Seth Goldberg, Tracy Gallegos and Paul Josephson, Duane Morris partners and team leads of the Cannabis Industry Group, are once again recognized in Cannabis Law Report‘s list of Global Top Lawyers.
The list honors cannabis practitioners via the publication’s annual survey of clients and lawyers in the cannabis legal services sector as well as its personal editorial decisions based on its reporting of the industry for nearly 10 years.
In the absence of federal enforcement action, state legislatures have stepped into the breach, enacting laws regulating products containing intoxicating substances that are chemically synthesized versions of chemicals in hemp. Those substances are referred to here as hemp-synthesized intoxicants or HSIs. Challenges to state authority to regulate HSI are being filed. In a recent decision that may foreshadow what is to come, a federal court declined to enjoin Wyoming’s hemp law.
As we have previously reported, the passage of the Agriculture Improvement Act, commonly referred to as the 2018 Farm Bill, opened the floodgates to unregulated intoxicating hemp products across the country. Though the 2018 Farm Bill authorized the U.S. Food and Drug Administration to regulate hemp-derived products intended for human consumption, the FDA has yet to promulgate rules for such products or HSIs. In the absence of federal regulations, states have begun to enact their own rules.
In Green Room LLC, et al. v. State of Wyoming, et al., a group of HSI wholesalers, retailers, and manufacturers filed a federal suit challenging amendments to Wyoming’s hemp laws and requesting a preliminary injunction. In pertinent part, the amendments expanded the definition of THC to include any psychoactive structural, optical, or geometric isomers of THC, encompassing both CBD and the popular Delta-8 THC. Because cannabis remains illegal in Wyoming, the amendments effectively prohibited the possession, sale, transport, and production of intoxicating substances synthesized from hemp. The plaintiffs argued, in part, that the amendments were unconstitutional because they were preempted by the 2018 Farm Bill, which they claim legalized all hemp substances, including intoxicating substances synthesized from hemp, for intrastate and interstate purposes.
On July 19, 2024, the federal court denied plaintiffs’ request to enjoin enforcement of the new law, finding that they do not have a substantial likelihood of success on the merits.
Specifically, the court found that the 2018 Farm Bill does not prevent states from regulating HSIs. The court found the 2018 Farm Bill did not confer any right on plaintiffs to manufacture or sell intoxicating products resulting from hemp, but merely redefined the term hemp. Most important, it held the 2018 Farm Bill contains an express “no preemption” clause permitting states to regulate hemp more stringently than federal law. The no preemption clause expressly permits a state to enact laws regulating intoxicating substances synthesized from hemp in a manner “more stringent” than the 2018 Farm Bill. The court further concluded that Wyoming’s amendments do not violate the dormant commerce clause, do not amount to a regulatory taking, and are not unconstitutionally vague or overbroad.
Green Room is not the first challenge to state restrictions on HSIs. In Bio Gen LLC et al. v. Sanders et al., the State of Arkansas appealed a trial court decision enjoining Arkansas regulations that restrict the manufacture and distribution of products that contain synthetic cannabinoids that could be intoxicating, such as Delta-8 THC. In Northern Virginia Hemp and Agriculture LLC, et al. v. Commonwealth of Virginia, et al., the plaintiffs, an HSI product manufacturer/distributor and consumer, appealed a trial court decision that denied their motion to enjoin the State of Virginia from enforcing Virginia regulations that restrict the manufacture and distribution of products that contain synthetic cannabinoids that could be intoxicating, such as Delta-8 THC.
Those pending appeals present the possibility of a federal circuit split on the question whether the 2018 Farm Bill legalized intoxicating substances that could be derived from hemp. On behalf of the American Trade Association for Cannabis & Hemp, Duane Morris filed an amicus brief in each case that asserts that the 2018 Farm Bill did not legalize hemp-synthesized intoxicants, and it reserved for states the right to regulate such substances in the interest of public safety.
As more states roll out new restrictions on intoxicating hemp products and operators, we expect to see more challenges. Though not a final ruling on the merits of the suit, the court’s decision suggests these plaintiffs and others challenging state intoxicating hemp laws have an uphill battle ahead.
Duane Morris was nationally recognized by Chambers & Partners USA 2024 for Cannabis, and partners Tracy Gallegos, Seth Goldberg, Paul Josephson and Michael Schwamm were individually honored.
“Duane Morris helps clients across all sectors of the multi-faceted legal cannabis industry. The group has extensive experience with the wide array of issues attendant to legal cannabis business activities, including licensing for cultivation, processing and dispensing; litigation; banking and finance; raising and deploying capital; protecting intellectual property; real estate development and leasing; public company representation and SEC filings; land use and zoning; healthcare and research; taxation; and cross-border transactions.”
The Legal 500 2024 has also placed the Cannabis Industry Group in Tier 1 nationally, with clients noting that “Duane Morris’ cannabis practice is simply the best in the country. They have the most thorough knowledge of our ever-changing industry and its regulatory landscape.”
