New York Cannabis Control Board Issues First CAURD Licenses and Votes to Publish Proposed Regulation Package

The New York Cannabis Control Board (the “Board”) held a public meeting on November 21, 2022, during which it approved a number of conditional license applications and voted to publish new and revised regulations for public comment. These approvals represent important steps forward in New York’s rollout of its adult-use legalization plans. In approving both the license applications and proposed regulations, the Board highlighted New York’s commitment to social and economic equity as principles underlying its regulatory scheme.

The state aims to begin adult-use cannabis sales by the end of this year. To this end, the Board has accepted applications for three different components of the supply chain: growing, processing, and cultivating. During last week’s meeting, the Board approved of measures granting eight applications for conditional cultivator licenses, and eight for conditional processor licenses. The application period for the third sector of the supply chain, Conditional Adult-Use Retail Distributors (“CAURD”), closed in September, and the Board received more than 900 applications. The Board voted to issue the first of New York’s CAURD licenses, to 29 business applicants and eight nonprofits, subject to the applicants’ submission of final application materials. Once these entities receive final licensure, they will be permitted to sell cannabis products grown and processed in New York State. The Board will continue to review applications and issue licenses on a rolling basis, to qualifying businesses owned by justice-involved individuals.

The Board also voted to publish revised regulations for product packaging and laboratory testing, and to publish a comprehensive package of proposed regulations. The Proposed Adult-Use Cannabis Regulation Package addresses, among other items, the application process and ownership and licensing requirements; protections for cannabis businesses from discrimination by municipalities; environment and sustainability regulations, including requirements for sustainable packaging and energy use tracking and water use conservation measures by growers and processors; and social and economic equity. The Board noted during this meeting that enforcement for cannabis-related offenses has affected minorities in New York even more disproportionally than in other states, and New York is now prioritizing these affected groups in its licensing and funding. The state will also prioritize other licensing applicants, including disabled veterans, minorities, women, and distressed farmers. New York’s cannabis laws create a “two-tier” market, which discourages vertical integration by prohibiting common ownership of retailers and suppliers and imposing certain disclosure requirements. The Board approved publication of this set of regulations for a 60-day public comment period.

The Board noted that this meeting included several milestones – particularly the approval of the first set of CAURD licenses and publication of the proposed regulation package. The Board’s focus moving forward will be to get current licensees up and running and continue to review and approve new applications.

Medical Cannabis Research Bill Set to Become Law

Last week, the Senate unanimously passed H.R. 8454, or the Medical Marijuana and Cannabidiol Research Expansion Act (the “Act”), sending the bill to President Biden’s desk for signature. The bill passed the House this summer by a vote of 325 – 95, and marks the first time a standalone cannabis bill has been approved by the federal government. Essentially, the Act is intended to simplify and expand research into the medical possibilities of both cannabis and cannabidiol as a treatment for certain serious ailments. However, the Act does not de-schedule cannabis under the Controlled Substances Act, instead keeping cannabis a Schedule 1 drug. This means that cannabis will still be deemed to be a drug with a high likelihood for abuse, with no accepted medical use.

In particular, the Act provides for a streamlined process for the approval of cannabis research applications as follows:

  • An applicant under the Act must submit a completed application to the U.S. Attorney General, which the Attorney General must approve, deny, or request additional information within 60 days. The application must include: 1) details relating to the applicant’s research protocol, reviewed and approved by the Secretary of the Department of Health and Human Services (the “DHS”), the National Institutes of Health, or another agency, or according to provisions in the Federal Register, and 2) the safety measures to prevent diversion of cannabis substance (including storing it in a locked, constructed cabinet).
  • If the Attorney General requests additional information and the applicant so provides, the Attorney General must approve or deny the application within 30 days of the applicant providing such additional information. If the Attorney General ultimately denies any application, an explanation of the denial must be provided.
  • A registrant may update its research protocol without informing the Drug Enforcement Administration, if the quantity and form of cannabis, the source of the cannabis, and the conditions of storage will not change. If any of the foregoing items will change, the registrant must notify the Attorney General via registered mail or an electronic means permitted by the Attorney General.
  • If the Attorney General does not object to the changed protocol within 30 days, it is considered approved and the registrant may go ahead with the changed protocol.

