washington cannabis non-competeAs the cannabis industry has matured, the competition between businesses has increased exponentially whether engaged in the sale of recreational marijuana, hemp, or CBD. A significant risk for any ongoing or new venture arises at the end of a term of employment, whether that end is voluntary or involuntary. That risk is of a former employee starting a business that directly competes with your business, using knowledge and skills she acquired in your employ. Depending on the state in which your business operates, you may use a non-compete agreements (NCA) to mitigate that risk. Each state’s laws carefully circumscribe the scope of an NCA. (In some states NCAs are not enforceable at all.) Generally, legislatures and courts frown upon NCAs because they restrict a person’s ability to engage in the livelihood their choosing. So NCAs must be carefully drafted to be enforceable — some states permit courts to reform NCAs under the “blue pencil” doctrine while others states apply the “red pencil” doctrine, known as the all or nothing rule.

Just last month Washington enacted a new law that radically changes the landscape for non-compete agreements. The bill was signed into law by Governer Jay Inslee on May 8 and takes effect as of January 1, 2020.

Before getting into the substance of the new law, let’s address why you might want to make use of NCAs in your cannabis business. There are several reasons:

  • Your employees have access to confidential, proprietary, or trade secret information. An enforceable NCA can prevent former employees from using such information in their next venture. (See here for a discussion on the use of cannabis non-disclosure agreements, here for a discussion on cannabis trade secrets, here for discussion on cannabis patents, and here for a discussion about cannabis trademarks).
  • You may sell your company at some point in the future. Enforceable NCAs may enhance the value of your company by protecting key customer relationships. NCAs do this by preventing employees from leaving the company upon its sale and taking those customers and business relationships with them to a new venture.
  • Your willingness to share company secrets and protect your investment in training. Training employees is expensive, so is the possibility that an employee may leave having learned key processes or information that they can use in a new venture. An enforceable NCA can mitigate this expense and risk and may enhance your willingness to share information with key employees leading to additional innovation or productivity.
  • You set expectations for employees and the consequences for future litigation. Employees subject to an enforceable NCA are less likely to believe they can simply jump ship to a new company that competes in your industry. This is especially true where the NCA provides for injunctive relief and liquidated damages.
  • You put competitors on notice. Competitors are less likely to hire a person subject to an NCA and must be careful not to interfere with the NCE less they find themselves in court on a claim of tortious interference with contract.

With that, lets take a look at the highlights of Washington’s new law, and its severe restrictions on the use of NCAs:

  • The law defines a non-compete agreement as any written or oral agreement that prohibits an employee or independent contractor from “engaging in a lawful profession, trade, or business of any kind”;
  • The law creates a rebuttable presumption that any NCA longer than 18 months is unreasonable and unenforceable. A party seeking a longer NCA must prove by clear and convincing evidence that a duration longer than 18 months is necessary to protect the party’s business or goodwill.
  • It renders void and unenforceable an NCA against employees who earn less than $100,000 per year or $250,000 per year in the case of an independent contractor. (Seattle’s tech giants lobbied for this threshold as it would not apply to many of their employees).
  • The employer must disclose the terms of the NCA in writing “no later” than the time of the acceptance of the offer of employment. So disclose the NCA when making the offer of employment, or earlier. If the agreement is entered into later, it must be supported by independent consideration.
  • For employees who are terminated by a layoff, an NCA is not enforceable unless the employee is compensated for the period of enforcement minus compensation otherwise earned by the employee during the period of enforcement. These amounts are subject to an annual inflation adjustment.
  • By definition, an NCA does not include (1) a nonsolicitation agreement with respect to employees or customers of the employer; (2) a confidentiality agreement; (3) a covenant prohibiting use or disclosure of trade secrets or inventions; (4) a covenant entered into by a person purchasing or selling the goodwill of a business or otherwise acquiring or disposing of an ownership interest; or (5) a covenant entered into by a franchisee when the franchise sale complies with applicable Washington law.
  • Persons who believe they are subject to an NCA in violation of the new statute may bring a cause of action (or the Attorney General may). If a violation is found, the violator must pay the higher of actual damages or a statutory penalty of $5,000 plus attorney’s fees and related costs and expenses.

The law becomes effective as of January 1, 2020. But by its terms, it applies to all proceedings commenced on or after January 1, 2020, regardless of when the cause of action arose. This means that, to some extent, the law applies retroactively.

The retroactivity provision of the law is important. It means that cannabis employers who attempt to enforce an existing NCA that does not comply with the new law may be subject to penalties. Although this provision may be subject to certain constitutional challenges concerning the impairment of contracts, cannabis businesses should strongly consider revising any existing NCAs to comply with the new law, including complying with the provisions concerning new consideration.

Does all this mean that you shouldn’t bother with an NCA in the Washington? No, an NCA can remain a useful tool in the right situation. But it does mean that you need to be careful in drafting NCAs to ensure that your NCA complies with the new law. Otherwise you may find yourself paying statutory fines and plaintiff’s attorney’s fees.

fda cbdLast Friday, May 31, the Food and Drug Administration (“FDA”) held its first public meeting during which stakeholders shared their perspective on how to regulate cannabidiol (“CBD”)-infused products. The objective of the meeting was to gather scientific data and information about the safety, manufacturing, product quality, marketing, labeling and sale of these products.

