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CBD Beauty and Skincare Products in California’s Shifting Regulatory Landscape

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CBD and skin care: it’s complicated.

As I read this week’s Forbes article titled, “Cannabis Could Be The Most Profitable Ingredient In Skincare, If The U.S. Government Allows It,” it felt like déjà vu. Legislators, law enforcement, lawyers, and cannabis business owners have been going in circles for years now trying to figure out how, exactly, CBD products fit within the current state and federal regulatory structure. But despite the potential legal ramifications of violating the Controlled Substances Act (CSA), CBD companies, particularly those manufacturing beauty and skincare products, are cropping up everywhere and expanding rapidly.

We wrote a few months ago about Target, which pulled a line of CBD products from its website after a BuzzFeed article calling out the sales. And even Forbes, which stated that “A Sephora executive who asked to remain anonymous confirmed the beauty giant has plans to launch at least one CBD-based skincare brand this year,” was unable to reach anyone at Sephora for comment. These large companies have legal counsel who are undoubtedly cautioning them against venturing into the realm of cannabis and CBD; such high-profile sales of CBD products would be an easy target for federal enforcement.

Because we’ve been getting so many inquiries on this topic in California and elsewhere from companies that are unsure whether or not they need a manufacturing license to make these products and a retail license to sell them, and because this is obviously still a hot topic in the media, we thought it would be a good time to revisit the Drug Enforcement Agency’s (“DEA”) stance on the subject, as well as the scenarios under which CBD products are arguably legal under federal law.

Currently, the DEA’s stance is that CBD as well as other cannabinoids derived from cannabis are Schedule I substances under the CSA, regardless of their source. In 2016, the DEA clarified that “marihuana extract,” which is an extract “containing one or more cannabinoids derived from any plant of the genus Cannabis,” is marijuana, and therefore a Schedule I controlled substance. The DEA’s use of the word “any” means that this interpretation applies to any derivative of the cannabis plant, including CBD and any of the other cannabinoids found in cannabis. This definition is extremely broad, and according to the DEA, makes derivatives of the cannabis plant that were formerly thought to be legal, illegal.

As we’ve discussed before, there are three scenarios in which cannabis extracts are arguably legal under federal law. The first scenario is when extracts are derived from the “mature stalk” of the cannabis plant, because the CSA’s definition of marijuana “does not include the mature stalks of such plant, fiber produced from such stalks, oil or cake made from the seeds of such plant, any other compound, manufacture, salt, derivative, mixture, or preparation of such mature stalks (except the resin extracted therefrom), fiber, oil, or cake, or the sterilized seed of such plant which is incapable of germination.” 21 USC §802(16). The DEA has clarified that the rule does not apply to portions of the plant specifically exempt from the CSA’s definition of marijuana, but there is debate as to whether products that contain any meaningful amount of CBD can be derived from the mature stalks.

Another scenario is when extracts are derived from an industrial hemp plant lawfully grown in compliance with Section 7606 of the 2014 US Farm Bill (“The Farm Bill”). The Farm Bill allows states to enact pilot programs for hemp research purposes. Hemp that is cultivated in compliance with a state’s pilot program is legal pursuant to the Farm Bill, although the sale of any products derived from this research is not explicitly allowed.

The third scenario is when products are derived from imported hemp. In the early 2000’s, two cases out of the Ninth Circuit, Hemp Indus. Ass’n v. DEA, 357 F.3d 1012 (9th Cir. Cal. 2004) and Hemp Indus. Ass’n v. DEA, 333 F.3d 1082 (9th Cir. 2003) clarified that the DEA could not regulate hemp products merely because they contained trace amounts of THC. This was because some portions of the cannabis plant are explicitly outside the scope of the CSA, and the DEA was not permitted to expand the scope of the CSA to encompass all parts the cannabis plant. At the time of the ruling, it was illegal to grow hemp so it only applied to hemp imported from outside the USA. Some now argue that the holding could apply to hemp grown pursuant to the Farm Bill although, as stated above, commercial sales of these products is not explicitly allowed.

The Hemp Industries Association has sued the DEA over the “marijuana extract” rule, and that case is still pending. Until it’s decided, we’re left with a legal quagmire of rules interpretations that leave businesses selling CBD products in a precarious legal position. And of course, if you’re hoping to sell to cannabis dispensaries in any regulated state, including California, you’ll have to be licensed by that state, and you’ll only be able to sell to other licensees. Given the recent shift in federal enforcement priorities, we wouldn’t be surprised to see an uptick in enforcement action against companies selling CBD skincare and beauty products, particularly in interstate commerce and outside the ambit of state regulatory systems. But that’s a legal and business risk that many are clearly still willing to take.

