hemp cbd fda securities curaleaf litigation

Just a few weeks ago, Curaleaf Holdings (“Curaleaf”) announced that it would pay $875 million, mostly in stock, to acquire a Chicago based cannabis company, Grassroots. (See here.) This followed news in May that Curaleaf had reached a nearly $1 billion all-stock deal with one of Oregon’s biggest cannabis companies, Cura Partners, Inc. (See here).  These deals made Curaleaf one of the world’s largest marijuana companies, if not the largest.

Not much later, Curaleaf found itself on the wrong side of the FDA with respect to health claims Curaleaf had made about its CBD products. As this CNBC report explains,

The FDA told the cannabis company earlier this week that it was ‘illegally selling’ CBD products with ‘unsubstantiated claims’ that the products treat cancer, Alzheimer’s disease, opioid withdrawal, pain and pet anxiety.”

The article explains that in response to the FDA warning letter, Curaleaf (wisely) scrubbed its website and social media accounts of health claims about its CBD products. How and why a company of this size was making these types of claims in the first place, however, is truly puzzling.

We have written extensively about the FDA’s increasing intolerance for companies making “over the line” health claims about CBD and warned that retailers ought to be concerned about selling hemp-derived CBD in cosmetics. Yet everywhere our CBD business lawyers go, including in our Washington, Oregon and California offices, we see products extolling the benefits of CBD for nearly any kind of ailment – whether it affects adults, children, or pets. Although the FDA’s enforcement against businesses making health-related CBD claims has not been universal, that doesn’t make its warning letters without force as Curaleaf has learned. (Even if consumers don’t appear overly concerned.)

As a result of its claims about CBD and the subsequent warning from the FDA, Curaleaf now finds itself on the wrong side of a class-action securities complaint that was filed on August 5 in the Eastern District of New York, Michael Skibbe v. Curaleaf Holdings, Inc. et al., No. 1:19-cv-04486. The complaint alleges violations of Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated by the SEC. (Feel free to email me if you’d like a copy of the lawsuit).

The gravamen of the lawsuit is that Curaleaf violated federal securities law by making knowingly making materially false and misleading statements to the investing public that artificially inflated the market price of Curaleaf securities. The complaint quotes liberally from Curaleaf’s press releases and audited financial statements concerning its line of hemp-based CBD products.  These include statements such as:

CBD has been shown in initial third-party studies to support a pet’s overall wellness including the potential to help manage pain and anxiety.

Our human customers are already reaping the benefits of CBD with Curaleaf Hemp. The same care and research went into the development of Bido. We are excited to be extending our high quality, trusted products to pet owners,” said Joe Lusardi, President and Chief Executive Officer of Curaleaf. “The launch of Bido is just one more way we are the most accessible cannabis company in the U.S.”

These statements and others drew the ire of the FDA. The FDA letter warns Curaleaf that some of the CBD products it sells are classified as “drugs under section 201(g)(1) of the FD&C Act, 21 U.S.C. 321(g)(1), because they are intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease and/or intended to affect the structure or any function of the body.” The FDA letter goes on to say that Curaleaf is wrongly marketing CBD products as “dietary supplements . . . because they do not meet the definition of a dietary supplement under sections 201(ff)(3)(B) and 201(ff)(2)(A)(i) of the FD&C Act, 21 U.S.C. 321(ff)(3)(B) and 321(ff)(2)(A)(i).” And finally, the FDA letter takes issue with Curaleaf’s marking of “Bido CBD for Pets” line of products.

The FDA letter, says the complaint, caused damage to investors when shares of Curaleaf fell 7.27% on July 23, 2019. The plaintiffs now seek to represent a class of “all person other than defendants who acquired Curaleaf securities” between November 18, 2018 and July 22, 2019 with damages to be calculated at trial. Will this lawsuit mark the end of Curaleaf? Probably not, but my guess is that Curaleaf won’t get rid of it for pennies.

Once again:  regardless whether your company is publicly traded, your company is at risk if you are making claims about the therapeutic value of CBD products. Setting aside Curaleaf, companies making health claims about CBD may be subject to claims arising under state laws prohibiting unfair and deceptive trade practices, or under the federal Lanham Act for false and misleading advertising, or even run-of-the mine personal injury claims allegedly caused by your product.

So ask your hemp-CBD regulatory attorneys to review your marketing and merchandising materials before you find yourself on the wrong side of a lawsuit. And take their advice! Curaleaf probably wishes it had done exactly that.

We’ve followed and written extensively about trademark litigation in the cannabis space for the last several years, which you can read about here:

The latest case in this string of cannabis trademark litigation was filed in the Central District of California on July 19, 2019 by Mondelez Canada Inc. (“MCI”), the owner of the Sour Patch brand of candy, against Stoney Patch, maker of cannabis-infused candies in California. In the opening sentence of its complaint, Mondelez notes:

There has been a growing trend among makers of cannabis products, including edible products infused with tetrahydrocannabinol (“THC”), to market their products by copying and misappropriating the colors, flavors, names and packaging of popular snacks and candies.”

