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.
NYS Office of Cannabis Management June 2023 Updates
This week, the New York State Cannabis Advisory Board (CAB) and the Cannabis Control Board (CCB) held meetings to discuss the current state of the cannabis industry and proposed regulations and legislation. The CCB is the approval and oversight body of the Office of Cannabis Management and is responsible for approving the regulatory framework for New York’s cannabis industry. This includes licensing cannabis businesses and approving the regulations and rules that will govern the cannabis industry in the state.
Cannabis Advisory Board Meeting
On June 13, 2023, the CAB met at CUNY School of Law in Queens to discuss the revised proposed regulations after receiving 3,500 public comments. These regulations range from focusing on achieving environmental and sustainability targets in the industry to rules for third-party platforms. Current proposals involve allowing the current Registered Organizations (i.e. vertically integrated medical cannabis operators) to co-locate three adult use dispensaries among their eight medical dispensaries. The CCB will vote on the final regulations at its first meeting in September. The CAB and CCB’s hope is to have a live functioning cannabis industry “with all the bells and whistles.”
The Conditional Adult-Use Retail Dispensary (CAURD) License is the first retail dispensary license available to businesses in New York State. These licenses are awarded to justice-involved New Yorkers and their family members. A “justice-involved” individual is someone who has been convicted of certain marijuana-related offenses in New York.
The State hopes to create a foundation to support an equitable industry. The CAB discussed the benefits of being a part of the CAURD Academy, which offers live education, seminars, office-hour meetings, calls with operators from other states, one-on-one mentorship, vendor demos, and access to accountants. Twenty-five licensees have taken part in the Academy thus far.
The CAB also discussed the NY Social & Economic Equity Plan and its recent report analyzing the national landscape of the cannabis market. Between 1980 and 2021, cannabis-related misdemeanor and felony convictions resulted in lost lifetime earnings of approximately $31 billion, and Black and Hispanic people accounted for 83% of those losses.
Acknowledging that it is inherently difficult for small operators to compete against large corporations, regardless of funding, the CAB agreed that New York State must protect its two-tiered market, enforce antitrust laws, protect against predatory practices, and approve regulations that are pro-competition and pro-employee. The CAB noted that cannabis cultivators and farmers want a clear path to licensure, additional Registered Organizations, and a community-driven incubator program.
Cannabis Control Board Meeting
On June 15, 2023, the CCB met in Buffalo to discuss recent Board updates and hear from the public. Chair Tremaine Wright opened the meeting by assuring New York residents that the state is continuing to open more dispensaries, expand access, and further develop New York’s cannabis supply chain.
The CCB approved Resolution No. 2023-23: Consideration of Conditional Adult-Use Retail Dispensaries. This adds 36 CAURD licenses in the Bronx, Brooklyn, Manhattan, Queens, Central NY, Mid-Hudson, and‒for the first time‒the Finger Lakes. Seven dispensaries were approved in the Finger Lakes region. This approval brings the number of CAURD to 251. Wright said these locations will help farmers get more of their product to market.
The Board then presented updates to the market. There are currently 13 open retailers statewide with more than 40 in development. Twenty-one percent of New Yorkers now live in a city with legal cannabis access. Some dispensaries are delivery-only, which is a new form for the state. Consumers are asked to look for a QR code on the window of the dispensary confirming that it is approved by the state. Retail sales are growing; cannabis sales year-to-date are $22.6 million. Some of the dips in sales were attributed to pop-up shops that have transition to brick-and-mortar spaces, which often require a brief shutdown to build out a new space. Product innovations are occurring regularly. Flower sales make up 51% of the revenue, with the rest split between beverages, complex caramels, premium vapes, and more. This widening of product options draws more consumers to the legal market.
The Executive Director reported next that under a newly enacted law, the Office of Cannabis Management (OCM) and the taxing authorities began raids on unlicensed businesses since June 7, 2023. This law allows OCM to take action against businesses selling cannabis without licenses, bolsters OCM authority by conducting regulatory inspections, utilizes court orders to padlock doors if necessary, and allows OCM to seize illicit cannabis.
Each location inspected is issued a notice of violation for selling cannabis without a license. The maximum penalty is $10,000 per day, plus potential additional penalties and consequences if sales continue.
Finally, during the closing comments, board member Reuben McDaniel resigned, presumably as a result of the perceived conflict of interest of his being both a CCB board member and also as the president of DASNY.
Minnesota Becomes 23rd State to Legalize Recreational Cannabis
This week, Minnesota Gov. Tim Walz signed into law a bill that legalizes recreational cannabis for adults 21 and older. The law goes into effect on August 1, 2023, and will permit adults to have up to two pounds of marijuana at home and two ounces while in public. The law also creates a new regulatory framework for licenses to cultivate, manufacture and sell cannabis at retail dispensaries. Until the regulations are drafted and licenses are issued, the sale of cannabis in Minnesota remains illegal without a license. Licensed retail dispensaries are expected to open within 12-18 months.
