Federal law and policy

california cannabis marijuana
California and the Feds are an odd couple in canna law enforcement.

When the Cole Memo was rescinded in January, uncertainty was rife on all sides of the state-regulated cannabis industry. Neither the regulators, the regulated, nor the unregulated knew what to expect from the federal government. The U.S. Department of Justice told each of its 93 United States Attorneys to exercise his or her own discretion when it comes to enforcing the federal prohibition on cannabis. While some indicated that they would more or less continue to follow the Cole Memo, the nature and status of enforcement priorities suddenly became an open question. Through the recent budget bill, thankfully, we learned that Congress would continue to prohibit the DOJ from enforcing against state-legal medicinal cannabis operators, but case law interpreting that law is relatively undeveloped.

On the other side of the equation, California regulators continue to struggle with the still-unlicensed operators who have decided that it’s better to continue operating unregulated and unlicensed—and tolerate the ongoing risk of a crackdown—than it is to incur the costs of compliance. That calculus depends largely on the robustness of the state’s enforcement efforts, which, like the federal government’s priorities, has also been somewhat of an open question. Two recent developments in California suggest what direction the Department of Justice may be headed on the question of cannabis enforcement. Perhaps even more interesting, however, is how the interests of the federal government and the state of California have apparently converged—if only for a moment—on the issue of cannabis enforcement.

Recently, hundreds of federal agents and local law enforcement officers conducted raids at 74 houses in and around Sacramento, in the Eastern District of California, and filed more than 100 civil asset forfeiture actions against residential properties. The houses, many gutted to make room for indoor grow rooms, were reportedly part of a Chinese organized crime operation for the secret cultivation and export of cannabis, and may have been purchased with funds of dubious origin. But the U.S. Attorney in charge of the enforcement action made clear that it had nothing to do with California’s cannabis regulatory regime, as the authorities weren’t conducting actions interfering with state cannabis laws, and that the alleged actions would be “illegal under anybody’s law.” Needless to say, the suspects did not have state or local licenses to conduct any cannabis activity.

In United State v. Gilmore, a case on appeal from the Eastern District of California, the court held that the operators of an El Dorado County cannabis garden on federal land were not entitled to the protections of the Rohrabacher-Blumenauer amendment, which restricts DOJ funds from being used to prosecute medicinal cannabis in states where it is legal. The court reasoned that nothing in federal or California law purports to allow anyone to grow cannabis on federal lands: In other words, there is no set of circumstances under which this operation would be compliant with state law. (Of particular note was the court’s rejection of the appellants’ claim that they were unaware they were growing on federal land—a good plug for the value of due diligence in a real estate transaction).

In both the Sacramento and El Dorado County cases, the federal government carried out or continued enforcement actions against operators who were neither licensed nor in compliance with state law. Also in both cases, the exit of unlawful operators from the marketplace furthered the state of California’s regulatory priorities; local law enforcement even assisted with the Sacramento raids. It is not clear what DOJ’s cannabis enforcement priorities will be going forward, but it cannot be ignored that at least in these two cases, the interests of both governing bodies were served, and under circumstances consistent with Cole Memo priorities to boot. It begs the question of what might result from future alignments of priorities, but the reality is that California has an unregulated black market cannabis problem, and at least in these two cases, that problem was alleviated to some degree.

hemp federal law
Are the glory days of hemp returning?

Senator Mitch McConnel (R-KY) recently introduced S.2667, a bill which would allow states and tribes to regulate hemp production. The proposed law is appropriately titled the “Hemp Farming Act of 2018” (the “Act”). As the Senate Majority Leader, McConnell is one of the most powerful politicians in Washington, so it goes without saying that this is a big deal. In addition, the Act is being fast-tracked through the Senate, bypassing the standard committee review process.

The Act is currently in draft form and the details are subject to change. As written, “hemp” would be defined as:

“the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-0 [THC] concentration of not more than 0.3 percent on a dry weight basis.”

This proposed definition is significant, because it specifically includes the term “extracts”, thereby undermining the DEA’s much-maligned “marihuana extract” rule, which broadly defines any extract from the cannabis plant as “marijuana” and not hemp. The proposed “hemp” definition also includes “cannabinoids” contained in hemp which could add much needed legal certainty to the already booming CBD market. The Act would also explicitly remove hemp from the Controlled Substances Act’s definition of marijuana.