As evidenced by the list of similar cases above that we have written about, we can’t say that we disagree with this assertion, although we’ve seen these kinds of product imitations since the early days of medical marijuana as well. The only difference is that with the growing legitimacy of regulated cannabis, big companies like MCI are starting to pay attention to what’s happening in the market.

One novel component of the Stoney Patch case is that MCI alleges that Stoney Patch is actually in violation of California state law by selling candies that look like the SOUR PATCH brand of gummy candies because these candies are marketed to be appealing to children, something that is prohibited under the Medicinal and Adult Use Regulation and Safety Act (“MAUCRSA”):

In complete disregard of California’s law, of concerns for public safety, and of MCI’s rights, Defendants intentionally have designed their THC gummy products to copy MCI’s long-established SOUR PATCH brand of gummy candies. Defendants have adopted the confusingly similar brand name STONEY PATCH, have copied the look of MCI’s actual product, and have copied the look of the packaging that has long been associated with MCI’s SOUR PATCH candies. Such actions have the effect of making the THC gummy products sold by Defendants more appealing to children and likely to be mistakenly consumed by children. Further, such actions are antithetical to the business and reputation of Plaintiff.”

Interestingly, it is unclear whether Stoney Patch products are actually manufactured by a licensed California cannabis company. Apparently, MCI has had a tough time tracking down the entity that manufactures the Stoney Patch products, noting that the packaging of the products does not designate a maker, nor do they seem to have a website beyond their Instagram page. By not designating a licensed manufacturer on the packaging, the maker of the Stoney Patch products are in violation of California cannabis manufacturing regulations.

MCI seeks to prevent Stoney Patch from unfairly trading on the goodwill of the SOUR PATCH brand and from tarnishing MCI’s intellectual property rights, and seeks damages and injunctive relief for willful trademark infringement, dilution, and unfair competition under the Lanham Act as well as California state law. The Complaint cites that Sour Patch Kids have come “in a distinct bag that has a yellow center with green dabs at the edges that allow the yellow to peak (sic) through … [with] the words SOUR, PATCH, and KIDS stacked one atop the other in the colors green, orange, and red, respectively … [and] the slogan “Sour then Sweet” … in the top left.” The packaging further shows the appearance of the actual gummy kids around the outside of the packaging. Stoney Patch’s packaging is “virtually identical,” Mondelez alleged. It follows the same color scheme, has the words STONEY and PATCH stacked atop the other in green and orange, and the slogan “Sour & Sweet then Stoned” in the top left. Instead of gummy kids around the outside of the packaging, there are marijuana leaves. The product itself is also identical, except that the humanoid gummies have one eye instead of two. Based on the evidence in the complaint, we think MCI’s claims are strong. The images of the allegedly infringing packaging make this pretty clear:

 

 

 

 

 

 

 

 

 

This is probably a good time for a reminder that parody is not a defense to trademark infringement in this type of commercial context. There is a line between using another’s mark to make political or social commentary and using another’s mark to gain recognition and increase sales of your own product. We’ve written before about cannabis companies that have attempted to spoof well known marks and have paid a price for it. Hershey’s, for example, initiated multiple lawsuits against companies that branded cannabis-infused chocolate products with names such as “Mr. Dankbar,” “Reefer’s Peanut Butter Cups,” “Hasheath,” and “Ganja Joy,” all meant to imitate their non-cannabis Hershey’s counterpart. These cases ultimately settled out of court.

 

 

The problem with these types of “parodies” is two-fold. The first concern is over likelihood of confusion, and the second pertains to dilution or tarnishment. If there is sufficient similarity between the parody and the original mark, the court will find infringement based on a likelihood of confusion. This means that the marks are similar enough to cause consumer confusion as to the source of the product (and confusion among children as to which product is candy and which is cannabis), and big brands obviously do not want other companies piggybacking off the success of their trademarks.

The second issue, dilution or tarnishment, is typically a fairly weak means of attacking a trademark parody. However, because of the federally illegal status of marijuana, arguing that a cannabis-infused version of a popular product “tarnishes” a famous brand is not a stretch. MCI, which markets its products to children, does not want consumers thinking of “Stoney Patch” every time they buy SOUR PATCH products.

A First Amendment argument for parody is always easier to make in a non-commercial context, where a parody of a mark is not used in connection with any goods or services. This makes for a stronger argument that the parody is only meant to express an idea, and not to generate profit based on brand recognition. Second, the degree of similarity between a “parody” and the original mark makes a big difference. The more similar the marks, the more likely it is that the court will find infringement based on likelihood of confusion. Third, tarnishment is a much bigger issue in the context of marijuana branding than in most other industries, and may be a way for established companies to attack infringing marks. And finally, even if you think you have a strong argument for defending your mark on the basis of parody or First Amendment grounds, the cost of litigating with corporations like MCI or Hershey’s could very well put you out of business, even on the off chance that you prevail.