As we have explained in previous blog posts (here and here), the FDA currently treats the sale and marketing of CBD-infused food and dietary supplement in interstate commerce as unlawful because CBD was approved as a drug by the agency before it was marketed as a food or a dietary supplement. Accordingly, CBD cannot be marketed simultaneously as a food/dietary supplement and a drug.u

Although nothing groundbreaking  came out of the nearly 10-hour long meeting, we thought it would be interesting to highlights some of the major topics discussed during this meeting.

Several hemp and cannabis organizations, including the U.S. Hemp Roundtable, argued that the FDA should allow the sale of hemp-derived CBD-infused products given the congressional intent behind the 2018 Farm Bill, which legalized hemp and its derivatives. In addition, the U.S. Hemp Roundtable mentioned ongoing efforts with lawmakers to draft legislation that would regulate hemp-derived CBD-infused products in the event the FDA concludes that it cannot design a regulatory framework on its own. This scenario seems plausible given Former FDA Commissioner Scott Gottlieb’s statement that Congress may hold the key to legalizing CBD-infused products by issuing additional legislation that expressly allow the use of Hemp-CBD in foods. Indeed, while the intend of Congress was undeniably to legalize the production of crop and its derivatives, Congress did not define the term” production,” thus leaving open for interpretation whether the sale of hemp-derived CBD-infused products is legal.

Supporters of hemp-derived CBD-infused products also suggested that these products be regulated under the existing dietary supplement framework, where products are intended for non-medicinal purposes.

While some speakers expressed concerns regarding the sale of cannabis-infused products; their concerns were primarily directed at marijuana-infused products.

State regulators discussed the need for FDA guidelines in regulating these products.

Specifically, Brenda Morris, Florida Department of Agriculture and Consumer Services, discussed the “patchwork of laws” surrounding CBD products that has created an environment in which “anything is allowed.”

Pam Miles, a representative of the Virginia Department of Agriculture, raised the lack of scientific evidence regarding CBD products and urged the FDA to take the lead on this issue:

Currently, states are struggling with the lack of sound scientific research available in CBD and long-term health impacts, including those to children’ and that her department “is hopeful that FDA will begin to supply significant leadership as it related to CBD, including research related to its health impacts.”

Health and consumer advocates also weighed in on the issue and expressed concerns regarding the lack of scientific research needed to substantiate claims about the therapeutic value of CBD in treating various illnesses, including Alzeimer’s, dementia, and epilepsy – despite the FDA approval of Epidiolex.

Others stressed the need to adopt terminology, manufacturing and standards for these products in order to protect the consumer and avoid a public health crisis.

While speakers had various opinions regarding how stringent those rules and regulations should be, all agreed that a regulatory framework was needed immediately. The FDA has previously declared that creating a framework for allowing CBD into the food supply would take sometime; however, the agency is hoping to share information and/or finding with the public, as Gottlieb explained in his April 2 statement, as early as this summer (but no sooner than July 2, which is the last day to submit public comments).

Until then, the CBD industry will need to continue navigating through these murky waters.

cannabis trade secret intellectual propertyCannabis businesses use non-disclosure agreements (NDAs) constantly. This may be due to a combination of factors: 1) the relative hardship of acquiring and protecting intellectual property over marijuana-related processes and products, today and historically; 2) a general modus operandi of “close to the vest” dealings in an industry that historically was pushed underground; and 3) the fact that most cannabis businesses are small businesses which have not taken steps to formally register (registrable) intellectual property.

But none of that is any excuse for having a terrible cannabis NDA, or, more specifically, one terrible clause in your otherwise satisfactory cannabis NDA. Here is the problem clause:

Recipient’s obligations under this Agreement with respect to the Confidential Information will survive for a period of two years.”

That’s it. That’s the whole problem, which, if drafted by an attorney on behalf of a client attempting to protect a trade secret may rise to the level of malpractice. Why? Because trade secrets derive their protection from proof that the owner has taken reasonable efforts to safeguard the secret information. Once they are out, they are out, whether that is two, five or ten years down the line. You can’t un-ring a bell.

That said, the above clause is probably fine for an NDA where the parties are discussing an investment opportunity in a cannabis business and the information is limited to e.g., financial statements or proposed deal terms. It is never OK, though, in the context of one party trying to protect a trade secret as that term is respectively defined under the Defend Trade Secrets Act or the Uniform Trade Secrets Act as adopted in the relevant jurisdiction. Courts have said as much for quite some time.

When a client is thinking about protection of its trade secrets, the advice our cannabis business and intellectual property lawyers give is usually two-fold. First, the best way to protect the secret is never to talk about it (ever). That means withholding confidential information about methods and processes prior to getting signatures on an investment or licensing or other agreement. It also means safeguarding this information even from the businesses’ own employees, to the extent possible. Second, if you simply must share the information with a third party, the confidentiality obligations can never expire and the typical exemption requests (court order, recipient’s advisors, etc.) need to be narrowed and provisioned (under seal, advisors must sign a separate NDA and recipient is liable, etc.)

I anticipate crossing out the “will survive for X years” clause a dozen more times in 2019 on forms that clients send our law firm for tailoring and review. I anticipate seeing it another dozen times on NDAs sent to our clients by other cannabis businesses—businesses that are trade secret holders—at which point our clients can consider whether to politely raise this issue or simply take the favorable term.

