Cannabis Law Prof Blog

Q&A: The "Dopest" Lawyer in Town (Part 2 of 2)

This is a continuation of Q&A: The "Dopest" Lawyer in Town (Part 1 of 2).  

Every U.S. state that shares a border with Texas has passed legislation to legalize medical marijuana -- so what does that mean for the Lone Star State?

I recently had a chance to talk to one of the lawyers on the front lines of that issue, Daniel Mehler, of Dallas's Roper & Mehler. Here, the self-proclaimed "dopest lawyer in town" talks about his front-row seat to what's happening.

It is no secret that "canna-cations" (tourism for legal cannabis use) have become more popular as its become easier to access legal cannabis in other states. Pair the travel trend with the huge black market in Texas and it’s safe to say that a lot of employees have cannabis in their system. Mehler shared some information on the relationship between marijuana and employment law.

AG: Are you aware of any trends that Texas employers are creating to manage potential risks posed by employees obtaining and using “legal” pot out of state?

DM: As far as Texas-based companies, I haven't really seen any change. We have seen a change on the national level. A lot of national companies have started to exempt marijuana smoking from their pre-employment drug testing. In Colorado, most employers don't drug test, but the issue has been litigated and determined that employers can punish you up to and including dismissing you from employment for legal use, off the clock, of medical cannabis, never mind recreational cannabis. So it has become an employment minefield. You also see things like for car salesmen, because of insurance requirements, employers, even though it's legal, not allowing [off the clock use] at all. On the flip side of it, getting away from just the domestic market, Vancouver, British Columbia just announced that it's police officers will be allowed to smoke legal, Canadian cannabis once their market is live beginning October 17th, as long as they're off duty.

AG: It just seems like it's going to be so hard to police for the out of office conduct stuff because of the drug testing issues. How can an employer tell if someone engaged on vacation or right before their shift?

DM: No, that's just it, in Colorado, it doesn't matter. The employer can just fire you regardless of where it actually occurred. You don't actually have a right to consume cannabis, even though it is legal in the state.

Moving into family law, Mehler pointed out a few points of contention that will continue to grow as more people begin to access and use marijuana both medically and recreationally.

AG: Are you aware of any effect either the compassionate use act or the legalization of marijuana in nearby states on family law matters in Texas?

DM: Google Christy and Mark Zartler. They have a profoundly disabled daughter named Kira. She has autism and is extremely self-injurious. They started administering cannabis smoke and discovered that it relieved all of herself injurious symptoms. CPS tried to intervene. It went to court and this past year a Judge ruled that the State would not take custody of their daughter; that nothing that they had done was dangerous to their daughter. So, they actually beat CPS in court, despite having published a YouTube video that got several million views of them administering cannabis to their daughter. So yeah, the impact is there. You see that CPS removes children when parents consume cannabis, but then we've also seen a highly publicized case where a judge, an impartial arbiter, says no, no, no, CPS was out of line on this. So, we’ll see how that plays out as we go forward. Another problem with family laws circles back to the THC concentrate problem, where those people are getting charged with felonies [rather than simple possession]. As more time passes, you're going to see more of their kids in CPS investigations.

AG: What about in divorce or child custody matters? Are parents able to use examples of the other using cannabis in a legal state against one another?

DM: Absolutely. We see it all the time. I have buddies that do divorces, and obviously, some of our criminal defendant clients also have marital issues. We see “drug use” arise in those matters all the time, even if it's strictly cannabis. Parties take and use those facts as a hammer and just club each other with it.

Last, we moved in to talk more about Mehler’s other practice area. I was interested to know about the presence of and risks to Texans in out-of-state, legal cannabis business.

AG: Have you seen any changes in business law in Texas in response to marijuana legalization in the surrounding states?

DM: In Texas, we don't have a lot of business law on it because there's not new jurisprudence and, obviously, you can't contract to do things that are illegal. Originally in Colorado, there was no contract enforcement. Everything was basically done with handshake deals–an understanding that all of this is illegal and there was no contract enforcement because it's all in violation of federal law.  It took an act of the Colorado state legislature; they revised the statutes and specifically made cannabis contracts enforceable in state court. This built the foundation for the business to flourish because without contractual security it's very tough to draw in investors. Everybody wants security and defined rules. Eliminating the risks and making contracts enforceable in state court allowed the cannabis business very much to flourish in Colorado as a result.

AG: Should Texas residents seeking to invest in or open a cannabis business across state lines (but do not carry the product into Texas) be aware of any potential punishment in Texas for trafficking, money laundering, conspiracy, etc.?

DM: I don't think there are any problems with it at this point. We assist clients in moving money around the country in the legal markets and in trying to find the proper vehicles to do so. There is, theoretically, federal exposure to conspiracy charges, but I don't think it will become a problem as long as the cannabis is being produced and distributed in compliance with state laws where it's legal and no products are crossing state lines. I've never had any clients implicated in any sort of conspiracy like that. It doesn't happen from a functional standpoint. The feds have been up in the panhandle since the cannabis industry picked up and have started prosecuting cannabis being transferred across borders into Texas. The northern district hadn’t prosecuted this stuff for the previous 20 years. All of the charges went into state court. Now they (the feds) have decided to make that a priority. But, as far as legit business people just moving their funds in the legit markets, there's effectively no barriers at this point. The biggest investors from DFW to have money in California, Oregon, Washington, and Colorado at this point. 

AG: That’s interesting. This is sort of an inexperienced question, but how do these prosecutions end up in federal court? Aren’t these people being stopped by local police officers?

DM: So, generally it is your local police stopping and making an arrest. Unless it starts with a DEA investigation. That's one way, you know, the DEA does its own investigation. But in most of these, loads the weigh 30, 50, 100, 250 pounds, whatever it may be, it’s that the local police have busted some courier moving it around, and the arrest triggers a federal investigator. Usually, it’s a local cop that makes the stop and the arrest and then DEA will pick it up and then the U.S. Attorney will then prosecute it in federal courts plan. Generally, after that happens, State charges will get dropped. They’re not going to spend their time pursuing you once you land in the federal pen.