Having already defended some of these cases, we can tell you it is just not worth the risk. Take this as another gentle reminder to stay away from using other companies’ branding, even if you think you are doing so as some sort of parody.

cbd utah multilevel marketing

Utah is a unique state for a variety of reasons, but recently it gained additional notoriety because the “world leader in essential oils” (based on global revenue), Young Living Essential Oils, announced it acquired Colorado-based Nature’s Ultra. Nature’s Ultra owns more than 1,500 acres of hemp farms in Colorado and produces “natural, organic, vegan approved, and gluten free” CBD oil with 0.0% THC. 0.0% THC is the key. Why? That is hard to explain without providing a little background about the “clean living” culture in Utah, the MLM (multi-level marketing) essential oil companies that call Utah home, and their drive for producing unadulterated essential oil products to compete with each other in the global marketplace.

Young Living’s acquisition of Nature’s Ultra is a big deal for Young Livng’s more than three million worldwide distributors. It is also a big deal for doTERRA, which is Young Living’s direct competitor (archrival is not an understatement) in this niche nutraceutical market, which also has more than three million distributors worldwide. To put it simply, in the world of essential oils, these market leaders vie for dominance as the company that can produce the purest, basest “essence” of oil from a living plant source. All plant sources are nearly sacred to these companies. Their oils comes from a variety of sources: the peel of a citrus fruit like lemon or orange, the leaves of an herb like peppermint or oregano, or from other parts of a plant like bark (cinnamon) or resin (frankincense). And in the case of Young Living, its CBD oil now comes from hemp plants.

Young Living and doTERRA have battled for more than a decade for market dominance. Young Living has the longer history. It was formed in 1993, and doTERRA’s owners are an offshoot of Young Living, comprised of former Young Living employees who formed doTERRA in 2008. The two companies’ global headquarters are only ten miles apart in Utah County. Each company has taken distinct but similar marketing positions. Young Living touts its products as meeting its “stringent Seed to Seal® Standards”, while doTERRA points to its CPTG® (certified pure therapeutic grade®) standard. There is currently no accepted objective industry standard. Both companies use products sourced from around the world. Both decry the other’s essential oils as less pure than the other. They are not the only essential oil companies in the world, but they are two massive forces in Utah and beyond.

But Young Living and doTERRA are not just essential oil companies. They are MLMs, each with an army of evangelist independent distributors (not employees!) who use their company’s products, train their own downline distributors, and are fiercely loyal to their brand. Utah is the unofficial MLM mecca of the world. Over 15 MLMs have global headquarters in Utah County (yes, just in Utah County). Utah MLMs are actively working to rebrand themselves because the term MLM has, after 30 years, become unpopular in Utah (or in the local vernacular, it has become a hiss and a byword). I recently learned from two midlevel executives at a Utah MLM company that MLMs no longer refer to their industry as MLM; they are now “direct-selling companies.” To me, it sounds a little like po-TAY-to vs. po-TAH-to, but as a student of marketing and branding, I understand the drive to continue to innovate, even if that innovation is a lateral move rather than a forward or upward move.

What does all of this mean for the world of direct-selling essential oils, especially CBD oil? It means that Young Living is about to deploy its massive army of worldwide distributors into our households and onto our social media streams to teach us the virtues of CBD oil. And it means doTERRA’s equally large army of distributors will likely follow suit. And CBD oil-derived products will be appearing with regularity in products available from other Utah MLMs like NuSkin, USANA, Nature’s Sunshine, Neways, and LifeVantage. This will have not just national but international implications because these companies operate in dozens of countries throughout the world through their distributors.

Utah has emerged as a dark horse in the business world for several reasons, but I cannot go into all of them in this post. As we reported last year, Utah joined the ranks of states in voter-approved (and legislature modified) legislation authorizing medical marijuana (but cannabis sounds better for historic and linguistic reasons). This stunned many outsiders (including some of my blogging colleagues) who are only tangentially familiar with Utah’s infamous notoriety as a state with a majority populace that is adverse not only to illegal drugs but also alcohol, tobacco, tea, and coffee use. But to many Utahns (and quasi-Utahns like me who have family roots in Utah or attended school in Utah), the move to legalize medicinal marijuana (not for smoking, only for ingestion, vaping, and topical application) fits perfectly within the general population’s mantra of seeking out the best things, researching to understand them, and taking the positive while abstaining from the negative (which is why smoking medical cannabis is banned). In sum, if there are positive applications of marijuana, like the production of CBD with less than 0.3% THC or – better yet – with 0.0% THC, then the majority of Utahns are more likely to embrace those “healthy” applications. Utahns are, like most humans, compassionate and almost assiduously seek to relieve the suffering of others by whatever means they can. First it will come through 0.0% CBD oil; second through medical marijuana used in its near-purest form for greatest effect and less chance of it being used merely for recreational purposes.