The authority to regulate legal hemp would be placed in the U.S. Department of Agriculture. One major issue with the current federal “Industrial Hemp” program is that the 2014 Farm Bill, which established the program, does not name a federal agency to oversee it. Feel free to debate whether government regulations help or hurt an industry, but at least this bill provides some guidance as to who is responsible for the program.

Speaking of the 2014 Farm Bill, the Act would repeal and replace the “Industrial Hemp” section of that the 2014 Farm Bill one year after Act is passed into law.  The 2014 Farm Bill allows states to enact pilot programs for hemp research making hemp legal within the state’s borders. Hemp cultivated in compliance with a State’s program is expressly legal under the Farm Bill. The Drug Enforcement Administration (DEA) and other federal agencies have issued a joint Statement of Principles claiming that the commercial sale and/or the interstate transfer of Industrial Hemp is outside the scope of the Farm Bill and therefore unlawful. However, 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.

Ultimately, the Act would require that states and tribes submit a plan to the US Department of Agriculture in order to cultivate hemp. The plan must include details on how to track the land where hemp is produced, a procedure for testing the THC concentration in hemp, a procedure for disposing of products that are not in compliance, and procedures for enforcing the Act. The Act would also allow hemp researchers to apply for grants from the and make hemp farmers eligible for crop insurance.

McConnell introduced the Act in the Senate on April 12, 2018, and it was co-sponsored by Oregon senators Ron Wyden and Jeff Merkley. That same day saw Representatives James Comer of Kentucky introduce companion bill H.R. 5485 in the House of Representatives with and Rep. Jared Polis of Colorado co-sponsoring.

McConnell hails from Kentucky and it’s no surprise that lawmakers from Kentucky, Oregon, and Colorado would support hemp legalization. In 2014,  we predicted Kentucky would lead the nation in industrial hemp as it was one of the first states to implement a hemp cultivation program under the 2014 Farm Bill. Kentucky was also one of the first states to legally obtain hemp seeds after it stepped up to fight the DEA in federal court in order to obtain those seeds. Since then, farmers in Kentucky have been happily producing hemp as a replacement for tobacco crops. McConnell and Kentucky Agriculture Commissioner Ryan Quarles highlighted Kentucky’s hemp program in announcing the Act:

McConnell: Hemp has played a foundational role in Kentucky’s agricultural heritage, and I believe that it can be an important part of our future. I am grateful to join our Agriculture Commissioner Ryan Quarles in this effort. He and his predecessor, Jamie Comer, have been real champions for the research and development of industrial hemp in the Commonwealth. The work of Commissioner Quarles here in Kentucky has become a nationwide example for the right way to cultivate hemp. I am proud to stand here with him today, because I believe that we are ready to take the next step and build upon the successes we’ve seen with Kentucky’s hemp pilot program.

Quarles: Here in Kentucky, we have built the best Industrial Hemp Research Pilot Program in the country and have established a model for how other states can do the same with buy-in from growers, processors, and law enforcement. I want to thank Leader McConnell for introducing this legislation which allows us to harness the economic viability of this crop and presents the best opportunity to put hemp on a path to commercialization.

In addition to Kentucky’s leadership on hemp, Oregon has reconfigured its hemp program and is a national bellwether in this space. Oregon hemp growers and handlers are able to sell their products to state-licensed marijuana businesses (as well as anyone else in the country). The merger of Oregon’s hemp and marijuana markets is unique and other states will likely follow suit, especially if the Act becomes law. Finally, Colorado has more acreage dedicated to hemp cultivation than any other state at present.

As mentioned above, it appears that McConnell is flexing his considerable political muscle to get this bill fast-tracked through Senate. McConnell is using procedural Rule 14 which allows a bill to skip over the committee process so that legislation may be brought up on the Senate floor. This doesn’t guarantee that the Hemp Farming Act will get a vote, but it does indicate that McConnell means business.

marijuana cannabis federal policy
Let’s hope so, when it comes to prohibition.

The election of Donald Trump as president of the United States caught many pundits and prognosticators off guard. President Trump’s victory also instilled a level of uncertainty in America’s burgeoning state-legal cannabis industry. During the presidential campaign, Trump routinely professed his adherence to states’ rights when it comes to cannabis legalization (at least for medical cannabis activities). Once elected, however, President Trump appointed known cannabis prohibitionist Jeff Sessions to be his choice as U.S. Attorney General for the Department of Justice (DOJ) and cannabis operators went from feeling uncertain to outright fear.