We often write on this blog that cannabis agreements are not like other agreements. With trade secrets, though, they sort of are – at least with respect to the consequences of disclosure. So watch out for any survival language if you are trying to safeguard a critical device, method, technique, process, etc. It’s a simple precaution but it could make all the difference for your cannabis business.

California cannabis has a problem: roughly 80% of jurisdictions in the state prohibit cannabis stores of any kind, despite voters approving full legalization with Prop 64 (the Adult Use of Marijuana Act, now the Medicinal and Adult Use Cannabis Regulation and Safety Act, or MAUCRSA) in 2016 by nearly 60%. The result has been “cannabis deserts,” large areas of the state where people do not have access to legal cannabis storefronts at all, and instead have to resort to the illegal market.

But that’s not all—after the state said in its finalized regulations earlier this year that cannabis licensees could deliver to any jurisdiction in California regardless of whether or not it was legal under local law, a coalition of California cities sued the state’s Bureau of Cannabis Control. The cities argued that the state’s interpretation goes against one of the promises of Prop 64, which was that local jurisdictions would have the power to prohibit or restrict cannabis businesses within their jurisdictions. Supporters of the regulation claim the opposite—that local bans on delivery frustrate one of the purposes of MAUCRSA, which is to provide increased access to safe, legal cannabis for all California residents. Also, as the state points out, the statute says in black and white, “A local jurisdiction shall not prevent delivery of cannabis or cannabis products on public roads by a licensee,” and there’s no way to reconcile that language with a city being able to block deliveries.

Not exactly standard in California.

Back to cannabis deserts. That delivery lawsuit is ongoing, and if the state wins it will at least provide some relief to cannabis-barren areas. But in the meantime, any hope of a large-scale fix to the cannabis desert problem has hit a big roadblock. California legislators had been considering AB 1356, a bill that would have mandated that every jurisdiction where Prop 64 passed with at least 50% of the vote would have to allow at least one cannabis retail store—medical, adult-use, or a mix—for every 15,000 residents. However, the bill would create an exception: if a local jurisdiction submits (or has already submitted) an ordinance or resolution to its voters to authorize or prohibit cannabis retail activity, and the voters do not vote to authorize it by more than a simple majority it (or if they vote by simple majority not to allow it, in the case of a proposed prohibition), then that local law would control and no retail cannabis operations would be required.

Now, that bill has now been shelved. It required a 2/3 vote to pass, and the bill’s sponsor determined that it did not have enough support, plus it was facing strong oppositions from cities and counties that argued it would have usurped their power to exercise local control—a core promise of Prop 64. But is that really what AB 1356 would have done? It would only apply to jurisdictions where the will of the voters in 2016 was to legalize adult-use cannabis business activity, and the bill would still give local jurisdictions the right to ask their voters again for a thumbs-up or thumbs-down on cannabis businesses.

That leads to a bigger question about MAUCRSA and cannabis legalization in California generally: did Prop 64, while giving power to cities and counties to prohibit and restrict cannabis activities, also reserve power for local legislative bodies to prohibit cannabis businesses—even when contrary to the will of their own voters? Our firm is currently fighting that fight in Kern County, where the Board of Supervisors attempted to implement a cannabis ban by legislation after the voters had expressly rejected it by referendum.

AB 1356’s sponsor says he intends to reintroduce it next year, and the delivery lawsuit is still pending, but for now the cannabis deserts will stay dry until someone finds a compromise solution.

trademark cannabis marijuana uspto

I have advised countless cannabis companies, both start-up and well-established, on how to choose a strong brand and ideally, how to avoid trademark litigation down the line. But inevitably, clients come to me (even those who put a lot of thought into choosing their trademarks) with cease and desist letters and notices of opposition that have been filed against them with the United States Patent and Trademark Office (USPTO). The credibility of those litigious threats will fall somewhere on a sliding scale of “completely unfounded” to “very credible.” But something many business owners often don’t think about is the fact that even if the threats against them fall closer to the “completely unfounded” end of the scale, they will still need to pony up the cash (at least initially) to defend themselves, which can be costly.

I really got to thinking about this problem the other day when, following receipt by a couple of my clients of letters that I would deem verging on the “completely unfounded” end of the credibility scale, I saw a news article about one of my favorite coffee shops. Cat & Cloud, a small coffee roastery based in Santa Cruz, CA, is facing a petition to cancel one of their two trademark registrations with the United States Patent and Trademark Office’s (USPTO) Trademark Trial and Appeals Board (TTAB) by Caterpillar, Inc, maker of heavy machinery and workwear.

Cat & Cloud’s registration (for CAT & CLOUD) in Class 25 covers “[c]lothing, namely, shirts, hats, tank tops, sweatshirts, socks, underwear, shorts and shoes.” Caterpillar, Inc. owns numerous federal trademarks for things like heavy machinery, equipment rental, engineering services, and freight brokerage. They also own registrations in Class 25 for footwear and workwear apparel. Caterpillar, Inc. alleges that consumers are likely to be confused by Cat & Cloud’s use of its mark on footwear and apparel, presumably associating the goods with the Caterpillar brand. A quick look at the Cat & Cloud branding should make it pretty clear that this petition to cancel falls squarely on the “completely unfounded” end of the credibility scale.