So Young Living’s acquisition of Nature’s Ultra is a logical step in its business model, and it is also a logical step for a company headquartered in Utah. Thanks to the passage of the 2018 Farm Bill, hemp and hemp-derived CBD oil can now generally be transferred across state lines (caveat, caveat, caveat). Colorado had a years-long head start ahead of Utah, so rather than try to make the Utah desert bloom with hemp plants, Young Living has taken a logical shortcut in this recent acquisition. The question remains of what steps doTERRA will take to match strides with Young Living. doTERRA’s distributors have naturally been inquiring when doTERRA will launch CBD oil so that those distributors can market the next best thing to their downline distributors and customers. But doTERRA has no publicized interest in CBD oil. Why not? That is a topic for a future post. In the meantime, the doTERRA distributors will have to source their CBD oil from their competitors.

smokable hemp

Last month, South Carolina’s Attorney General Alan Wilson’s office issued a letter to the Chief of the state’s Law Enforcement Division. The letter responded to a number of questions raised by the Chief regarding hemp. South Carolina, like many other states, regulates the cultivation, handling, and processing of hemp. It distinguishes between raw hemp and “hemp products.” Hemp products in South Carolina are defined as:

All products with the federally defined THC level for hemp derived from, or made by processing hemp plants or hemp plant parts, that are prepared in a form available for commercial sale, including, but not limited to, cosmetics, personal care products, food intended for animal or human consumption, cloth, cordage, fiber, fuel paint, paper, particleboard, plastics, and any product containing one or more hemp-derived cannabinoids, such as cannabidiol. Unprocessed or raw plant material, including nonsterilized hemp seeds is not considered a hemp product.

One question presented by the Chief was whether “merely placing raw plant material in a package constitute processing hemp into a hemp product?” The South Carolina Attorney General determined that it did not and deferred to law enforcement as to whether a given product is unprocessed, raw hemp which can only be possessed with a license from the South Carolina Department of Agriculture, or a processed hemp product.

According to a recent report by Greenville News, police in South Carolina are seizing smokable hemp products in South Carolina.  On July 13, Anderson County deputies seized 2 pounds of hemp from Top Hat Tobacco. No one was charged but the police report indicated that deputies were investigating the illegal sale of marijuana. Anderson County deputies performed a similar seizure at a convenience store on July 12.

Greenville News contacted Robert Kittle, a spokesman for the South Carolina Attorney General, who stated that “nothing in our opinion addresses CBD Hemp Flower specifically, so whether [its sale] is illegal without a license is a question of fact that would have to be determined by law enforcement.” A spokeswoman for the South Carolina Law Enforcement division, when asked whether her agency was confiscating smokable hemp in the state said, “we feel the opinion speaks for itself.” However, the Greenville County Sheriff’s Office said that it was not seizing hemp flower from stores.

South Carolina may not have explicitly banned the sale of smokable hemp, but the sale of any smokable hemp in South Carolina comes with some risk. According to the Greenville News, the smokable hemp sold at Top Hat “is typically heated, cured, and dried by licensed processors before it’s sold to stores.” Arguably, the sale of those products were not the unlicensed sale of raw hemp but rather the sale of hemp products. The situation in South Carolina is murky at the moment.

Other states have grappled with whether to allow any smokable hemp products. Here is a non-exhaustive list of some states that address the issue of smokable hemp:

  • In June 2019, Louisiana’s Governor signed House Bill 491 into law which states that “[n]o person shall process or sell [a]ny part of hemp for inhalation.”
  • Kentucky’s hemp regulations prohibit the sale of hemp cigarettes; hemp cigars; chew, dip or other smokeless material consisting of hemp floral material; and hemp leaf material or floral material teas.
  • North Carolina’s legislature has been debating whether or not to criminalize smokable hemp in Senate Bill 315, which has yet to make it to the Governor’s desk.
  • In Indiana, a group of retailers who sell CBD products filed a lawsuit in the Southern District of Indiana to declare Indiana’s law making it illegal to manufacture, finance, deliver, or possess  “smokable hemp” under state law.

The mismatch of laws, regulations, and policies on smokable hemp make it difficult for businesses to sell smokable hemp products across state lines. If you operate in this space, you must keep track of each state’s position on smokable hemp. Failure to do so could result in the seizure of products and even criminal charges.

oregon hemp litigation lawsuit

As we predicted, litigation concerning hemp production continues to rise. At this point, it is the rare week that we do not see at least one new lawsuit on the state or federal docket– and that is just in Oregon. Given the extraordinary growth in hemp licensure and cultivation nationwide, it seems the courts will have their hands full for the foreseeable future with hemp industry litigation.

This post concerns a contract to purchase between 9,000 to 14,000 pounds of industrial hemp at $50 per pound. The Oregon state-court lawsuit, Boring Hemp Company v. Natural Health Resources, LLC, is simple enough: Natural Health, the purchaser-defendant,  picked up a load of industrial hemp from the producer’s (Boring Hemp) warehouse. Per the agreement, the purchaser transported the hemp to a certified scale in Oregon where the hemp was weighed – the load net weight was 10,240 pounds.  The terms of payment were “net 30 days” with a ten-day grace period and a 10% fee added to the balance if payment was not made within that period.  The complaint alleges the purchaser has not made any payments to the producer and the producer seeks to recover approximately $560,000 under breach of contract and unjust enrichment theories.  Run-of-the-mine stuff.