Under the law, non-felony cannabis offenses will be automatically expunged and a board will be established to review more serious crimes involving cannabis.
In the wake of the new law, the St. Paul, MN office of the federal Bureau of Alcohol, Tobacco, Firearms, and Explosives (“ATF”) issued an advisory warning that Minnesotans who use cannabis cannot legally own firearms. This is because cannabis remains a Schedule I controlled substance under federal law.
The ATF warning said, “Until marijuana is legalized federally, firearms owners and possessors should be mindful that it remains federally illegal to mix marijuana with firearms and ammunition.”
DEA Finds that Lab-Derived Cannabis Compounds Are a Schedule I Drug, Even if Made from Hemp
On February 13, 2023, the U.S. Drug Enforcement Administration (DEA) published a letter in which it opined that two acetate compounds chemically derived from cannabis, delta-8-THCO and delta-9-THCO, are Schedule I substances under the federal Controlled Substances Act (CSA), even if they are derived from hemp, which is federally legal. The DEA’s letter came in response to an inquiry from an attorney who represents the Hemp Industries Association.
Dr. Terrence L. Boos, Chief of the DEA’s Drug & Chemical Evaluation Section Diversion Control Division wrote, “Delta-9-THCO and delta-8-THCO do not occur naturally in the cannabis plant and can only be obtained synthetically, and therefore do not fall under the definition of hemp.” Dr. Boos wrote that the CSA classifies THC under Schedule I, and THC (tetrahydrocannabinols) means those “naturally contained in a plant of the genus Cannabis (cannabis plant), as well as synthetic equivalents of the substances contained in the cannabis plant and/or synthetic substances, derivatives, and their isomers with similar chemical structure and pharmacological activity to those substances contained in the plant.” (emphasis added).
It’s important to note that the compounds addressed in the DEA letter are different from delta-9-THC, the psychoactive chemical found naturally in cannabis that causes a high, and delta-8-THC, a compound that can be synthesized from CBD derived from hemp.
Given the DEA’s position, retailers selling products that contain Delta-9-THCO or delta-8-THCO must hold all requisite licenses to sell cannabis products in jurisdictions where cannabis has been legalized, either for medicinal or recreational purposes. For retailers who are selling delta-9-THCO or delta-8-THCO products in states where cannabis has not been legalized, such retailers would likely be in violation of the CSA, according to the DEA’s position.
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.
Biden’s Pardon Announcement Gives a Boost to SAFE Banking Prospects
As we previously reported, on October 6, President Biden took executive action and announced that he would issue pardons for all prior Federal offenses of simple possession of marijuana, and urged state governors to do the same. As part of his executive action, Biden also directed the Secretary of Health and Human Services (HHS) and the Attorney General to “initiate the administrative process to review expeditiously how marijuana is scheduled under federal law,” which is currently classified as a Schedule I drug, along with heroin and LSD.
Many observers think that this executive action could usher in cannabis banking reforms. While some have noted that if cannabis is actually de-scheduled, banks and financial institutions will feel more comfortable banking with cannabis and cannabis-related companies, it seems more likely that Biden’s pardon announcement may push Congress to finally pass some version of the SAFE Banking Act.
After Biden’s announcement, Sen. Cory Booker (D, N.J.) said he was hopeful that Congress would pass federal legislation in the lame-duck session after the November election. On that front, Booker alluded to “bipartisan movement” due to “problems in the banking industry” that many think refers to a version of “SAFE Banking Plus” or “SAFE Plus” that we previously reported senators were discussing.
The SAFE Banking Act – which has passed the House of Representatives seven times in recent years but has not been taken up in the Senate – would allow cannabis businesses to access the federal banking system and service providers to the cannabis industry such as attorneys, accountants, bankers and landlords would be permitted to accept payment from cannabis businesses without the risk of violating federal law.
“SAFE Plus” would add equity provisions to the SAFE Banking Act, ensuring equitable access to financial services for minority-owned cannabis businesses, requiring financial institutions to prove compliance with anti-discrimination laws, as well as other reforms like expungements, veterans medical cannabis access and more.
U.S. Senators May Introduce “SAFE Banking Plus” By End of Year
After finally introducing the comprehensive Cannabis Administration and Opportunity Act (CAOA) in the U.S. Senate last month, last week Sen. Cory Booker (D-N.J.) softened his prior position on a separate, narrower cannabis banking bill when he said that he would now consider the banking bill with modifications. As we previously reported, the SAFE Banking Act would allow cannabis businesses to access the federal banking system and service providers to the cannabis industry such as attorneys, accountants, bankers and landlords would be permitted to accept payment from cannabis businesses without the risk of violating federal law. SAFE Banking has passed the House of Representatives seven times in recent years but so far has not been taken up in the Senate.