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Cannabis Oversupply Presents a Challenge to Regulators

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Properly managing marijuana supply is the single most challenging aspect of state-level marijuana regulation. In an op-ed published January 12th in the Oregonian, Billy Williams, U.S. Attorney for the federal district that encompasses Oregon wrote about what he calls Oregon’s “massive overproduction problem.” According to Williams, postal agents in Oregon seized 2,644 pounds of marijuana in outbound parcels in 2017 alone. Decreasing wholesale prices in Washington and Colorado indicate oversupply as well based on the inverse correlation between supply and price. We hear anecdotes in Washington all the time from marijuana producers that are finding it more and more challenging to survive with the current market prices.

If this were any other market, data points indicating falling prices and oversupply would be wholly unremarkable. Free markets tend to find an equilibrium point between supply and demand that support relatively stable wholesale and retail prices. Free markets also tend to self-correct, if given the opportunity to do so. If businesses in a market are all extremely profitable, new firms are induced to enter the market. The entry of those new firms tends to increase competition and decrease profits across the board, signaling to other would-be market participants not to enter. Similarly, if things are not going well and competitors exit the market, surviving businesses are given a little bit more room to maneuver and succeed.

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Managing cannabis supply is a tightrope for state regulators.

But standard markets differ from cannabis markets. They have a longer history from which to draw conclusions and base expectations. The legal cannabis markets in Washington and Colorado didn’t really start until 2014. It is challenging to determine what effects outside forces have on those markets when there isn’t historical data to draw on. How elastic are cannabis markets– meaning, how price-sensitive are they? We are learning a lot now, but the cannabis data we have pales in comparison to, for example, the alcohol market with data going back to prohibition.

The cannabis market’s short life span can also explain why market participants often act differently than one might expect. People investing in the cannabis market see it as a once-in-a-lifetime opportunity to get in on the ground floor of something. Whether it’s the original dotcom bubble, bitcoin, or marijuana, new markets create hope of potentially boundless returns. Because of that hope, firms tend to stick around longer than one might expect — you don’t want to be the person that exited the industry right before it took off and made everyone in it a billion dollars.

And that hope is part of the reason that oversupply issues exist in legal marijuana states. Oversupply by itself wouldn’t be a problem if not for cannabis’s federal illegality. Because even in the cannabis market, forces will eventually correct oversupply and get us to equilibrium. Companies aren’t going to stay in business losing money year after year into eternity. But whereas other markets get the benefit of time to find that equilibrium, cannabis oversupply issues bring threats of federal enforcement. If there is too much supply in the legal market, the incentives remain for certain unscrupulous and desperate cannabis businesses to cut their losses and sell their overage in the black market.

Which brings us back to state regulations. If we could have had Eric Holder as attorney general for ten more years, the Department of Justice may have understood that legal cannabis markets need time to adjust, and that the adjustment period would be occasionally rocky. But under Jeff Sessions and the U.S. Attorneys that share his views, these periods of market adjustment provide ample opportunity to criticize state cannabis programs and claim that federal law enforcement is necessary due to black market leakage.

Ending the cannabis black market is the one shared goal that prohibitionists and legalization proponents have in common. No one thinks that empowering an underground illegal cannabis market is a good idea. But if states move too far in controlling supply because they are worried about black market leakage inviting in federal law enforcement, legal cannabis prices will rise too high within those states. And those high prices will incentivize black markets to continue selling outside the eye of any state regulatory system.

This tightrope is why managing supply is such a tough nut to crack for state regulators. If U.S. Attorneys and the Department of Justice really want to see the end of cannabis sales in black markets, though, they will provide room for the legal markets to stabilize and find their natural supply, demand, and price points on their own.

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Prosecutors and Pot: Annette Hayes — US Attorney for Western District of Washington

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Will she or won’t she?

Jeff Sessions’ decision to rescind Obama-era guidance on the Department of Justice’s approach to marijuana enforcement was troubling for the cannabis industry. The “Sessions Memo”  withdrew earlier marijuana-specific guidance memoranda and directed US attorneys to decide which marijuana activities to prosecute “with the Department’s finite resources,” based on well-established principles that govern all federal prosecutions including, “the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.”

The Sessions Memo does not provide much additional insight as to what prosecutors should look for in determining what marijuana crimes to target. In lieu of such guidelines, it is important that stakeholders in the cannabis industry familiarize themselves with the US Attorney in their district. This post is focused on Annette Hayes, the US Attorney for the Western District of Washington.

On January 4, Hayes issued the following statement regarding the Sessions Memo:

Today the Attorney General reiterated his confidence in the basic principles that guide the discretion of all U.S. Attorneys around the country, and directed that those principles shepherd enforcement of federal law regarding marijuana.  He also emphasized his belief that U.S. Attorneys are in the best position to address public safety in their districts, and address the crime control problems that are pressing in their communities.  Those principles have always been at the core of what the United States Attorney’s Office for Western Washington has done – across all threats to public safety, including those relating to marijuana.  As a result, we have investigated and prosecuted over many years cases involving organized crime, violent and gun threats, and financial crimes related to marijuana.  We will continue to do so to ensure – consistent with the most recent guidance from the Department – that our enforcement efforts with our federal, state, local and tribal partners focus on those who pose the greatest safety risk to the people and communities we serve.