What is worth mentioning is the one-page “Hemp Purchase Agreement” between the parties. The agreement does not require the industrial hemp contain a certain percentage of cannabidiol (CBD). The agreement does not place any limitation on the moisture content of the hemp (an important term when you pay by the pound). The agreement does not make any reference to THC content, or “total THC” content, nor any other of the terms that hemp producers and purchasers ought to be thinking about such as testing, pesticide content, and so forth.

To be sure, a better contract may not have prevented non-payment for the hemp (though a better contract may have provided some form of security or other terms to lessen the chance that the purchaser simply decide not pay the producer). But we continue to be somewhat alarmed at the poor quality of the hemp production contracts we see.  For further reading on hemp production contracts, see below – and note that it may be no coincidence that the hemp contracts ending up in court are the poorly drafted ones.

Not only do many of the contracts we see lack what ought to be basic provisions, many hemp production contracts fail to account for the evolving federal and state regulatory environment – including those governing the growing, handling, processing, testing, and the manufacturing of hemp and CBD products. Feel free to email me if you’d like a copy of the complaint.

delaware cannabis marijuana hemp

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

In light of these legislative changes, we are presenting a 50-state series analyzing how each jurisdiction treats hemp-derived cannabidiol (“Hemp-CBD”). Each Sunday we will summarize a new state in alphabetical order. So far, we have covered Alabama, Alaska, Arizona, Arkansas, CaliforniaColorado, and Connecticut. This week we turn to Delaware.

In 2014, Delaware passed its Industrial Hemp Research Act (the “IHRA”). Pursuant to the IHRA, “Industrial hemp” is defined as:

the plant Cannabis sativa L. and any part of such plant, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.

In line with the 2014 Farm Bill, the IHRA allows the Delaware Department of Agriculture (“DDA”) to cultivate and certify institutions of higher education—not individuals or businesses—to cultivate industrial hemp for agricultural or academic research purposes.

However, about a year ago, the state legislature enacted Senate Bill 266, which provided some critical updates to the IHRA. SB-266  notably authorizes the DDA to adopt regulations to permit industrial hemp cultivation for broader purposes than just agricultural or research purposes—if that cultivation were consistent with federal law. According to the DDA, the hemp pilot program requires operators to partner with the Delaware State University and that “[p]roduction of hemp for research purposes is limited to 10 acres per approved operation.”

Critically, SB-266 hasn’t yet allowed for commercial cultivation. According to the DDA, commercial cultivation won’t be allowed until the USDA issues its own regulations for hemp production plan review:

When USDA re-opened following the shutdown, any plans that had been submitted by states were not approved and before submitting plans, states were instructed to wait for regulatory guidance from USDA regarding the 2018 Farm Bill and hemp production. Furthermore, for the 2019 planting season, the 2018 Farm Bill provides states and institutions of higher education the ability to continue to operate under the authority of the 2014 Farm Bill.

This hold from USDA means that no commercial production of hemp will be able to take place in Delaware for 2019. Growers can legally produce hemp in affiliation with an institute of higher education or state department of agriculture.

As first reported by Marijuana Moment, the USDA’s regulations should be released tis month.

In spite of this, in application materials for the hemp research program, the state notes:

The program authorizes growers to work with permitted institutions of higher education to gain knowledge of any aspect of hemp cultivation, harvesting, processing, marketing, or transportation of hemp for agricultural, industrial, or commercial purposes.
. . .
Hemp may not be grown in Delaware for general commercial activity, only as part of a research program; however, growers participating in the program are able to sell their crop if all research requirements are met.

In other words, while general commercial sales won’t be allowed, the DDA apparently views commercial sales for research purposes may be permissible. To that end, the DDA publishes an application for hemp processors on its website which states: “A Processor Registration is required for processing hemp in Delaware. Processing means to treat or transform harvested hemp from its natural state for distribution in commerce.”  The application also states:

Please Note: The Delaware Department of Agriculture cannot advise that a viable market will exist for any processor of hemp to sell their crop. The Delaware Department of Agriculture does not hold any responsibility for ensuring that an end market for hemp or hemp products exists and does not take any responsibility for any losses that may be incurred by the processor.

For now, that’s the state of the law. DDA’s application materials for the hemp research program makes clear that it intends to open up for commercial cultivation when the USDA allows it to, so stay tuned for further updates.

corey booker marijuana cannabis

Each Saturday, we have been running a series of blog posts that take a close look at each of the Democratic Party candidates for President in 2020. We examine each candidate’s historic approach to marijuana law and policy, and we also canvas their current respective stances on marijuana.

Over the past five weeks, we covered Joe BidenBernie SandersKamala Harris, Elizabeth Warren and Pete Buttigieg. Today, we turn to Corey Booker, Senator from New Jersey.