AG: So it's just a handover process. It's not like there are FBI or DEA agents driving around pulling people over…

DM: No. No. You never see that. You absolutely will never see a federal agent conducting a traffic stop. They form drug task forces and work with local law enforcement. So you'll see like a DEA agent and two sheriff's deputies working together as federally funded task forces. If the DEA wants to stop a vehicle, that's how they'll do. They will put a call into local law enforcement to stop them.

AG: Do you know of any other interesting or surprising effects that have happened in Texas or have any anecdotal stories to share?  

DM: I can't really tell you the specific stories because I'll be trampling on my client confidentiality. But I will say, Texas has always been the most business-friendly place in the country–has always had a lot of people that are interested in making a lot of money– but the state of Texas doesn't want to move towards legalization. There's a lot of Texans’ money that's out there chasing [cannabis] profit and, frankly, I think it's kind of a shame that it's chasing it outside of the state of Texas. You know, a lot of Texan money is making a lot of tax revenue for a lot of other states. That's both in the black market [buying the “legal” stuff and bringing it to Texas] and the legal market [investment and tourism outside the state]. It's kind of ridiculous. And it’s just going to get easier the more concentrated marijuana businesses are surrounding Texas. Once it gets to be a two-hour drive rather than a 12-hour drive from DFW… let's just keep the money at home.  Look at what they did in Colorado the first year it was legalized. The first 40 million in tax revenue every year goes straight to the public schools capital campaign. So they are able to start building schools, giving teachers raises, doing all of this without raising anybody's taxes. If that's not the most Texas shit in the world, I don't know what is. The reality is, the people are smoking pot [in Texas] whether you’re taxing them or not.

- Ashley Goldman

Adult Use Marijuana Legalization Leads to Increased Auto Accidents?

Marijuana is so much safer than alcohol . . . ... or is it?

Despite the common argument presented by advocates of marijuana, the U.S. News & World Report recently published an article describing a study that outlined statistics of auto accidents in legal marijuana states versus their neighboring prohibition states. Researchers found an increase in auto accidents in states that have legalized recreational marijuana use:

An analysis of insurance crash claims show that accidents are up by as much as 6 percent in in Colorado, Nevada, Oregon and Washington, compared to neighboring states where recreational marijuana is not legal. Another analysis of police accident reports in Colorado, Oregon and Washington saw a 5.2 percent spike in accidents in those states, again compared with neighboring states.

As the 2018 midterm elections approach, and hot on the tail of Canada's marijuana market kickoff, author Claire Hansen warns that states considering marijuana legalization should consider the correlation between auto accidents and marijuana legalization. While Hansen acknowledges that there is no direct link between marijuana use and auto accidents, she seems to agree that the correlation is concerning, to say the least. 

An analysis of insurance crash claims show that accidents are up by as much as 6 percent in Colorado, Nevada, Oregon and Washington, compared to neighboring states where recreational marijuana is not legal. Another analysis of police accident reports in Colorado, Oregon and Washington saw a 5.2 percent spike in accidents in those states, again compared with neighboring states.

The studies were conducted by the Highway Safety and Highway Loss Data Institute and the National Highway Traffic Safety Administration. President of theHighway Safety and Highway Loss Data Institute, David Harkey, urges that allocation of tax revenues should account for the potential increase in auto accidents post marijuana legalization.

"If you're considering this in your state, if you're a legislator, you need to pay attention to what may be on the horizon in terms of road safety," Harkey says.

The studies highlight the challenge of measuring and enforcing marijuana impairment, Harkey says. Researchers controlled for differences in driver population, weather, unemployment and the mix of urban and rural roads. But while alcohol impairment is easily measured through a driver's blood alcohol concentration and limits are codified into law, there's no equivalent for marijuana use. And though alcohol impairment is generally prevalent at night, roadside survey work found drivers impaired by marijuana at all times of day. 

All of the results point to a need for proactive intervention and awareness from both legislators and the public, Harkey says, adding that something else to consider is how the tax revenue from marijuana sales will be used. Given the studies' results, it's smart to allocate some of the funds to enforcement and intervention efforts, he says.

As Republicans plan to push for medical marijuana reform after the midterm elections, an eye toward motor vehicle safety will likely benefit states that could soon be subjected to an influx of drivers under the influence of marijuana. 

 --Ashley Goldman

RECENT CASES: Harvard’s First Medical Marijuana Dispensary Opens Amid Legal Controversy

The Commonwealth of Massachusetts legalized the sale of marijuana for medical use through Registered Marijuana Dispensaries ("RMDs") in 2012, and in May 2013, the Department of Public Health enacted regulations that authorized municipalities to regulate the medical use of marijuana.

Cambridge’s Harvard Square saw its first medical marijuana dispensary open at the start of the year. Healthy Pharms, a registered nonprofit medical marijuana dispensary, opened for business but wasn’t entirely welcomed by its new neighbors. Some Cambridge residents and store owners believed the marijuana dispensary would have a negative effect on the neighborhood.

Property owners in Harvard Square brought a lawsuit claiming they had been injured by the anticipated opening of the licensed marijuana dispensary. Crimson Galeria Ltd. P’ship v. Healthy Pharms, Inc., 2018 U.S. Dist. LEXIS 141689 (D. Mass. August 21, 2018). The property owners asserted RICO claims and sought declaratory and injunctive relief against the dispensary and other related parties for acting and conspiring to distribute marijuana in violation of the federal Controlled Substances Act.

The plaintiffs also brought claims against Massachusetts state and local governments on the grounds that federal law preempts Massachusetts' regulatory regime implementing the legalization of medical marijuana dispensaries.

Background

The City of Cambridge issued Healthy Pharms a special permit to operate a dispensary. Another defendant owned the building and leased the property to Healthy Pharms. The individual defendants are officers or principals of several of the defendant entities, including the bank the dispensary uses.