Moreover, the Act also streamlines the process for applying to manufacture cannabis products for research purposes. The application timeline is similar to the research application process, but will only begin when the Attorney General posts in the Federal Register that the Attorney General’s office will increase the number of entities able to be registered under the Act as manufacturers of cannabis for medical research purposes. Then, entities may submit applications to the Attorney General. The application must show:

  • The requirements of the Act and the Federal Register have been satisfied.
  • The applicant will only transfer cannabis to those who are registered under the Act to perform preclinical or clinical research.
  • The applicant will only transfer or sell cannabis under the Act with the prior written consent of the Attorney General.
  • The applicant has completed the review process set forth in 21 U.S.C. § 823(a) of the Controlled Substances Act, which discusses general registration requirements for manufacturing Schedule I and II Controlled Substances.
  • The applicant has established and actually follows a process for storing and handling a Schedule I controlled substance.
  • A license to operate, if the State in which the applicant operates requires one.

The Act further authorizes registered covered institutions of higher education, like medical schools and research schools, to manufacture, distribute, dispense and possess cannabis for medical research, with guidance from the DHS and the U.S. Food and Drug Administration.

Additionally, the Act allows for doctors to discuss with their patients, and their patients’ parents if the patient is a minor, the potential benefits and risks in using medical cannabis under state medical cannabis laws. Prior to the Act, it was unclear whether such an act was a punishable offense under federal law. Senate Majority Leader Chuck Schumer is hopeful this provision, and the Act in general, will help patients with conditions like Parkinson’s, epilepsy, and severe post-traumatic stress.

Lastly, the Act requires the DHS to report to Congress on particular topics of research, including but not limited to, the effects of cannabis on the human body, effects on the adolescent brain, potential impairment of cognitive ability, and barriers and solutions to studying cannabis from states with legal cannabis.

Importantly, there are a few things the Act does not do. The Act does not allow research using state-legalized products for medical research purposes; the Act only allows for using the products manufactured through the Act’s protocols. Therefore, there will not be research into the products people are currently using to treat their medical ailments under state medical cannabis laws. Furthermore, as mentioned above, the Act does not de-schedule or re-schedule cannabis. President Biden issued an executive order in October asking the Secretary of the DHS and the Attorney General to begin the administrative process of de-scheduling cannabis. Presumably, research performed under this Act may lead to either de-scheduling or re-scheduling cannabis, but it is far too soon to tell.

Additionally, the Act does not implement more widespread reform. President Biden issued a pardon last month for simple cannabis possession offenses under federal law, but further reform will not be enacted unless the Senate passes one of several reform bills on the table. Even so, critics and proponents alike across the political spectrum, are lauding the Act as a necessary step for the federal government to catch up to the state legalization wave.

To read the full text of the Act, see https://www.congress.gov/bill/117th-congress/house-bill/8454/text.

Could Cannabis Banking Reform Finally Pass In Lame Duck?

In the Nov. 8 midterm elections, voters in both Maryland and Missouri approved legalization of cannabis for adult use, while voters in Arkansas, North Dakota and South Dakota voted no on legalization.

With the passage in Maryland and Missouri, 21 states as well as the District of Columbia have now legalized cannabis for adult use, and another 16 states permit cannabis for medical use.

Despite the fact that nearly half of all states have now legalized cannabis for adult use, it remains illegal under the federal Controlled Substances Act as a Schedule I drug, along with drugs like heroin and LSD. Such a classification means that cannabis has a high potential for abuse and has no acceptable medical use, despite research to the contrary.

To read the full text of this article by Duane Morris attorney Deanna Lucci, originally published in Law360, please visit the firm website.

Pennsylvania Almost Surrounded With Adult-Use Cannabis

Cannabis had a decent day at the polls yesterday, with voters in Maryland and Missouri legalizing adult-use, bringing the number of adult-use states to 21, but voters in Arkansas and the Dakotas voted against adult-use. With Maryland legalizing adult-use, Pennsylvania, which has a medical marijuana program, is getting closer to being surrounded by states where adult-use is legal. Across it’s northern, eastern, and southern borders Pennsylvania is now adjacent to adult-use states – New York, New Jersey, and Maryland. All three states are predicted to generate billions each in cannabis sales.

The election of Josh Shapiro as Pennsylvania Governor would guarantee the passage of adult-use legislation should it pass in the Pennsylvania senate. However, notwithstanding the tax revenues, job growth, and overall economic boost expanding from medical marijuana to adult-use would create in Pennsylvania, most believe state legislators are not there. Perhaps revenues lost from Pennsylvanians crossing the border to buy cannabis in New York, New Jersey, and Maryland will make the difference.

 

New York Expects 20 Dispensaries to Open by End of Year and Issues Guidance for the State’s First Adult-Use Retail Cannabis Dispensaries

On October 28, 2022, the New York Office of Cannabis Management (OCM) released forward-looking guidance for those seeking to operate within the state’s recreational cannabis market.

