california cannabis intellectual property licensing BCC
These proposed BCC regulations would be a mistake.

As we’ve been blogging about for the last couple of weeks, the Bureau of Cannabis Control (BCC) recently released modifications to the proposed regulations for cannabis licensees, one of which effectively prohibits all licensing, white labeling and manufacturing agreements between two parties where one of those parties is not a licensed cannabis business. In our post on this modification, we urged stakeholders to submit written comments to the BCC expressing their opposition to the rule change. We also noted that we would be submitting formal comments as a firm on behalf of our clients and are publishing those comments here. Our hope is that the BCC understands the damaging implications this rule change will have on the industry here in California, and we will be following the rule adoption process closely to see how this shakes out.

Below is the full text of our November 2 letter to BCC, minus the letterhead and signatures. We will continue to dialogue with affected parties and regulators on this crucial issue as opportunities permit. Please continue to join us in making your voices heard!


Lori Ajax, Chief
Bureau of Cannabis Control
P.O. Box 419106
Rancho Cordova, CA 95741

Re:       Comments Regarding Modifications to Text of Proposed Regulations for All Bureau Licensees §5032-Commercial Cannabis Activity

Dear Ms. Ajax,

On behalf of Harris Bricken McVay Sliwoski, LLP and our clients participating in California’s cannabis industry, we submit our comments to the Bureau of Cannabis Control’s Modifications to the Text of the Proposed Regulations for All Bureau Licensees.

Our comments are limited to Section 5032 pertaining to “commercial cannabis activity.” This section proposes to expand the definition of “commercial cannabis activity,” which may be conducted only between licensees, as follows:

  • 5032. Commercial Cannabis Activity

(a) All commercial cannabis activity shall be conducted between licensees. Retail licensees, licensed retailers and licensed microbusinesses authorized to engage in retail sales may conduct commercial cannabis activity with customers in accordance with Chapter 3 of this division.

(b) Licensees shall not conduct commercial cannabis activities on behalf of, at the request of, or pursuant to a contract with any person that is not licensed under the Act. Such prohibited commercial cannabis activities include, but are not limited to, the following:

(1) Procuring or purchasing cannabis goods from a licensed cultivator or licensed manufacturer.

(2) Manufacturing cannabis goods according to the specifications of a non-licensee.

(3) Packaging and labeling cannabis goods under a non-licensee’s brand or according to the specifications of a non-licensee.

(4) Distributing cannabis goods for a non-licensee.

In particular, we take issue with the expansion of the definition of “commercial cannabis activity” to include “Manufacturing cannabis goods according to the specifications of a non-licensee” and “Packaging and labeling cannabis goods under a non-licensee’s brand or according to the specifications of a non-licensee,” as this modification will effectively prohibit all intellectual property licensing agreements between licensees and non-licensees. We have not encountered such a prohibition in any other state in which cannabis is legalized and regulated, and we believe that this modification would stifle the industry and eliminate many, if not most, of the brands currently on dispensary shelves in California.

Intellectual property licensing agreements are utilized widely throughout virtually every industry. We have assisted clients with many licensing deals throughout the state, none of which were intended to circumvent cannabis regulations or hide ownership or financial interests. In fact, our interpretation of the “financial interest holder” rule has been that the licensor in each of these licensing deals including a royalty component where the licensor receives a share of profits or revenue from the licensee must already be disclosed to the appropriate state regulatory agency as a “financial interest holder” in a licensee.

There are many reasons why intellectual property licensing agreements make sense for a licensed operator, and why access to intellectual property beyond that owned by licensed operators benefits consumers:

  • Many licensed operators do not have the resources to develop new technologies, products, or brand identities and intellectual property licensing can provide a mechanism for expanding and improving their product offerings.
  • Many companies and individuals that own intellectual property, such as recipes, techniques, processes, and brand identities do not have the resources to obtain local and state permits or are based in jurisdictions that do not allow commercial cannabis activity. Intellectual property licensing can provide a mechanism for these companies to provide their intellectual property to licensed operators and become fully disclosed financial interest holders in those licensed operators by taking a royalty based on product sales.
  • For entities that own multiple operations, it often also makes legal sense to utilize an IP holding company (that is not a licensed entity) to hold and manage the group’s IP portfolio for the avoidance of IP ownership disputes and liabilities, among other reasons.
  • Licensed intellectual property expands the ability of licensed operators to provide a greater variety of brands and products to consumers.

Eliminating the ability of licensees to enter into intellectual property licensing deals with non-licensees harms both licensees and consumers by restricting the number of brands and products available. It also seems that the Bureau’s goals may not be well-served by this proposed rule modification due to overbreadth of its scope. The intent of Sections 5032(b)(1) and (b)(2) appears to be preventing licensed entities from conducting cannabis business operations at the behest or at the direction of unlicensed entities. The main purpose of intellectual property licensing deals is not to direct an entity how to conduct its business, but to restrict the ways in which the intellectual property may be used, and to ensure compensation to the owner for those limited uses. The proposed modification to Section 5032 casts an unnecessarily wide net that would prohibit all manufacturing, packaging, and labeling operations by a licensed operator that happen to use intellectual property owned by a non-licensed entity—a result that does not serve consumers, licensed entities, or public safety. Just as a landlord should not have to be licensed in order to lease its property to a licensed cannabis operator in exchange for rent, an owner of a brand or a recipe should not have to be licensed in order to license its intellectual property to a licensed operator in exchange for compensation.