The plaintiffs allege that the prospect of a dispensary has diminished the market value of their properties because the odor of marijuana will disrupt commercial tenants and interfere with the neighboring owners' use and enjoyment of their property. Also, there’s a stigma associated with the sale of marijuana, they claimed.

Judge’s Decision

U.S. District Judge Allison D. Burroughs explained in her opinion that the plaintiffs' claims against the government defendants weren’t valid because, although the federal Controlled Substances Act criminalizes the possession and distribution of marijuana, the authority to enforce the law rests only with the U.S. Attorney General and the Department of Justice.

Healthy Pharms asked the judge to dismiss all of the RICO counts because the plaintiffs didn’t really suffer an injury caused by the opening of the dispensary. There must be clear and definite damages to state an injury under RICO, the dispensary argued. The plaintiffs claimed injuries included: (1) the proposed dispensary might emit odors of marijuana that would interfere with use and enjoyment of their properties; (2) that banks and investors wouldn’t finance certain planned projects due to the anticipated dispensary; and (3) the stigma associated with marijuana and the fear of increased crime had already diminished the market value of their properties.

The judge agreed with the dispensary, holding that the plaintiffs didn’t dispute that their damages theory relied on the public disclosure of the future possibility of a dispensary, and the plaintiffs hadn’t suffered actual damages.

As far as the bank used by the dispensary, the plaintiffs argued that outsiders who help the enterprise accomplish its illicit goals, “thereby evidencing their agreement to advance the cause, are fully liable” under the RICO statutes. But Judge Burroughs held that the plaintiffs hadn’t adequately shown how providing ordinary banking services to marijuana-related businesses, in compliance with Treasury Department guidance aimed at enabling banks to provide such services, sufficiently demonstrated it joined and intended to further a RICO conspiracy.

The judge found that the plaintiffs’ complaint contained little to no allegations that connect any of the other defendants to the alleged enterprise or conspiracy.

The government defendants' motions to dismiss were granted. The remaining motions to dismiss were denied, but the plaintiffs were allowed the opportunity to amend their complaint as far as the other defendants.

Implication of case

While the ultimate outcome of this case remains to be seen (assuming the plaintiff’s amend their complaint regarding other defendants), the primary implication of this case is that cannabis-related banking organizations are able to provide basic banking services to cannabis industry businesses without the threat of RICO liability hanging over their heads. Thus, while a multitude of risks to those in the marijuana-related banking industry still persist, this is at least one positive development for those organizations, and ultimately cannabis-related commercial activity in Massachusetts as well.

-- Jason Carr

The Canadian Marijuana Experiment

On October 17 Canada became the second country to legalize marijuana allowing Canadians to grow, possess, and consume marijuana recreationally. Canada expects the legalization of recreational marijuana to boost their economy, but the laws surrounding marijuana are left up to each province's experimentation. Inquirer.net reports:

... legalization is expected to boost the Canadian economy, generating $816 million to $1.1 billion in the fourth quarter without taking into account the black market, which is expected to account for a quarter of all joints smoked in Canada, according to Statistics Canada.

A $400 million tax revenue windfall is forecast as a result, with the provinces, municipalities and federal government all getting a slice.

In total, Statistics Canada says 5.4 million Canadians will buy cannabis in legal dispensaries in 2018, about 15 percent of the population. 4.9 million already smoke.

Inquirer.net states that by legalizing marijuana, the Canadian federal government overturns the marijuana ban that had been in place since 1923. The federal government left the task of creating laws to regulate legal marijuana up to the individual provinces. Hence, the world gets to sit back and watch to see which province's experimental regulations work the best. The article further reports:

Several [provinces] have already said they will not fully implement the law.

For example, even though federal law will permit each household to grow up to four cannabis plants, central Manitoba and Quebec in the east say they will ban it and go all the way to the Supreme Court over the matter.

Like with alcohol and tobacco, the question of legal age also falls to the provinces. Nineteen seems to be the standard, but it is 18 in Alberta, while Quebec, whose new government will enter office the day after legalization, wants to raise the age to 21.

With regards to sales, some provinces such as Quebec will implement a public monopoly while others, including Ontario and Nova Scotia, have decided to trust the market to the private sector.

As for law enforcement, federal police will be ordered to abstain for 28 days before working, as will police in Toronto.

Officers in Montreal, however, are simply asked to not show up to work high.

Another issue for the provinces to mull over is open consumption, with Montreal deciding to impose the same rules as those for tobacco, while people in other provinces will have to light up at home.

Legalizing marijuana clearly leads to many new problems, but with each province able to conduct their own experiment concerning the laws surrounding legalization, perhaps these experiments will lead to a structure the rest of the world can implement when moving towards a greener future.

--Wyatt Hinson

Budding Industries: How Cryptocurrency Might Solve The Cash-Only Cannabis Problem

Where traditional efforts to comply with financial and logistical regulations have failed, blockchain industrialists believe that cryptocurrency could solve the "cash-only" cannabis problem by reducing the amount of capital moving through the system in the form of cash and increasing the efficiency, security, and predictability of payments.

Although some form of cannabis is legal in thirty of the fifty states, it remains classified as a Schedule I narcotic under the Controlled Substances Act (CSA) and is illegal on a federal level; therefore, it is impossible for cannabis businesses to get bank accounts from federally chartered banks. As a result, policy, as it currently stands, forces cannabis companies to operate on an all-cash basis. Despite $10 billion worth of sales transactions occurring within the cannabis industry last year, anyone involved in the business operation is susceptible to federal prosecution and left with limited financial service options.

For context, in mid-June, the Senate Appropriations Committee moved to block an amendment that would have allowed cannabis businesses to store their profits in financial institutions. Forbes reporter, Tom Angell provided insight of the Senate bill:

In a 21 - 10 vote, the Senate Appropriations Committee tabled an amendment on Thursday that would have shielded financial institutions that open accounts for cannabis businesses that are complying with state laws from being punished by federal regulatory authorities.