This short paragraph indicates that Hayes’ office will focus on threats to public safety, as it has for the past few years, and will act in a manner “consistent with the most recent guidance from the Department.” This statement is fairly vague and does not give a strong indication as to how Hayes will act in light of the Sessions Memo. To better understand Hayes’ opinions on cannabis, we can turn to her career as a prosecutor.

Hayes joined the U.S. Attorney’s Office in 1997 as an Assistant United States Attorney in the Criminal Division. Early in her career she was assigned drug cases including large-scale, international trafficking and cartel-related cases. In 2002, she became the Deputy Supervisor of the Complex Crimes Unit where she prosecuted cyber hacking and intellectual property cases.  In 2005, she became one of the supervisors of the General Crimes Unit, focusing on a range of federal crimes including child exploitation, drug, fraud, identity theft, immigration and violent crimes cases. Hayes took over for Jenny Durkan (Seattle’s current mayor) as the Acting US Attorney for the Western District of Washington in October 2014.

As she moved up the ranks, Hayes has not focused solely on drug crimes. Since taking over as US Attorney for the Western District of Washington, Hayes’ office has focused on marijuana cases involving acts of violence or the distribution of other drugs, like methamphetamine. I uncovered no examples of Hayes’ office prosecuting a licensed marijuana business. The following are some of the key marijuana-focused cases prosecuted in western Washington under Hayes:

  1. Illegal BHO Operation in Bellevue. In June 2015, Hayes announced that David Shultz had been sentenced to nine years in prison after causing a fire in a Bellevue apartment complex while manufacturing Butane Hash Oil (BHO). A man was killed as a result of the fire and several others were injured. The incident occurred in November 2013 and Hayes took over this case after replacing Durkan. Mr. Shultz was operating squarely outside of Washington’s regulatory framework.
  2. IRS Fraud. In May 2016, Hayes announced that former IRS agent Paul Hurley would serve 30 months in prison for soliciting and then accepting a bribe while auditing Have a Heart. Have a Heart worked with the FBI and local law enforcement to document the events leading to Mr. Hurley’s arrest and conviction. Have a Heart is a licensed retailer but did not face charges relating to this incident.
  3. Unlicensed Medical Marijuana. In June 2016, Hayes announced that Lance Gloor would serve a ten-year sentence for drug trafficking. Gloor owned several medical marijuana dispensaries. In 2010, police officers obtained a warrant to search Gloor’s home and found over 70 marijuana plants and a firearm. While awaiting charges in state court, Gloor allegedly opened four marijuana dispensaries in the Puget Sound area. During his trial, Gloor the court ruled that Gloor violated court orders by contacting witnesses. In announcing the conviction and sentence, Hayes stated, “[d]espite repeated notice that his marijuana business was illegal under state and federal law, he continued to use lies, threats and intimidation to try to cover his tracks and make as much money as he could.” The court found that Gloor was not operating in compliance with state law and he did not have a license to produce, process, or sell marijuana from the Washington State Liquor and Cannabis Board.
  4. SPD Marijuana Diversion. In May 2017, Hayes announced the arrest of four Seattle Police Officers on conspiracy charges related to the delivery of hundreds of pounds of marijuana from Seattle to Baltimore. Alex Chapackdee, a 16-year veteran of SPD, was the alleged ringleader who also drove across the country to deliver marijuana on several occasions. This case is ongoing and the individuals involved have not yet been convicted.

Overall, Hayes does not appear to have the same zealous opposition to cannabis as Jeff Sessions. However, she has pursued marijuana cases that involved individuals who operated outside of Washington’s regulatory framework.  Hayes, like all of us, has relied on the Cole Memo for the last four years and is likely re-evaluating how her office will deal with marijuana in Washington. Under the Sessions Memo, we could see Hayes take a tougher approach to cannabis but her history of prosecuting marijuana crimes appears to indicate that she is not inclined to target licensed businesses.

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MLK Day: Cannabis and Civil Rights

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Happy MLK Day!

For our international readers, Martin Luther King, Jr. Day is an American federal holiday marking the birthday of its eponymous civil rights hero. Dr. King was the chief spokesperson for nonviolent activism in the Civil Rights Movement, which successfully protested racial discrimination in federal and state law. Dr. King was assassinated in 1968, four years after the passage of one of the great U.S. laws of the 20th century, the Civil Rights Act of 1964. His death also came two years prior to one of the 20th century’s most controversial and insidious laws, the Federal Controlled Substances Act of 1970 (CSA).