Grade: A+

Stance on marijuana: Cory Booker has a long and storied pro-cannabis history and he has made legalization an important part of his criminal justice reform platform. He is an advocate for legalization, both through his legislative action in the Senate and his words on social media. As stated on his website, he plans to “decriminalize marijuana, expunge records, and restore justice to individuals and communities that have been devastated by the War on Drugs.” It is unclear whether his use of “decriminalization” rather than “legalization” in this statement is meaningful since his rhetoric and his legislative history otherwise demonstrate that he strongly favors legalizing marijuana.

History: In 2014, Booker kicked off his career in the Senate with an issue statement on criminal justice reform that advocated for decriminalizing marijuana. In 2015, Booker co-sponsored the CARERS Act which would reschedule marijuana and protect states who have legalized.

Booker has introduced and sponsored numerous bills aimed at criminal justice reform. In 2018, Booker pushed for the inclusion of sentencing reform in the bi-partisan First Step Act, which was later signed into law. This included reducing the minimum sentences for certain non-violent drug crimes. This past March, Booker followed up the First Step Act with the Next Step Act. If passed, this new bill would reduce minimum sentences for nonviolent drug crimes, eliminate the disparity between the penalties for crack and cocaine, and decriminalize marijuana (and expunge criminal records of marijuana related charges).

Back in 2017, Booker specifically addressed the legalization of marijuana by introducing the Marijuana Justice Act to the Senate in 2017. If passed, the bill would not only decriminalize marijuana at the federal level, it would also expunge records of past marijuana-related convictions. In an interview this past May, Booker explained that the bill had both “carrots and sticks” to encourage states to address inequities in the enforcement of marijuana laws. Most notably, the bill would punish states that do not legalize marijuana and that are determined to disproportionately arrest certain populations (specifically minorities and low-income people) for marijuana charges.

When the Marijuana Justice Act was first introduced in August of 2017, Booker was its sole sponsor. The bill is now co-sponsored by five other presidential candidates. Booker’s bill largely reflected the American public’s increasing support for the legalization of marijuana, but he deserves credit for shaping the marijuana platforms of his fellow candidates.

Conclusion: Booker receives an “A+” grade. From the beginning of his career in the Senate, Booker has dedicated substantial effort towards legislation focused on criminal justice reform, including the legalization of marijuana. He is not only an outspoken advocate of legalization but he has taken the lead on legislation to reform marijuana laws. When it comes to cannabis, there is no better presidential candidate than Cory Booker.

oregon hemp total thc import export

A few weeks ago, we explained what Oregon’s “total THC” testing requirement is and why it matters from a contractual point of view. Today, we further explore this issue and discuss how it is affecting industry players’ ability to export and import hemp and hemp products to the Beaver State.

Back in 2018, Oregon law makers passed Senate Bill 1544 (later codified in ORS 475B),  which prohibits the exportation and importation of marijuana items in the state. “Marijuana items” means “marijuana, cannabinoid products, cannabinoid concentrates and cannabinoid extracts”, and includes “industrial hemp products and commodities that contain more than 0.3 percent tetrahydrocannabinol” (emphasis added).

Although the statutory language does not define “tetrahydrocannabinol,” it provides that the testing standards and processes addressed in the statute must comply with those adopted by the Oregon Health Authority (“OHA”).

The OHA testing rules are codified in OAR 333-007-0010 et seq.. Pursuant to OAR 333-007-0200(3), the concentration of THC permitted must take into account both the amount of Delta-9 THC in the product and the amount of tetrahydrocannabinolic acid (“THCA”) that if heated would convert THCA into THC.

As you know if you have been following our blog for a while, the Oregon Department of Agriculture (“ODA”) updated its testing rules to align with those adopted by OHA. Specifically, the ODA testing rules provide that finished hemp products or commodities, such as industrial hemp for human consumption, hemp items, usable hemp, and hemp cannabinoid products, must be sampled, tested, and reported in a manner consistent with the OHA’s marijuana sampling and testing rules. In addition, the ODA rules state that “[a] registrant may not sell an industrial hemp product that contains more than 0.3 percent total THC to a consumer….” (Emphasis added).

Accordingly, the importation and exportation by ODA registrants of hemp products and commodities exceeding 0.3 percent total THC is prohibited under Oregon law. But, according to the language of ORS 475B, ODA registrants are not the only ones that are barred from importing or exporting these products; “any person” must comply with this requirement.

This is problematic for many reasons.

First, requiring the total THC concentration not to exceed 0.3 percent is harmful to growers because it drastically limits the type of hemp strains they can cultivate. Limiting the strains with which growers may work creates an undue burden on an already challenging activity and places cultivators in a worse economic position than those in states that only require a Delta-9 THC compliance testing – without going into too much detail, it is easier to comply with a Delta-9 testing requirement.

Second, by prohibiting the exportation and importation of hemp and hemp products containing more than the 0.3 percent total THC, Oregon is reducing the number of hemp business opportunities within the state. Oregon growers and producers whose products exceed this THC limit, but satisfy the Delta-9 compliance testing, do not have the option of selling their products to states that have adopted the less stringent testing requirement. Also, out-of-state business players whose products meet the Delta-9 testing requirement are barred from entering the Oregon market.