Moreover, just a week earlier the House Appropriations Committee voted to reject a similar proposal, also reported by Angell:

A powerful congressional committee voted on Wednesday to reject a measure to protect banks that open accounts for marijuana businesses from being punished by federal financial regulators. Supporters then scrambled to craft a more limited measure focused on medical cannabis businesses, but it was ultimately withdrawn before a vote could take place.

 

The broader measure would have prevented the U.S. Department of Treasury from taking any action to "penalize a financial institution solely because the institution provides financial services to an entity that is a manufacturer, producer, or a person that participates in any business or organized activity that involves handling marijuana or marijuana products" in accordance with state or local law.

The restrictive regulatory system leaves cannabis businesses open to organized crime like money laundering, theft, and cheating on payroll and taxes; however, there is speculation that cryptocurrency can ease these pains. Nick Meyers of The Phoenix New Times describes the premise of cryptocurrency in his article, Weed Money: Cryptocurrency May Be Key to Unlocking Bank Vaults for Cannabis Industry:

The basic idea of cryptocurrency is that it’s decentralized money, acting as both a currency and a transaction system.

. . .

Unlike official currencies such as the dollar, euro, or yen, no government authority tracks how much cryptocurrency is in circulation or who’s using it. Instead, these all-digital currencies use a process called blockchain.

 

The easiest way to think of a blockchain is as an electronic ledger that gets updated with each transaction. 

 

Every time someone makes a cryptocurrency transaction, that data, along with all previous transactions in the chain, gets stored in a new block.

 

The kicker is that blockchains are secure by design. Because transaction information gets stored in every new block, it’s difficult to tamper with or alter that data without compromising its authenticity.

In addition to solving the "cash-only" problem, the emerging blockchain industry can provide support regarding helping cannabis companies "meet regulatory requirements by offering immutable records showing the source of each plant in a harvest, where it is processed, how it is shipped and where it is distributed," as reported by John McMahon of News BTC. 

Moe Asnani, owner of Downtown Dispensary and D2 in Tucson, also stated that "anti-money-laundering laws are some of the biggest hurdles to legitimate cannabusiness banking, and having the verifiable ledger stored in high-security blockchains would demonstrate the market's legitimacy."

Asnani and McMahon's sentiment is shared amongst other cannabis and blockchain experts who say that blockchain platforms create transparency in the cannabis supply chain, and various cryptocurrencies, like HempCoin and ParagonCoin, are taking proactive approaches to solve the cash dilemma. 

Both cannabis and cryptocurrency are budding industries, and their similar challenges create the opportunity for joint growth; as cryptocurrency provides transparency to the cannabis business and marijuana operators can supply a stable customer base for the use of cryptocurrencies, perhaps this partnership will be the future of finance in the cannabis industry.

(For those unfamiliar with blockchain, Forbes and BlockGeeks are accessible resources.)

-- Gianna Redeemer

British Colombia's marijuana: Not ready for legalization?

With the fast approaching legalization of marijuana in Canada, a British Colombia public health advisor is suggesting that the provincial government's policies will need improvement.

As have various US states, BC is now faced with the dilemma of how to handle legalization of an industry that is still in its infancy. CBC has the story:

The B.C. government's expert on keeping people safe in the consumption of recreational cannabis says getting ready for legalization on Oct. 17 is still very much a work in progress.

"What we have been saying for the past eight months is that we are building the plane as we are flying it," said Gerald Thomas, the director of alcohol, tobacco, cannabis and gambling prevention and policy for the Ministry of Health.

Thomas is an academic consultant on public health as it relates to consumption of those substances.

On Friday, he participated in a panel discussion at a cannabis conference at the University of British Columbia on issues concerning upcoming legalization.

. . .

Thomas did not take questions from media afterwards, but told around 150 people in attendance that the government doesn't "have it right," when it comes to its recreational cannabis policy.

Since the majority of marijuana legalization policy has not had to stand the test of time, there is not a tried and true basis for British Colombia to model their policies on. CBC goes on to report:

Despite the work done to date, there are still unknowns such as how people seeking to use marijuana for therapeutic uses will get reliable advice in the legal recreational system.

It's also unclear what will happen to producers of products, like edibles, which aren't currently part of the recreational plan, and how police forces will deal with impaired driving and marijuana.

"Having just spent the last eight months of my life consumed by the cannabis monster, I call it, I would suggest with most of folks here that we don't have it right," said Thomas.

"We have been pushed to the wall to try and make this happen in such a short time frame."

Still he told the audience though that people in the government who are working to be ready for legalization are doing their best to get it right.

The article lastly notes that Thomas hopes the government can get marijuana policies right before parties conform to the existing structure and make the policies difficult to modify.

--Wyatt Hinson

Trademarks, Patents, and Copyrights, Oh My! Protecting Brand Logos in the Cannabis Industry

Cannabis-related business owners could find their brand name and logo designs at risk for imitation by competitors due to federal requirements that the trademark is related to items lawfully used in commerce. Marijuana remains illegal under federal law and its classification as a schedule one drug renders the substance unlawful for use in commerce and can create intellectual property nightmares for business owners in states that have legalized marijuana use.

In a recent article for the National Law Review, lawyer Gene Markin gave an overview of the complications those in the cannabis industry face in trying to protect their brand names and logos from hijacking competitors. Markin offers advice for overcoming the trademark prohibition that arises from marijuana’s schedule one status:

State trademark protection is one option. Where a federal trademark registration is protected nationwide, a state trademark registration has statewide protection. Of course, this depends on the state in which the business is being conducted. It is a lot easier to make “lawful use” of cannabis goods and services in states where it is legal to do so. Some states require the owner of the trademark to use the mark prior to registering. Common law trademark rights, however, are more easily attainable. To obtain common law trademark rights, one must simply use a mark in commerce. Under common law, the owner is given protection within the geographic area in which the trademark is used. Consequently, under common law, there is little to no protection against an infringer who uses the mark in a different territory.