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Don’t forget that cannabis is a civil rights issue.

As cannabis business lawyers, we write about cannabis law topics every day of the year on this blog, but we seldom address pure social issues. When it comes to cannabis, however, it is sometimes difficult to separate law and policy. This is because the federal prohibition of marijuana in the United States has had a racially disparate impact on non-white individuals, especially black and Latino Americans. That should come as no surprise to anyone: It is well documented that former president Richard Nixon wanted to link marijuana use and its negative effects to African Americans and hippies, who he perceived to be his enemies, when he signed the CSA.

That was almost 50 years ago, but in a way, not much has changed. Although the Trump Administration has instated policies that make it more difficult to track drug arrests, publicly available FBI data reveals that 1,572,579 marijuana-related arrests occurred in 2016, comprising 42% of all reported U.S. drug arrests. This is 10,000 more marijuana arrests than were made in 2015. Thus, marijuana arrests are increasing, even as more states legalize possession and sale of the plant. It is profoundly regrettable that non-white individuals are arrested for marijuana crimes on a grossly disproportionate basis to whites, today and historically, despite lower levels of consumption overall. Most arrests are made for simple possession of small amounts of pot, and are made at the state and local level.

As far as federal enforcement and policy, both the Drug Enforcement Administration and the Federal Bureau of Investigation operate under the jurisdiction of the Department of Justice (DOJ), which is headed by Attorney General Jeff Sessions. Mr. Sessions has a long and well-documented history of fervent opposition to marijuana. Since his confirmation in January of 2017, Sessions has made various attempts to strengthen the hand of federal agencies in prosecution of marijuana-related crimes. Most of these attempts are either aggressively or latently anti-civil rights. These attempts include:

  • reversing a DOJ policy to combat draconian federal sentences for drug-related convictions (which affect blacks and Latinos disproportionately);
  • reversing a DOJ policy phasing out federal private prisons (which impound blacks and Latinos disproportionately);
  • calling for an inquiry into the link between marijuana and violent crime (likely to target blacks and Latinos disproportionately);
  • reinstating the controversial and legally problematic police tool of asset forfeiture, which allows law enforcement to seize property of individuals who have been suspected of, but not charged with, crimes (in violation of everyone’s civil rights, but to affect blacks and Latinos disproportionately);
  • petitioning Congress for funds to prosecute the retrograde War on Drugs, including recreational and medical marijuana (still more racially disparate impact);
  • importuning state governors with “serious questions” about their state cannabis programs, in an apparent effort to challenge the legitimacy of those programs (latently problematic); and
  • ripping up the Cole Memo, which gave some cover to marijuana businesses.

Jeff Sessions has been dogged by allegations of racism throughout his career, and his fusillade of anti-civil rights actions begs the question: If a racist were in charge of criminal justice for the United States, what would he do? The answer is literally everything listed above. Unfortunately, there may be more to come.

The War on Drugs started out as a war on minority groups, and not much has changed in 50 years. If Dr. Martin Luther King Jr. were alive today, it is almost certain that he would be advocating for an end to the War on Drugs, starting with removal of marijuana from Schedule I of the CSA. Until that happens, and in honor of Dr. King, here are some ways you can pitch in to reverse the racist, immoral and counterproductive state of federal law with respect to cannabis:

  • demand that your Senator co-sponsor to the Marijuana Justice Act;
  • demand that other public officials in your state finally step up to de- or reschedule marijuana as relates to the CSA;
  • support organizations across the political spectrum, from the American Civil Liberties Union (ACLU) to Republicans Against Marijuana Prohibition (RAMP), with respect to their efforts to end federal prohibition;
  • support trade groups like the Minority Cannabis Business Association, which promote diversity in the cannabis industry; and
  • support and advocate for city and state programs that aim to help disadvantaged communities cash in on marijuana legalization.

Dr. King died 50 years ago, but his legacy continues to resonate and expand. On this day honoring one of our greatest leaders, it is important to remember all of the reasons we strive to put an end to prohibition, including the most important ones.

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Sessions Made His Move, Now What?

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The worst.

If your New Year’s resolution was to stop paying attention to the news you may have missed that last Thursday U.S. Attorney General Jeff Sessions formally rescinded the Cole Memo – which we covered here and here. By rescinding the Cole Memo, Sessions, whose outdated and prohibitionist stance on cannabis is well documented, has sown uncertainty in the states that have legalized cannabis use. This is especially true for the states that have legalized and are regulating adult-use cannabis businesses and individual rights.

