The New York Times reported yesterday that the New York State Health Department is ready to recommend legalizing adult use of cannabis in the Empire State. Commissioner Howard Zucker was quoted as saying they had reviewed the pluses and minuses and concluded, in a study requested by NY Governor Andrew Cuomo, that “the pros outweighed the cons.” The study, started in January, has not been released yet.
Governor Cuomo, as recently as last year, said that cannabis is a “gateway drug.” But he is now facing strong opposition on the issue from his primary opponent Cynthia Nixon. Even his Republican opponent wants to legalize cannabis and use the money to fix New York’s transportation system. He is also feeling pressure from New Jersey’s apparent plan to legalize adult use in the near future, not to mention Massachusetts’ full adult use rollout commencing very soon. This led to his commissioning the Zucker study.
Even with this study recommending legalization, the NY legislature would have to pass a law to make it happen. Republicans, who tend to be more anti-legalization, currently control the Senate while Democrats control the Assembly. So there is no certainty of getting a bill passed. But it appears the momentum is building towards adult use legislation in the nation’s fourth largest state.
Yesterday, Senators Elizabeth Warren (D-Mass) and Cory Gardner introduced bipartisan legislation that, if passed, would make the regulation of marijuana a state issue. Comments by Senator Gardner show public safety issues resulting from the dearth of banking providing services to the industry are a focus of the newly-proposed legislation. The Hill reports Gardner stating when introducing the legislation:
“This city of Denver, the state of Colorado, can collect taxes … they can take it to the bank,” Gardner said. “But if you’re in the business, if you work for the business, you can’t get a bank loan or set up a bank account because of the concern over the conflict between the state and federal law. We need to fix this public hypocrisy.”
It was widely reported on April 13, 2018, that President Trump promised to Senator Gardner that he would support a states’ rights approach to marijuana, which promise appears to have resulted in this proposed legislation. A lot has to happen before this bill reaches Trump, but if it does, a veto may be unlikely. Such states’ rights legislation could then pave the way for more banks to service the industry.
The Bureau of Cannabis Control is the state agency designated under the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) as responsible for issuing licenses to and regulating distributors, retailers, delivery-only retailers, microbusinesses, and testing labs.
The BCC issued emergency regulations in November 2017, and has now proposed readopting those regulations for another 180 days. Based on feedback from the public and stakeholders in the industry, the BCC has proposed some changes to these regulations.
This blog post will highlight the changes to the BCC emergency regulations and identify key issues for distributors, retailers, delivery-only retailers, microbusinesses, and testing labs. In separate posts, we will be describing the changes made by the California Department of Food and Agriculture and the California Department of Public Health. Those posts can be found here and here.
Changes to Emergency Regulations:
The BCC has removed the distinction of A and M Licenses and now only requires one application and applicants will only have to pay one licensing fee. Additionally, license fees have been reduced. Previously you had to submit two applications and pay two separate licensing fees if you wanted to operate in the medicinal and adult-use market.
A delivery employee may now complete multiple deliveries of cannabis goods if they are prepared by the retailer prior to the delivery employee leaving the licensed premises. The total amount of cannabis goods in the delivery vehicle may be up to $10,000, the previous limit was set at $3,000.
The definition of owner has been amended to specify that the chief executive officer and/or the members of the board of directors of any entity that own 20% or more of a commercial cannabis business will be considered “owners.”
The definition of financial interests has been amended to include “an agreement to receive a portion of the profits of a commercial cannabis business.” Commercial cannabis business and service providers will have to review their agreements and applications to determine if certain amendments will need to be made to include other people or businesses as having a “financial interest” in a commercial cannabis business. Interestingly, this change was not made in the definition of “financial interest” under the CDFA and CDPH regulations.
Retail stores may not sell or deliver cannabis goods through a drive-through or pass-out window and sales cannot be made to people within motor vehicles.