Another suggestion is to file for federal trademark protection for goods and/or services ancillary to cannabis sales, provided those are federally legal. For example, one could file a federal trademark application to protect the use of his or her mark on apparel or accessories. Clothing, smoker’s articles, or products that cultivate and package cannabis can be federally protected. This way, such products can sufficiently support an infringement claim against future businesses that use a similar mark on their own goods/services. While ancillary registration cannot be used to protect the core cannabis products, it would at least protect the brand name or logo from infringement and allow the trademark owner to expand the registration to cannabis products and services once the federal law changes.

Markin explains that copyrights and patents are also potential solutions:

Unlike trademark law, copyright law does not require “legal use” in order to obtain intellectual property protection. To obtain copyright protection, the content, such as logos, advertisements, product descriptions, photos, website layouts, etc., must (1) be original to the author, (2) have a minimal level of creativity, and (3) be fixed in tangible form that is sufficiently permanent to be reproduced. Registration is not required but doing so would afford the copyright holder significant benefits, particularly the right to sue an infringer.

Patent protection is another viable option. The fact that marijuana is a Schedule I controlled substance is not a bar to obtaining a patent, whether a utility patent or a design patent. For utility patent protection, the invention that is to be protected must be new and useful. A design patent, on the other hand, protects a manufactured object or product’s original ornamentation that is visible when the product is engaged in its intended use.

With some clever maneuvering, marijuana businesses can likely find ways to protect its brand designs and reputation now and be prepared to expand protections of their intellectual property if and when federal decriminalization of marijuana takes place.

--Ashley Goldman

Nevada cannabis industry shatters revenue projections; state expects more growth to come

Nevada is the latest state to feel the economic boom of legalized cannabis, and so far it is smooth sailing for state regulators. The state fully legalized the drug beginning in January 2017 and total industry sales soared over $500 million, $425 million of which came from recreational sales alone. These numbers drastically outperformed both state projections, and first year sales of other states. The Las Vegas Review-Journal has the story: 

Including recreational and medical marijuana as well as marijuana-related goods and accessories, Nevada stores
eclipsed a half-billion dollars in sales, just under $530 million, according to figures released Tuesday by the Nevada Department of Taxation.

 

Bill Anderson, executive director of the Tax Department, said that the industry “has not only exceeded revenue expectations, but proven to be a largely successful one from a regulatory standpoint.”

 

“We have not experienced any major hiccups or compliance issues,” he added. “As we move into fiscal year 2019, we expect to see continued growth in the industry by way of additional businesses opening up, and we expect revenues to continue to be strong.”

This stunning performance translated into $70 million in tax revenue for the state. To give some context to these metrics, state regulators projected $265 million in sales and $50 million in tax revenue, according to the Review-Journal. Furthermore, the states of Colorado, Washington, and Oregon–largely considered to be trailblazing states in the cannabis industry, and all with larger populations than Nevada by at least 1 million citizens–recorded first-year cannabis sales of $303 million, $259 million, and $241 million, respectively, putting them far behind Nevada's first year numbers. Perhaps most surprisingly, despite being home to Las Vegas, Nevada only collected $49 million in intoxicating beverage taxes from 2016-2017, signaling that marijuana may be a greater source of revenue for the state than alcohol moving forward.

Nevada's "sinful" tourist economy can likely be thanked for such astounding numbers, although the state's casinos have come out against marijuana use in their facilities, out of fear of losing their gaming licenses. Additionally, the state's marijuana law prohibits consumption anywhere but in private residences. State Senator Tick Segerblom told the Las Vegas Sun: “The numbers are kind of leveling off, and we need to reach the tourist market a little more. We need a venue where people can come and enjoy marijuana properly."

These results suggest a few things: first, that tourism economies can drive marijuana sales even in states with lower populations and where marijuana use is not widely supported by dominant businesses. Second, that as more states legalize cannabis they may take cues from states that have previously approved legalization in order to more efficiently bring the drug to market. Finally, that there is still much progress to be made with respect to laws surrounding marijuana consumption in states where it has been made legal. Perhaps as more states begin venturing into legalization, they will use Nevada as a model of how best to regulate, tax, and sell cannabis.

--John Robinson

Massachusetts Cannabis Cash Finds a Home at Federal Credit Union

It's no secret that recreational marijuana is a cash cow, but until recently, retailers have had no piggy bank in which to deposit all their earnings. However, thanks to the efforts of Gardner Federal Credit Union, marijuana dispensaries in Massachusetts may have found a home for their earnings. The Boston Business Journal has the story:

The bank said Friday afternoon that it would begin banking for the industry, working with Safe Harbor Services, a
wholly-owned affiliate of Partner Colorado Credit Union that is the leader in compliance-based cannabis banking services.

 

“As a credit union committed to helping people and serving the underserved, we found in Safe Harbor a partner who offered a viable and proven compliant-based cannabis banking option and a way to keep our communities safe. Our board of directors recognizes the need to provide banking services for the safety of our citizens in reducing the ‘cash on the streets’ and I applaud them for their vision and commitment to providing public safety," said GFA Federal Credit Union’s CEO, Tina Sbrega.

Banking has long been a thorn in the side of recreational marijuana retailers. Because marijuana is still illegal at the federal level, if a bank were to accept funds derived from marijuana sales, that would constitute money laundering. The resulting friction between state legalization and federal drug policy has created an business ecosystem where cash is king. Colorado marijuana entrepreneur Babak Behzadzadeh told The New York Times: "If we had bank accounts, it'd be much easier."

Safe Harbor Services began helping local banks and credit unions in Colorado accept marijuana money in 2014, serving a vital–and very profitable–role in the cannabis industry. The company has expanded its reach outside of Colorado, now offering its services to credit unions like Gardner Credit Union in Massachusetts. The company is able to help its customers deposit their cannabis profits "legally" by ensuring that none of the money is derived from activities specifically prohibited by the Cole memorandum, and that the banks who accepted cannabis cash were careful about what they did with it–specifically ensuring that it did not migrate outside of states in which marijuana was legal. However, with the recent rescission of the Cole memorandum by Attorney General Jeff Sessions, it is not clear that Safe Harbor will be able to continue offering their services to financial institutions. 