It now appears that those fears may have been unfounded. After his confirmation, Sessions didn’t immediately seek to enforce federal laws against marijuana operators (to the pleasant surprise of many in the cannabis industry). The honeymoon lasted until January 4, 2018. Just four days into adult-use cannabis sales being legal in the state of California, Sessions formally rescinded the Cole Memo and the cannabis industry was once again thrown into turmoil. The rescission of the Cole Memo, when added with the Environmental Protection Agency’s refusal to register pesticides on cannabis crops and the Federal Drug Administration’s (FDA) threatened crackdown on medical cannabis claims, painted an ominous picture for the cannabis industry throughout the United States (although some of us were more optimistic).

It’s been over four months since Sessions rescinded the Cole Memo and although he’s rattled his saber on some occasions, the dreaded crackdown has not occurred. For that we may have Russia to thank. Sessions’ self-recusal from the DOJ’s investigation into Russian government meddling in the presidential election has made him persona non grata in the Trump administration — thereby placing his priorities at the very bottom of President’s Trump list.

Rather than a return to federal enforcement actions, we’ve begun to see quite a few positive developments as of late. Last week, President Trump told U.S. Senator Cory Gardner (R-CO) that he was committed to supporting a legislative solution to the tension between state’s that regulate cannabis activities and federal law (which we covered here). This could be a very important development, and let’s hope that this is one issue in which the President doesn’t change his mind.

Besides the commitment that the President made to Senator Gardner, there have been a number of other developments that have given cannabis businesses a reason to be optimistic:

  • The FDA just released a report that a CBD based drug has shown to have positive effect on those that suffer from seizures and epilepsy. This is a big blow to the federal government’s position that the cannabis plant has no medical value.
  • U.S. Senator Mitch McConnell (R-KY) recently introduced a bill in the Senate that would authorize hemp as an agricultural product. Any progress in the federal legalization of hemp will eventually also benefit marijuana legalization.
  • Senators Orrin Hatch (R-UT) and Kamala Harris (D-CA) sent a letter to the DOJ and the Drug Enforcement Agency, calling on them to increase the pace of medical research in cannabis. There have been approximately twenty-five applications submitted to the DEA to produce federally approved research-grade marijuana but none of them have been approved.
  • U.S. Representative  Dana Rohrabacher (R-CA) recently issued a statement that he plans on introducing a stand-alone bill that will respect a state’s right to regulate cannabis and would make the Rohrabacher-Bluemenaur Amendment permanent.

Taken as a whole, these are all encouraging developments– especially considering their bipartisan support. However, this is not the time to rest on our precarious laurels. The November mid-term elections will be on us before we know it and it will be up to all of us to elect officials that are against the government’s draconian war on cannabis. We can’t leave this up to Russia to decide for us, after all.

gardner marijuana cannabis
Martin Sheen? Or Cory Gardner? Either way, good news!

In January 2018, Cory Gardner, Colorado’s junior senator (and Martin Sheen doppelgänger) made news by announcing that he would block Trump Administration Department of Justice appointments after Attorney General Jeff Sessions released a memo suggesting that U.S. Attorneys could consider prosecution of federal marijuana laws despite state legalization. In keeping his promise, Gardner has held up about 20 DOJ nominees proposed by the Administration.

Senator Gardner released the following statement today, April 13, 2018:

“Since the campaign, President Trump has consistently supported states’ rights to decide for themselves how best to approach marijuana. Late Wednesday, I received a commitment from the President that the Department of Justice’s rescission of the Cole memo will not impact Colorado’s legal marijuana industry. Furthermore, President Trump has assured me that he will support a federalism-based legislative solution to fix this states’ rights issue once and for all.

Because of these commitments, I have informed the Administration that I will be lifting my remaining holds on Department of Justice nominees. My colleagues and I are continuing to work diligently on a bipartisan legislative solution that can pass Congress and head to the President’s desk to deliver on his campaign position.”

White House legislative affairs director Marc Short confirmed on Friday that Trump “does respect Colorado’s right to decide for themselves how to best approach this issue.”

While no specific legislation has been announced, the Washington Post reports that “Gardner has been talking quietly with other senators about a legislative fix that would, in effect, make clear the federal government cannot interfere with states that have voted to legalize marijuana.”

Sessions has been on the outs with Trump since he recused himself from the Mueller Russia investigation. The Trump Administration’s willingness to back off from Sessions’ attempts to revise the Cole Memo suggests a further wedge between the President and his Attorney General.

Or not. Consult the oracle at Twitter for the latest.

medical marijuana cannabis
Medical cannabis businesses are shielded, for now.