Although Oregon has not taken enforcement actions regarding the importation and exportation of hemp and hemp product that contain more than 0.3 percent total THC, it is critical for hemp and CBD stakeholders in the state but also around the country to understand this issue and be cognizant of the fact that Oregon may not be, after all, the hemp-friendly state we all assumed it was.

foreign ownership investment cannabis

Our cannabis business attorneys see more and more deals where foreign individuals or companies want to invest in or acquire licensed cannabis businesses. It’s often easy for foreign companies to assume that because cannabis is state-lawful, it is similar to any other investment. This couldn’t be further from the truth. Even for local companies, the cannabis industry is much different from any other industry.

But for foreign companies, the cannabis industry is filled with pitfalls and potential liabilities. Many of these can be resolved if foreign investors understand and prepare for the issues ahead of time. Below, I walk through some of the more pertinent issues that our cannabis attorneys see in deals with foreign investors on a fairly regular basis.

#1 Residency Requirements

One of the biggest problems for foreign investors is states that have residency requirements. Washington State, for example, requires that all cannabis business owners be residents of the state. An investment into or acquisition of a Washington-based cannabis company that renders foreign citizens (or even out-of-state) owners may jeopardize the license.

#2 Differences in Laws Between Jurisdictions

Another potential problem for foreign investors is the difference in laws in the US and their home countries. State-lawful cannabis activity here may still be a crime in a foreign investor’s home country. Even if it’s not, there may be a host of different laws in a person’s home country that don’t square with US cannabis laws. For example, there are onerous ownership disclosure requirements (that I’ll get into below), which could include shareholders or members in foreign companies. Certain laws in a foreign resident’s home country might not allow or might just put roadblocks in the way of compliance with US state-lawful cannabis regulations. And good luck explaining to a regulator that the laws of a foreign country don’t allow compliance with cannabis laws here.

#3 Ownership Disclosure Rules

One of the most important things for foreign companies or person to consider before investing in or acquiring a US-based cannabis company is the concept of “ownership” (which we recently wrote about here). All states that regulate cannabis have ownership disclosure requirements that are often very onerous and invasive and, in some cases, require disclosure up through all parent companies to actual persons.

These disclosure requirements can be immensely difficult to comply with for foreign, and even some domestic, cannabis companies or investors. It’s not always clear who is an owner, and equity in a company is usually not the only trigger for ownership. For example, California cannabis regulators consider LLC managers, corporate directors or officers, and anyone else who exercises direction, management, or control in a licensed entity to be owners. At least one California cannabis agency considers companies or people who are entitled 20% of the profits of a licensee to be owners. Even more significantly, if an owner is a company, then certain persons who own or run that company may be considered owners. For at least one agency, owners are required to disclose many different kinds of equity holders, directors, officers, and managers, all the way up the corporate chain.

#4 Financial Interest Holder Requirements

Like with owner disclosures, some states also require disclosures for certain classes of people who hold smaller equity interests in a cannabis company or who have less significant investment, loan, or profit-sharing relationships with those companies. In California, these people are called “financial interest holders”, and still have to disclose information to the state.

In California, financial interest holders are persons with less than 20 percent equity, as well as persons with loans to, investments in, or profit-sharing agreements of any kind in a cannabis company. There’s a number of exceptions, including that persons with less than 5 percent of the equity in a publicly traded company don’t need to be disclosed as financial interest holders. Just like with owners, if a financial interest holder is a company, it may need to disclose certain persons all the way up its corporate chain.

#5 Constant Reporting Obligations

State-lawful cannabis companies have constant reporting obligations throughout the life of their license. In California, almost any change (sometimes even seemingly insignificant changes) in the business needs to be reported to the applicable agencies within 10–14 calendar days. Other states are similar.

Monitoring reportable events is difficult for foreign companies. If they want to be fully compliant, they will need to either have US cannabis counsel or trust the licensee’s US-based counsel. Some things can be significantly challenging to report, like changes in financial interest holders. Take for example, a Canadian public company where shares may be constantly sold. Companies would need to constantly monitor transactions to ensure that new persons who acquire significant amounts of shares make disclosures within the tight timeframes set by the US state regulators.

Moreover, reporting is almost always the actual licensee’s obligation, meaning that an investor can’t actually communicate with agencies on the licensee’s behalf and will need to hope that the licensee actually makes disclosures after being provided with information from the investor. This can be frustrating for foreign companies who don’t actually have control over the licensee, so it is important to ensure in any kind of written agreement that the licensee meets its reporting obligations, and to spell out what happens if the licensee is penalized because it failed to make appropriate disclosures.

#6 Immigration Concerns

Being involved in the US cannabis industry can bar a person from entering the United States, obtaining a visa, or obtaining citizenship if they are here. We’ve written about cannabis immigration issues for foreign investors and owners in the past (see here, here, and here). It goes without saying that these are issues that must be considered in any deal. Failure to consider them before inking a deal could lead to disastrous effects and potential breaches that could have been avoided had the foreign investors consulted with US immigration counsel before inking the deal.