To some extent, cannabis businesses are already feeling the effect of this new and uncertain landscape. But in following up on his antiquated stance on cannabis, did Sessions overplay his hand? Will this be a Pyrrhic victory for the prohibitionist crowd? With recent polls showing that 64% of Americans support legalizing cannabis (even 51% of Republicans support legalization) Sessions might have done cannabis proponents a favor by bringing the federal government’s stance into the national spotlight. So the next question everyone’s got to be asking themselves is “what do we do now?”

The most pressing thing that we can do is get Congress to extend the Rohrabacher-Blumenauer Amendment (“RBA”) and include adult-use cannabis into its provisions. We covered the RBA a couple of weeks ago but in case you missed it, here’s the Cliffs Notes version: the RBA is a federal budgetary provision that prohibits the Department of Justice from spending money to interfere with the implementation of a state’s medical cannabis laws. The RBA has proven to be a valuable protection for medical cannabis businesses as evidenced by the Ninth Circuit Court of Appeals ruling in U.S. v McIntosh. In McIntosh, the Ninth Circuit ruled that the DOJ could not use funds to go after medical cannabis businesses that were operating in compliance with their medical cannabis state laws.

The RBA provides medical cannabis businesses with some protective certainty (at least for those states under the Ninth Circuit’s jurisdiction), but moving forward there are two glaring concerns: 1) the RBA only applies to medical cannabis businesses; and 2) since the RBA is a budgetary provision it needs to be included in the federal budget and that budget is set to expire on January 19! The likelihood of a Republican led congress including adult-use cannabis into the RBA prior to January 19th is pretty slim, but if Republican Senators like Corey Gardner and Lisa Murkowski are serious about protecting their respective states’ residents, they will need to hold Trump and Sessions’ feet to the fire.

Legally compliant cannabis businesses have always had to deal with a level on uncertainty and risk when it comes to federal government but there’s been one industry that’s remained afraid to openly engage with cannabis businesses: the banking industry. Many observers feel that Sessions’ main goal is to slow the growth and investment in the cannabis industry by keeping cannabis businesses from obtaining bank accounts. If you want to know what a cannabis business owner has to do find proper banking, take a look at this recent piece in the New York Times Magazine where my colleague in our Seattle office, Robert McVay, was interviewed. Cannabis businesses had a difficult enough time finding banking options when the Cole Memo was in place and that won’t get easier any time soon.

To be sure, Sessions has taken an odd and extremely hypocritical stance. He fancies himself a states right guy (when convenient) and a law and order guy (always), but he would rather have cannabis businesses dealing in cash, placing everyone at greater risk. It’s time that our elected officials make access to banking for the billion dollar state-legal cannabis industry a priority. Making sure cannabis businesses have access to banking services will only increase compliance, since cannabis business that continued to operate in cash-only would immediately be flagged by regulators as suspicious. To that end, we all need to press our regulators to support the Secure and Fair Enforcement Banking Act (“SAFE Banking Act”). The SAFE Banking Act would prohibit a federal banking regulator from penalizing a banking instituting from providing services to a cannabis business. The SAFE Banking Act was introduced by Senator Jeff Merkley (D-OR) and currently has twelve co-sponsors (8 Democrats, 3 Republicans, and Bernie).

In the House of Representatives there’s the Respect State Marijuana Laws Act (“RSMA”) that was introduced by Dana Rohrabacher (R-CA) which would amend the Controlled Substances Act (“CSA”) so that its provisions would not apply to a person acting in compliance with a state’s cannabis laws. The RSMA is basically an attempt to codify the Cole Memo it had twenty-four sponsors prior to Sessions revocation of the Cole Memo -it now has thirty-seven!

It’s also time to gather support for the Marijuana Justice Act (“MJA”) that was introduced in the Senate by Senator Corey Booker (D-NJ) on August 01, 2017. The goal of Mr. Booker’s bill is to remove marijuana from the CSA and end the federal government’s criminalization of cannabis. As of this writing only one other Senator has co-sponsored the MJA, Senator Ron Wyden (D-OR). While the Cole Memo was still in place a number of senators probably didn’t fell the necessity to co-sponsor the MJA, so it will be interesting to see if that calculus will change under the new landscape.

Those of us that live in California can expect that our state government will push back against this federal encroachment against the will of Californians – as California hasn’t been afraid to take the Trump administration head on. Other states have also sued the Trump administration and although states exerting their rights are a good thing, cannabis rights (personal and commercial) will ultimately be decided on the federal level. Sessions has made his position on cannabis clear, it’s now up to Congress to speak for the people.

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The Tax Act and Cannabis Employment Practices

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Look out for a change in tax deductions for employer provided benefits — at least for some businesses.

President Trump signed the Tax Cuts and Jobs Act (the “Act”) into law on December 22, 2017.  The Act contains several sections that will impact companies that work with cannabis businesses and provide important indications of where states might be going with taxes in the coming year. As for the Act itself, its sweeping provisions went into effect on January 1, 2018.