Polls show that the majority of Americans favor legalization of marijuana, and 30 states have legalized the drug in some form. With this increasing momentum in favor of legalization, states have expressed an interest in allowing banks to accept money derived from marijuana sales in order to quell threats of violence and robbery to marijuana businesses, who generally carry large amounts of cash on hand. Whether the current administration will crack down on organizations like Safe Harbor and their partners like Gardner Credit Union in Massachusetts remains to be seen, but something will have to be done with all of the cash currently being generated by the marijuana industry.

 -John Robinson

Sixth Circuit Defers to State Cannabis Law in Insurance Dispute

Federalism might bolster insurance coverage for commercial landlords who choose to rent to legal marijuana grow operations if the landlord ensures their insurance policy does not contain a broad exclusion for “criminal acts.” An insurance claim for damage to a rental unit may not bring a commercial landlord any relief, especially when the tenant was growing cannabis illegally under both state and federal law. K.V.G. Properties, Inc. v. Westfield Ins. Co. (hereinafter KVG), a recent case out of the Sixth Circuit, begs the question: Would an exclusion in a first-party insurance contract for criminal acts apply if the tenant had complied with state law when growing marijuana?

Michael S. Levine and Geoffrey B. Fehling of Hunton Andrews Kurth recently weighed in on the K.V.G. decision, which was handed down in late August and, according to Levine and Fehling, “previews ‘federalism’ arguments that are likely to reappear in future cannabis coverage disputes where state law permitting all or limited use of cannabis conflicts with federal law.”

This dispute began when the DEA raided KVG’s commercial tenants for growing marijuana in rental units, but not before the tenants had already done substantial damage, like wall removal, holes in the roof, altered ductwork, and severe damage to HVAC systems. KVG evicted the tenants and sought coverage for nearly $500,000 in related losses from its insurers. KVG sued after the insurer denied its claim because the damages resulted from acts contained in the “Dishonest or Criminal Acts Exclusion” in the policy. The exclusion states that the insurer “will not pay for loss or damage caused by or resulting from any dishonest or criminal act by you, any of your partners . . . employees (including leased employees) . . . authorized representatives or anyone to whom you entrust the property for any purpose.”

Cultivating marijuana is a crime under federal law, but it is protected by Michigan law under the Michigan Medical Marihuana Act (the “MMMA”). The Court noted that “under different circumstances, KVG might have a strong federalism argument in favor of coverage.” However, KVG’s tenants did not comply with Michigan law, which KVG admitted in eviction pleadings. KVG claimed that the “tenant illegally grew marijuana” and it was a “continuous health hazard.”

Moreover, when raiding the premises, the DEA operated under guidance from the Deputy Attorney General James Cole stating that they should not prioritize “individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana.” The Court reasoned that “the fact of the raid itself has some tendency to show that the tenants were not in ‘clear and unambiguous compliance’ with Michigan law.” Since pleadings are binding legal documents, KVG admitted its tenants engaged in a criminal act and never argued legality under the MMMA. Instead, KVG argued that the Dishonest or Criminal Acts Exclusion only applied if the tenants had been convicted. The Court rejected this argument because the policy says “criminal act,” not “crime” or “criminal conviction.”

Levine and Fehling concluded that two of the biggest takeaways from KVG are that:

"Policyholders should look for narrow criminal acts exclusions—that are, for example, triggered only by a 'crime' or 'conviction'—that do not apply broadly to alleged 'criminal acts.'" If KVG had not admitted the acts were 'illegal,' a court would be required to interpret exclusions narrowly and in favor of coverage, which may have led to a different outcome in KVG. Also, as the Sixth Circuit recognized, federal courts "act as faithful agents of the state courts and the state legislature," meaning that federal courts sitting in diversity emulate state courts that will enforce applicable state law.”

This deference to state law, including legalized cannabis use through ballot initiatives, may result in different outcomes on “criminal acts” arising from different facts.

--Kindal Wetuski

Wine and Weed?

A recent lawsuit illustrates that perhaps wine does not pair well with weed. Earlier this month, M. Shanken Communications, Inc., the publisher of Wine Spectator e-magazine, filed a complaint alleging trademark infringement against  Modern Wellness, Inc., the operators of the Weed Spectator website.

Reuters reporter, Jonathan Stempel has details of the lawsuit:

M. Shanken Communications Inc, the publisher of Wine Spectator magazine, has filed a lawsuit accusing the northern California-based operators of Weed Spectator of infringing its trademarks, and copying its familiar 100-point rating scale for wine to rate cannabis.

In a complaint filed on Tuesday (September 4, 2018)^, M. Shanken said Sacramento-based Modern Wellness Inc, “in a classic case of ‘passing off,’” created a website and social media pages for Weed Spectator that bear “striking similarities” to Wine Spectator’s own website and e-magazine.

“M. Shanken has no interest in associating Wine Spectator and the Wine Spectator marks with cannabis, a largely illegal drug,” the complaint said. “Any association of this type is likely to tarnish the reputation and goodwill that has been built up in the Wine Spectator marks and business for decades, resulting in dilution of the brand.”

The lawsuit comes at a time when the unusual relationship between the wine and cannabis industries is becoming apparent due to the legality of marijuana in more jurisdictions.

Dave McIntyre's article for the Washington Post entitled Could Marijuana Give Wine a Run for its Money? states that the lawsuit "reflects the wine industry's unease about the legalization of marijuana." McIntyre's article discusses the threats that the rise of marijuana present to the wine industry, including the stigma of alcohol as a drug, labor and employment issues, and the "limited amount of 'inebriation dollars' in the economy."

The article also includes insights from industry experts:

Tom Wark — the Napa-based author of the Fermentation wine blog, as well as publicist and advocate for wineries — stated that he believes there will be a number of people who will switch from wine to cannabis as a result of the limited "inebriation dollars" and the legalization of a new way to become inebriated, namely marijuana. 