Since the introduction of the CAOA last month, which would not only permit cannabis companies to access the banking system but would legalize and decriminalize recreational cannabis with an eye toward supporting communities that have been most impacted by the war on drugs, Sens. Booker and Schumer (D-N.Y.) have said they would be willing to consider more incremental cannabis reform such as SAFE Banking with added equity provisions. Many are referring to the as-yet proposed bill as “SAFE Banking Plus,” which would ensure equitable access to financial services for minority-owned cannabis businesses and require financial institutions to prove compliance with anti-discrimination laws, among other things.
Schumer and Booker have been meeting with other lawmakers to work on a compromise bill, and Booker said a proposal might come after the November elections and before the new Congress starts in January.
Long-Awaited Marijuana Legalization Bill Introduced in the U.S. Senate
More than a year after introducing a first draft, U.S. Senators Chuck Schumer (D-N.Y.), Cory Booker (D-N.J.) and Ron Wyden (D-OR) finally introduced their proposed marijuana legislation, the Cannabis Administration and Opportunity Act (CAOA) on Thursday, July 21.
The CAOA is a comprehensive bill that would not only permit cannabis companies to access the banking system but would legalize and decriminalize recreational cannabis with an eye toward supporting communities that have been most impacted by the war on drugs. The CAOA also provides for cannabis industry workers’ rights, a federal responsibility to set an impaired driving standard, expungements of criminal records and penalties for possessing or distributing large quantities of marijuana without a federal permit. It would also create a new federal definition for hemp that would increase the permissible THC by dry weight to 0.7 percent from the current 0.3 percent, and the definition would include all THC isomers, not just delta-9 THC. Other features of the bill include grant programs for small business owners hoping to enter the industry who come from communities that were disproportionately affected by the war on drugs, increased funding for law enforcement for illegal cultivation, and cannabis marketing restrictions.
Under the proposal, the Drug Enforcement Administration would no longer have jurisdiction over cannabis and would be regulated by the U.S. Food and Drug Administration and the Alcohol and Tobacco Tax and Trade Bureau (TTB) within the Treasury Department. The bill proposes a 5% to 12.5% excise tax for small and mid-sized cannabis producers. It would charge an initial tax of 10% on larger cannabis businesses and gradually increase it to 25%.
The Senate Judiciary Subcommittee on Crime and Terrorism chaired by Booker scheduled a hearing for Tuesday, July 26 titled, “Decriminalizing Cannabis at the Federal Level: Necessary Steps to Address Past Harms.”
While the bill is unlikely to garner the required 60 votes to pass in the Senate, many see it as a first step toward opening the cannabis debate on Capitol Hill and passing incremental reform that could finally end the federal prohibition on cannabis.
As we have previously reported, the U.S. House of Representatives has passed legislation multiple times in the past few years that would decriminalize cannabis and allow cannabis businesses to access the federal banking system. However, none of those measures have yet made it to the Senate floor.
U.S. Mayors Call on Congress to Pass Cannabis Reform
This week, the U.S. Conference of Mayors – which represents the 1,400 U.S. cities with populations of 30,000 or more – passed a resolution urging Congress to pass the SAFE Banking Act of 2021, the MORE Act and the Cannabis Administration and Opportunity Act (CAOA), which has yet to be formally introduced.
The House of Representatives has passed both the bipartisan SAFE Banking Act and the MORE Act at least six times in recent years but the Senate has yet to take these bills to a vote. Per the resolution, the SAFE Banking Act would “provide financial security for cannabis dispensaries and related companies and enhance public safety” while the MORE Act and/or the CAOA would “legaliz[e] the medicinal use of cannabis and the adult use of recreational cannabis.” Continue reading “U.S. Mayors Call on Congress to Pass Cannabis Reform”
California Governor Proposes a Cannabis Tax Reduction in an Effort to Shore Up the Legal Market
On Friday, May 13, California Gov. Gavin Newsom introduced proposed revisions to his 2022-2023 budget proposal, which would eliminate the cannabis cultivation tax rate beginning July 1, 2022.
The 15% excise tax on cannabis sales would remain, and the collection and remittance of that tax would be limited to retail sales beginning January 1, 2023. Currently, the cultivation tax rates are $10.08 per ounce of flower, $3.00 per ounce of trim, and $1.41 per ounce of fresh cannabis plant, and these taxes are paid on all recreational and medicinal cultivation of cannabis. Continue reading “California Governor Proposes a Cannabis Tax Reduction in an Effort to Shore Up the Legal Market”