License applications must now include:
Cannabis waste procedures; and
Delivery procedures, if applicable.
These changes show that the BCC and the other regulatory agencies are being responsive to their stakeholders and while not all changes are positive, we believe this is a step in the right direction for cannabis businesses in California.If you have any questions about the regulations, please contact Jennifer Briggs Fisher in our San Francisco office or Justin Santarosa in our Los Angeles office.
While the Cole Priorities were in place, that guidance provided a clear path for banking cannabis industry participants adhering to the Cole Priorities. FinCen’s guidance is still in place, and banking cannabis is still possible, but confusion about how to do so without the Cole Priorities as guideposts has caused greater reluctance on the part of banks.
Enter proposed legislation in California, SB-930, which passed in the California Senate yesterday. Not a complete solution to the banking problem by a long shot, but progress nonetheless. If it becomes law SB-930, would result in the establishment of a California-chartered bank that would permit California cannabis industry participants to deposit the proceeds of their state-lawful cannabis activities, and would provide to them limited banking services that would allow for payment of taxes and vendors by check.
As reported in the Sacramento Business Journal, the Bill’s sponsor, Sen. Bob Hertzberg (D-Van Nuys), characterized SB-930 as an attempt alleviate the public safety concerns resulting from the federal government’s current hands off approach to banking cannabis. As Herzog stated, “It’s not only impractical from an accounting perspective, but it also presents a tremendous public safety problem. This bill takes a limited approach to provide all parties with a safe and reliable way to move forward on this urgent issue.”
As more and more politicians of all stripes move towards support of federal legalization of cannabis, two senior Republicans have joined the advisory board of a major cannabis company. According to The Hill, the former Speaker of the House John Boehner and former Massachusetts Governor William Weld became advisers to a New York-based grower and distributor of cannabis.
The article reminds us that Boehner was formerly opposed to legalization, though Weld, a moderate, has been a long-time supporter. They issued a joint statement saying, “we both believe the time has come for serious consideration of a shift in federal marijuana policy.” They focused particularly on the view of a large majority of Americans that cannabis should be legalized on a federal level.
As we know, President Trump said during the campaign that he is “100%” in favor of medical cannabis and that adult use should be decided by the states. Of course he is famous for changing his mind and frankly does not appear focused on the issue. And Attorney General Jeff Sessions remains strongly opposed to legalization and rescinded a series of advisory memos designed to protect those complying with state cannabis laws. But we have not yet seen any increase in federal enforcement efforts, though a number of states recently have been cracking down on unlicensed operators.
While it seems unlikely for the time being that the Trump Administration would unilaterally deschedule cannabis and legalize it (which they could), there is growing belief among DC-watchers that Congress might yet consider some action. For example, Republican Senate Majority Leader Mitch McConnell said he intends to introduce legislation to legalize hemp. The legislators are paying attention to the massive taxes coming into legal states, reduction in opioid use and deaths in those states, and many new jobs being created.
On April 5, 2018, Phase 2 of the PA Department of Health’s permitting for commercial medical marijuana cultivation and dispensary operations will begin.
13 Grower/Processor permits will be available, two in each of the six DOH regions, and the 13th going to the highest scorer. 23 Dispensary permits will be available, nine in Region 1, three in Regions 2 and 3, two in Regions 4 and 6, and four in Region 5. Applications will be available online at www.medicalmarijuana.pa.gov on April 5, and the submission deadline will be May 17.
In June 2017, 12 Grower/Processor and 27 Dispensary permits were granted. According to April Hutcheson of DOH:
25,573 patients have registered to participate in the PA program;
9,020 patient certifications have issued;
7,000 of those patients have purchased their ID cards;
6,683 patients have bought medical marijuana in a PA dispensary;
866 physicians have been registered to participate in the program; and
473 of the registered physicians have been approved.
Given the very real possibility that PA will approve the use of dry flower products, i.e., smoking and edibles, this summer, the PA market is positioned for strong performance over the next few years.