Rather than becoming the first state to prohibit IP licensing in its cannabis regulations, we recommend that the Bureau instead amend the following rule pertaining to financial interest holder disclosure requirements to explicitly include intellectual property and manufacturing agreements where the licensor receives a royalty as disclosable to the state (proposed language emphasized):

  • 5004. Financial Interest in a Commercial Cannabis Business

(a) A financial interest means an agreement to receive a portion of the profits of a commercial cannabis business, an investment into a commercial cannabis business, a loan provided to a commercial cannabis business, or any other equity interest in a commercial cannabis business except as provided in subsection (c) (d) of this section. For the purpose of this section, an interest in a diversified mutual fund, blind trust, or similar instrument is not a financial interest. For purposes of this division, an agreement to receive a portion of the profits includes, but is not limited to, the following individuals:

(1) An employee who has entered into a profit share plan with the commercial cannabis business.

(2) A landlord who has entered into a lease agreement with the commercial cannabis business for a share of the profits.

(3) A consultant who is providing services to the commercial cannabis business for a share of the profits.

(4) A person acting as an agent, such as an accountant or attorney, for the commercial cannabis business for a share of the profits.

(5) A broker who is engaging in activities for the commercial cannabis business for a share of the profits.

(6) A salesperson who earns a commission.

(7) A non-licensed entity that has entered into an intellectual property licensing agreement or manufacturing agreement with a commercial cannabis business for a share of the profits.

From an ownership and financial interest holder perspective, intellectual property and manufacturing agreements are no different than any of the arrangements already referenced in Section 5004 where a non-licensee receives a share of profits from a licensed entity. Intellectual property and manufacturing agreements that stipulate that all commercial cannabis activity shall be carried out solely by a licensed operator and that the non-licensee shall have no control over the licensed entity should not be treated any differently than leases, consulting agreements or any other agreement in which a non-licensee receives a royalty.

If the Bureau is instead concerned with the contents of these intellectual property licensing and manufacturing agreements, we recommend requiring disclosure of the agreements to the state, rather than prohibiting them altogether or requiring the licensor to secure onerous local approval and eventual state licensing for a commercial cannabis license they never intend to actually use. Washington State, for example, which has some of the strictest regulations pertaining to ownership and financial interests in cannabis businesses in the country, requires that licensors entitled to a royalty in a licensing agreement be disclosed to and vetted by the Washington State Liquor and Cannabis Board (WSLCB), and that the licensing agreement itself be disclosed to and reviewed by the WSLCB.[1]

We appreciate the opportunity to provide these comments to the Bureau’s proposed modifications to the text of the proposed regulations for all Bureau licensees and would be happy to engage in a dialogue to identify a means for regulating these types of business deals without causing significant harm to the industry and to consumers. If you have any questions, please contact Alison Malsbury at alison@harrisbricken.com or Hilary Bricken at hilary@harrisbricken.com.

[1]RCW 69.50.395.


Let’s hope that the Bureau considers these and other comments thoughtfully and seriously as California continues to build out its cannabis program architecture. We will keep you posted.

Jeff Sessions Hates Cannabis
Finally, Sessions is a goner.

Jeff Sessions, the drug warrior that may or may not have liked the KKK until he found out they smoked pot, is out as U.S. Attorney General. After two years of being relentlessly bullied by President Trump, Sessions has apparently had enough. The Sessions resignation is of special interest to the marijuana industry because of just how much he hates marijuana. So it’s great news that Sessions is out, right?

While it’s certainly not bad news, the real story is that it doesn’t really matter. Looking back at the Sessions era, the only truly significant act that he took regarding marijuana was the withdrawal of prior federal guidance to U.S. Attorneys regarding marijuana enforcement in January 2018. At the time, we couldn’t tell whether this was the first step in an organized crackdown on marijuana or simply a shot across the bow. As a result of the withdrawal of the prior guidance memos, discretion on whether to prosecute marijuana crimes shifted from the Department of Justice to each of the 93 U.S. Attorneys assigned to the various federal judicial districts.

But lo and behold, nothing actually changed in federal enforcement. There were rumblings out of Oregon (whose U.S. Attorney was just picked to chair the Attorney General’s Marijuana Working Group), but those rumblings led to stakeholder meetings and the issuance of detailed enforcement guidance. This is a far cry from the raids, arrests, and seizures that doom and gloom types predicted when Sessions was named Attorney General. To date, since Washington and Colorado legalized in 2012, there has not been a single instance in the United States where law enforcement has acted against a marijuana business unless it has been able to demonstrate significant violations of state law and violation of prior-stated federal enforcement priorities.

