. An off-the-cuff remark before meeting with G-7 allies (or are they adversaries now?) does not constitute unwavering support. We’ll have to see more consistent and direct support from the President before we can feel confident that the STATES Act will become law. The President’s support is necessary because he’s still very popular with the Republican base and can therefore give recalcitrant Republicans in Congress cover if they’ve been cannabis opponents previously.

Let’s keep our fingers crossed that the North Korea Summit meeting goes well (who cares about cannabis legalization if nuclear war’s broken out?), that Congress pushes this one through, and that the President carries that high over to the STATES Act.

california marijuana cannabis

The year 2018 has been confusing so far for California’s commercial cannabis industry in terms of the conflict between federal and state legal regimes. It began with California formally opening its doors for licensed cannabis activity. That was soon followed by the U.S. Department of Justice rescinding its 2013 Cole Memo that deprioritized enforcement against state-legal cannabis operations — a move that sparked considerable concern among operators who had invested substantial resources to become legitimate, licensed cannabis businesses. Then we discovered that the former Republican speaker of the House, previously having been “unalterably opposed” to cannabis, had now become a board member of a cannabis investment company.

Next, we heard about a massive enforcement effort against cannabis grow operations in Sacramento involving one of the largest residential civil asset forfeiture efforts in U.S. history. Meantime, California continued to struggle with its persistent black market problem, as the vast majority of operators have declined to come into regulatory compliance, due in no small part to the enormous market advantage of not paying licensing fees or the extremely high taxes levied on legitimate cannabis businesses.

The uncertainty and apparent inconsistency begs the question, what are the current state and federal policies on cannabis enforcement in California? We don’t have a crystal ball, but we can glean some information based on what the state and federal government are saying and doing as of late. It’s good news.

We’ve previously observed how state and federal enforcement incentives have started to converge based on common interests. That convergence has continued and has actually become somewhat solidified through public statements of federal and state law enforcement officials. Recently, the U.S. Attorney for the Eastern District of California, McGregor Scott, issued informal guidance on his office’s cannabis enforcement goals: “The reality of the situation is there is so much black market marijuana in California that we could use all of our resources going after just the black market and never get there … So for right now, our priorities are to focus on what have been historically our federal law enforcement priorities: interstate trafficking, organized crime and the federal public lands.” To that end, the federal government will allocate $2.5 million towards enforcement against illegal grows on public land, a concern arising largely due to an increase in the use of banned pesticides on federal land in California.

It has not been lost on careful observers that Mr. Scott’s announced enforcement priorities align closely with those of the 2013 Cole Memo. Mr. Scott also appeared to distinguish the illegal operations he seeks to target from the legal cannabis regime that California is working to implement: “[California’s black market] is of biblical proportions and what we’re talking about here today is a classic example of that market—people who have no intent of ever entering the legal system that has been created and California has attempted to establish.” In other words, a top federal law enforcement authority in California seems to be conveying that the federal government will not prioritize licensed commercial cannabis operations that comply with California laws and regulations.

On the state side of things, the Bureau of Cannabis Control is working on finalizing its regulations and is continuing to process state licenses, and Governor Brown has sought to put teeth behind those regulations, requesting $14 million “to crack down on tax evasion, conspiracy and other financial crimes by the black market cannabis industry as well as stem the flow of illegal cannabis in the mail and parcel delivery systems.” At the same time, licensed cannabis businesses have started to speak out more forcefully against illegal operators, and rightfully so: black market businesses have an enormous market advantage in that they don’t pay taxes or licensing fees, and follow no advertising or distribution restrictions. While the cannabis industry was largely united behind Prop 64, which legalized cannabis in 2016, those alliances have diverged as some businesses have taken the legal route while others have remained in the shadows. In fact, we’ve now reached a point where licensees are filing formal complaints against illegal operators and local prosecutors are encouraging them to do so.

Given the federal government’s desire to protect public lands, eliminate organized criminal operations, and prevent interstate trafficking of cannabis, and given California’s desire to give meaning to its regulatory regime and prop up those operators that have spent the time, effort, and resources to become licensed citizens of the California cannabis industry, it’s no wonder that the previously unthinkable is now materializing: the federal government is now teaming up with the State of California to crack down on unlicensed cannabis operations. What comes next is uncertain, but one thing is clearer now than ever: commercial cannabis businesses in California are now exponentially better off from an enforcement standpoint if they can demonstrate compliance with California laws and regulation. That includes spending the time and effort to obtain a state license.