The migration of spending from wine to cannabis may explain why some prominent companies in the alcohol industry have begun to invest in cannabis. Earlier this month Breakthru Beverage, one of the largest U.S. distributors of alcoholic beverages, signed an agreement to be the exclusive distributor for CannTrust, a Canadian marijuana producer. On a similar note, Constellation Brands, a leading alcoholic beverage producer, has invested more than $4 billion in Canopy Growth, a Canadian firm that plans to disrupt the marijuana market by producing weed-infused beverages for the Canadian market. 

As legalization becomes more widespread in the United States, perhaps the proactivity of U.S. alcoholic beverage companies in the Canadian marijuana market will allow for a more seamless transition into the domestic cannabis market. Ideally, their international position will facilitate the development of a unified channel for licensing and regulation, allowing the U.S. alcohol and cannabis industries to coexist. 

--Gianna Redeemer

Crackdowns of black market operations in legalized territory are amping up

Operating a dispensary without a license? Beware! Los Angeles and several other California cities are increasing efforts to stop cannabis operations that continue to operate without a license.

Officials initially issued warnings to the many perpetrators, but after many months of noncompliance, LA is now filing criminal charges against various retailers, growers, and delivery services. 

The Los Angeles Daily News reports that earlier this month, prosecutors there have charged 515 people for helping to run 105 illegal marijuana operations: 

“Our message is clear: If you are operating an illegal cannabis business you will be held accountable,” Los Angeles City Attorney Mike Feuer said.

It’s widely believed that Los Angeles has the world’s biggest marijuana market, and businesses have thrived for years under the state’s loose medical marijuana laws. But since the start of the year, new California laws have required all cannabis businesses to have both a state and city license to operate — licenses that can add costs to operations in the form of fees, testing requirements and hefty taxes.

The new laws also let cities regulate the marijuana industry, and many cities so far have opted against allowing such operations. Los Angeles, however, began licensing retail outlets in late January and most other types of marijuana businesses on Aug. 1. As of Friday, the city said 163 businesses have been given temporary licenses to operate.

But that represents just a fraction of the overall marijuana market, and for the past eight months, the City Attorney’s office coordinated with the Los Angeles Police Department to identify and investigate businesses that were operating without licenses. Most are retail shops, the City Attorney’s office said, but action also was also taken against marijuana growers, extraction labs and delivery services.

California and other legalized states, like Washington, and Colorado, continue to struggle with black market operations well after legalization has taken effect. In an effort to level the playing field, Los Angeles and other cannabis officials say they will take all measures necessary to crackdown on illegal operations. The 120 criminal cases recently filed in LA are intended as a loud and clear signal to all cannabis operators that they must follow the licensing regulations, or face the consequences. 

--Manda Mosley Maier

 

Cannabis Law Institute program set for September in DC

The National Cannabis Bar Association's "Cannabis Law Institute" is just two weeks off.  The two-day event features more than 70 speakers from the legal, business ,and political worlds, and looks to have some terrific programming.  Check out the conference web site for schedules, registration, and other information.

I'll be seeing you there!

--Frank Snyder

No Trademark for “THC Tea” . . . Because It Does Not Contain THC

It’s well known that applicants have stuck out repeatedly with the U.S. Patent & Trademark Office in trying to register trademarks for cannabis products.  The PTO reasons that because marijuana is illegal under federal law, that same federal law shouldn't be use to protect band names in an illegal product.  (Think of it like getting an actual trademark on "Murder, Inc.")

But marijuana culture is cool and edgy, so what about applicants who sell legal products but want to capitalize on the coolness of marijuana?

Well, they lost a round last fall in front of the Trademark Trial & Appeals Board, in a case involving something called "THCTea." The product itself had no THC in it, and therefore didn’t run afoul of the rules prohibiting trademarks for illegal substance. But because (again) it had no THC in it, the product ran afoul of the rules banning deceptive trademarks. The net result seems to be that you can’t get a trademark for a cannabis product, and you also can’t get a trademark for a non-cannabis product that pretends to be one.

Trademarks in this area are confusing, but Chicago lawyer Scott Slavick of Brinks Gilson & Lione has a very nice piece in Inside Counsel (free registration required) on the nuances of the THCTea case and the problems of deception in this area.  Recommended.

Related articles

Marijuana Trademarks: Legal Issues in Branding Pot

The "Pandora's Box" of Marijuana and Insurance

We've mentioned before the problems quasi-legal marijuana has for insurers and their insureds.  Fox Business has a nice rundown of the issues involved.  There's not much new, but it's a good overview.  Here's a sample:

Conflicting laws a 'huge Pandora's box'

    Where does this awkward federal-state split over marijuana enforcement leave consumers and insurers?

    "I think the problem is a huge Pandora's box, and nobody wants to touch it," says Brenda Wells, director of the risk management and insurance program at East Carolina University in Greenville, North Carolina.

    Wells researched the legal precedents of pot-related insurance claims in her 2014 paper, "Marijuana Legalization: Implications for Property/Casualty Insurance." She found that, perhaps surprisingly, standard home and personal auto policies contained no exclusions of coverage for marijuana-related losses -- at least not yet.

    That means your home insurance conceivably could be made to pay for the loss of your medical pot or the theft of your recreational stash in states that have legalized marijuana. The same could hold true for pot that goes up in smoke in a home fire, although proving it was there pre-inferno could be a challenge.

Homeowners coverage for pot plants?

    Wells says even backyard growers may be covered, though maybe not generously, under current policy boilerplate.

    "You have a limit in your standard homeowners policy of $500 for trees, shrubs or bushes, so the insurer possibly could limit it under that," she says.

    Similarly, a homeowner's liability coverage could come into play for damages caused by a guest who drives home stoned, or legal actions arising from exposing a child to the drug.

    "If they're using the standard forms in places like Colorado and Washington and they haven't reworded them, right now they would have to cover marijuana for loss or theft," says Wells. "If the insurance industry is smart, they're going to put an exclusion in the standard policy. ... If they don't, they could be on the hook for some big claims."