The Background

In January, Gov. Kathy Hochul published an extensive State of the State book, laying out New York’s plan for 2022, including $200 million loan fund in support of social equity applicants within the state’s nascent marijuana market.

The state government set a goal of opening dispensaries by the end of the year that will allow New Yorkers to legally purchase cannabis. Hochul told the editorial board of Advance Media, owner of the Syracuse Post-Standard, that the state would open 20 dispensaries by the end of the year, with another 20 opening each month thereafter.

On October 17, Hochul told reporters that New York is “on track” to open some cannabis dispensaries within months.

Under Hochul’s plan, it is up to the state to select and lease locations for the dispensaries, including 70 in New York City. While the state’s OCM has not yet announced any locations for dispensaries anywhere in the state, it recently issued guidance in clear anticipation of this plan unfolding in the near future.

The Regulations

The New York OCM’s “Guidance for Adult-Use Dispensaries” is a series of prospective regulations for Conditional Adult-Use Retail Dispensary (CAURD) licensees and applications and are immediately effective.

The 27-page document includes requirements and operational rules addressing everything from operations and compliance measures to marketing, sales and distribution parameters, while providing insight into the OCM’s plans for issuing licenses when the time comes. This includes topics of record-keeping requirements, required training for staffers, and inventory and tracking requirements, among others.

While these guidelines are not yet formally adopted and enacted as rules, they at least offer both CAURD licensees and regulators a “working” preview of the New York Cannabis Control Board’s (CCB) expectations for the forthcoming dispensaries.

Indeed, the document states that it “serves to provide the framework that will assist CAURD licensees plan for how to operate their dispensary before regulations are formally adopted. . . and provides clarity on what the Office’s expectations are in relation to those regulations and laws currently in place and the regulations that will be promulgated in the future.”

What Does This Mean for CAURD Licensees?

The state and regulators are gearing up for the opening and development of these dispensaries, possibly within the next few weeks, and throughout the next 15 months. CAURD licensees in New York should adhere to OCM’s newest guidance, in addition to existing Cannabis Law and Title 9 of the New York Codes, Rules and Regulations, until a copy of the final regulations is made available on the OCM’s website.

On November 3, a Business of Cannabis: New York panel discussion ensued, where much of the conversations centered on the importance of providing equal opportunities to small business and justice-involved entrepreneurs to participate in the industry. Panel participants included Tremaine Wright, Chair of the CCB, Crystal Peoples, New York State Assembly Majority Leader, and Jeremy Berke, Reporter for Business Insider.

The same day, Wright tweeted, “[New York] is on target to open stores by the end of the year.” Axel Bernabe, Chief of Staff & Senior Policy Director for OCM, who delivered the keynote more specifically assured, “In 15 months, we’ll have a fully established supply chain built on social equity. That supply chain will form the backbone of what we’re going to build on in the future.”

Qualifying New York small business owners and entrepreneurs should keep a close pulse on this evolving regulatory landscape over the coming weeks and months to ensure they remain in legal compliance and best positioned to take full advantage of this next phase of the state’s cannabis initiative.

House Approved Its First Appropriations Bill that Supports Tribal Cannabis Production and Distribution

Tribal leaders of federally-recognized tribes that have legalized cannabis, either medicinally or for adult use, may soon be able to breathe a sigh of relief. The Fiscal Year 2023 appropriations bill for the Department of the Interior (the “2023 Appropriations Bill”), awaiting Senate approval after having passed the House, includes a provision prohibiting the use of any Interior funds to enforce federal laws that otherwise criminalize cannabis on Indian lands where tribal law authorizes its use, distribution, possession, or cultivation. There are, however, two important caveats.

First, if the tribe is subject to state law that is contrary to tribal law, or the tribal land is located in a state where cannabis is illegal, the non-enforcement provision does not apply. Some tribes are still subject to Public Law 280, a relic from the 1950s, which gives certain states criminal jurisdiction over tribal members on tribal land. For those tribes, state criminal law would control and cannabis use, distribution, possession, or cultivation would remain illegal on tribal land.

Second, tribes must take reasonable steps to ensure tribal laws regarding cannabis are compatible with certain federal policy objectives, such as prohibiting cannabis use for minors and ensuring cannabis is not diverted to states or tribes where it is illegal, used to support organized crime or other illicit drugs, or brought onto federal public lands.