On May 22, the federal Drug Enforcement Administration (“DEA”) issued an internal directive (the “Directive”) acknowledging the Agency’s jurisdiction over cannabis has its limits. The directive is in line with a plain reading of the federal Controlled Substance Act (“CSA”), which authorizes the DEA’s enforcement power, but does not regulate the whole cannabis plant.

To conceptualize this, think of the CSA distinguishing the cannabis plant into two parts. The first is “Marihuana” which is “all parts of the plant Cannabis sativa L., whether growing or not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt, derivative, mixture, or preparation of such plant, its seeds or resin.” The second classification under the CSA is “Exempt Cannabis Plant Material.” As per the CSA definition, we can break Exempt Cannabis Plant Material into four categories:

  1. Mature stalks
  2. Fiber produced from mature stalks
  3. Oil or cake made from seeds
  4. Seeds incapable  of germination

Exempt Cannabis Plant Material also includes “any other compound, manufacture, salt, derivative, mixture, or preparation” of the items listed above. However, there is an exception to the exemption as resin derived from mature stalks is considered Marijuana, not Exempt Plant Material. If you are feeling confused at this point, don’t worry: This stuff is not for the faint of heart.

And that is where the Directive comes in. The Directive states that it was issued in order to clarify the ruling in Hemp Industries Ass’n v. DEA, 357 F.3d 1012 (9th Cir. 2004). In this 2004 decision the Court prevented the DEA from enforcing 21 C.F.R. § 1308.11(d)(31), which independently lists THC as a Schedule I substance, with respect to Exempt Plant Material. The Directive also acknowledges that the DEA does not enforce 21 C.F.R. § 1308.35, which was the agency’s attempt to regulate Exempt Plant Material when it was contained in products intended for human consumption. Kyle Jaeger of Marijuana Moment reported that the Directive’s concession was part of a settlement with the Hemp Industries Association (“HIA”).

So why would the DEA is issue a directive based on a case that was 14 years ago? It probably has to do with the HIA’s more recent lawsuit against the DEA over its Marijuana Extract Rule. In that case, the Ninth Circuit declined to review the Marijuana Extract Rule on largely procedural grounds. For those keeping score, HIA has sued the DEA three times, with two wins and a qualified loss.

The “Marijuana Extract Rule” broadly defines a “marijuana extract” as:

“[A]n extract containing one or more cannabinoids that has been derived from any plant of the genus Cannabis, other than the separated resin (whether crude or purified) obtained from the plant.”

Under the plain text, the “hook” for this rule is the presence of any cannabinoid from any part of the cannabis plant. Full stop. It makes no distinction between Exempt Plant Material and Marijuana. This seems to go far beyond the scope of the CSA. However, this directive concedes that the DEA’s power is limited to Marijuana and not Exempt Plant Plant Material:

“Products and materials that are made from the cannabis plant and which fall outside the CSA definition of marijuana (such as sterilized seeds, oil or cake made from the seeds, and mature stalks) are not controlled under the CSA.”

The Directive goes a step further by acknowleding that Exempt Plant Material is outside of the DEA’s jurisdiction despite the presence of a cannabinoid:

“Such products may accordingly be sold and otherwise distributed throughout the United States without restriction under the CSA or its implementing regulations. The mere presence of cannabinoids is not itself dispositive as to whether a substance is within the scope of the CSA; the dispositive question is whether the substance falls within the CSA definition of marijuana.”

The Directive goes on to clarify that Exempt Plant Materials are also legal to import and export in compliance with the Controlled Substances Import and Export Act.

The Directive does not explicitly address Industrial Hemp as defined in 7606 of the 2014 US Farm Bill (the “Farm Bill”). 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. In the Court’s recent decision to deny reviewing the Marijuana Extract Rule, it threw HIA a pretty nice bone:

“[The Farm Bill] contemplates potential conflict between the Controlled Substances Act and preempts it. The Final Rule therefore, does not violate the [Farm Bill].”