The takeaway, then, is that the cake has already been baked. With another round of state liberalization of marijuana rules, the country has continued its unstoppable march toward federal legalization/decriminalization. If the politics and logistics of enforcing federal marijuana laws against state legal businesses proved unworkable for Jeff Sessions, they are unworkable for anyone.

So celebrate – the Sessions era is over and hopefully we don’t have to sit through any more scoldings from the Attorney General trying to tie marijuana to the opioid epidemic. But even though we may be wrong, we think the real story of the Sessions era is that the fear of widespread federal enforcement of drug laws against state-legal actors will never come to fruition.

 2018 marijuana cannabis midterms michigan utah missouri

Today was a stellar day for marijuana advocates around the country. Not only did a handful of states authorize legalization of medical and recreational marijuana at the polls, but the Democratic Party took control of the House of Representatives, and one very problematic Congressman, Pete Sessions, was sent packing down in Texas.

Below is a summary of the big changes nationwide, with many of these results still firming up at the time of writing. Note that this post does not detail some of the “smaller” local developments, such as decriminalization in certain Ohio cities, enthusiasm for cannabis by Wisconsin voters, or many other positive developments ushered in by this evening’s voting.

Michigan

Congratulations to the Wolverine State, which voted to legalize adult use (recreational) marijuana statewide. Individuals who are at least 21 years of age will be permitted to possess and use marijuana and marijuana-infused edibles, and grow up to 12 marijuana plants for personal consumption (that’s quite a bit). Permitted retail sales will be subject to a relatively modest 10% tax. Per state law, ballot initiatives take effect 10 days after results are certified, which can take up to three weeks from yesterday. So, legalization should take effect by the end of the year. Michigan is the tenth most populous state in the nation, and the first Midwestern state to legalize cannabis– which is a big deal. (Yes, Michigan is a part of the Midwest.)

Missouri

Missouri is another Midwestern state to make giant strides on cannabis, legalizing medical marijuana statewide. Missourians reviewed three medical cannabis legalization measures on the ballot: the one that passed is known as Amendment 2. Amendment 2 is an impressive entrée into legalization for a couple of reasons: first, it actually amends the state constitution to allow medical cannabis; and second, it contemplates a licensing program extending far beyond decriminalization, to state licensure for cultivators, manufacturers, testing labs and dispensaries. Under the new regime, qualified patients with physician approval will be allowed to receive cards for any condition the physician sees fit. There will be a 4% tax on retail transactions. Of the three initiatives on Missouri’s ballot, this one was the best.

North Dakota

Alas, North Dakota failed to move beyond the confines of its medical marijuana program. Measure 3 would have allowed people 21 and older to possess, use, grow, buy and sell marijuana for recreational purposes, and it would have expunged previous cannabis convictions from criminal records. Stepping back, Measure 3 was an odd initiative in that it failed to include any language regarding regulation or taxes. Apparently, the idea was to let the legislature figure that part out, but Measure 3 advisers may be kicking themselves for that strategy today.

Utah

Like North Dakota, Utah is a fairly conservative state. In keeping with that ethos, Utah passed a fairly conservative ballot measure last night to legalize medical marijuana – but passed it nonetheless. Proposition 2 allows qualified patients with physician approval to a purchase two ounces of medical marijuana in any two week period, or products containing 10 grams of CBD or THC. Curiously, smoking medical marijuana isn’t allowed. To the good, patients who live more than 100 miles from a dispensary will be able to cultivate 6 plants at home, and there will be a caregiver program. The state will issue licenses for cultivation, processing, testing and dispensaries.

In all, Proposition 2 had a very interesting backstory, such that today’s legalization of medical marijuana in Utah was something of a fait accompli. You can read about that here.

Congress

Democrats took back the House of Representatives last night, which is great news for federal legislation prospects. Although cannabis is not a distinctly partisan issue these days, most progressive cannabis legislation tends to come from the House, and the prospects of moving marijuana legislation are far superior today than yesterday. The fact that the Senate is still solidly Republican is not ideal for federal legalization, but the prospect of compromise legislation on everything from decriminalization to banking to taxes — to say nothing of issues like industrial hemp — is better than ever.

Pete Sessions (“Prohibition Pete”)

This one could probably fall under the “Congress” paragraph above, but it’s a significant enough development to merit special mention. Back in March, I had fun writing about how Pete Sessions was almost single-handedly blocking cannabis reform, including bipartisan proposals, from his perch as Chair of the House Rules Committee. Well, Pete lost yesterday. This means that the undemocratic nonsense of blocking floor votes on issues that both parties want to vote on, is likely over. This development will probably be under-reported given everything else that occurred today, but it’s huge.

All in all, voters across the U.S. once again expressed their desire to do away with prohibition on November 6. This morning, 33 states and the District of Columbia have laws broadly legalizing marijuana in some form. The President may be open to reform, and we expect industrial hemp to be legalized within a couple of months. Interestingly, the U.S. has also found itself in a marijuana sandwich of sorts, between Canada’s recent federal legalization and Mexico’s imminent legalization. But that’s a story for another day.