These policy objectives mirror ones that had been included in the “Wilkinson Memo,” a 2014 Obama-era statement of policy emphasizing the Department of Justice’s non-enforcement policy against tribes for legal cannabis businesses (both medicinal and adult-use). That memo gave tribes and tribal members some comfort that legalization efforts would not subject them to prosecution, or prevent federal funds from continuing to support their communities. When Attorney General Sessions rescinded that policy statement in 2017, tribal legalization was left in political limbo. The Biden administration has remained silent on the issue of tribal legalization, despite President Biden’s pardon announcement earlier this month.

If the Senate approves the 2023 Appropriations Bill, it will give tribes that have already legalized cannabis some much-needed clarity on where the federal government stands on enforcement of the federal Controlled Substances Act. During the Obama administration, tribes in states like Washington and Nevada found success in compacting with the state to create a uniform system of distribution. Tribes in California do not have that option as the state has prevented any such partnership, despite the state and tribes separately legalizing adult-use. More recently, some tribes located in New York went ahead without state partnership while state adult-use licenses linger in the approval process. Indeed, more than 100 dispensaries have opened in New York on Native land.

For tribes in states where cannabis remains prohibited in some or all forms, or the state has criminal jurisdiction over tribal members, the 2023 Appropriations Bill is a reminder that the complex system of federal and state law governing tribal affairs continues to create issues affecting tribal sovereignty.

Cannabis Industry Sees Rise in Consumer Fraud Class Actions, With More To Come With Interstate Sales

Consumer Protection

Cannabis products – such as vapes, pre-rolled joints, tinctures, gummies, and beverages – are consumer packaged goods that are required under state law to be marketed with packaging and labeling that demonstrates their safety to consumers. Although the U.S. state-licensed cannabis industry has been one of the fastest-growing industries in the U.S. over the past decade, consumer fraud lawsuits arising out of alleged packaging and labeling problems, which are a common risk for CPG manufacturers in other industries, have, until now, not been a major consideration for the cannabis supply chain.  However, that is changing. As three recent lawsuits suggest, consumer fraud class actions may be on the rise in the industry. Given the media attention cases like these attract, and the potential for damages for thousands or millions of potential consumers, the cannabis supply chain should take notice. As we discuss in the full text of this post, this is going to be especially true once cannabis products are permitted to be sold interstate.

To read the full text of this post by Duane Morris partners Seth GoldbergGerald L. Maatman, Jr., and Jennifer A. Riley, please visit the Duane Morris Class Action Defense Blog.

Text Message Costs Cannabis Executive

Recently, the 11th Circuit upheld a district court ruling that decided George Russo, president of 3 Delta, Inc., is individually responsible to pay BrewFab, LLC roughly $365,000 in outstanding invoices. This ruling is premised upon a text message Russo sent to a BrewFab owner promising to pay the outstanding invoices.

In 2018, 3 Delta hired BrewFab to construct a machine to extract CBD oil. The parties initially proceeded under the oral agreement without issue until December 2019 when the 3 Delta stopped paying BrewFab’s invoices.

Next month, the parties had a conference call to discuss the outstanding invoices, and soon thereafter, George Russo sent a text message to Rick Cureton, one of BrewFab’s owners, which read, “As per our conversation on Jan 30 2020 I george (sic) Russo from 3 Delta do promise to pay brew fab in full all outstanding bills as of this date and all agreed upon work for 3 delta future forward. I thank you for your patience.”

As a result of the text, work resumed, but the invoices did not get paid, and in June of 2020, BrewFab brought suit against 3 Delta to recover the past due amount. The lawsuit contained a count against Russo, in his individual capacity, for breach of his personal guaranty stemming from the text message he sent to Cureton.

BrewFab asserted in its summary judgment motion that Russo’s text message was an unambiguous and enforceable personal guaranty. The district court agreed. Russo appealed.

On appeal, Russo attempted to argue that he did not send the guaranty text message in his personal capacity, but the Eleventh Circuit disagreed. The Eleventh Circuit, agreeing with the District Court, stated that the language in the text message merely identified Russo as the one sending the text message, which contained no language to indicate that Russo was sending the message in his capacity as 3 Delta’s president.

According to a report from Reuters this summer, commercial disputes make up about 1/3 of cannabis related lawsuits. These disputes cover the gamut of disagreements, and involve breach of contract lawsuits, landlord-tenant disputes, securities related litigation, and other business torts such as breach of fiduciary duty. One such lawsuit is discussed above, but should serve as a reminder to those operating in the cannabis industry that business disputes are prevalent, and to remain vigilant and cautious in all business related communications.

© 2009- Duane Morris LLP. Duane Morris is a registered service mark of Duane Morris LLP.

The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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