On Thursday, March 8, 2018, Duane Morris hosted the Bay Area Women Grow Signature Networking Event in our San Francisco office. Our panel speakers included Duane Morris partner Jennifer Briggs Fisher, who specializes in providing regulatory and compliance advice to cannabis companies, and Nicole Elliott, the Director of the San Francisco Office of Cannabis. The panel was moderated by Women Grow Co-Founder Jazmin Hupp.
Our panel speakers addressed the cannabis business permitting process in San Francisco, the equity applicant program, requirements for licenses from the State of California, and legal and compliance considerations for cannabis businesses. It was a fantastic way to celebrate International Women’s Day!
Although, in making the above comments, Sessions was clear that marijuana was still illegal in the U.S., he appears to have drawn a box around those types of marijuana-related criminal activities on which federal prosecutors are focused. The above comments are not inconsistent with the Sessions memo of January 4, 2018, and may help clarify what prosecutorial discretion looks like under that memo. Based on the above comments, it would seem that activities conducted pursuant to state marijuana programs are not the types of activities on which federal prosecutors are focused.
Another breakthrough for the cannabis space occurred on Tuesday, February 27, 2018, when Toronto-based Cronos Group Inc. began trading on the Nasdaq Stock Market. (MJN:CN). This marks the first listing of a company focused purely on cannabis on a major U.S. stock exchange. The listing of Cronos comes within two months of the memorandum issued by Attorney General Sessions that rescinded the federal government’s previous guidance regarding enforcement of state-lawful cannabis activities under the Cole Memorandum. That earlier guidance is credited with providing the cannabis space with a window of opportunity for the warp-speed growth the space has seen in recent years. The Sessions memo was intended to slow the growth of the cannabis space, especially with respect to the capital markets. The Nasdaq listing of Cronos suggests that 2018 could be another strong year for cannabis-related investments; 2017 was believed to have resulted in approximately $2 billion in cannabis-related investments in the U.S.
As the values of transactions in the cannabis industry grow, commercial litigation is certain to follow. One reason for this is that lawyers may be more inclined to represent clients on a contingency fee basis. Where the value of a cannabis transaction is small, the expense of litigation may not be worthwhile for an individual or business feeling cheated, and any settlement or judgment would likely not cover the costs of an attorneys’ contingency fee. However, where the value of a cannabis transaction is sufficiently high, say the upper six-figures or more, a lawyer may be more inclined to take the case for a contingency fee because the lawyer’s percentage of any recovery is likely to be greater than the costs the lawyer will incur in litigating the matter. A contingency fee arrangement may also be utilized to the advantage of a party that believes threatened or actual litigation might shift the leverage in negotiations and result in more attractive commercial terms.
A recently filed action captioned Silver v. High Street Capital et al., 2:18-cv-00020 (E.D. PA. 1/3/18), appears to result from the type of high value transaction that might warrant a contingency fee in a commercial litigation. The plaintiff, industry consultant Harris Silver alleges that, in connection with their bid to obtain a license to grow and process cannabis pursuant to Pennsylvania’s Medical Marijuana Program, defendant High Street Capital and other defendants associated with High Street promised Silver a lucrative compensation package, including (a) $180,000 to prepare the license application; (b) a $150,000 cash bonus upon the granting of a license and a 4% non-dilutable equity stake in any licensee; and (c) a salaried position with the licensee. Silver claims that notwithstanding his work on the High Street application, for which a permit was granted, the High Street defendants never paid Silver the valuable consideration that was contingent on the permit being granted. Thus, based on a host of factual allegations detailing various communications he had with the High Street defendants, and other allegations detailing his efforts on their behalf, Harris asserted claims against the High Street defendants for breach of contract, common law fraud, promissory estoppel, unjust enrichment, securities fraud and civil conspiracy. Continue reading Contingency Fees and Commercial Litigation Hit the Cannabis Space→