Recreational Cannabis

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E-Book Cover: Employment Compliance in the Age of Legalized MarijuanaThough cannabis is illegal under federal law, at least 30 states and the District of Columbia have legalized cannabis for medical use and nine states, as well as D.C., have legalized it for recreational use—a dichotomy that presents a unique and complex challenge for employers. In a new e-book, Fox attorneys Joseph A. McNelis III, Lee Szor, William Bogot and Joshua Horn provide an overview of federal and state marijuana laws, discuss specific aspects of the employment relationship affected by the legalization of marijuana in certain states, and offer practical guidance for employers on how to navigate this new and developing area of the law.

We invite you to download a PDF of the e-book.

Nevada legalized the recreational adult-use of marijuana on July 1, 2017 and the state has generated millions in tax revenue as a result. Nonetheless, the Nevada Regulation and Taxation of Marijuana Act (the “Act”) provides that until November 2018, only registered marijuana certificate holders may apply for recreational retail marijuana establishment licenses. The Nevada Department of Taxation (the “Department”) ceased accepting applications at 2017 year’s end.

Nevada state flag on cannabis backgroundThe Act further provides that at least once a year, the Department will determine whether additional marijuana establishments are necessary to support the demand in the state. It was anticipated the Department would begin accepting recreational retail marijuana establishment licenses again in November 2018.

On July 6, 2018, the Department issued a notice of its intent to begin accepting applications for recreational retail marijuana establishment licenses. The notice came sooner than expected, but there’s a catch! The Department is accepting applications under two (2) conditions: (1) the applicant must be a registered medical marijuana establishment certificate holder; and (2) the applicant must be in “good standing” with the Department. The plus side is that such applicants may apply for one (1) or more recreational retail marijuana establishment licenses.

For those prospective applicants meeting the two (2) foregoing conditions, they must act fast. The application acceptance period lasts only ten (10) days – from September 7-20, 2018 (excluding weekend days).

In addition, prospective applicants should not expect to be open for business anytime soon. The application review period begins September 7, 2018 and extends to December 5, 2018. The Department will award conditional licenses no later than December 5, 2018.

There’s another catch! Conditional license holders must be fully operational no later than twelve (12) months following the issuance of a conditional license. If the establishment is not fully operational after twelve (12) months following the issuance of a conditional license, the establishment must surrender the license to the Department, unless an extenuating circumstance applies.

The application can be found on the Nevada Department of Taxation website.

In November 2018, the Department may open up the applicant pool to all persons interested in submitting an application to operate a recreational marijuana establishment – emphasis on may.

Jack Praetzellis writes:

Green California Vector IllustrationOn July 1, 2018, California’s Cannabis “transition period” ended for manufactured cannabis products (i.e., edibles).  All manufactured cannabis products must now meet California’s (very) specific labeling and packaging regulations.

California Cannabis Label SymbolAmong other things, the packaging must include THC and CBD content in milligrams along with the Cannabis “universal symbol” (and no, you can’t change the color).

The “don’ts” are more interesting than the “dos”.  Among other things, packaging cannot:

  • Include the name of a county in California unless all of the cannabis in the product was grown there.
  • Imitate candy packaging or labeling and cannot use the terms candy or candies, or otherwise appeal to those under 21.
  • And, in a typically California move, packaging must identify all potential allergens (shellfish, peanuts, etc.).

Manufacturers should take (or, well, should have already taken) a close look at these detailed labeling and packaging requirements.  Although some of these regulations may seem excessive, there are high stakes here.  Failure to comply with any of the host of California’s Cannabis regulations subjects a licensee to discipline (which may include suspension or revocation of the license).  See Cal. Bus & Prof Code §§ 26030-26031.

Jack Praetzellis is an associate in the Litigation Department, resident in the San Francisco office.

Green California Vector IllustrationIn an Alert published Thursday, Fox partner Tracy Gallegos and associate Lynnel Reyes examined new emergency regulations recently proposed by the California Department of Public Health to allow Type 6, 7, or N cannabis licensed manufacturers to register their facility as a “shared-use” facility. The regulations also provide for a new license, the Type S license, which would allow licensees to create infusions, package and label cannabis products and conduct extractions with butter or food grade oils (provided that the extract or concentrate produced may only be used in infused products manufactured by that licensee.) The regulations are expected to be approved by tomorrow, April 13, 2018.

Tracy and Lynnel outline the details of the proposed regulations and the new Type S license, including its benefits, associated concerns and the application process.

To read their full discussion, please visit the Fox Rothschild website.

Jack Praetzellis writes:

Green California Vector IllustrationCalifornia law requires all contracts to have a “lawful object”.  Previously, this posed a problem for contracts involving cannabis since cannabis-related contracts are largely unlawful under federal law.  On January 1, 2018, California enacted Civil Code Section 1550.5. That Code Section explicitly states that cannabis-related contracts have a lawful object under California law.

California’s new law provides that commercial activity relating to adult-use cannabis conducted in compliance with California law is deemed to be the lawful object of a contract.  Section 1550.5 means that cannabis businesses can enter into and enforce contracts knowing that courts will not (or at least, should not) find their contracts invalid for lack of a lawful object.

Businesses in the cannabis industry should draft their contracts to take advantage of this change in the law and there are at least two immediate implications.  First, choice of law provisions should require application of California law (e.g., this contract shall be governed by California law).  Second, forum selection clauses should be used to make it mandatory that any claims relating to the contract be brought in California State Courts and not in any United States District Court (e.g., any action relating to this contract shall be decided by the Superior Court for the City and County of San Francisco).

