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.

 

Biden Statement on Cannabis Scheduling: Be Careful What You Wish For …

On October 6, 2022, President Biden issued perhaps the
biggest shift in federal policy on cannabis since enactment of
the Controlled Substances Act, issuing a Statement on Marijuana Reform that:
– Pardons all prior federal offenses of simple possession or use of
marijuana;
– Urges all Governors to pardon all prior state offenses of simple
possession or use of marijuana; and
– Requests that the Secretary of Health and Human Services and the
Attorney General initiate an administrative review of marijuana’s
scheduling under the CSA.

This unexpected but welcome shift in Administration policy led to the usual bump in prices of publicly-traded cannabis companies, as investors seized on any legalization news as good news. 

But this may well be one of those be careful what you wish for moments.

Many commenters presume this move presages the federal legalization of cannabis. But astute observers understand that the devil is in the details when it comes to so-called federal legalization – and that there are many shades of legalization with very different outcomes for the current industry, legacy operators, and the various noncannabis industries waiting for a break in federal policy that will allow them to enter the cannabis space.

Notably, President Biden did not instruct his agencies to deschedule or even to reschedule cannabis.  Instead,  he “ask[ed]” HHS and DOJ “to initiate the administrative process to review expeditiously how marijuana is scheduled under federal law.”

The President noted that “… even as federal and state regulation of marijuana changes, important limitations on trafficking, marketing, and under-age sales should stay in place.” Reading the statement closely, it would seem that descheduling is an unlikely result, unless done in tandem with federal legislation creating a federal regulatory regime or authorizing states to regulate the business.

And rescheduling is not necessarily good news for the industry, either. Rescheduling could result in FDA regulation of products that would all but require cannabis companies to operate like pharmaceutical companies.

If cannabis is descheduled or rescheduled, existing state regulatory schemes that feature or include local protectionist measures would likely fall as substantial burden on interstate commerce. The only sure way to preserve existing state-based markets will be an act of Congress authorizing the states to continue to discriminate in favor of local operators and local cultivation.

The big questions following this Statement: 
– Will DEA/DOJ/HHS drag their feet yet again?
– Will marijuana be declassified altogether?
– Will it be re-classified as a Schedule II, III, IV, or V controlled substance?
– Will it remain a Schedule I controlled substance?

Any of these outcomes are possible.  And where you stand on this review very much depends on where you sit.

An Update on New York’s Conditional Adult-Use Licensing Process

New York State legalized adult-use cannabis in March 2021 through passage of the Marihuana Regulation and Taxation Act (the “Act”), and the state is currently processing its first applications for retail dispensaries. The Act established the New York Office of Cannabis Management (the “OCM”), which is responsible for promulgating regulations under the Act as well as issuing licenses to participants in both adult-use and medical cannabis markets. Through the OCM, New York began issuing licenses for cannabis cultivation in April, and for processing – converting plants grown in the state to usable products such as edibles and vape oils – in August. Approximately 240 conditional cultivation licenses have been granted, and 15 conditional processor licenses.

New York’s legalization scheme includes a focus on social equity, whereby it is currently accepting applications only for “conditional” licenses, available primarily to businesses and nonprofits owned by or serving individuals affected by marijuana convictions. The state is currently reviewing applications for Conditional Adult-Use Retail Dispensary (“CAURD”) licenses – the application period was open from August 25 to September 25, and the state received approximately 900 applications, for 175 available licenses.
The state has two categories for CAURD licenses, which both have slightly different criteria. Up to 150 of these licenses will be issued to qualifying businesses, and 25 to nonprofits. To be eligible for a CAURD license, an applicant must be a business with at least 30% ownership interest held by a person who:

• First, is “justice-involved” – was either convicted of a marijuana-related offense in New York State before March 31, 2021, or who has a family member with such a conviction;
• Second, has owned at least 10% of a business which earned a net profit for at least two years; and
• Third, has a significant presence in New York – either lives in, or owns land or property in, the state.

Any type of business organization may apply for a CAURD license. Licensees may operate one retail dispensary, and are eligible to receive loans from the New York Social Equity Cannabis Investment Fund to pay for construction, renovations, and equipment associated with the dispensary location.

The second category of CAURD licenses is available to qualifying nonprofits, which must have a history of serving or employing currently or formerly incarcerated individuals, at least one justice-involved member, officer, or advising committee member, and a history of at least two years of net profits. One key distinction between the two types of licenses is that nonprofits are not eligible for financial support from the Fund, and must provide their own retail storefront, over which the OCM has approval authority.