For now, cannabis reform advocates should rejoice: Voters rejected prohibition in many places, nationwide.

label CBD hemp oregon FDA
Start from scratch with your CBD product labels.

Since the beginning of the year, our firm has received a growing number of inquiries related to the labeling of cannabinoids (“CBD”)-infused foods. This legal issue is particularly confusing given the fact that the U.S. Food and Drug Administration (“FDA”) has yet to provide clear guidance for this category of products. This post aims to shed some light on the matter by addressing some of the requirements with which manufacturers and distributors of CBD-infused foods, specifically those derived from industrial hemp, must comply in Oregon.

Unlike the State of Indiana, which recently adopted the most stringent labeling rules for hemp-derived CBD products, Oregon opted to defer to the labeling rules promulgated by the FDA.

The Fair Packaging and Labeling Act (“FPL”) directs the FDA to issue regulations requiring that all “consumer commodities” be labeled to disclose net contents, identity of commodity, and the name and place of business of the products’ manufacturer, packer or distributor. Specifically, the FDA rules aim to ensure that foods sold in the United States are safe, wholesome and properly labeled.

The FDA rules provide two ways to label packages and containers:

  1. Place all label statements on the front label panel (also known as the “principal display panel” or “PDP”), which is the portion of the package label that is most likely to be seen by the consumer at the time of purchase (i.e., the front of the package or container); or
  2. Place certain statements on the PDP and others on the information panel, which is the label panel immediately to the right of the PDP, as seen by the consumer facing the product.

Although the FDA gives you the option of placing all label statements on the PDP or split them between the PDP and the information panel, you must ensure that the following label statements appear on the PDP:

  • The statement of identity or name the food as commonly known or used (e., chocolate, pasta); and
  • The net quantity statement or amount of product.

Due to the FDA’s ambiguous position on CBD, manufacturers and distributors should refrain from using the term “CBD” in their statement of identity and should favor instead the term “industrial hemp-infused.” (If you have been on Amazon lately, you will notice that everyone has moved over from the “CBD” to “industrial hemp” terminology.) Note also that the FDA rules impose strict font sizes and methods to accurately determine the weight of your product. Make sure you comply!

In addition to the statement of identity and the net quantity statement, labels will have to provide:

  • The Manufacturer/Distributor Information.
  • Ingredients List: Each ingredient must be listed in descending order of predominance (i.e., heaviest to lightest).
  • Nutrition Labeling, unless you qualify for an exemption, such as the “manufactured by small businesses” exemption which applies to companies that refrain from making nutritional claims and generate $50,000 or less in annual sales.
  • Serving Size.

Lastly, manufacturers and distributors should abstain from making any health claims in fear of being investigated by the FDA which treats products with labels containing health claims as drugs, not food (see here and here more information on this issue). Sometimes, “health claims” can be a fine line, so you should assume that the FDA is going to take a restrictive view of what you can and cannot say.

Although the FDA does not impose a pre-approval process of food labels, manufacturers and distributors of CBD-infused foods should have their labels reviewed by an attorney before they enter the market. Relying on attorneys who are well-versed on the issue of CBD law will ensures compliance with the FDA rules, but also help manufactures and distributors avoid wasting money on reprinting labels and marketing materials.

los ángeles california medical dispensary licensing
Certain L.A. dispensaries may soon be stuck in place.

Los Angeles’s existing medical marijuana dispensaries (“EMMDs”) under Measure M will soon be precluded from relocating from their current operations unless and until they receive their local annual licenses from the City of Los Angeles. Movement post-initial application to L.A. has been a common practice for  EMMDs for some time, and has apparently caused a rift with other potential commercial cannabis licensees who were effectively “zoned out” based on buffer requirements when an EMMD moved into their planned licensed territory (non-EMMD storefronts have to be no less than 700 feet from each other). The new requirement goes into effect soon—but just how soon remains to be seen.

On October 19, 2018, the Los Angeles Rules, Elections, and Intergovernmental Relations Committee (the “Committee”) held a meeting which dealt with various cannabis-related matters. Shortly before the October 19 meeting, the Los Angeles Department of Cannabis Regulation (“DCR”) submitted a letter requesting amendments to the City’s cannabis procedures, which are codified in the Los Angeles Municipal Code (“LAMC”). The letter requested that the City Council instruct the DCR to stop processing EMMD relocation requests or amend the LAMC accordingly. The DCR is concerned with EMMD relocation requests because:

In certain instances, an EMMD has re-located to a business premises within 700 feet of a location a Phase 3 applicant has secured as a potential retail business premises. Because the City does not permit a Phase 3 retailer to be within 700 feet of another retailer, in those instances, the Phase 3 applicant must abandon the location it has secured and find an alternate location. As this re-location issue may impact the Tier 1 and Tier 2 Social Equity Applicants applying for retail licenses, DCR recommends that the City Council either instruct DCR to stop processing EMMD re-location requests or amend Sec. 45.19.7.2 of Article 5.1 of Chapter IV of the LAMC to prohibit EMMD re-locations as of January 1,2019.