But defending your trademark in petition to cancel or an opposition proceeding before the TTAB is an expensive endeavor. These proceedings follow a similar track to any other kind of litigation, and parties can quickly rack up tens of thousands of dollars in legal fees. If your mark is opposed and you choose not to respond, the opposer will win by default and your mark will be cancelled. So, regardless of the credibility of the threat, parties on the defensive in any kind of TTAB proceeding must pay to fight back if they want to retain their trademark rights.

We’ve already seen this play out in the cannabis space as well. A couple of years ago, our client Lux Pot Shop, formerly known as Stash Pot Shop, was confronted with allegations of trademark infringement by Stash Tea Company. Whether or not the large tea company could have prevailed in litigation was ultimately irrelevant, because paying tens of thousands of dollars to litigate the matter in federal court was not on the table for a relatively young start-up company. Stash Pot Shop still paid a substantial amount of money to gracefully re-brand to Lux Pot Shop and lost its initial branding investment in the “Stash” name.

So, ultimately, this is a cautionary tale. We’ve written before about how to choose a brand name that won’t get you sued and we’ve gone over the factors a court will utilize to determine whether one brand is likely to be confused with another:

  1. Strength of the mark;
  2. Proximity of the goods;
  3. Similarity of the marks;
  4. Evidence of actual confusion;
  5. Marketing channels used;
  6. Type of goods and the degree of care likely to be exercised by the purchaser;
  7. Defendant’s intent in selecting the mark; and
  8. Likelihood of expansion of the product lines.

But it’s also important to think beyond these factors and use common sense. If you’re using an existing trademark or copyright as inspiration for your brand, the likelihood of running into trouble is higher. If you’re choosing a mark that is similar to one owned by a company like Disney Enterprises, for example, which is extremely aggressive in defending its IP, even if the goods or services are very distinct, the likelihood of running into trouble is high. Don’t rely on third-party designers to provide you with a mark that won’t raise issues of infringement with another trademark owner. It’s always a good idea to have a conversation with your trademark attorney as early in the brand development process as possible, since they can help guide you in the direction of a strong and distinctive mark. But it’s also important to budget for worst case scenario, because there’s no way of removing all risk that you won’t end up in the same unfortunate situation as Cat & Cloud or Stash.

second circuit marijuana deschedule dea

A split decision decided last Thursday, May 30, by the Second Circuit Court of Appeals reflects a lack of patience with U.S. Drug Enforcement Administration (DEA) when it comes to DEA’s handling of petitions to remove marijuana from the list of most dangerous drugs. As most of our readers likely know, the Schedule of Controlled Substances, established by the Controlled Substances Act of 1970 (CSA), places marijuana in the most restrictive class, Schedule I, alongside heroin. Schedule I is reserved for drugs with a high potential for abuse, no currently accepted medical uses, and a lack of accepted safety for medical use. Less dangerous than marijuana, according to the CSA Schedule, are methamphetamine, cocaine, and hydrocodone.

The Schedule was garbage when created and remains so today. (Click here and here for a detailed explanation why marijuana ended up as a Schedule 1 drug.) Here’s what John Erlichman, a key aid to then-President Nixon, told Harper’s Magazine in 2016:

You want to know what this was really all about? . . . The Nixon campaign in 1968, and the Nixon White House after that, had two enemies: the antiwar left and black people. You understand what I’m saying? We knew we couldn’t make it illegal to be either against the war or black, but by getting the public to associate the hippies with marijuana and blacks with heroin, and then criminalizing both heavily, we could disrupt those communities. We could arrest their leaders, raid their homes, break up their meetings and vilify them night after night on the evening news. Did we know we were lying about the drugs? Of course we did.”

NORML launched the first petition to reschedule marijuana in 1972. Since then many different parties have tried to reschedule or end prohibition by filing petitions with DEA per the CSA protocol on rescheduling. Yet despite the horrid purpose of the drug schedule, the ensuing tragic and profound effect on African Americans, and the waves of state legalization sweeping across the country, the DEA has essentially refused to act.

Last year we wrote about a new lawsuit filed by a group of five plaintiffs comprised of a 12-year old who uses cannabis oil successfully to treat life-threatening seizures; a 6-year old who treats Leigh Syndrome with cannabis; a former NFL linebacker who uses cannabis; an Iraq War veteran who suffers from post-traumatic stress disorder and was told by the Veterans Administration that his options were “opioids or nothing;” and the nonprofit Cannabis Cultural Association. In discussing the history of attempts to reschedule, or end the federal prohibition on marijuana, we noted:

A dozen times or so, private parties have filed petitions with the Drug Enforcement Administration (DEA), per CSA protocol on rescheduling. The DEA has routinely denied each petition, or declined to accept it outright. The lone exception was a petition filed by the pharmaceutical manufacturer of Marinol, to move the synthetic cannabis drug from Schedule II to Schedule III. That one was granted.

Other efforts have been made in the court system. These efforts are too numerous to detail at present, but they too have failed. Even a ruling by DEA’s own administrative law judge that cannabis should be reclassified was swatted away by the agency—and that was nearly 30 years ago.

This post provides an update on the lawsuit in light of the Second Circuit’s decision. Before getting to that, here’s a bit of background by way of our prior post:

The lawsuit targets marijuana’s status as a Schedule I drug under the CSA, and it asks the court to declare this status unconstitutional under the Due Process Clause of the Fifth Amendment, the Right to Travel, and the Commerce Clause. It also seeks a permanent injunction restraining the federal government from enforcing the CSA as relates to marijuana, and other relief. The named defendants here include none other than Attorney General Jeff Sessions, the Department of Justice, DEA, and the United States itself. Earlier in the litigation, plaintiffs sought a temporary restraining order against the feds with respect to enforcement of the CSA as to cannabis, but that motion was denied.

