Cannabis Industry

On August 18, 2023, a New York Supreme Court judge, ruled that the state’s discretionary licensing process violates the law.

A group of disabled military veterans filed a lawsuit against cannabis regulators claiming the initial round of New York licenses were improperly limited to people with prior marijuana convictions, rather than a wider group of service-disabled veterans and other social equity applicants prioritized by New York’s Marihuana Regulation and Taxation Act.

Supreme Court Judge Kevin Bryant upheld the lawsuit and stated, “There is no dispute” that state law says applications “shall be opened for all applicants at the same time.” As a result, Justice Bryant issued an injunction blocking the the state Office of Cannabis Management (OCM) from processing or issuing marijuana dispensary licenses until at least Aug. 25. 

This is the latest setback in a series of delays since New York legalized marijuana two and a half years ago. There are only 23 legal dispensaries in the state, with more than 300 farmers and manufacturers in need of a place to sell their goods. 

Further arguments on the ruling will be held Aug. 25. The OCM plans to appeal, a spokesperson said in a statement Monday.

A sea change in the funding of New Jersey cannabis businesses has been approved by New Jersey’s Legislature and is pending on Governor Murphy’s desk awaiting his signature.  Duane Morris attorneys assisted in the conception and drafting of this legislation.

That legislation, A4151, will allow far greater levels of investment in minority, women and disabled veteran owned adult use cannabis businesses by those best positioned to invest in them on equitable terms – current licensees and cannabis funds. The bill will increase the equity stake a licensee or investment fund may have in these diversely owned businesses from 5% to 35%, and allow them to invest in up to 7 diversely owned licensees. This will also allow capital stacks to rely more heavily towards equity, reducing the debt component at high interest rates that burn cash flow new operators need to get their businesses on solid footing. To date, these terms have only been available to New Jersey small universe of diversely owned medical cannabis licensees.

The bill protects against predatory conduct by preventing investors from acquiring a majority interest in the diversely owned business, even in cases of default. In the event of default, majority ownership by diverse interests must be maintained.  Terms must be commercially reasonable as determined by the Cannabis Regulatory Commission.

Context: Hundreds of New Jersey conditional licensees are struggling to raise the $250,000 to $1 million initial investment they need to fund even a simple dispensary given high real estate, labor, tax and compliance costs in New Jersey. Without funding, they simply cannot complete the steps needed to convert to annual licensure (i.e., secure real estate and municipal approval and complete their operational plans and SOPs) and open for business.

Without funding, many of those conditional licensees will be forced to abandon their efforts and in many cases wipe out their personal investments to date, which often are funded out of 401(k) and other savings accounts.

Diversely owned cannabis businesses and equity investors alike interested in learning more about this opprtunity should contact Paul Josephson, Tracy Gallegos, or Michael Schwamm.

Duane Morris Takeaways: In Zanetich v. Walmart, Inc., Case No. 1:22-CV-05387 (D.N.J. May 25, 2023), a case of first impression, the Judge Christine O’Hearn of the U.S. District Court for the District of New Jersey found the New Jersey Cannabis Regulatory, Enforcement Assistance, and Marketplace Modernization Act (“CREAMMA”), the 2021 law legalizing recreational marijuana use in the state, does not allow job applicants and employees to file lawsuits alleging adverse actions based on marijuana use.  The ruling is a boon for employers across New Jersey, who will not face the possibility of private lawsuits filed by applicants and employees based on adverse employment actions by employers for their workers’ off-duty marijuana use.  However, the victory may be short-lived, as the Court invited re-examination of the law by way of legislative amendment, enforcement guidance, or New Jersey state court clarity on application of the state’s common law “failure to hire” theory to claims under the CREAMMA.

Case Background

On January 21, 2022, the plaintiff applied for a job with defendants in the Asset Protection Department in one of defendants’ New Jersey locations.  A few days after his January 25, 2022 interview, on January 28, 2022, defendants offered plaintiff the job, beginning on February 7, 2022, “subject to him submitting to and passing a drug test.” Id. at 2. Plaintiff alleged that at the time, the defendants had a Drug & Alcohol Policy that stated “any applicant or associate who tests positive for illegal drug use may be ineligible for employment,” which included marijuana. Id.

After plaintiff took a drug test on January 21, 2022 and tested positive for marijuana, he contacted defendants on February 10, 2022 for an update on his application.  Two days later, defendants informed Plaintiff that his job offer would be rescinded.  When plaintiff asked for the reason for this decision, he was advised it was because he had tested positive for marijuana.

To read the full text of this article, please visit the Duane Morris Class Action Defense Blog.

Duane Morris partners Michael D. Schwamm and Paul P. Josephson contributed sections on New Jersey and New York to the Cannabis Chamber of Commerce’s “State of Cannabis: 15 Key US Markets 2023 Annual Report.” Also involved were partner Katelynn Gray and associate Deanna Lucci for the New York section, and associate Miranda Bovit for the New Jersey section.

Read the full white paper at the Cannabis Chamber of Commerce website.