State medical marijuana laws and their implementation are safe until September 30th of this year. In a highly anticipated move, Congress extended the protections of the well-known “Rohrabacher-Blumenauer Amendment” (the “Amendment”) last week. This extension is an important political and legal action after Attorney General Jeff Sessions threw the state-legal cannabis industry into a fit from his rescinding of the Obama era Cole Memo in January (he has provided further, largely unhelpful guidance since then). But what impact does the Amendment really have? It could be significant over the coming months, though I am confident that Sessions and other U.S. Attorneys may seek to undermine the spirit of that law as time goes on.

The Amendment first passed back in 2014 and has been consistently renewed and extended by Congress in the form of budget riders since then (and this last one is around 2,200 pages). The Amendment has been construed as stopping the federal government from prosecuting state-legal medical cannabis operators, but outside of the Ninth Circuit it has not been tested. The Amendment provides that:

“None of the funds made available under this Act to the Department of Justice may be used, with respect to any of the States of Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming, or with respect to the District of Columbia, Guam, or Puerto Rico, to prevent any of them from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.”

On its face, the law only precludes the Department of Justice (DOJ) from spending funds to “prevent” any of the foregoing states “from implementing” their medical cannabis laws. However, in the Ninth Circuit, as a result of the McIntosh case, the Amendment has some serious teeth. In that case, the Court ruled in favor of medical cannabis providers who disputed the DOJ’s enforcement of the federal Controlled Substances Act against them in their respective states (all of which have legalized medical cannabis) due to the Amendment. In doing so, the Court reaffirmed Congress’s intent to halt federal enforcement measures against medical marijuana providers in states that have legalized and regulated it.

To date, the McIntosh ruling represents the highest judicial approval of that legislation as an effective means of curbing federal crackdowns on state-legal medical marijuana programs. Nonetheless, the Court made clear that its ruling only applies to medical cannabis operators. And the Court remanded the cases back the lower courts to investigate whether the appellants were, in fact, in full compliance with their states’ laws regarding medical cannabis. Notably, the DOJ didn’t appeal this ruling to SCOTUS, and it also dropped another major case—the Harborside Health Center forfeiture case that had raged on for years–after the McIntosh ruling.

Clearly, to avail yourself of the protections of the Amendment in the Ninth Circuit, you must be on the medical cannabis side and you must be in completely compliance with your state’s medical cannabis laws and regulations. While the McIntosh and Harborside cases show us that the Amendment can be used as an effective shield, those cases resolved before Jeff Sessions took the helm at the DOJ (and, in case you missed it, Sessions is a major marijuana hater).

Whether the Amendment will be interpreted as strongly in other U.S. District and/or Circuit Courts (or even by SCOTUS) in the future remains to be seen. At the same time, Sessions has already asked Congress in the past not to renew the Amendment (which Congress has continually ignored) and, back in 2015, the DOJ already instructed its personnel (prior to McIntosh) on how to soundly defeat in court any defense raised by a cannabis operator under the Amendment. Given that Sessions recently called for U.S. Attorneys to seek the death penalty for drug dealers of all kinds (which, under current federal law, includes cannabis business operators), I am confident that the DOJ is not going to lay down for use of the Amendment in Court so long as Sessions has any kind of influence.

california immigration marijuana
The Feds and California are not getting along so well.

If you’ve been following the news lately you’ve probably noticed that that the Trump administration, along with the U.S. Department of Justice (DOJ), have not exactly been getting along with the state of California. Just last week the Department of Justice filed a lawsuit against the Golden State, claiming that three of its laws interfere with the federal government’s authority to regulate the country’s immigration system. The California laws in question are Senate Bill 54 (“SB 54), Assembly Bill 450 (“AB 450”), and Assembly Bill 103 (“AB 103”). This is not the proper venue for an in-depth breakdown of every provision in these laws, but a brief description of each will help frame this discussion:

  • SB 54: Also known as the “California Values Act” was signed by California Governor Jerry Brown on October 05, 2017. SB 54 places limitations on when California law enforcement authorities can cooperate with federal immigration officials.
  • AB 450: Signed by Gov. Brown on October 05, 2017, AB 450 prohibits employers from cooperating with immigration enforcement officers unless the employer has been served with a subpoena or judicial warrant.
  • AB 103: Approved by Gov. Brown on June 27, 2017, AB 103 is a public safety omnibus bill (meaning it is a law that covers a number of measures). The DOJ takes issue with the provisions regarding state inspection of immigration detention facilities and granting the California Attorney General the authority to review the conditions of confinement and the standards of due process at these facilities (Section 12532).