Typically, challenges to marijuana’s status under the CSA have been brought in administrative fora, where venue is not in dispute. Here, however, plaintiffs argue that the administrative process has proven to be so dysfunctional—and plaintiffs’ requests so urgent—that district court is a viable alternative. Thus, much of the oral arguments presented recently by both sides centered around whether the plaintiffs’ case could continue. If the judge can find a creative justification for that to occur, he seems to be leaning strongly toward plaintiffs on the merits.

Unfortunately, the district court ruled that the plaintiffs must seek relief from the DEA before turning to the courts. That set the stage for plaintiffs’ appeal to the Second Circuit.

The appeal turned on the doctrine of law known as exhaustion of remedies. That doctrine, well known to lawyers, is routinely applied by courts across the country. The doctrine holds that before going to court, a person challenging an administrative decision (here the DEA) must first pursue any remedies available before the agency. A prime example at the state level is the recreational marijuana industry, where participants must first resolve issues through the governing regulatory body (e.g. the Oregon Liquor Control Commission, the Washington Liquor Control Board) before seeking relief in the courts.

At the district court and on appeal, the plaintiffs sought to avoid petitioning the DEA pursuant to various exceptions to exhaustion requirement. Although the plaintiffs did not prevail on appeal, they didn’t exactly lose.

The opinion has four key parts. In the first, the court ruled that although the CSA does not mandate the exhaustion of remedies, requiring exhaustion was consistent with congressional intent. The court relied on specific statutory language concerning rescheduling and procedures from which the court inferred that Congress intended to implement scheduling decisions under the CSA through an administrative process. The court also ruled that exhaustion furthered the goals of protecting administrative agency authority and promoted judicial efficiency by giving the agency a chance to resolve the dispute.

The court’s skepticism of the scheduling regime seems apparent:

[Plaintiffs’] argument raises a complex policy question: whether the extant regulatory regime continues to advance the CSA’s goals in light of the current state of our knowledge about the drug. It is possible that the current law, though rational once, is now heading towards irrationality; it may even conceivably be that it has gotten there already.”

This is strong language. Appellate courts do not often call out the rationality of regulatory regimes.  After holding that exhaustion applies, the second and third parts of the opinion address whether any exceptions to exhaustion apply (no) or whether the requirement may be waived (no).

At this point, things have not gone very well for the plaintiffs.

But the fourth portion of the opinion is another story because two of the three judges ruled in favor of holding the case in abeyance and retaining jurisdiction. (The third dissented from this portion of the opinion). In the usual case, an appellate court would affirm the lower court and dismissed the lawsuit. Here, however, the majority expressed considerable displeasure with the DEA which, when combined with the exigencies of plaintiffs’ health issues, led the court to retain jurisdiction over the case.

The opinion here reads as a stern warning to the DEA:

Taking the facts as alleged, and, accordingly, taking the supposed benefits some Plaintiffs have experienced from marijuana as true as well, we—like the District Court below—are struck by the transformative effects this drug has assertedly had on some Plaintiffs’ lives.  As a result, we are troubled by the uncertainty under which Plaintiffs must currently live.

. . .

Plaintiffs argue that the administrative process will prolong their ordeal intolerably.  And their argument is not without force.  Plaintiffs document that the average delay in deciding petitions to reclassify drugs under the CSA is approximately nine years.

. . .

Courts have, moreover, on occasion deemed it proper to encourage prompt decisionmaking.  Thus, where agencies have a history of dilatory proceedings, federal courts have sometimes retained jurisdiction of related cases to facilitate swift review.

. . .

We think it possible that future action by us may become appropriate here.  Plaintiffs have not asked for—and we do not even consider issuing—a writ of mandamus to force the DEA to act.  But we exercise our discretion to keep jurisdiction of the case in this panel, to take whatever action may become appropriate if Plaintiffs seek administrative review and the DEA fails to act promptly.  And we note that, under the unusual health‐related circumstances of this case, what has counted as appropriate speed in the past may not count as appropriate speed here.

(emphasis added).

This is a good result for the plaintiffs, all things considered. The practical effect is that the DEA will have to act with “adequate dispatch” or face the prospect of the court reinserting itself into the case and deciding the scheduling question. And once the DEA acts, plaintiffs can challenge the DEA’s ruling in court.

With any luck, this opinion marks the beginning of the end of marijuana’s inclusion as a Schedule I drug. We will keep you posted.

marijuana cannabis lease
These leases are different, you know.

Whether you are a landlord, tenant, or subtenant in the cannabis industry, you need a first-rate cannabis lease. The structure of the leasing relationship and the terms of the lease are key components, both for getting funds out of the primary business and mitigating your risks, of which there can be many. If you are involved in more than one venture or have a complex organizational structure, any good attorney or accountant will advise you to put a separate lease in place for each discreet relationship. No, you cannot find the right lease on Google. No, you cannot use the lease your lawyer drafted for a non-marijuana real estate scenario. No, you cannot jot some bullet points down on a piece of paper and call it good. And you should not use a retail cannabis lease as a substitute for a manufacturing space or a cultivation facility. You also should not use a cannabis lease in place of a hemp lease, and vice versa, because those products are treated completely differently.