#7 Tax Issues

Cannabis is STILL illegal at the federal level in the United States. Internal Revenue Code Section 280E is a major roadblock for US-based cannabis companies and leads to extremely high taxes in most cases. Many foreign investors may not even be aware of some of the 280E issues, and there could be other problems in their home jurisdictions based on these high taxes.

washington cannabis marijuana crime true party in interestMost of us do not intend to break the law, but occasionally we may be caught on the wrong side of law enforcement. Both felony and misdemeanor crimes can derail an individual’s or company’s initial marijuana license application or renewal process. The Washington Liquor and Cannabis Board (the “WSLCB”) utilizes a point system, and if a true party of interest (“TPOI”) in a cannabis business accumulates too many points based on criminal activity, that can jeopardize the company’s ability to obtain, retain, or renew its license. The severity of the crime dictates the number of points counted against the TPOI. If a TPOI accumulates eight points, they will jeopardize the license application or renewal.

Let’s briefly review the definition of a TPOI. Only Washington residents may own a licensed marijuana business, and a marijuana license must be issued and maintained in the names of all TPOI. The WSLCB defines TPOIs broadly. A legal owner of any shares or membership interest in a marijuana business and that person’s spouse are considered TPOIs. WAC 314-55-035 lists who must qualify as a TPOI for various marijuana business entity structures:

True party of interest (TPOI) Persons to be qualified
Sole proprietorship Sole proprietor and spouse
General partnership All partners and spouses
Limited partnership, limited liability partnership, or limited liability limited partnership

All general partners and their spouses

All limited partners and spouses

Limited liability company

All members and their spouses

All managers and their spouses

Privately held corporation

All corporate officers (or persons with equivalent title) and their spouses

All stockholders and their spouses

Publicly held corporation

All corporate officers (or persons with equivalent title) and their spouses

All stockholders and their spouses

Multilevel ownership structures All persons and entities that make up the ownership structure (and their spouses)
Nonprofit corporations All individuals and spouses, and entities having membership rights in accordance with the provisions of the articles of incorporation or the bylaws

The WSLCB also considers as a TPOI any entity or individual who has the right to receive any percentage of the gross or net profits from a marijuana business, which could include key employees and financiers. Licensees must apply to the LCB to add or change any TPOI for any reason. The WSLCB has discretion to inquire into all matters with the sale or issuance of a TPOI’s ownership interest or proposed change to the marijuana business’ officers or owners. Because a marijuana license is issued in the name of all TPOIs, each TPOI must be a Washington resident at least six months prior to applying to the WSLCB.

As mentioned above, in the license application and renewal processes, the WSLCB reviews each TPOI’s criminal history and assigns a score to each TPOI based on a point accumulation system. All criminal history must be reported on the application, and each successful applicant is responsible to report any criminal convictions to the WSLCB within 14 days of such conviction for as long as they remain a licensee. As a general rule, subject to some mitigating circumstances below, any individual who accumulates eight or more points will be disqualified from the license or the application. This means that all TPOIs must be aware of what is going on in other TPOIs lives, and that business partners need to engage in the practice of full ongoing disclosure with each other and the WSLCB. Failure to disclose any relevant circumstances to the WSLCB results in a significant penalty in itself.

Description Time period during which points will be assigned Points assigned
Felony conviction Ten years 12 points
Currently under federal or state supervision for a felony conviction n/a 8 points
Gross misdemeanor conviction Three years 5 points
Misdemeanor conviction Three years 4 points
Nondisclosure of any of the above n/a 4 points each

If a person is disqualified due to point accumulation, their spouse is also disqualified. For license applications at the entity level, the entity’s license will not be granted or renewed if any individual TPOI is disqualified. If an individual has a criminal case pending that would result in the accumulation of eight or more points, the WSLCB will hold the application until the case is final. However, if no final result is reached within 90 days on that criminal case, the WSLCB will administratively close the application.

The criminal points do not stay relevant forever. After three years or ten years, depending on the severity of the crime, certain crimes are no longer calculated. This is consistent with Washington’s pardoning certain marijuana-related convictions, as we discussed in a prior blog post. Also, the above point accumulations can be reduced in the WSLCB’s discretion. Up to two federal or state misdemeanor convictions in the prior three years that occurred before the initial license application, and that involved only the possession of marijuana, may not be assigned points. However, state misdemeanor possession convictions that accrued after December 6, 2013 (the commencement of Washington’s recreational cannabis program) that exceeded the allowable amounts will count toward point accumulation. In addition, the WSLCB will consider for mitigation, on an individual basis, any one state or federal conviction for the growing, possession, or sale of marijuana that arose prior to the initial license application, taking all circumstances into account.

Bottom line, the commission of a crime by a TPOI could result in a license revocation or an initial or renewal application denial by the WSLCB, and it is better to disclose rather than try to conceal it from the WSLCB.