In its lawsuit, the DOJ asserts that all three laws violate the Supremacy Clause of the United States Constitution by “constituting an obstacle to the United States’ enforcement of the immigration laws and discriminating against federal immigration enforcement.” I’ll save you from having to attend a semester of Con Law 101 by giving you a succint explanation on the Supremacy Clause: the Supremacy Clause is the constitutional provision that federal law takes precedence over conflicting state laws (assuming, of course, that the law is constitutional) . California has not yet filed an answer to the DOJ’s lawsuit but any response will be sure to include a Tenth Amendment argument.

Tenth Amendment jurisprudence states that the federal government can enact laws but it can’t force (or “commandeer”) state officials to administer them. In Printz v. U.S., 521 US 898 (1997), Justice Scalia, writing the majority opinion in a close decision (the case was a 5-4 traditional conservative-liberal split) held that “Congress cannot compel the States to enact or enforce a federal regulatory program.” California can make the plausible argument (and likely winning one) that under the Printz ruling the federal government cannot force local law enforcement to assist in federal immigration enforcement. However, the Printz decision will likely only apply to SB 54. Whether AB 103 or AB 450 can survive federal judicial scrutiny is far from certain.

The concern for states that have legalized medical and adult-use cannabis activities, along with state-legal cannabis businesses, is that the DOJ’s Supremacy Clause argument can be made against a state’s lawfully regulated cannabis industry. Under the federal Controlled Substances Act marijuana is still a federally illegal Schedule I drug and that is the supreme law of the land. The conflict between federal law’s cannabis prohibition and the states in the U.S. that now regulate cannabis activities is not an issue that the U.S. Supreme Court has yet to rule on directly but it has been bubbling around the surface for some time now and that day will arrive soon enough — leave it to California to lead the way! Assuming it does, we explained in detail how a state might defend its cannabis programs here.

With respect to California state laws, we should also note that in February of 2017, California state Assemblyman Reginald Jones-Sawyer introduced AB 1578. Just like with SB 54, AB 1578 would prohibit state or local agencies from assisting the federal government in taking certain actions, except in this instance it’s cannabis activities instead of immigration enforcement. AB 1578 ended up stalled in the state legislature but ever since the rescission of the Cole Memo by U.S. Attorney General Jeff Sessions there’s been a push to reintroduce AB 1578.

Hopefully AB 1578 is revived, but if the federal DOJ is eager for a fight before that happens it doesn’t have to wait: the city of Berkeley has already fired the first shot. Last month, the Berkeley city council voted to prohibit city agencies from using resources in enforcing federal cannabis laws or providing information on cannabis activities. Because the underlying theme between SB 54 and the Berkeley resolution are the same–prohibiting local officials from assisting federal authorities in enforcing federal law–one would assume that the DOJ will let their immigration lawsuit make its way through the courts before going after Berkeley (or AB 1578, if it’s ever enacted). All of that said, the Trump administration continues to pursue a path that continuously defies logic, so why would it show restraint now?

The DOJ immigration lawsuit will likely find its way to the Supreme Court and although I highly doubt a majority of conservative justices would overturn Justice Scalia (a conservative icon to many) there’s no guarantee that the Supreme Court won’t find a way to somehow differentiate Printz from the DOJ lawsuit. This is definitely a case to follow and we’ll be sure to keep you updated on all developments.

As noted before in this blogHemp Industries Assoc. v. DEA, pending in the U.S. Court of Appeals for the Ninth Circuit, appeals the DEA’s final administrative rule creating a new drug code number for “marihuana [sic] extract,” defined as “containing one or more cannabinoids that has been derived from any plant of the genus Cannabis.”  Petitioners, a cannabis industry trade group and other industry participants, argue that DEA’s rule effectively reschedules CBD as a Schedule 1 drug under the Controlled Substance Act (CSA), in violation of the Farm Act of 2014, which allows the states to set up pilot hemp programs. The DEA counters that this rule does not restrict substances that were not previously controlled, but simply adjusts DEA’s methods for tracking substances that Congress put in Schedule 1.

On February 15, 2018, a Ninth Circuit panel of three judges heard oral argument. You can watch the argument here. Because federal appellate courts never issue decisions at oral argument, we won’t know how the court decides for several months. But watching the argument gives some clues to how the judges are thinking about this case.