Every contract in every scenario in every business in every industry needs to be customized to some degree, and marijuana real estate leases are not your typical leases. If the other party wants to negotiate (e.g. change) any portion of the lease arrangement, even if you think it may not have any significant effect on your bottom line, you will want to have a good cannabis real estate lawyer backing you up. Here are some general principles to keep in mind as you decide how to move forward:

Be sure you have a written lease. Handshake deals and contracts established by text messages or Venmo emojis are not the foundation of a good lease. You want definite terms in all areas of the contract that are important to you and your lawyer who may have to help you enforce the lease (for landlords) or get out of the lease (for tenants). The less you put in writing now, the more you will have to pay later in attorneys’ fees (so your lawyer can prove the terms of your lease), regulatory fines (see #2 below), nuisance settlements (so your former landlord releases you from the lease), or the expenses of re-leasing real estate (because your tenant terminated the lease early upon terms favorable to them). Many states have default laws that fill in contract gaps, and, depending on which side of the contract you sit, you may not want those rules applied to your situation.

Be sure your lease complies with state and local laws. Real estate is, by its character, tied to local laws. States like to regulate their real estate with their own rules, and those rules can vary wildly, which is why you need a local attorney familiar with both state laws and “the way thing are done around here”. Just ask our California cannabis lawyers how California laws and practices differ from Oregon, Washington, or any other state. The permissions and prohibitions on cannabis, marijuana, and hemp (and their varying stages of cultivation and processing) mean different things to different states. That means if you are going into a new market or even a new town, you need to know what the state laws and regulations are, along with the local zoning ordinances and how they are all enforced. You should assume that what works under one state’s regulatory guidelines will get you into trouble in another state. And because every state is in a different phase of legalizing pot, you need to know the current and proposed laws and regulations so you can roll with the constant changes.

Be sure your lease is tilted in your favor. Leases are contracts, so they are customizable. If someone wants you to sign their “form lease” because it is their “standard practice”, tell them that your standard practice is to negotiate a balanced arrangement that is good for both sides. Then make sure that your lawyer knows what they are doing so they can tilt as many provisions as possible in your favor. The scenarios can vary drastically: if the other side does not use an attorney, that is generally very good for you; if they use an attorney who does not know real estate, that is also good for you; and if they use an attorney who knows real estate but does not know marijuana real estate, that could result in a relatively balanced lease or a painful and expensive experience because you have to pay your lawyer to teach their lawyer about every part of the contract that is cannabis specific. Landlords generally are the ones who have the upper hand in the lease drafting and negotiations. Ensure your cannabis lawyer prepares a lease with all of the provisions tilted in your favor and then insist with your prospective tenant that it is your form lease and you never vary from it.

Be sure you know your position in the leasing food chain and negotiate accordingly. The cannabis industry is maturing, and years ago those people and businesses with land or capital to buy land started recognizing the opportunity to lease real estate to marijuana businesses, which has been hailed as a saving grace for landowners with real estate in economically depressed areas like my old stomping grounds in Maine. The first generation of state-legal pot growers, manufacturers, and retailers have been encountering offers to exit the business via both domestic and international M&A activity, and that means leases are extremely important to a potential purchaser and a smart seller. Savvy first generation pot entrepreneurs know that they can make a healthy profit by remaining in the industry via real estate even after the sale of their business, like the legacy landlords who got into the leasing business early. Real estate can be a stable and profitable income stream. Sellers under a master lease who sublease to the new purchaser, unlike the actual landowner, have no risk of underlying asset forfeiture. The former-tenant-turned-sub-landlord’s (aka a sub-lessor) only risk is in the subtenant, and they will make up for that risk by charging the subtenant triple (or more) what they owe to the landowner under the master lease. Landowners with good legal counsel will ensure that the master lease accounts for this clever business maneuver by either prohibiting subleasing or (better yet) requiring any upcharge in the sublease to be passed directly onto the landowner.

In every industry and in every contract, especially the cannabis leasing space, it is crucial you understand what you want out of the relationship and ensure you have a good legal team to help you get there.

On May 28th, 2018, the United States Department of Agriculture (“USDA”) issued a non-binding opinion letter regarding hemp production (“USDA Letter“). The USDA’s Office of General Counsel (a.k.a., the USDA’s lawyer) made four conclusions in the letter, which I’ll explore in this post.

1. As of the enactment of the 2018 Farm Bill on December 20, 2018, hemp has been removed from schedule I of the Controlled Substances Act and is no longer a controlled substance.

Much of the 2018 Farm Bill is contingent on the USDA implementing a program to oversee the cultivation of hemp on the federal level. Section 10113 of the 2018 Farm Bill covers hemp production (which you can read about here) in great detail and gives the USDA the authority to oversee hemp production at the federal level and to approve of State and Tribal plans covering the cultivation of hemp. In February, the USDA stated that it will not start approving plans until it issues its own regulations in Fall of 2020. This clarification from USDA indicates that in the agency’s opinion, the CSA removed hemp as a schedule I substance as soon as it was signed into law by Donald Trump.

2. After USDA publishes regulations implementing the new hemp production provisions of the 2018 Farm Bill, States and Indian tribes may not prohibit the interstate transportation or shipment of hemp lawfully produced under a State or Tribal plan or under a license issued under the USDA plan.