Premption means that the Farm Bill overides the CSA, when the two conflict. The DEA cannot use its enforcement authority under the CSA to enforce the Marijuana Extract Rule with regards to extracts derived from bona fide Industrial Hemp. Specifically, the Industrial Hemp must be grown pursuant to a state’s industrial hemp program and contain less than .3% THC. Also, the DEA has stated that the Farm Bill  does not permit the commercial sale of Industrial Hemp or its interstate transfer, although Congress has limited DEA’s ability to use federal funds to prohibit the sale or interstate transfer of Industrial Hemp until September 2018.

So where does that leave us with regards to cannabidiol (“CBD”)? The Marijuana Extract Rule is valid. Obviously, it would cover any product containing CBD if that product were derived from Marijuana. However, based on the Directive and the Ninth Circuit’s decisions, extracts containing CBD derived from Exempt Plant Material or Industrial Hemp would not be within the Marijuana Extract Rule.

There is significant scientific research showing that meaningful levels of CBD cannot be extracted from Exempt Plant Material. The Farm Bill provides protection to all parts of the cannabis plant if the plant is Industrial Hemp, including the flowering tops. CBD could be extracted from Industrial Hemp without necessarily falling under the DEA’s jurisdiction. And can it be sold interstate? Well, given what Congress has done, at least until September.

Seems like a good approach.

Once upon a time, the cannabis industry had something called the Ogden Memorandum. That was back in 2009, prior to any state legalizing cannabis for recreational use. The Ogden Memo gave prosecutorial guidelines to U.S. Attorneys in medical marijuana states. Many people read the Ogden Memo too cavalierly for the feds’ liking (to wit, over 1,000 new Colorado dispensaries opened that year), and Eric Holder’s office attempted to cool industry expectations with the first Cole Memo in 2011. A few years later, after Colorado and Washington legalized adult use cannabis, we got the second Cole Memo and its famous eight federal enforcement priorities to help guide state lawmaking. The second Cole Memo, which everyone just called the “Cole Memo”, lasted an astonishing 4.5 years until Jeff Sessions rescinded that guidance in early 2017, with a memo of his own. The Sessions Memo effectively reset everything to a primitive ground zero, lecturing that “marijuana is a dangerous drug and marijuana activity is a serious crime.”

Aside from disrupting longstanding federal policy framework on cannabis, the Sessions Memo directed federal prosecutors “to weigh all relevant considerations” in bringing prosecutions for violations of the federal Controlled Substances Act. As of last week, one such prosecutor gave explicit indications as to what relevant considerations will take priority in his district. That U.S. Attorney was Billy Williams of the District of Oregon. So now we now have the Williams Memo.

The Williams Memo is a thoughtful if somewhat awkward document. In the classic posture, it reserves prosecutorial discretion and promises nothing to anyone. Instead, it explains that lawyers in Mr. Williams’ office will primarily focus on five enforcement priorities when deciding whether to enforce the draconian federal laws against cannabis operators. Those priorities are:

  • Overproduction and interstate trafficking;
  • Protecting Oregon’s children;
  • Violence, firearms, or other public safety threats;
  • Organized crime – including tax evasion and money laundering; and
  • Protecting natural lands, natural resources, and Oregon’s environment.

The one that has state compliant operators a little worried is “overproduction,” given that the Oregon legislature has not capped marijuana licenses and does not require verticality in licensees. When I say “a little worried” I mean very little: So far, of the large number of Oregon cannabis and cannabis-adjacent clients my firm represents, I’ve heard from exactly zero of them with concerns over the Williams Memo. The only people I’ve heard from are reporters.

Still, the Williams Memo is important because it could serve as a template for U.S. attorneys in other states, and it illustrates the curious and uncomfortable bind that U.S. attorneys in states like Oregon find themselves. These attorneys are not going to attempt to shutter licensed and compliant cannabis businesses. It would be too costly, too politically hazardous, and ultimately, too late. On the other hand, when you have serious issues of overproduction, and especially interstate leakage, federal actors appointed by “tough on crime” executives may feel compelled to say something. So Williams did.

For states like Oregon, the hardest part about overproduction is that it is driven by significant and unrelenting demand beyond the four corners of the state. This means that if Oregon were to cap marijuana licenses tomorrow, or to shrink the pool of available licenses to a very small number over time, black market activity would persist. Prices for illegal marijuana would rise within Oregon, but there is nothing to suggest that demand would decrease elsewhere. Said another way: As long as there is demand for Oregon marijuana nationwide, Oregon marijuana will ship nationwide.