In other words, EMMD relocations could create a block on real estate for potential other dispensary licensees, and based on the social equity program in the City (for more on social equity, see here), the City wants to make sure that phase 3 social equity retailers get a fair shot at a more static real estate situation.

Also on October 19, the Committee issued a report that requests that the City Attorney, working with the DCR, “prepare and present an Ordinance to amend [the LAMC] to prohibit future Existing Medical Marijuana Dispensaries re-locations prior to the issuance of an annual license, and instruct the DCR to cease accepting and approving new re-location requests while this ordinance is under consideration by the City Council.”

EMMDs whose local annual licenses are still under review will thus no longer be able to change locations (unless and until they get that annual local approval)—but the big question is when that will kick in. From the text of the report, the DCR will be instructed to cease accepting and approving new relocation requests while the to-be-drafted ordinance is under consideration. It does not look like the ordinance is yet under consideration, so relocation requests may still be processed by the DCR if you get in the queue now.

One other important issue is whether relocation requests submitted before the ordinance is passed can still be approved after the ordinance is implemented–meaning, is the ordinance going to be retroactive? The text of the report suggests that the DCR’s ban will be only for new relocation requests made after the ordinance is under consideration. That said though, it really depends on what the ordinance ultimately says in the end and whether the City Attorney and DCR decide to prohibit any already-pending relocation requests.

For now, stay tuned. We will be sure to provide updates on the EMMD relocation prohibition as it evolves.

oregon cannabis salesperson representative

Outside sales people can be a great tool to sell your cannabis product. They may be invaluable to your company. In Oregon, outside sales people may be exempt from minimum wage and overtime requirements if certain requirements are met. Lately, we’ve seen more and more Oregon marijuana companies start working with outside sales people (sometimes called a “sales representative”, “account representative”, etc.) in order to get a leg up in the highly competitive Oregon industry.

As with any sort of employment-adjacent relationship, working with outside salespersons is covered by administrative rules, in this case through the Bureau of Labor and Industry (BOLI). As such, OAR 839-020-0005(4) defines an “Outside Sales Person” as:

an employee who is customarily and regularly engaged away from the employer’s place of business and the salesperson is employed for the purpose of making sales or obtaining orders or contracts for services or for use of facilities for which a consideration will be paid by the client or customer, and the person’s hours of work spent engaged in activities other than sales does not exceed 30 percent of the hours worked in the workweek by non-exempt employees of the employer.

That’s a mouthful: Let’s look at how that might work in practice. A producer could have an employee that travels to processors, wholesalers, or retail stores to induce them to buy the producer’s product. The employee may provide samples to the prospective buyer in accordance with Oregon Liquor Control Commission (OLCC) rules, and induce them to enter into a contract to purchase the producer’s flower. If the employee is performing this type of work, outside of the producer’s farm a majority of the time, they may legally be qualified as an outside sales person. If so, minimum wage and overtime laws would not apply to the outside sales person.

For practical purposes, this means you would not be required to pay the outside sales person the current Oregon minimum wage of $10.75 per hour, nor would you be required to pay the sales person time and half for when the person works over 40 hours in a week. However, if you employ an outside sales person, you shouldn’t take this as permission to pay them less than the current minimum wage. The exemption exists for outside sales persons because they are typically paid commission wages. Commission wages is typically a percentage of sales. If an outside sales person is unable to enter into enough contracts to obtain minimum wage based on their commission status, the exemption is there to protect employers from having to supplement their wages to ensure they are receiving minimum wage.

Because we are talking cannabis, things are more complicated, of course, especially where a cannabis employer chooses to pay an employee commission wages instead of hourly wages. Under OLCC rules, any employee that receives commission payments is considered a person with a “financial interest” in the business. Persons with a financial interest in a cannabis business must be disclosed to the OLCC, and in certain circumstances, the OLCC may require the person to undergo a background check.

What the take-away from this information? An outside sales person can be a great employee to have as a cannabis business in Oregon. In certain circumstances, you may not be required to pay the employee minimum wage, and instead, create a commission structure for the employee’s wages. However, before this is done, the employee should be disclosed to the OLCC as a person with a financial interest in the business. If you are ever unsure if an employee qualifies as an outside sales person or needs to be disclosed to the OLCC, it’s always best to consult an attorney before making any changes that could have legal consequences. And it’s very important to have the scope of the relationship in writing, in order to protect your business from BOLI and other claims.

hemp cbd paul ryan farm bill
There’s been quite a bit of it lately on hemp and CBD.

Earlier this week, Speaker of the House Paul Ryan announced his support to end federal cannabidiol (“CBD”) prohibition and expressed strong support for the uses of industrial hemp. To view the video of Ryan’s comments, go here at the 21:15 mark.

For any newbies out there, CBD is one of the many chemical compounds in a class called “cannabinoids” that naturally occur in cannabis plants. “[CBD] has proven to work,” Ryan said, specifying that it “helps reduce seizures.” Indeed, the Food and Drug Administration (“FDA”) approved Epidiolex back in August, which is G.W. Pharma’s oral CBD solution for the treatment of seizure associated with Lennox-Gastraut and Dravet syndrome. The FDA approval prompted the Drug Enforcement Administration to reschedule all FDA-approved drugs containing cannabis-derived CBD with no more than 0.1 percent THC under Schedule V of the Controlled Substance Act (“CSA”).

