New York Court Invalidates Cannabis Marketing and Advertising Regulations

New York’s already troubled rollout of the Marihuana Regulation and Taxation Act (“MRTA”) has hit yet another snag. In a ruling late last week, Albany County Supreme Court Justice Kevin R. Bryant invalidated several provisions of the cannabis regulations promulgated by the New York Cannabis Control Board. The final ruling actually scaled back the judge’s own ruling of a day prior, which initially tossed out the entire regulatory scheme.

The online cannabis retailer Leafly filed an Article 78 proceeding against the New York State Office of Cannabis Management, the Cannabis Control Board and the heads of those agencies, arguing that the regulations promulgated to carry out the MRTA were arbitrary and capricious and violated constitutional free speech protections. Specifically, Leafly argued that the regulations banning paid marketing or the advertising of prices and offerings on third-party platforms improperly prohibited Leafly from engaging in lawful commercial speech without advancing a substantial government interest.
On April 3, 2024, Justice Bryant issued a Decision and Order granting the petition and invalidating the entire regulatory scheme of the MRTA as “unlawful and void as arbitrary and capricious.”

The following day, April 4, Justice Bryant issued an Amended Decision and Order that invalidated only the challenged provisions of the regulations relating to third-party platforms.

Specifically, Justice Bryant nullified portions of the “Third-Party Marketing Ban,” which was intended to prohibit cannabis licensees from marketing, promoting or fulfilling orders of their products through a third-party platform or marketplace (such as Leafly). The Order also invalidated the “Third-Party Order Ban,” which prohibited licensees from contracting with a third party for cultivation, processing, distribution or sales of cannabis or cannabis products, as well as the “Pricing Ban,” which had required licensees to only enter into agreements with online third-party platforms that redirected users to the licensee’s website before the products’ prices were displayed. The Court also struck down the “Third-Party All-Licensee Listing Mandate,” which would have required licensees to only enter into agreements with third-party platforms or marketplaces that listed all licensees authorized for the retail sale of cannabis products, and the “Third-Party Distributor Listing Mandate,” which had prohibited licensees from listing their products on a third-party platform or marketplace that restricted information about and did not permit direct negotiation with licensed cannabis distributors.

With regard to the challenged regulations, Justice Bryant held that the various bans were arbitrary and capricious because the state cannabis agencies failed to demonstrate that they considered sufficient (or any) evidence before promulgating their rules. As such, the agencies’ determinations were not entitled to deference from the Court as there was no rational basis in the record for their actions. The judge found that the agencies’ attempts to provide support for the regulations through the case filings was an improper “post hoc rationalization” of their decisions. With regard to Leafly’s free speech challenge, Justice Bryant sidestepped the question of what degree of scrutiny to apply to the bans, finding that the regulations were unconstitutional under any standard of review given the “complete lack of justification” presented by the state agencies in defense of the regulations at issue.

On its face, the ruling invalidates certain restrictions on the use by cannabis operators of third-party platforms to facilitate marketing and sales activities, but its implications are farther reaching. Justice Bryant’s ruling highlights significant substantive and procedural deficiencies underlying the cannabis agencies’ rulemakings. Justice Bryant may have limited the scope of this particular ruling, but the opinion’s description of the flawed and incomplete regulatory process followed by the state agencies here and the legal consequences that necessarily follow has created a clear roadmap for future challenges to New York’s cannabis regulations.

Webinar: Mainstreaming Cannabis: Real Estate and Valuation

The Duane Morris Cannabis Industry Group, the American Trade Association for Cannabis and Hemp and Centri Business Consulting present Mainstreaming Cannabis: Real Estate and Valuation on Thursday, April 25, 2024, from 12:00 p.m. to 1:00 p.m. Eastern.

As with any type of business, the cannabis industry faces real estate concerns ‒ but with particular lease-related issues unique to the field. Facilities for the cultivation, manufacturing and distribution of cannabis and cannabis products are important not only to cannabis operators, but also investors and landlords, all of whom face federal, state and local regulations that can vary by location. Our panel will discuss the interplay between state and federal laws as it relates to cannabis regulations and implications for real estate transactions. REGISTER FOR THE WEBINAR.

What Rescheduling Could Mean For Cannabis Bankruptcies

Lawrence J. Kotler, Seth A. Goldberg and Ryan Spengler authored the Law360 article, “What Rescheduling Could Mean For Cannabis Bankruptcies.”

More than 75% of the U.S. population lives in states that have legalized cannabis for adult and/or medical use. Pursuant to a 2022 directive from President Joe Biden, a 2023 recommendation of the U.S. Department of Health and Human Services, and a scientific review released in January supporting the HHS’s recommendation, the U.S. Drug Enforcement Administration is now evaluating whether to reclassify cannabis as a Schedule III drug.

Read the full article. 