One caveat to this that the article doesn't note.  Yes, you might get these positive results in state courts, who would treat marijuana as legal for state-law purposes.  But many insurers have the ability to move cases to federal court (because they are not resident in all the states they do business) and federal courts have been holding that covering marijuana losses is not permissible under federal law.

Upcoming Session on "Financial Planning for Your Marijuana Business"

Starting any new business is risky.  Starting a new business that the federal government still considers a felony, and in which most of the legal rules that govern other businesses don't apply or are seriously unsettled, only raises the risk.

Bold entrepreneurs are finding it worth doing, but they obviously need to do what they can to limit their risk.  Potential Washington business owners have got a special program coming up this Saturday that sounds like it will be worthwhile:

    Members of the professional cannabis world in Washington have an opportunity this weekend to attend a special event organized by the Marijuana Business Association (MJBA) and hosted at the Bellevue, Washington Red Lion.  Entitled “Dollars & Sense of Risk & Financial Planning for Your Cannabis Business,” the event is slated to run from 9am to 5 pm this Saturday, November 22nd and features educational presentations from established financial professionals.

    The event will be limited to 100 participants, but there are still some spaces available. The smaller size of the event allows for audience members to ask direct questions of the presenters. There will be professionals from Cornerstone Financial Group, Salal Credit Union, CIPS, Cannabis Commodities Exchange, and Cannabis Merchants present, among others. The experts will be speaking on a wide range of topics, from insurance and taxes to business planning and development.

    Unlike some educational or networking events in the cannabis industry, this “Dollars & Sense” event stands out because despite limiting attendance to 100 participants, there is no ticket fee to I-502 licensees or applicants or those who have memberships to the Marijuana Business Association. For those interested in the cannabis industry who haven’t actually taken the plunge yet, tickets are only $10 (plus processing fees).

    You can purchase or reserve tickets via the Eventbrite page for financial planning event.

The event is free to MJBA members and I-502 applicants; price for the general public is $10.

Can Cannabis-Related Debt be Discharged in Bankruptcy?

COURTS, AS WE'VE NOTED RECENTLY, have tended to say "no."  But a student comment by Vivien Cheng of Emory Law School, Medical Marijuana Dispensaries in Chapter 11 Bankruptcy, surveys the whole field and makes the opposing case.  Here's the abstract:

Since California passed the Compassionate Use Act of 1996, the interaction between state and federal medical marijuana laws have been a subject of frequent legal debate. But few have considered whether state-compliant medical marijuana dispensaries may seek assistance from the bankruptcy system. Two dispensaries recently tested their ability to reorganize under chapter 11 of the Bankruptcy Code, but the cases were quickly dismissed. The U.S. Trustees argued that the debtors’ business activities constituted “cause” to dismiss, lack of good faith in filing, and a “means forbidden by law,”and left the debtor with little reasonable chance of success.

This Comment argues that the requirements in §§ 1112(b), 1129(a)(3), and 1129(a)(11) to propose and confirm a chapter 11 plan do not foreclose bankruptcy protection for a medical marijuana business. Since medical marijuana dispensaries are legitimate businesses under state statute, there should be no lack of good faith or cause to dismiss the case under § 1112(b). Therefore, chapter 11plans should also be confirmable since § 1129(a)(3) does not bar confirmation of plans based on the legality of the plan’s specific terms, but rather on the legality of the manner of the plan’s proposal. Such a plan should not be per se infeasible under § 1129(a)(11), although the risk of federal intervention may be a factor weighing against a finding of feasibility.

Even if a court decides to assess the substance of a dispensary’s plan, they may use their discretion to give greater weight to state rather than federal law. Successful state legalization despite federal prohibition suggests the federal government’s tacit acceptance of state-compliant dispensaries. Courts should allow dispensaries to pursue bankruptcy to satisfy more creditors and preserve a regulated medical marijuana market that protects patients and produces positive externalities for society. Debtors should be allowed to fund their repayment plans with state-compliant medical marijuana sales and leave constitutional challenges of state legalization policies to their proper forums. One group of marijuana business attorneys noted that if “bankruptcy courts develop a policy of denial of bankruptcy relief to medical cannabis entities, the legitimacy of the industry itself will continue to be stymied.”

H/T Rebecca Pressman

Related articles

Nowhere to Turn for Insolvent Marijuana Businesses

When Your Medical Marijuana Business Fails, You're Screwed

Why Pot Companies Can't File For Bankruptcy

Chapter 11 Bankruptcy vs. Chapter 13 Bankruptcy: What's the Best Option for Your Small Business?

Scheuer on Marijuana and Business Entity Law

THE DUAL LEGAL STATUS OF MARIJUANA in many states causes no end of conundrums for lawyers, particularly those who do business transactional work.  Such simple things as drafting contracts, setting up LLCs, handling real estate purchases -- the ordinary things business lawyers do every day -- can lead to potentially disastrous liability for lawyers if the business is involved in marijuana.

In a new paper, "The 'Legal' Marijuana Industry's Challenge for Business Entity Law," forthcoming in the William & Mary Business Law Review, Widener-Delaware's Luke Scheuer takes a look at some of the problems and offers his thoughts on a solution.  Here's the abstract:

In recent years many states have legalized the use and sale of marijuana for medical or even recreational purposes. This has led to the booming growth of a “legal” marijuana industry. Businesses openly growing and selling marijuana products to the consuming public are faced with some unusual legal hurdles. Significantly, although the sale of marijuana may be legal at the state level, it is still illegal under federal law. This article explores the conflict between state and federal marijuana laws from a business entity law perspective. For example, managers owe a fiduciary duty of good faith to their businesses and equity holders. One of the ways in which managers can violate this duty is by causing their business to intentionally violate the law. This is a problem for the marijuana industry because its managers constantly and intentionally violate federal law and therefore violate their fiduciary duties by growing and selling marijuana. This article concludes that the industry’s ability to attract professional stakeholders is harmed by marijuana business stakeholders’ inability to take advantage of key business law protections, such as limited liability. This article proposes a state law exception that allows for marijuana businesses to operate normally under state business entity law, with normal business entity law protections, despite their continuing violation of federal law.