This is an affirmation of Section 10114 (b) of the 2018 Farm Bill, which states the following:

TRANSPORTATION OF HEMP AND HEMP PRODUCTS.—No State or Indian Tribe shall prohibit the transportation or shipment of hemp or hemp products produced in accordance with subtitle G of the Agricultural Marketing Act of 1946 (as added by section 10113) through the State or the territory of the Indian Tribe, as applicable.

In plain English, this means that states and Tribes can’t prohibit hemp or hemp products from passing through their state or territory if the hemp or hemp products were produced in compliance with Section 10113 of the 2018 Farm Bill.

3. States and Indian tribes also may not prohibit the interstate transportation or shipment of hemp lawfully produced under the 2014 Farm Bill.

This is where things get interesting. The 2018 Farm Bill did not repeal Section 7606 of the 2014 Farm Bill. The 2014 Farm Bill authorized colleges and state departments of agriculture to cultivate industrial hemp for research purposes. The hemp industry that we know and love has “grown up” under the 2014 Farm Bill because the USDA has not yet approved any 2018 Farm Bill state plans. That means that all the hemp grown in this country is done so under the 2014 Farm Bill. The 2018 Farm Bill will repeal Section 7606 of the 2014 Farm Bill one year after the USDA issues hemp regulations.

The USDA Letter’s third conclusion says that Section 10114 of the 2018 Farm Bill, which prohibits states and Indian tribes from interfering with the interstate transport of hemp, protects hemp cultivated pursuant to the 2014 Farm Bill. The USDA’s reasoning turns on a subsection of Section 10113, which states that “[n]othing in this sections prohibits the production of hemp in a State or the territory of an Indian tribe, for which a state or Tribal plan is not approved under this section, if the production of hemp is in accordance with [. . .] other Federal laws[.]” According to the USDA Letter, the 2014 Farm Bill qualifies as “other Federal laws” and therefore states and Indian tribes cannot interfere with the transport of 2014 Farm Bill grown industrial hemp or products derived from industrial hemp.

It’s worth pointing out that the USDA Letter is a non-binding interpretive statement and a judge may disagree with the USDA’s conclusions. However, this gives strong support to the argument that states should not interfere with legally grown hemp shipments.

4. A person with a State or Federal felony conviction relating to a controlled substance is subject to a 10-year ineligibility restriction on producing hemp under the Agricultural Marketing Act of 1946. An exception applies to a person who was lawfully growing hemp under the 2014 Farm Bill before December 20, 2018, and whose conviction also occurred before that date.

This last conclusion, though unfortunate, is a pretty straight forward interpretation of the 2018 Farm Bill’s prohibition on felons producing hemp. If anything, it clears up the date when felons are “grandfathered” in: 12/20/18.

This guidance from the USDA is helpful and mostly positive for the industry, especially when in comes to the uncertainty around interstate shipments. It’s also worth noting that the USDA released this guidance a few days before the FDA is scheduled to hold a public hearing on May 31. This all but assures that it will be a big week for hemp.

tsa cbd cannabis flightIn the past few months, our team has been quoted in several magazines and online publications on the risks of traveling with CBD products. These media inquiries resulted from repeated arrests of travelers in possession of CBD oil at the Dallas/Fort Worth International Airport (“DFW”).

At the time of these arrests, the Transportation Security Administration (“TSA”), an agency of the U.S. Department of Homeland Security that has authority over the security of the traveling public in the United States, maintained the position that:

Possession of marijuana and cannabis infused products, such as Cannabidoil (CBD) oil, is illegal under federal law. TSA officers are required to report any suspected violation of law, including possession of marijuana and cannabis infused products. TSA’s screening[s] are focused on security and are designed to direct potential threats to aviation and passengers. Accordingly, TSA security officers do not search for marijuana or other illegal drugs, but in the event a substance that appears to be marijuana or a cannabis infused product is observed during security screening, TSA will refer the matter to a law enforcement officer.”

As a federal agency, TSA adheres to the rules and regulations of the federal government. However, even after the passage of the 2018 Farm Bill and the legalization of hemp, TSA continued not to differentiate marijuana from hemp and to treat all CBD products as illegal under federal law.

However, following more arrests at DFW last week, TSA decided to provide some clarification and revised its Medical Marijuana page, which provides that:

Products/medications that contain hemp-derived CBD or are approved by the FDA are legal as long as it is produced within the regulations defined by the law under the Agriculture Improvement Act 2018.” (Emphasis added).

However, these new guidelines are vague and confusing.

First, to which “regulations defined by the law” under the 2018 Farm Bill is TSA referring? Is TSA going to allow hemp-derived CBD products processed pursuant to a plan approved by the U.S. Department of Agriculture (“USDA”)? No such product currently exists since the USDA has yet to approve state plans. Alternatively, is the agency authorizing passengers to carry products processed under a 2014 state pilot program? This might make more sense, as the 2018 Farm Bill provides that the 2014 Farm Bill shall remain in place for one year following the adoption of rules by the U.S. Department of Agriculture.