“What makes Duane Morris unique among peer firms is the entrepreneurial spirit of the cannabis practice, backed up by extensive institutional knowledge and experience of business. They created laws, regulations and precedents that govern and protect the cannabis industry today and advised businesses how to operate within them.”
Clients also acknowledged “the passion and commitment of Duane Morris’ lawyers to serve businesses and entrepreneurs.” The Legal 500 named partners Seth Goldberg and Michael Schwamm “Leading Lawyers” in the Cannabis Industry – as well as recognizing Tracy Gallegos, Paul Josephson and Justin Santarosa for their work.
“The firm has acted as a pathfinder through a constellation of state laws and regulation – many of which the firm’s cannabis practice has helped shape.”
By Paul Josephson and James Hearon
State cannabis advertising bans are getting their day in court, albeit before the federal Fifth Circuit, a court that has been increasingly hostile to regulation.
In February 2022, Mississippi enacted the Medical Cannabis Act, legalizing medical marijuana within the state. The Act granted the Mississippi Department of Health (“MDOH”) authority to establish and promulgate rules and regulations governing the advertising of medical cannabis.
The Act made clear that any proposed rules or regulations could not prohibit a cannabis operation from engaging in certain types of marketing and advertising, including displaying appropriate signage on the licensed premises, listing in business directories and other publications, or displaying logos or other branding materials. In promulgating its proposed regulations, MDOH prohibited licensees from advertising or marketing in any form of media (i.e., broadcast, electronic, print, etc.)
In November 2023, Tru Source Medical Cannabis, LLC challenged MDOH’s advertising restriction as a violation of the First Amendment. In January 2024, the Northern District of Mississippi federal court upheld the advertising ban and dismissed the lawsuit, entitled Cocroft, et al. v. Graham, et al., in its entirety. The district court relied extensively on the Montana Supreme Court’s analysis in Montana Cannabis Industry Association v. State of Montana, 368 P.3d 1131 (Mont. 2016), rejecting a similar challenge to cannabis ad regulations. The district court agreed that “an activity that is not permitted by federal law—even if permitted by state law—is not a ‘lawful activity’” and, thus, does not qualify for commercial speech protection. Tru Source appealed this ruling to the Fifth Circuit.
We are closely watching the Fifth Circuit’s decision to see whether antipathy for cannabis or regulatory overreach will prevail. The circuit, which embraces Texas, Louisiana and Mississippi, has been making headlines lately for rulings hemming in the authority of federal agencies. In recent cases, the Fifth Circuit rejected FDA rules permitting use of the abortion-inducing drug mifepristone (just overturned by the Supreme Court late last week), tossed out the SEC’s system for adjudicating enforcement cases, and declared the Consumer Financial Protection Bureau’s funding mechanism unconstitutional (also reversed by the Supreme Court). The Fifth Circuit has been in the legal spotlight, and its rulings have been keeping the Supreme Court busy.
The Fifth Circuit’s decision is also likely to implicate a much broader and unsettled legal question; that is, whether constitutional protections apply to state-legal, but federally prohibited, conduct. In 2022 and 2023, we saw a number of constitutional challenges to residency requirements in state cannabis regulations alleging that such requirements discriminate against out-of-state operators and violate the Dormant Commerce Clause.
Several courts, including the First Circuit and the Eastern District of Michigan, have held that discriminatory residency requirements likely violate the Dormant Commerce Clause. Other federal courts, such as the Western District of Washington and the District of Maryland, have found that, because cannabis is federally illegal, the Dormant Commerce Clause likely does not apply—the same rationale relied on by the district court in Cocroft.
The Fifth Circuit’s recent history as a venue where regulators have fared poorly suggests Mississippi’s outright ban on commercial speech by state-legal businesses will get a hard look. Briefing will be complete shortly, and we would expect oral argument and a decision before year end.
Duane Morris cannabis industry group team lead Paul Josephson spoke with The Legal Intelligencer on Pennsylvania cannabis legalization as the Drug Enforcement Administration has officially moved to reschedule marijuana from a Schedule I to a Schedule III substance.
“There’s not a legal practice area that hasn’t touched or worked for our cannabis practice here,” he said, although he and other attorneys emphasized the potential growth in financing work should rescheduling and local legalization efforts go through.
“Removing this from Schedule I … it provides immediate tax relief to companies in the cannabis business,” Josephson said, explaining that as the law currently stands, cannabis businesses aren’t allowed to deduct business expenses when they calculate and pay taxes, resulting in razor-thin profit margins. “When rescheduling happens, when that monkey comes off the back of the industry, it will improve cashflows for everyone in the business and allow for more investment.” Read more on the Duane Morris website.
New Jersey Governor Murphy announced yesterday that current NJCRC Executive Director Jeff Brown is returning to the New Jersey Department of Health to take on the role of Deputy Commissioner for Healthcare Systems, effective May 20, 2024.
Current NJCRC Deputy Executive Director and former General Counsel Christopher Riggs will assume the role of acting Executive Director upon Brown’s departure.