Before you watch, consider first that this case is a challenge to a rule made by the DEA, a federal administrative agency exercising rule-making power expressly delegated to it by Congress. Under established law, the court must defer to the DEA’s exercise of this power. The court may set aside DEA’s rule only if it is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law.” The court’s review is narrow: it must simply determine whether the DEA articulated a rational connection between the facts found and the choice made. As long as the DEA’s decision was “based on a consideration of relevant factors and there is no clear error of judgment,” the agency’s action is not arbitrary and capricious.

Second, consider that there are many administrative procedures that must be followed before a petitioner can even ask for review of an agency rule. All rulemaking is open to public comment by any interested party. If you fail to weigh in at the rulemaking procedure, you may not get to complain in court. Also, the petitioner has to show particular identified harm that it will suffer because of the rule.

Third, keep in mind that lower appellate courts such as the Ninth Circuit will often (though not always) try to decide a case on the narrowest grounds possible. This means that these judges may choose to decide on a technicality or procedural issue, rather than reaching the merits of the claim. That could very well happen here.

Keeping these points in mind, observe that the judges ask the lawyers: isn’t this rule just a change in the numbering system used by DEA made in order to facilitate record-keeping and reporting activities? Of course, the DEA lawyer agrees, while the cannabis industry lawyer strongly disagrees. Also notice that the judges continue to press the cannabis lawyer about whether evidence supporting harm claimed to be suffered is found “in the record.” This is an important point, because courts of appeal are not allowed to refer to facts that were not brought up in the original proceeding– in this case, the rulemaking process. Finally, there is no discussion about whether de-scheduling CBDs is a good or a bad policy. That is not an issue raised by this case, and the panel will almost certainly not address this in its opinion.

It is also worth reading a brief filed not by the parties to this case, but by several members of Congress who are appearing as amici, that is, friends of the court, Their brief supports the cannabis industry group, broadly arguing that DEA had no authority to issue its rule. The amicus brief also broadly urges that the Farm Act of 2014 allows states to effectively legalize CBD sales. Although many of the amici were among those who voted for the Farm Act, this brief is unlikely to sway the judges, who will likely say nothing about what the Farm Act does or doesn’t cover.

Check back in a few months, when we will discuss the opinion of the panel. My guess is that the opinion will narrowly decide the case, perhaps on procedural grounds, but that there will be no controlling ruling on scheduling of CBDs, keeping this area of law as confusing as ever. Stay tuned.

marijuana lgbtq employmentThe Trump administration is known for its hostility to marijuana. It’s also known for its hostility to the LGBT community. In a huge blow to the Trump administration, the Second Circuit Court of Appeals ruled last Monday that employers cannot discriminate against employees based on sexual orientation.  Many states, including Oregon, Washington, and California have statutes explicitly prohibiting employers from discriminating against employees based on sexual orientation. The Federal Civil Rights Act (“the Act”) does not explicitly protect employees based on sexual orientation: instead, it only protects employees based on sex. Circuit courts across the country are taking up the issue of whether employees should be protected based on sexual orientation, and reaching different conclusions.

In 2010, Donald Zarda sued his employer, Altitude Express, Inc. alleging they had terminated him because he was gay. The federal district court ruled in favor of the employer, holding the Act did not protect employees based on sexual orientation. The case pitted the federal Equal Employment Opportunity Commission (EEOC) against the federal department of justice. The EEOC submitted a brief in support of Mr. Zarda, arguing the Act protects employees based on sexual orientation. The Federal Department of Justice (headed by our good friend, Mr. Sessions) submitted a brief supporting the employer, and arguing the Act did not extend to sexual orientation.

The Second Circuit overruled the lower court. Siding with Mr. Zarda in a lengthy, 69-page opinion, with multiple concurrences and 80 pages of dissents, it ultimately held that “sexual orientation is doubly delineated by sex because it is a function of both a person’s sex and the sex of those to whom he or she is attracted. Logically because sexual orientation is a function of sex and sex is a protected characteristic under [the Act] it follows that sexual orientation is also protected.” Makes sense to us.

Two other federal appeals courts recently have heard similar cases. The Seventh circuit determined discrimination based on sexual orientation was discrimination based on sex under the Act, while the Eleventh Circuit held the Act’s reference to sex did not encompass discrimination based on sexual orientation. The Supreme Court declined to hear the Seventh Circuit’s case, but now, with multiple circuits offering opinions on the issue, the Supreme Court may be persuaded to hear the Second Circuit’s case. If they do, let’s hope they get it right.