Still, if TSA intended for the latter to apply, then it would mean that passengers could carry hemp-derived CBD “products/medications,” such as CBD-infused food and dietary supplements, whose introduction in interstate commerce has been deemed unlawful by the FDA. Indeed, the language of the TSA guidelines provides that both hemp-derived CBD “products/medications” that meet the “regulations defined by the law” under the 2018 Farm Bill “or” FDA approved “products/medications” may be brought on planes. Currently, the FDA has only approved the following “products/medications”: (1) three generally recognized as safe (“GRAS”) hemp seed ingredients; and (2) Epidiolex, a CBD-infused drug used in the treatment of epilepsy.

TSA is now one of several federal agencies to have revisited its policies regarding the legality of hemp-derived CBD products, including the U.S. Alcohol and Tobacco and Trade Bureau, the U.S. Patent and Trademark Office, the U.S. Postal Services and the USDA.

It remains to be seen how TSA will enforce its new policy and whether it will defer to other federal agencies, including the FDA which is exploring potential pathways for dietary supplements and/or conventional foods containing CBD to be lawfully marketed, in developing its enforcement strategy.

But one thing is certain, unless TSA clarifies these guidelines, more airport arrests could ensue.

We will continue to monitor this issue and will keep you informed of any development. For now, the “anything goes” approach to CBD and air travel is a risky one, despite some reporting out there to the contrary.

l.a. cannabis social equity tier 3The prelude to Phase 3 licensing in the City of L.A. is finally upon us. Today, L.A. will begin accepting applications for Phase 3 social equity applicants for retail and delivery in the City. Specifically, Phase 3 social equity applicants will have from today through July 29th to prove up their Tier 1 or Tier 2 status. And if they can do that, they’ll move on to be able to apply for actual licensure in Phase 3, which kicks off (or should kick off) in September of this year.

If you have any hope at all of securing a coveted L.A. brick and mortar retail or delivery retail license, you must apply as a Tier 1 or 2 social equity applicant in Phase 3 and you must first demonstrate your Tier 1 or 2 eligibility in this 60-day window set up by the Department of Cannabis Regulation (DCR). This is incredibly important as the City will not accept eligibility applications after July 29th. Moreover, only 250 retail licenses remain in the entire City.

Logistically, Tier 1s and 2s will apply online through the DCR’s licensing portal. This is the specific link to register for pre-verification. There is no application or verification fee and this is not a first come, first serve process–the City will simply review eligibility applications as they come in and respond to applicants as quickly as possible. The date at which you file in this pre-vetting window has nothing to do with your place in line when Phase 3 actually opens in September. Most important of all for this 60-day window is that applicants must also upload “various documents to prove certain eligibility criteria.”

Translated: you’ll need to provide physical evidence of your low income status, your residency in a Disproportionately Impacted Area, and/or your cannabis arrest or conviction when you file online.

In the future, DCR will make the rounds on verifying that social equity applicants receive their mandatory equity allocations in their cannabis businesses but, for now, DCR is solely focused on basic eligibility criteria. For more on that criteria and how to prove you meet it, see here. Now is the time to compile your eligibility documentation so that you’re not caught flatfooted at the end of July. And applicants should include their strongest, prima facie evidence of Tier 1 or Tier 2 status where the DCR allows a range of evidence to come in, including declarations signed under penalty of perjury (which you’ll need to draft yourself since there is no designated City form for that).

Finally, it’s worth revisiting the ownership thresholds at play in this convoluted process. A Tier 1 social equity applicant must own at least 51% of the applicant business and has to meet the following criteria:

  1. Low Income (which means means 80% or below of Area Median Income for the City based on the 2016 American Community Survey and updated with each decennial census) and prior California Cannabis Arrest or Conviction (which means an arrest or conviction in California for any crime under the laws of the State of California or the United States relating to the sale, possession, use, manufacture, or cultivation of cannabis that occurred prior to November 8, 2016); or
  2. Low Income and a minimum of 5 years cumulative residency in a Disproportionately Impacted Area (which means total (not consecutive) years in those eligible zip codes based on the “More Inclusive Option” as described on page 23 of the “Cannabis Social Equity Analysis Report” commissioned by the City in 2017, and referenced in Regulation No. 13 of the Rules and Regulations, or as established using similar criteria in an analysis provided by an applicant for an area outside of the City).

As to Tier 2, each social equity applicant has to have at least 33 1/3% equity in the applicant business and has to meet the following criteria :

  1. Low Income and a minimum of 5 years cumulative residency in a Disproportionately Impacted Area; or
  2. A minimum of 10 years cumulative residency in a Disproportionately Impacted Area.

Yes, there is overlap between the Tier 1s and Tier 2s per the above, and if you don’t know which tranche you qualify for, the DCR will let you apply for both in the next 60 days. The DCR’s social equity program FAQ is also a helpful resource for addressing ambiguities about the program, so be sure to check it out before you start throwing documents at the City.

It is incredibly important for stakeholders to understand that today doesn’t represent the actual opening of the Phase 3 licensing window–people won’t submit their business or real property documents to the DCR until September when Round 1 and 2 of Phase 3 licensing commence. This window is only dedicated to qualifying social equity applicants and that’s it.

So, gather and organize your eligibility documents and get them into the City well before July 29th. And if you haven’t sorted your business dealings yet for the actual cannabis businesses, it’s never too early to start planning for Round 1 in September. Last, because social equity applicants are going to be the hottest (and only) ticket in L.A. for retail licensing, be on the lookout for hawkish, predatory business partners as they’re a dime a dozen in L.A.’s emerging cannabis scene.