Note that much of the Tax Act’s deductions and credits won’t apply to cannabis businesses due to IRC 280E, but these deductions and credits are still important to many ancillary businesses that serve the industry, and which may not be subject to 280E (we recommend that anyone with questions as to where they fall seek advice from their CPA or cannabis tax attorney). If these credits and deductions prove to be popular we may see states enact similar changes that will directly affect cannabis business themselves.

On the employment front, many cannabis businesses obtain employees through staffing agencies. Those agencies should will be subject to these new tax deductions and credits. We may see an influx of agency recruits, or a decrease, depending on how the recruitment companies take advantage of these deductions and how the new laws remove deductions for benefits provided to employees.

Sexual Harassment Settlements

Prior to 2017, we didn’t hear much about sexual harassment in the workplace. One reason for this is because a majority of sexual harassment settlements contain nondisclosure agreements. A nondisclosure agreement typically prohibits the employee from discussing the sexual harassment suit, its result or even the fact that harassment was ever alleged. Currently, employers are allowed to take a tax deduction for settlements paid out for sexual harassment and sexual abuse, regardless of the terms of the settlement agreement. That’s finally changing.

Going forward, employers cannot deduct settlement payments related to sexual harassment if the settlement agreement contains a nondisclosure agreement. Employers can receive a tax deductions on sexual harassment settlements that do not contain nondisclosure agreements. Payments in sexual harassment suits can be huge–meaning the tax deduction can also be huge. (Bill O’Reilly paid $32 million to one female accuser.) This will force employers to carefully consider how sexual harassment suits are settled, which is a welcome change. States might follow suit. Plan now how to handle sexual assault cases so you don’t have to make this decision.

Paid Leave Credit

Paid family and medical leave is a significant benefit for cannabis employees. Providing paid family and medical leave can attract highly qualified employees and help retain those employees. In what has been described as the first step towards a “nationwide paid family leave policy”, the Act provides employers incentives to provide paid family and medical leave—admittedly in a very complicated fashion.

Employers can qualify for up to a 25 percent tax credit for providing paid leave for qualifying employees under the Family Medical and Leave Act (FMLA). Employers qualify for the credit by providing at least two weeks paid leave equal to at least 50 percent of the employee’s regular wages. At a minimum, employers will receive a 12.5 percent tax credit for providing paid leave. The credit incrementally increases based on the percentage of regular wages the employee receives. The paid leave credit is only applicable to employees who earn less than $72,000 and have been employed at least one year. Paid leave must be provided separately from vacation leave, personal leave, or other medical or sick leave.

The Paid Leave credit expires in 2019 unless extended by Congress. Some congressional members have suggested Congress is considering enacting separate legislation that requires paid leave. Paid sick leave requirements are already in effect in several states, including those with cannabis laws.

Pay attention to expenses related to paid leave, and consider whether this a feasible option for your cannabis business. Several states already have paid leave and more are likely to follow. If your state does not already have paid leave that applies to your cannabis business, you should assume they will enact similar tax incentives soon.

ACA Individual Mandate

The Act removes the Affordable Care Act individual mandate to purchase health insurance. At first glance, this does not seem like it would affect your cannabis business, but staffing agencies employing more than 50 full time employees. are required to purchase healthcare for their employees. Employees that are recruited to your cannabis business are considered employees of the staffing agency. The ACA’s individual mandate was designed to work with the employer mandate to provide health insurance. The employer mandate is still in place. Employers with 50 or more full-time employees are still required to provide health insurance.  Without the individual mandate, it is likely insurance premiums will continue to rise unless Congress acts to reform health care.

Further, given the mandates were designed to work together, there is a strong suggestion that Congress will start to undo the employer mandate. It will likely come in the form of fewer reporting requirements or a complete removal of reporting requirements. This means that staffing agencies may reduce the number of recruits they have out at a time to avoid the employer mandate of the ACA, meaning you will have less of a pool to pull from.

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Marijuana Businesses and the End of Prohibition

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What will the future bring for marijuana markets?

The end of one year and the beginning of another presents a good opportunity to look ahead at the long-term goals of the marijuana legalization movement. In the near term (next year or two), nationwide legalization or even decriminalization of marijuana is unthinkable. The current Congress and President Trump have not shown any inclination toward effecting that type of change. At some point though, sooner or later, the United States will legalize marijuana nationwide — not just move it to Schedule 2 or 3 of the Controlled Substances Act, but fully deschedule it. It’s not too early to think about what nationwide legalization would look like and how it would affect cannabis businesses that are open today.

There are three main routes that legalization could take. First, there is total unregulated legalization — treat marijuana like apples. That option is so unrealistic that it’s not worth discussing. Next, there is the alcohol model, with a mixture of federal and state regulations. Products can be distributed and sold across state lines, and states can regulate however they choose, but they can’t show preference to local actors. Finally, we could build on the current cannabis legalization model. Every state creates its own market with its own licensing system and regulatory scheme. Product cannot move across state lines, and many states limit or ban ownership stakes in marijuana businesses by out of state individuals.