Brown has served as the Executive Director since the formation of the NJCRC in April 2021, and before that as Assistant Commissioner for the Division of Medicinal Marijuana at the New Jersey Department of Health since 2018.
Despite the inevitable friction and challenges associated with this nascent field and reporting to a board of very active, full time commissioners, Brown has proven a steady hand at the tiller both at NJDOH and at NJCRC. Throughout his tenure in both agencies, Brown has been instrumental in the development and implementation of New Jersey’s medical and recreational laws and rules. He led the reinvention of New Jersey’s moribund-by-design medical marijuana program, and then stood up the NJCRC as a new agency to regulate both adult-use and medicinal cannabis. Under Brown’s leadership, New Jersey’s cannabis market has grown each year with 2024 cannabis sales expected to top $1 billion.
Though Brown will be a hard act to follow, Acting Executive Director Riggs is expected to be another steady hand at the tiller leading regulation of the market. Well-equipped to assume the role of Executive Director, Riggs has worked for the NJCRC since its inception. He initially served as the NJCRC’s first chief counsel and led the drafting and promulgation of the laws and rules that govern the industry. Before that, he was a Deputy Attorney General in the Office of the Attorney General and was assistant chief of the section representing the Department of Health and Human Services.
Well regarded among attorneys and industry veterans alike, it is expected Riggs and the NJCRC will now focus on streamlining and rationalizing regulatory processes to improve oversight and reduce bureaucratic delay and red tape. Riggs has also indicated he intends to prioritize clinical registrant applications and social equity certification process at the NJCRC.
We wish both well in their new roles.
Duane Morris partner Paul Josephson was once again named to the New Jersey ROI Influencers: Power List for Government Affairs and Cannabis.
Paul Josephson, partner and team lead of the Duane Morris Cannabis Industry Group, moderated a fireside chat with U.S. Virgin Islands Governor Albert Bryan Jr. at the Benzinga Cannabis Capital Conference on September 27, 2023.
“A governor who really gets economic development,” as Josephson said, Bryan said the region is on the cusp of an unprecedented economic surge. “We have a $4-billion economy right now. And we have $15 billion in sales over the next 10 or so years.”
Earlier today, on August 30, 2023, the U.S. Department of Health and Human Services (HHS) officially recommended that cannabis be moved from Schedule I to Schedule III under the Controlled Substances Act (CSA) – a landmark recommendation from HHS which indicates that HHS no longer considers cannabis to be a drug with high abuse potential and no medical value.
After completing a scientific review into cannabis per a requested review from the Biden Administration, HHS advised the Drug Enforcement Administration (DEA) that it believes marijuana should be placed in Schedule III of the Controlled Substances Act.
Note, HHS’s recommendation is NOT binding on the DEA but given the report’s findings and growing public sentiment is likely that the DEA agrees with the recommendation and shifts its policy.
Historically, cannabis has been federally prohibited as a Schedule I controlled substance. As noted by many pundits, the rescheduling to Schedule III would have major implications for researchers who have long criticized the Schedule I classification that creates significant barriers to access for studies.
For researchers, this change would likely mean that they would no longer need to go through the onerous registration process with the DEA in order to access cannabis for studies as a Schedule III drug. The shift to Schedule III would also enable various federal tax deductions to become applicable to the cannabis industry and unlock value for them that is currently stuck in an onerous tax structure under the Internal Revenue Code. Schedule III drugs are not subject to the same onerous structure under federal rules.
The cannabis ball is now firmly in the DEA’s court as the DEA has the final authority to schedule a drug as Schedule III rather than Schedule I under the CSA (or transfer a controlled substance between schedules or remove such a drug from scheduling altogether).
Parting Hits – With Congress due to reconvene after Labor Day, and the Biden Administration looking for a win on moving this issue along, look for pressure to continue to mount for some type of Congressional action in the Banking arena under a SAFE legislation bill and for the DEA to move through their rule making process in a swift and firm manner.
Duane Morris has a full service cannabis group that helps clients and investors in a wide array of cannabis-related issues including, but not limited to, licensing, fundraising, intellectual property protection and real estate. If you have any questions, please do not hesitate to contact Brad Molotsky or the attorney with whom you regularly communicate at Duane Morris.
News of widespread layoffs at cannabis companies across the United States has dominated headlines, but an analysis of employee counts at America’s largest multistate operators shows several actually grew their payrolls last year.
The fact that employee payrolls were up for some marijuana MSOs at the end of 2022 but down for others underscores how several factors can play a role in determining a company’s health.
Those factors include geographic footprint, taxes, operating costs and capital availability, experts said.
“The present moment is the Great Rationalization for the industry,” Paul Josephson, a New Jersey-based partner and leader of the cannabis industry group at the Duane Morris law firm, told MJBizDaily via email.
“Price compression and profitability varies tremendously by state and even within a state. So smart operators are taking a hard look at where they are investing their human capital.”
That means winding down operations in some areas and investing in others with more opportunity for revenue growth.
To read the full text of this article, please visit the MJBizDaily website.