Federal drug enforcement policy in the U.S. has always focused on the supply side, with abysmal results. (If you’d like to understand the economics of this, there are many years of data and interpretation, e.g. here, here and here.) Still, the federal government refuses to abandon or adequately reform its supply-side policies. For its part, the Oregon legislature recently enacted SB 1544, which funds interdiction of illegal grows at the state level, but the level of funding is unlikely to kneecap black market activity in any real sense. Southern Oregon especially will always be a banana belt for cannabis.

Given market dynamics and the failures of federal prohibition, the Williams Memo does a nice job of walking the line between what Williams’ bosses probably want and what Oregonians definitely want, as demonstrated by Measure 91 and elsewhere. Ultimately, this memo is unique in that is was penned by a U.S. District Attorney, but it’s nothing new. And it really shouldn’t matter much for state-compliant businesses.

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.

Last week I wrote about how the United States is close to approaching the tipping point when it comes to ending the federal government’s prohibition on cannabis. Legalization is long overdue. And just this week, U.S. Attorney General Jeff Sessions, while testifying before the U.S. Senate, surprisingly said that cannabis should be researched and that there may be some benefits to medical marijuana. We’ll take a lukewarm comment from the man that said “good people don’t smoke marijuana” and take that to the bank. Which brings me to the topic of today’s post, banking (a transition as smooth as my middle school dance moves).

california cannabis banking
Will California clear a way for banking?

It’s no secret that many cannabis operators have to operate as cash only businesses since many financial institutions still refuse to offer banking services to the cannabis sector (which has led to an increase in interest in cryptocurrencies). In California, many banking institutions that were considering openly banking cannabis businesses decided to remain on the sidelines once A.G. Sessions rescinded the Cole Memo this January. However, like the slow but forceful gravitational pull of the moon, we’re starting to see tide shift towards more banking opportunities on the horizon.

Part of the shift has to do with fact that the cannabis licensing agencies in California (the Bureau of Cannabis Control, the Department of Food and Agriculture, and the Department of Public Health) will start issuing annual licenses in May. To date, all of these agencies have only issued temporary permits, which required little more than a local permit, a location, and a premises diagram. The application for an annual license requires much greater detail. Although some applicants may balk at the amount of information they must provide, the fact intensive nature of the application process will undoubtedly help cannabis operators obtain banking services. A cannabis business owner that has received an annual permit from the state, can use that permit as a stamp of approval when walking into a bank to open an account. Possession of an annual license will signify to banks that you’ve passed a background investigation and proven to the state that you have the procedures in place to run a compliant cannabis business. Don’t lose sight of that fact as you’re cursing all the hoops you’re jumping through.

Another step in the right direction when it comes to opening banking services to the cannabis industry is the progress of Senate Bill 930 in the California state legislature. SB 930 was first introduced by State Sen. Robert Hertzberg (D-Van Nuys) on January 25, 2018, and was approved by the Governance and Finance Committee last Wednesday. SB 930 would provide for the licensure and regulation of cannabis limited charter banks and credit unions whose sole purpose would be to provide banking services to the cannabis industry. SB 930 is more workable and has a stronger likelihood of success than the prospect of a state backed bank, which we last discussed here.

In order for SB 930 to be successful, it is paramount that the FinCEN guidance issued by the Department of Treasury remain in place (see here for the importance of the FinCEN guidance). The bill would also create the Cannabis Limited Charter Advisory Board (“Board”) that would hold public hearings, submit reports of enforcement activities, and provide guidance on specified investment activities. The Board will be comprised of the state Treasurer (you can find our analysis of the Treasurer’s banking report, here), the state Controller, and Chief of the Bureau of Cannabis Control. SB 930 would also authorize charter banks and credit unions to issue special purpose checks for the following:

  • To pay fees or taxes to the state or local jurisdiction;
  • To pay rent on property that is associated with the account holder’s cannabis business; and
  • To pay a vendor that is located in California for expenses related to goods and services associated with the account holder’s cannabis business.

SB 930 will still have to clear some procedural hurdles before it’s in front of the full Senate for a vote, but this is definitely another step in the right direction to ease the logistical burden – and enormous public safety concern – that dealing in all cash poses on cannabis businesses. SB 930 is yet another piece in the fight against the federal government’s unjust war on cannabis. Eventually the final blow will have to come from the federal government, but in the interim California, along with many other states, will continue to lead the way.