The Speaker, who is not running for reelection and is retiring from Congress at the end of the year, shared that his mother-in-law used a synthetic form of cannabinoids when she was dying from melanoma and ovarian cancer.

Ryan also jumped on the opportunity to speak in favor of industrial hemp when responding to a medical marijuana question from a rally attendee who husband had succumbed to cancer. “And by the way, there’s a lot of industrial uses for hemp that I understand from talking to Mitch McConnell is a big deal to Kentucky agriculture,” he said. “And we’re all in favor of that as well.” Ryan is not going as far as John Boehner, a recent House Speaker who is currently sitting on an advisory board for a for-profit marijuana company, but his take is welcome news to us.

The Speaker’s endorsement of industrial hemp comes at a decisive time. As we previously discussed, Congressional leaders are still attempting to reconcile the House and the Senate versions of the 2018 Farm Bill. The Senate version, which was introduced and championed by Senate Majority Leader Mitch McConnell, would legalize hemp by removing the crop from the CSA definition of marijuana. The House version, however, is silent on this issue, and thus would afford meager protection for the crop. With Paul Ryan’s public support for ending federal CBD prohibition, however, it seems more likely that the House would approve the hemp language found in the Senate bill.

This is not the first time that Ryan has expressed support for the legalization of CBD and industrial hemp. Back in 2015, the speaker co-sponsored a bill with Rep. Scott Perry (R-PA) that sought to remove industrial hemp and CBD-infused products containing less than 0.3 percent THC from the definition of marijuana under the CSA.

It is still important to note, however, that the Speaker’s endorsement of CBD does not extend to the full legalization of marijuana, even for medical uses. “There’s no THC in that oil. That is not medical marijuana,” he declared. But of course, Ryan’s statement is inaccurate given that most CBD products contain small amounts of the psychoactive cannabis compound.

Nonetheless, proponents of industrial hemp and CBD should be pleased by this latest and encouraging development. The public support for the legalization of the crop and of marijuana’s non-psychoactive cousin by one of the most powerful Congressional leaders reveals a shift in the minds of conservatives and suggests the likely passage of the much anticipated 2018 Farm Bill. Stay tuned!

cannabis marijuana RICO litigation
Time for some of these plaintiffs’ lawyers to pack it up.

We’ve been writing about RICO lawsuits on this blog for a while. These lawsuits are typically brought by neighbors of state-licensed cannabis farms, who allege they are bothered by noise and smells associated with cannabis production, and that their property values have been damaged by extension. Generally speaking, these plaintiffs tend to have strong prohibitionist beliefs. Filing RICO lawsuits has also become a cottage industry for certain lawyers, and there are even educational courses for attorneys who want to spend their time on this sort of thing.

As a reminder, RICO is a federal statute that provides for a civil cause of action for acts performed as part of an ongoing criminal organization (in addition to criminal penalties). Because RICO complaints sound in federal law and implicate supply chain and vendor defendants, these cases differ from your ordinary nuisance-and-trespass actions, which pursue only the marijuana grower itself, and are also occasionally brought against cannabis farms.

The first RICO lawsuits started popping up a few years ago, and some of them are backed by prohibitionist groups attempting to rattle the industry. One common strategy of RICO plaintiffs, particularly in the early litigations, was to name every vendor doing business with the cannabis farm, including those that never touched the plant itself: e.g., banks, insurance vendors and equipment providers. The RICO plaintiffs would then dismiss these defendants one by one, as each defendant cut ties with the defendant farm— which seems like a racket if there ever was one.

Although pot-neighbor litigation is probably not what Congress had in mind back when it wrote the Racketeer Influenced and Corrupt Organizations Act, RICO litigants have found some success with their approach, most notably in a 10th Circuit case called Safe Streets v. Hickenlooper, which allowed a RICO lawsuit to proceed in Colorado. More recently, however, the U.S. District Court for the District of Oregon dismissed a RICO lawsuit brought by a different marijuana farm neighbor for “failure to state a claim.” That case is known as Ainsworth v. Owenby and Judge McShane’s well-reasoned decision tees up a potential circuit split.

Like most leading business law firms who specialize in the cannabis industry, we have had quite a few clients ensnared in RICO lawsuits. These client defendants have included everyone from the property owners themselves, to far-off dispensaries that were unaware the cannabis they sold came from a defendant farm. Fortunately, these lawsuits aren’t really panning out for plaintiffs and we expect to see the RICO trend wind down. Recent case law developments in both Oregon and Colorado show why.

Oregon

Last month, a case known as Rice v. Ambrocio settled relatively quickly, having been filed only five months before. Rice was a waste of time and money, and it’s a good example of why people don’t like lawyers. The 56-page complaint named almost 50 defendants, although not all of them “appeared” in the case and a few were never served. The parties ultimately settled for a $60,000 collective payment to the plaintiffs (a guy who runs an anti-cannabis website, and his partner), which pencils out to a measly $1,200 per defendant on average. Most importantly for defendants, the settlement agreement is non-confidential.