So why does this matter to cannabis businesses? Cannabis businesses are subject to both state and federal employment laws. If a cannabis business discriminates against an employee because of sexual orientation, the business could be in violation of both state and federal law. As we all know, Attorney General Sessions ripped up the Cole memorandum earlier this year. Without the memorandum, there is little guidance about when and where federal district attorneys will choose to enforce the Controlled Substance Act (CSA) against cannabis companies. Thus, compliance with state and federal regulations is more important than ever during this time. It is best to stay under the radar rather than drawing federal attention to your business by arguably violating federal laws—other than the CSA that is.

If you ever have questions about terminating an employee it is always best to consult an employment law expert first to ensure all basis are covered and no violations arise from the termination. If your company is not terminating an employee on the basis of sexual orientation, but you believe that the employee could make such a claim, it is crucial to consider and attempt to mitigate possible claims. Both state and federal laws tend to be very detailed when it comes to protection of employees. In unsettled areas of law, such as the employees and sexual orientation, prudence is advised.

marijuana prohibition
“Cannabis will eventually be legalized nationwide, but it is a lot more likely to occur in voting booths than in a court.” – Canna Law Blog, Jul 26, 2017

We’ve written extensively on a federal lawsuit filed by five plaintiffs against Attorney General Jeff Sessions challenging the constitutionality of the federal government’s continued classification of cannabis as a Schedule 1 drug under the Controlled Substances Act (CSA) (here, here, and here). While we were cautiously hopeful, the Judge dashed those hopes yesterday when he granted the government’s motion to dismiss the case, styled as Marvin Washington et. al. v. Jefferson Beauregard Sessions, III, et al.

In a nutshell, the plaintiffs sought a ruling that the continued classification of cannabis has no rational basis because cannabis clearly has a medical use. (Recall that the standard for Schedule I includes “no currently accepted medical use in treatment”). Although this is certainly true, it was not enough to win the day due to a few insurmountable and incredibly frustrating procedural hurdles.

Exhaustion of Administrative Remedies

Generally, parties must exhaust available administrative remedies before they can seek relief in federal court. The Judge found that these plaintiffs failed to exhaust an available remedy under the CSA: Interested parties can petition the DEA to reclassify drugs after an on the record hearing. 21 USC Section 811(a). If the parties receive an adverse ruling, they can seek judicial review of the DEA’s determination in an appropriate state circuit court.

Because the plaintiffs failed to follow this administrative procedure, the Court determined that dismissal was warranted.

Precedent Requires Dismissal

Although the case was dismissed for failure to exhaust, the Judge’s order states that “[e]ven if the Court were to reach the merits of plaintiffs’ rational basis claim, I would be bound by precedent to reject it.” The Judge then notes that the Second Circuit has upheld the constitutionality of the CSA, which is binding on the Judge, as has every other court that has reviewed it.

The Judge states that “[e]ven without the benefit of precedent, it is clear that Congress has a rational basis for classifying marijuana in Schedule I, and executive officers in different administrations have consistently retained its placement there.” In other words, because of potential harm caused by cannabis consumption, it can’t be said that Congress’ initial decision to classify cannabis as Schedule I was irrational at the time.

Classification Cannot be Unconstitutional if there Remains an Administrative Option to Modify Classification

Tying back to the exhaustion of remedies issue, the Court further explains that “any constitutional rigidity is overcome by granting the Attorney General, through a designated agent [the DEA], the authority to reclassify a drug according to evidence before it and based on the [Schedule I criteria]. There can be no complaint of constitutional error when such a process is designed to provide a safety valve of this kind.”

It must be incredibly frustrating for these plaintiffs, as the Judge at the hearing and in the order to dismiss recognized that cannabis has an accepted medical use. How then, can it remain as a Schedule I drug which requires a “high potential for abuse, no currently accepted medical use in treatment, and a lack of accepted safety for use of the drug under medical supervision”? Unfortunately, this Judge believes his hands are tied.

The Equal Protection Claim Based on Racial Animus was Also Dismissed

In connection with this lawsuit, the Cannabis Cultural Association (CCA), brought claims on behalf of its members that the scheduling of cannabis violates the Equal Protection Clause because it was passed with racial animus. The Judge also dismissed this claim on procedural grounds, holding that the CCA and its members did not have standing to bring this claim because a favorable decision was unlikely to redress the CCA members’ injuries, which were based on the negative effects of previous cannabis convictions. These plaintiffs failed to establish that a favorable decision would undo their prior convictions.

In looking at the merits, the Judge also found insufficient evidence that Congress originally included cannabis as a Schedule I drug because of racial animus. Although the plaintiffs pointed to numerous statements made by the Nixon administration to that effect (see here for a particularly egregious example), the Judge said that these statements would not support a finding that Congress acted with discriminatory intent.