While the OCM is currently reviewing applications and granting conditional licenses for cultivation, processing, and retail sales, it has not yet promulgated regulations governing general adult-use licenses – available to applicants not eligible for conditional licenses – but has stated it will do so in the coming weeks and months.

President Biden’s Pardon for Simple Marijuana Convictions

Seth Goldberg
Seth A. Goldberg

Today, President Biden took executive action and pardoned those convicted of simple possession of marijuana under the federal Controlled Substances Act, and encouraged state governors to issue similar pardons to those convicted of simple marijuana possession under their state’s laws.  In issuing the pardon, President Biden explained: “Criminal records for marijuana possession have also imposed needless barriers to employment, housing, and educational opportunities. And while white and Black and brown people use marijuana at similar rates, Black and brown people have been arrested, prosecuted, and convicted at disproportionate rates.”  He also asks the Secretary of Health “to initiate the administrative process to review expeditiously how marijuana is scheduled under federal law,” noting that marijuana is scheduled higher than fentanyl and methamphetamine.  The executive action could mark the real beginning of the ending of the federal prohibition on marijuana.  As President Biden stated, “Too many lives have been upended because of our failed approach to marijuana.  It’s time that we right these wrongs.”
 

 

 

RICO Claims Against Cannabis Companies Are Evolving

A few years ago, a trend began to emerge — driven by the anti-cannabis lobby — of civil claims being asserted against state-licensed cannabis operators under the Racketeer Influenced and Corrupt Organizations Act.

The suits were brought in an attempt to curtail operators’ state-legal cannabis activities based on the allegation that such activities violated the federal Controlled Substances Act and thereby satisfied the predicate act requirement under RICO.

In all such cannabis-related RICO cases, the plaintiffs’ bid for a civil judgment failed, and the trend of civil RICO claims against cannabis operators seemed to vanish as quickly as it appeared.

Recently, a putative class action, Plumlee v. Steep Hill Inc., was filed in the U.S. District Court for the Eastern District of Arkansas against four state-licensed cannabis operators, asserting civil RICO claims arising out of allegations that the operators falsified the amount of THC in their cannabis products.

To read the full text of this article by Duane Morris attorneys Ethan Feldman and Seth Goldberg, please visit the firm website.

Dissecting the $95M Verdict In Altria Client Services LLC v. R.J. Reynolds Vapor Co.: A Litigator’s Perspective for the Cannabis Industry

On September 1, 2022, Altria, the parent company of Philip Morris USA, secured a shocking $95 million award after a federal jury concluded that rival R.J. Reynolds Vapor Co. infringed three of Altria’s patents for its pod-style vape.  The jury’s number was based on Altria’s request for a 5.25% royalty rate for the infringed patents—light years away from Reynolds’ estimate of $3.6 million in damages. With damages this high for an instrument so integral to cannabis-based products, the industry should be mindful of how Altria was able to convince the jury to settle on its requested damage figure.  Continue reading “Dissecting the $95M Verdict In Altria Client Services LLC v. R.J. Reynolds Vapor Co.: A Litigator’s Perspective for the Cannabis Industry”

Lifting the Haze: New Jersey Cannabis Regulatory Commission Issues Interim Guidance on Drug Testing

On September 9, 2022, the New Jersey Cannabis Regulatory Commission issued interim guidance for employers on drug testing employees for cannabis. Since the legalization of recreational marijuana for adults 21 years of age or older, New Jersey employers are expected to follow certain procedures associated with drug testing employees based on reasonable suspicion of impairment. Until specific regulations are issued, the commission has provided interim guidance to clear some of the haze for employers trying to navigate compliance with New Jersey’s cannabis law.

To read the full text of this Duane Morris Alert, please visit the firm website.

Wage Loss Claims Find Their Way Into PA

FarmaceuticalRX LLC, licensed to process cannabis in Pennsylvania and Ohio, describes itself as “bringing healthcare, science, and innovation to the medical marijuana sector.” FarmaceuticalRX LLC boasts a “world-class research and development team” tasked with studying the effects of the cannabinoid in the treatment of opioid addiction, to lung cancer, and tumor cell remediation.

A lawsuit was filed in the USDC for the WDPA by former FarmaceuticalRX LLC delivery drivers, classified as independent contractors, seeking lost wages for overtime pay under the FLSA and PA Minimum Wage Act resulting from a misclassification as independent contractors rather than employees. According to the Complaint, the drivers attempted on several occasions to raise this misclassification, but the issue was never fixed. And one at least one occasion, the drivers were told that changing the classification mid-year may raise red flags with the IRS. The Complaint further alleges that the defendants controlled the work schedule and provided the drivers company cars. The defendants put out an advertisement looking for replacement workers about a month before the plaintiffs were fired.