This unimpressive plaintiffs’ outcome should make potential RICO litigants think twice about filing a lawsuit—especially one where it appears that the marijuana activity has all but ended on the defendant property before papers are even filed. Ultimately, if you want to file a complaint in federal court and take on 50 defendants, you are going to burn a LOT of cash just getting the thing filed and served. And, even if you battle your way through months or even years of motion practice, counterclaims, appeals, etc., the likelihood of success may not be great. Which brings us to Colorado.

Colorado

Earlier this week, we had what may have been the first jury verdict in a cannabis RICO case, and it came down in favor of the cannabis grower defendant. The plaintiffs were represented by a Washington, D.C. law firm with ties to Jeff Sessions, and apparently backed by a national anti-cannabis group known as Safe Streets Alliance. For all of that firepower, however, the plaintiffs could not prove their property value had been damaged by the cannabis grow they despised. The jury believed the defendants’ real estate expert, and reached a verdict relatively quickly in favor of the cannabis business. This case had been going for three years or so, and the plaintiffs had previously had the larger portion of their lawsuit—which sought to invalidate Colorado’s marijuana program entirely—thrown out.

The “no damages” finding by this jury is an extraordinary end to a protracted piece of litigation. When my law firm has potential clients come to us who are interested in filing litigation, we always look at a couple of things right away in addition to whether the claims seem viable. One of those is whether the potential plaintiff has been damaged. If the answer is “yes” (and the possibility of collection seems reasonable) we can usually proceed. But if the answer is “no”, bringing a lawsuit is probably a bad idea, regardless of whether the other side has breached a contract, done something “illegal”, etc.

If juries in cannabis RICO cases are going to find that cannabis production does not diminish the value of nearby properties, and that grower activity does not damage neighbor plaintiffs, these wasteful lawsuits may finally disappear altogether.

For more on RICO marijuana litigation, check out the following posts in our series:

marijuana business litigation damages

When people have been wronged, they naturally want to get justice and want the party that wronged them to pay enough money to make them whole. The law generally holds that when someone commits a tort or breaches a contract against you, they owe you an amount of money equal to the value of your damages suffered because of the tort or contract breach. Unfortunately, getting justice isn’t so simple. The general order of events is as follows. The defendant breaches its contract with you, and you make a personal demand to the defendant to either cure the breach or pay you for the breach. The defendant ignores you, so you hire an attorney to send a demand letter. The defendant either ignores the letter or has its attorney send a response back disclaiming liability. You then must decide whether to continue making demands or whether to pursue more aggressive action, including filing a lawsuit.

This is a challenging time, as emotions run high. In the cannabis industry, so many entrepreneurs are working on a shoe-string budget and have significant portions of their savings tied up in an already risky industry. Of course you don’t want to ignore the contract breach or tort and let the defendant get away with its actions. But you also don’t want to throw good money after bad money in a quest for vengeance. Just because you have been wronged doesn’t mean that you have a legally actionable claim, or that the defendant’s bad acts proximately caused your damages, or that the defendant doesn’t have counterclaims against you.

Instead, you have to remove yourself sufficiently from the emotions of the situation to determine what to do in an unbiased way. Here is a simplified formula that can help guide that decision-making process:

(W% * D * AP%) — ((DCW% * CD) + AF + IC)

Here’s how we break that down:

W%: Chance of winning litigation

D: Realistic damages estimate, based on provable verifiable damages

AP%: Percentage of award defendant could pay based on defendant’s cash holdings and other assets

DCW%: Chance of defendant winning a counterclaim

CD: Damages estimate of defendant’s counterclaim

AF: Your expected attorney fees, expert witness fees, and other costs related to litigation.

IC: Your indirect litigation costs (stress, time missed from your business, negative effect on business relationships, etc.)

If the equation equals a positive number, it probably makes sense to file a claim. If the equation equals a negative number, it is probably better to let the matter go, or seek alternative claim resolution.

The hard part, of course, is filling in the details. This is where it pays off to have good attorneys that have the experience necessary to come up with smart and reasonable answers for these variables, and the integrity to answer them honestly instead of in a way that leads to them generating fees with your losing case. If your lawyer tells you that you have a 100% chance of winning any case, fire that lawyer immediately. There are no guarantees in litigation. If your lawyer tells you that you have a 0% chance of winning the case, your attorney is either overly cautious, or your case is really that bad (suing a pedestrian that you ran over in a crosswalk for your tire damage bad). On the damages side, you really are looking for measurable, provable damages that have some basis in objectivity.

We often go through this process with our clients, and it doesn’t always feel good for the clients. You’re paying your attorney a lot of money for personal service, and it can feel like your attorney is doubting everything you say. If you’re going to make smart decisions about litigation, though, you have to go through the exercise. You want to see all the holes in your case before you file that first complaint. All cases are different, but even small cases that look relatively simple can generate well over six figure in legal fees and costs, and turn on a point of law that seemed insignificant at first. If your attorney is pushing you into litigation without communicating the inherent chance involved, be cautious.