As we said when this case was filed, “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.” So get out there, vote, and hold your representatives accountable. Congress has to act.

California marijuana banking
A public marijuana bank is a red herring.

It seems like every state in its own way has tried to grapple with a state-legislated solution to the notorious banking issue across the cannabis industry. And now California is going to study its own banking solution that, in all reality, probably isn’t going to go anywhere.

California is predicted to take in $7 billion by 2020 because of adult-use legalization. Its licensed operators have nowhere reliable to put all of that cash, and you can be sure that the California Department of Tax and Fee Administration doesn’t want those operators trucking hundreds of thousands of tax dollars to Sacramento. Additionally, the cash epidemic was complicated by the fact that Attorney General Sessions’s rescission of the 2014 Department of Justice (DOJ) Financial Crimes memo, which allowed financial institutions to bank marijuana businesses in states with “robust regulation”, in concert with the 2014 FinCEN guidelines. Thankfully, those guidelines still exist, but the Department of Treasury is currently looking at them in the wake of Sessions’s decision.

Back to California.

This month, Treasurer John Chiang announced that his office (along with the California State Attorney General’s office) would undertake a two-part feasibility study around forming a state-backed bank to serve California cannabis businesses. In his office’s November 2017 report, Chiang admitted that creating and supporting a state cannabis bank would be a “formidable” task and that the “definitive solution” is for the federal government to either legalize cannabis or for Congress to create some kind of legal safe harbor for financial institutions that bank the industry. Nonetheless, Chiang’s report proposed two options for a state cannabis bank:

  • “A public institution that would either (1) finance public infrastructure and expand banking for underserved groups, including the cannabis industry; or (2) take deposits, make loans, and provide other services primarily to cannabis producers, distributors, retailers, and related businesses.” Or,
  • “A privately owned bankers’ bank, supported by the state, which would not take retail or small business deposits, but instead provide financial services, compliance services, and technical assistance to financial institutions serving the cannabis industry.”

Chiang’s report goes into great detail about the pros and cons of choosing either a public financial institution or the banker’s bank model. The report runs the gamut of concerns over federal asset forfeiture risks, industry volatility, special problems with closed loop banking and the Federal Reserve, public costs, profitability, capitalization, federal and state regulatory issues, the inability to secure federal depository insurance, and various and complicated ownership structures over either model. Overall though, both models sound nearly impossible to create, capitalize, and sustain due to exiting federal regulations that are insurmountable in every way, because “marijuana” is still a Schedule I controlled substance.

While we appreciate the state’s desire to find a banking solution for cannabis operators, a state-owned, operated, and financially backed bank would have a gargantuan task just to get started–just ask Massachusetts and Colorado. Federal deposit insurers want nothing to do with a bank that is focused on marijuana businesses, regardless of whether it is state-owned. The Federal Reserve also seems unlikely to grant a master account to any newly chartered financial institution whose reason for being is to serve marijuana businesses. Without that master account, the bank wouldn’t have access to the federal money transfer system, a key aspect of banking.

California would be wise to examine state-legal marijuana banking in the Northwest. Washington and Oregon boast a small but stable number of banks and credit unions that provide services to state-licensed marijuana businesses. Private banking in those jurisdictions grew slowly as those states developed their regulations, and the vast majority of rules are promulgated by state government.

California has only just started, and banks that would serve marijuana businesses there would only now be in a position to start working with California cannabis operators. Additionally, with the level of control that California regulators allow local authorities, marijuana businesses in different, local jurisdictions still face significantly different hurdles from one another. It is more challenging for institutions in California to keep up with the myriad of state and local rules that have been promulgated, most of which are still untested and with new ambiguities being found daily.

Now that the 2014 DOJ Financial Crimes enforcement memo is gone, it’s anyone’s guess as to what Treasury will do going forward and whether increased MAUCRSA regulation will matter to banks and credit unions in California. If banks are going to participate, regulations need to be significant enough that banks believe that they are as “robust” as the Treasury guidance requires, but simple enough that a bank can feel confident about its ability to judge whether or not one of its account holders is complying with state law.

Ultimately, a public bank of any kind is a red herring for the cannabis industry. Instead, existing financial institutions need to be sufficiently supported by the states so that they feel comfortable taking on the risk of servicing cannabis accounts.

Editor’s Note: A version of this post previously ran in the author’s Above the Law column.