Attorney Generals Ask Congress to Fix Farm Bill “Loophole”

Seth Goldberg
Seth A. Goldberg

In a letter to Congress,  20 state Attorney Generals urge steps be taken in the upcoming Farm Bill to correct the loophole in the 2018 Farm Bill’s definition of hemp that has been exploited by those producing and distributing products chemically synthesized from hemp that are just as intoxicating, if not more so, than the cannabis sold under state-regulated cannabis programs.  Noting the public health and safety concerns of such hemp-synthesized intoxicants (HSIs), and the fact that their legalization was not intended by way of the 2018 Farm Bill, the AGs suggest the Farm Bill expected this year explicitly reserve for the states the power to regulate HSIs.   

Duane Morris client the American Trade Association for Cannabis & Hemp has taken a similar position in amicus briefs filed in the Eighth and Fourth Circuit Court of Appeals in Bio Gen LLC et al. v. Sanders et al. and Northern Virginia Hemp and Agriculture, LLC et al v. Commonwealth of Virginia et al.

Delta-8 THC Public Health and Safety Concerns Mount

Seth Goldberg
Seth A. Goldberg

Public health and safety concerns about delta-8 THC appear to be on the rise. A study published by JAMA this week showed that approximately 11% of all 12th graders in the US reported using products containing D-8 THC, with a higher prevalence in states that do not have existing D-8 THC regulations., and a related JAMA editorial, entitled “The Public Health Challenge of Δ8-THC and Derived Psychoactive Cannabis Products,” noted that D-8 THC products pose a risk to public health and safety because they are largely unregulated, in contrast to state-regulated medical and adult use marijuana.  As the authors of that editorial explain:

“The weak regulatory infrastructure for Δ8-THC has led to manufacturing, advertising, and sales practices that are inconsistent with public health and safety.Δ8-THChas been marketed to consumers as a low-risk medicinal cannabinoid product despite limited evidence for effectiveness. It has also been sold directly to minors through brick-and-mortar and online vendors, some of which do not restrict sales based on age. Inaccurate content labeling and potentially harmful adulterants are serious problems in the unregulated cannabinoid market. Products sold under the Δ8-THC designation vary considerably with regard to dosing and constituent ingredients.13 In an analysis of 20 commercial products marketed as Δ8-THC, authors observed that 5% of the products did not contain Δ8-THC and, among samples that did contain Δ8-THC, the quantities in each product varied markedly from advertised values.13 There is also evidence that products sold as Δ8-THC contain unlabeled constituents that may be dangerous for consumers.14 It is not known whether the constituents were added during manufacturing processes or whether they were added intentionally or because of poor
quality control procedures.”

The editorial’s authors note the need for more rigorous manufacturing, advertising, and sales standards for D8-THC and other intoxicating cannabis-related products, and encourage federal legislators to use the next Farm Bill to address the loophole in the 2018 Farm Bill that has resulted in the proliferation of D8-THC and other intoxicating substances chemically synthesized from hemp: 

“Given the potential harms posed by the widespread availability of Δ8-THC and other derived psychoactive cannabis products, more rigorous standards for manufacturing, advertising, and sales are warranted. The 2018 Agriculture Improvement Act is set to expire in September 2024, and legislators may take the opportunity to strengthen the regulatory infrastructure for derived psychoactive cannabis products or exclude certain derivative products from the statutory definition of hemp.”

 

 

 

PA Gov. Shapiro Calls for Adult-Use Legislation Now!

Seth Goldberg
Seth A. Goldberg

Citing the facts that Pennsylvania (i) is bordered almost entirely by states that have legalized cannabis for adult use; (ii) loses millions to the black market for cannabis annually; and (iii) projects hundreds of millions in annual revenue gains,  in his budget address for 2024 Pennsylvania Governor Josh Shapiro called on Pennsylvania’s legislature to deliver by July 1, 2024, legislation that would legalize cannabis for adult-use in Pennsylvania:

“Well, last year, 57 percent of voters in Ohio supported an initiative to legalize recreational marijuana.  And now, Ohio, New York, New Jersey, Delaware, and Maryland – practically all of our neighbors – have legalized marijuana.  We’re losing out on an industry that, once fully implemented, would bring in more than 250 million dollars in annual revenue.  And our failure to legalize and regulate this only fuels the black market and drains much needed resources for law enforcement.  It’s time to catch up.  I ask you to come together and send to my desk a bill that legalizes marijuana.  But that bill should ensure the industry is regulated and taxed responsibly.  That we create jobs and build wealth here in Pennsylvania, especially in the communities that have been disproportionately harmed by criminalization.  And that those who have been convicted for nonviolent possession of small amounts of marijuana have their records expunged.  Let’s stop hamstringing ourselves and start competing.”

Governor Shapiro’s urgency is not surprising.  Pennsylvania should have been leading the way in legalizing cannabis for adult-use, given its successful medical marijuana program, but instead other states have spring-boarded ahead of Pennsylvania.  Those states are now enjoying the revenues, job growth and overall economic benefits of legal cannabis, including even profiting from Pennsylvania residents crossing the border to buy their cannabis.  It truly is time for Pennsylvania “to catch up” and “start competing” in the legal cannabis market for the good of all Pennsylvanians.   

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

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