If the U.S. ultimately takes the last route, continuing the current trend, market change would be gradual. Banking would certainly be easier, and marijuana businesses wouldn’t pay as much in taxes. States would likely ease some of their regulations that they have in place solely because of the Cole Memo. But on the whole, the state markets would continue on much the same trend as today. Note that very few commodities cannot be transported interstate. Health insurance is one, but state insurance markets are more about individual states being able to regulate the types of policies that can be sold in the state. There isn’t a physical product that is being barred from crossing state lines.

Continuing with individual state cannabis markets doesn’t seem likely, either. If cannabis is legalized, it doesn’t make sense that Congress would bar states from opening their doors to out of state product. They don’t do that with any other similar products. The Dormant Commerce Clause would also present a major legal challenge for a state that wanted to only allow in-state actors to sell products to its residents.

The most likely outcome, then, is the alcohol/tobacco model, with interstate commerce allowed, and a mixture of federal and state licenses and regulations. Though this transition will undoubtedly be an exciting moment for many, it will also be a scary time for the cultivators and processors across the country that are already doing business. Two different kinds of consolidation would start happening at the same time. First, there is corporate consolidation. In 2015, 90% of the beer sold in the United States was owned by 11 multinational corporations. Constellation, owner of Corona and other beer brands, has already made a large investment in a Canadian marijuana company. Big business will certainly look at marijuana. But the other type of consolidation that isn’t talked about as much is geographic consolidation. In a free interstate market, it doesn’t make a lot of sense to grow marijuana in Nevada, Massachusetts, Washington D.C., and a number of other states that have current licensed marijuana cultivators. In the same way that Virginia and North Carolina dominate in tobacco cultivation, California, Oregon, and a few other places will likely dominate marijuana cultivation. That could leave producers getting licensed in other locations in a tough spot, when federal legalization finally happens.

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BREAKING: Sen. Ron Wyden (D-OR) Becomes First Co-Sponsor of Marijuana Justice Act

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At 3:30pm PST today, Sen. Ron Wyden became the first US Senate Co-Sponsor of Sen. Cory Booker’s Marijuana Justice Act (“MJA”). We’ve discussed the content of the MJA before here and as we stated in the Portland Mercury:

“Booker’s Marijuana Justice Act is remarkable in its scope. Not only would it remove marijuana and tetrahydrocannabinols (THC) from Schedule I classification, it would remove the federal criminal prohibition on the import and export of cannabis. It would also withhold federal money for the construction of prisons or jails from any state that has discriminatory (race or income) arrest and incarceration rates for cannabis offenses. Such states would also see up to a 10 percent reduction in federal funding for a broad array of crime fighting efforts. These funds would instead be directed into a community reinvestment fund that would go towards communities devastated by the drug war. Finally, and perhaps most ambitiously, it would expunge all old cannabis convictions, and anyone currently imprisoned on federal cannabis charges would have the right to a new sentencing hearing. The hearing judge would have authority to impose a modified sentence as if the Marijuana Justice Act was in effect on the date of the crime.”

It remains to be seen whether the Wyden sponsorship will catalyze other members of the Senate to step forward on this progressive bill. In the meantime, the near term focus for most industry watchers is the soon-to-expire protection for state medical marijuana programs and actors. We are cautiously optimistic that those protections will be extended later this week, provided the entire government doesn’t shut down. But in the long term, we would love to see the MJA build on today’s momentum, and eventually become law.

Sen. Wyden and Sen. Booker’s joint statement on the MJA was screened live on Sen. Booker’s Facebook page and is available here.

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Is the Supreme Court Gambling on State Cannabis Laws? Christie v. NCAA

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Cannabis legaization and federal law
We are hoping for a good roll from the Christie case

Christie v. NCAA is a U.S. Supreme Court (SCOTUS) challenge to the federal law that bans states from allowing sports gambling. Though nothing in Christie addresses cannabis directly, SCOTUS’s decision, due out next year, could give Congress a tool to ban states from allowing legal marijuana.

In 1992, Congress passed the Professional and Amateur Sports Protection Act (PASPA), which prohibits states (save for some that were grandfathered) to “authorize” gambling on sports. The state of New Jersey, which was not grandfathered, passed laws in 2012 to authorize sports betting. In a federal case, the state admitted that these laws violated PASPA, but argued that PASPA unconstitutionally allowed the federal government to “commandeer” the state to enforce federal law. The Court of Appeals found that the Constitution’s anti-commandeering doctrine (derived from the 10th Amendment) didn’t apply here because PASPA didn’t affirmatively require New Jersey to do anything, but simply prohibited it from enacting laws that allowed betting on sports. The Supreme Court declined to review the Court of Appeals’ decision.