Finally, for marijuana businesses specifically, the indirect litigation costs variable has to include any potential losses you can face from your dispute going public. This comes up all the time when we have ownership disputes. These disputes often stem from one or more owners causing the business to commit regulatory violations. Sometimes these regulatory violations have not been uncovered and could lead to large fines or license cancellation. In cases like that, you absolutely need to quantify your risk exposure before pulling the trigger.

For more on cannabis business litigation, see our archive here.

CBD alcohol california
Mint is still fine; CBD, not so much.

A few months ago, I spoke to a reporter from Quartz about cannabidiol (CBD). She told me that a local cafe was offering a CBD-infused latte and that it piqued her interest for a story. Her local baristas were not alone as numerous bars, restaurants, and cafes across the country have been experimenting with CBD-infused beverages. However, as with all things CBD, the regulatory framework is rapidly changing. If you’re a business owner looking to add a CBD beverage to the menu, it’s important to carefully consider state and local law.

That brings us to California. California is an excellent case study when it comes to CBD. The Golden State has a long history with cannabis, as it was the first state to create an affirmative defense for the medical use of marijuana in 1996. In 2016, California voters approved of recreational marijuana. California has also approved of an industrial hemp pilot program under the 2014 Farm Bill, but the program has been mostly dormant because the state’s laws and regulations make it nearly impossible to legally obtain hemp seeds. In addition, and perhaps most importantly when it comes to CBD, California has a propensity to regulate just about everything under the Sun.

Cue the California Department of Public Health’s (CDPH) infamous FAQs. As we wrote back in July, these FAQs stated that CDPH was banning the inclusion of hemp-derived CBD as a food, food ingredient, food additive, or dietary supplement. California’s Health and Safety Code defines food to include beverages meaning that CBD is not allowed in beverages of any kind. California’s Alcoholic Beverage Control (“ABC”) issued its own FAQs which stated that licensees could not serve alcoholic beverages mixed with cannabis, even if the licensee was using CBD. ABC cited to CDPH’s FAQs to prohibit the use of hemp-derived CBD.

The FAQs are examples of CDPH and ABC using policy statements to enact what feels like a new law or regulation. At the state level, laws are passed by both branches of a state legislature and signed into effect by the Governor. Laws establish requirements or prohibitions. In turn, regulations are issued by  agencies to clarify their interpretation of a law and how a law will be implemented. Like laws, regulations also impose requirements or prohibitions. When an agency issues a new regulation, there are procedural requirements such as a public comment period where stakeholders can voice concerns over proposed regulations. Similarly, when the legislature passes a new law, lawmakers hold public hearings. These procedural requirements provide for transparency.

Agencies also can issue guidance or other policy statements to clarify how an agency understands and implements existing laws and regulations. Generally speaking, guidance and other policy statements are not mandates but rather are an expression by the agency of a suggested or recommended action. Agencies are not generally required to provide the public with a notice and comment period before issuing a policy statement because those statements shouldn’t establish requirements or prohibitions.

When it comes to CBD-infused products, the outright prohibition in California is stated in the CDPH’s policy statement. There is no law or regulation that specifically prohibits using industrial hemp derived CBD as a food additive but CDPH interprets its governing rules and regulations to prohibit CBD in food or drinks.

Alternatively, ABC’s guidance prohibiting the use of CBD in alcoholic beverages has been enacted into California law. Recently, Governor Jerry Brown signed Assembly Bill 2914 (the “Bill”) prohibiting alcoholic beverage licensees, like bars and liquor stores, from providing hemp-derived CBD cocktails. The Bill’s purpose is summed up as follows:

This bill would prohibit an alcoholic beverage licensee from, at its licensed premises, selling, offering, or providing cannabis or cannabis products, including an alcoholic beverage that contains cannabis or cannabis products, and would provide that no alcoholic beverage shall be manufactured, sold, or offered for sale if it contains tetrahydrocannabinol or cannabinoids, regardless of source.”

That last phrase, “regardless of source,” encompasses cannabinoids like CBD even if it was derived from industrial hemp.

California has codified the prohibition of CBD-infused alcoholic beverages. The similar prohibition on CBD in non-alcoholic beverages and other consumable products is not codified in a law or regulation. In that sense, the latter prohibition would be easier to reverse. That said, CDPH’s guidance is powerful as agencies are given broad deference when interpreting their own regulations, so if CDPH changes that guidance, it will likely be because it wants to or because the legislature writes a law to expressly allow CBD in non-alcoholic beverages and other consumables. It will not be the result of a private party lawsuit.

The idea of offering a CBD-infused cocktail in California is a non-starter. If you are hoping to enjoy a CBD cocktail, you’ll have to forgo California and book a flight east. CNBC reports a New York bar is experimenting with CBD cocktails. Perhaps New York regulators will take a different approach from their California counterparts. Time will tell.