This is just another example of lawsuits that cannabis operators and those in the industry may face. As previously reported, products liability and class action suits resulting from alleged mislabeling were filed earlier this year. Additionally, RICO and consumer fraud claims have also been filed. In addition to plaintiffs seeking monetary compensation, cannabis businesses and operators are open to virtually any kind of litigation, such as landlord-tenant disputes and patent infringement claims. These lawsuits continue to highlight the importance of remaining vigilant in all aspects of business. As the industry continues to expand, it is likely that lawsuits will as well.

 

 

Minnesota Legislation Ushers In Sales of THC-Infused Beverages

Even absent a federal regulatory framework, the demand and market for cannabis-infused beverages continue to grow nationwide. As states legalize marijuana for medical and adult use, some have enacted specific provisions for the sale of food and beverages containing THC. Minnesota recently passed one such law, which became effective in early July. In Minnesota, medical marijuana is permitted for the treatment of certain medical conditions, but adult use legislation has not yet been passed. The state’s new law legalized the sale of food and drinks containing up to 5 mg of THC per serving, and 50 mg total per package – so long as the THC is derived from certified hemp plants. Under federal law, hemp plants – as opposed to marijuana plants – can contain no more than .3% THC by weight. These content limits apply to all strains of THC, including Delta 8, which is currently not federally regulated.

Minnesota’s new law prohibits THC-containing products from being sold to anyone under 21 or marketed to children. The products must be sold in tamper-proof packaging, and packages must contain a QR code that provides consumers with an ingredient list and testing information. The law is also different from other states’ legalization regimes in one major respect: while other states only permit sales of these products by licensed distributors, Minnesota places no restrictions on who can sell edibles or beverages containing THC. This also means that sellers are not subject to a lengthy application process. Businesses in Minnesota have wasted no time in benefitting from this legislation. Demand for THC-infused gummies has been high since their legalization, and beverage companies and breweries have already entered this new market. Minneapolis Cider Company introduced a non-alcoholic sparkling beverage called Trail Magic, which contains 3 mg of THC per serving, bringing the product to launch within a month of the law’s passage. Indeed Brewing, also in Minneapolis, introduced Two Good, a seltzer containing 5 mg of THC and 2 mg of CBD, in early August. While Minneapolis Cider Company sells Trail Magic for visitors to consume in its taproom, Indeed currently only offers Two Good for to-go sales. Both companies are selling their THC beverages as an alternative to alcoholic beer or cider, and both beverages have been popular with consumers since their introduction.

Market participants in Minnesota are still navigating the contours and nuances of the new law, as are those in many other states. But as states continue to legalize various forms of THC sales, it is likely that beverages like Trail Magic and Two Good will become more ubiquitous.

Could the NY conditional adult use retail dispensary program (CAURD) be in jeopardy?

A Maine law requiring all owners of medical marijuana businesses to be residents of the state was recently struck down by the US Court of Appeals for the First Circuit, which ruled that the statute is a violation of the “Dormant Commerce Clause” of the United States Constitution, which prohibits states from passing legislation that restricts interstate trade. In its opinion (Northeast Patients Group et al. v. United Cannabis Patients and Caregivers of Maine, the Appellate Court upheld a lower court ruling that the residency requirement is an unconstitutional restriction on interstate trade.
Under the Maine’s medical marijuana program, all directors or officers of a licensed medical cannabis dispensary are required to be residents of the state. Interestingly, Maine had already dropped its residency requirement for its adult-use market following an earlier legal challenge that was also based on the Dormant Commerce Clause but it sought to keep it in place for its medical cannabis program.
This could be a problem for NY’s new adult use cannabis program, as of the requirements is that the potential licensees must have been arrested (or are related to someone who was arrested) for a marijuana related crime in New York and must also have been a New York resident at the time of the arrest. This could like be deemed a residency requirement and thus lead to challenges not only to any individual licenses grants but the entire CAURD program.
Equally or possibly even more problematic is the fact that this ruling could also open the door to legal challenges to a variety of other State laws banning the exporting or importing of cannabis from other states, as the same rationale invalidating the residency requirements could come, as disallowing cannabis exports and imports between states could be construed as similarly placing unreasonable restrictions on interstate commerce.

 

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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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