In 2014, New Jersey passed a new law that merely repealed existing its laws prohibiting sports betting. The Court of Appeals was unconvinced that the new law was any different than the 2012 law. According to the Court of Appeals, the difference between “authorizing” sports gambling and “repealing” laws that prohibited sports gambling was insignificant. The result in either case was that New Jersey allowed gamblers in New Jersey to bet on sports, which was banned by PASPA.

This time SCOTUS took notice and agreed to hear the case. New Jersey’s brief before SCOTUS argues that under the anti-commandeering doctrine, it makes no difference whether the federal law prevents a state from repealing a law or affirmatively forces it to pass a new law. Either way, the federal government is forcing New Jersey to regulate conduct that its voters would rather leave unregulated. At least one amicus curiae brief argued that upholding the lower court’s decision would allow Congress to require states to affirmatively ban medicinal or recreational cannabis, denying the states their traditional role as experimenters in parallel legal regimes.

On December 4, 2017, SCOTUS heard oral argument in Christie v. NCAA. While it is difficult to predict the final decision simply from oral arguments, at least one noted commentator opined that “Justices seem to side with the state on sports betting.”

But what will happen to state-legalized cannabis if SCOTUS goes the other way and upholds the lower court’s decision? Nothing at first. Christie will only decide the question of whether the lower court properly found that PASPA applies to the New Jersey law. Although Justice Sotomajor mentioned marijuana in passing at oral argument, the issue of state marijuana regulations is not before SCOTUS in Christie. In the future, however, it is at least conceivable that Congress could take its lead from such a ruling and pass a law that requires states to repeal their legal cannabis regulations.

 

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Cannabis Businesses Protected From Federal Government. For Now.

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corporate cannabis lawyer
What will you say about cannabis this holiday season?

For many of us, the holiday season means attending a number of office holiday parties. Between trying to snag egg-rolls and chicken skewers there’s a lot of networking, re-connecting, and small talk (so what do you think about Jimmy Garoppolo?). If you’re talking to a stranger, the conversation often leads to “and what do you do?” When I tell them I’m a corporate attorney who advises cannabis businesses, they usually ask about the federal government. Specifically, they ask what’s keeping the federal government from cracking down on the cannabis industry? That’s when I ask them if they’ve ever heard of James Cole, Dana Rohrabacher, and Earl Blumenauer. I then give them a brief history lesson (while keeping an eye out for new appetizers) on the Cole Memorandum and the Rohrabacher-Blumenauer amendment (formerly known as the Rohrabacher-Farr amendment).

We’ve previously covered the tenuous nature of the Cole Memo since U.S. Attorney General Jeff Sessions can revoke it at any time. Fortunately for the burgeoning cannabis industry, Sessions has managed to restrain himself and has kept the Cole Memo in place. What’s of more immediate concern is the status of the Rohrabacher-Blumenauer amendment (“RBA”).

The RBA prohibits the U.S. Department of Justice (“DOJ”) from spending money to interfere with the implementation of a state’s medical cannabis laws. The RBA has proven to be one of the strongest protections for the cannabis industry since the Ninth Circuit Court of Appeals enforced the spending prohibition against the federal government. After that ruling, the DOJ filed a motion to put a stay on one of its cases against medical cannabis growers in Washington (known as the Kettle Falls Five case). In order for the RBA to survive, either the House of Representatives or U.S. Senate appropriations committees need to attach the RBA to a federal spending bill. That federal spending bill then needs to be approved by the House and Senate and then signed by the President. The House is doing its best to keep everyone in the cannabis industry nervous this year as they blocked a floor vote on the RBA back in September. To add to the unease, Congress came dangerously close to another government shutdown this past week as it had until December 8th to pass a budget to fund the government. Congress didn’t pass a comprehensive budget but instead passed a stopgap spending bill to keep the government running – and the RBA in place – until December 22nd.

A two-week extension of the RBA does not come close to providing the stability cannabis businesses in a billion dollar industry need when making strategic business decisions, but it’s better than the alternative: a government shutdown and wild uncertainty. What the stopgap bill does do, however, is buy everyone time to call their local congressperson and Senator to voice their support for the RBA and for an end to the federal government’s antiquated (and unjust and immoral) position on cannabis. What we’ve learned in President Trump’s first year in office is that he hasn’t made cannabis policy a priority and he will most likely sign whatever spending bill Congress puts in front of him.

The President’s lack of interest in protecting the legal cannabis industry means it’s vitally important YOU call your representative to make sure the RBA is included in the spending bill that ends up on the  President’s desk. So make that call and send that email! We don’t want the conversation at the next holiday party to be in remembrance of the Rohrabacher-Blumenauer amendment.