Jack Praetzellis is a partner in the Litigation Department, resident in the San Francisco office.

Jack Praetzellis writes:

Sunset at Manhattan Beach and Pier in Southern California, Los Angeles.California Governor Jerry Brown signed an amendment to California Evidence Code Section 956 ominously known as the “crime-fraud exception”.  The newly-revised Code Section attempts to address the tension between state and federal law governing cannabis.

Under normal circumstances, California’s attorney-client privilege makes confidential communications among an attorney and a client exempt from disclosure.  Essentially, neither a lawyer nor a client can be compelled to testify about the substance of their communications.

The crime-fraud exception punctures the attorney-client privilege.  It provides that if a client used the services of a lawyer to commit a crime or a fraud, then the attorney-client privilege doesn’t apply.  The conflict between state and federal laws governing cannabis raises the specter of whether or not legal advice about cannabis falls into the crime-fraud exception.

Under California’s newly enacted Evidence Code Section 956(b), so long as an attorney “advises the client on conflicts with respect to federal law,” the crime-fraud exception won’t impact the attorney-client privilege where the advice is “rendered in compliance on state and local laws on medical cannabis or adult-use cannabis.”

Before celebrating, however, be mindful of Federal Rule of Evidence 501.  Where federal law governs a claim, federal courts do not apply state law privileges and therefore will not apply Evidence Code Section 956(b).  And obviously no similar special exception has been written in to federal law.

What’s the takeaway?  If you are providing or receiving advice about cannabis in California, be sure that some of the advice concerns conflicts with respect to federal law.  While it’s not guaranteed to preserve the attorney-client privilege under all circumstances (see Federal Rule of Evidence 501), it’s undoubtedly better than nothing.

Jack Praetzellis is an associate in the Litigation Department, resident in the San Francisco office.

Las Vegas Strip, Las Vegas, Nevada

Approximately 43 million tourists visit Las Vegas annually, and of those tourists, some undoubtedly consume marijuana during their visits.

There is just one major issue: There is no place for the tourists to consume it. Pursuant to Nevada recreational use regulations, consumption is to be done privately, not publicly. Recreational use in gaming establishments, hotels, or concerts is strictly prohibited.

However, the City Council of Las Vegas has drafted a proposed ordinance to permit the operation of marijuana consumption lounges. Here are several key takeaways from the proposed ordinance:

  • Employees are prohibited from consuming marijuana in the establishment during business hours
  • Employees of the marijuana consumption lounge must be at least 21 years of age
  • Visitors of the marijuana consumption lounge must be at least 21 years of age
  • The establishment must be appropriately concealed as to not allow viewing by the general public
  • The establishment may obtain a nightclub license for live entertainment to be performed on the premises
  • The licensee must obtain a special use permit for the establishment to operate specific commercial, industrial, or hybrid commercial/industrial zoning districts.

The proposed regulation could take effect by March or April of 2018. Sooner rather than later, tourists and residents may be able to enjoy the consumption of marijuana in a more social setting. If the proposed ordinance passes, Las Vegas may experience an increase in annual tourists as a result.

After California voted in favor of allowing the recreational use of marijuana, the entrepreneurial bug bit many California residents. Consequently, three licensing agencies were tasked with creating emergency cannabis regulations prior to the issuance of any commercial cannabis licenses.

Sunset at Manhattan Beach and Pier in Southern California, Los Angeles.The Bureau of Cannabis Control (BCC) licenses microbusinesses, distributors, testing laboratories, and retailers. The California Department of Public Health’s “Manufactured Cannabis Safety Branch” licenses the manufacture of cannabis edibles. The California Department of Food and Agriculture (CDFA) licenses cannabis cultivators and has been tasked with implementing a statewide track-and-trace system to account for the distribution of cannabis from the point of seed-to-sale.

On December 15, 2017, the BCC issued its first twenty commercial cannabis temporary licenses. The temporary licenses are valid for 120 days. Temporary licenses may be extended for additional 90-day periods; provided, however that an application for permanent licensure has been filed and is pending with the appropriate licensing agency. The process of obtaining a cannabis license is robust because of dual-licensing requirements – attaining city and or county approval is one of the conditions to obtaining licensing approval by the state.

Additionally, on December 18, 2017, the CDFA opened its portal to begin accepting applications for cultivation licenses.

The licensing agencies are ramping up for distribution of more licenses post January 1, 2018 when recreational use of marijuana takes effect.

Yesterday, U.S. Senator Cory Booker (D-NJ) introduced the Marijuana Justice Act of 2017.  The bill, which Senator Booker first announced on Twitter and then described more fully on Facebook Live, aims to end the federal prohibition on cannabis with a multi-faceted approach.  First, the bill seeks to amend the Controlled Substances Act to declassify marijuana as a controlled substance under Schedule I of that Act.  Presently, marijuana is in the same category as heroin.

U.S. Capitol Building
Copyright: mesutdogan / 123RF Stock Photo

Although Senator Booker describes the legalization of marijuana at the federal level as “first and foremost,” he describes the declassification as “just the beginning.”  As written, the legislation is retroactive, requiring each federal court to issue an order expunging each conviction for a marijuana use or possession offense entered by the court before the date of enactment.  The bill would provide individuals presently incarcerated for marijuana-related offenses with an opportunity have their sentences reviewed as though the Act was in effect at the time the offense was committed.

In addition to the shift in federal law, the legislation incentivizes states to become more flexible in their criminalization of marijuana.  Under the proposed legislation, states would be ineligible for certain funding if they disproportionately arrest or incarcerate “low-income individuals” or “minority individuals,” as those terms are defined in the bill, for marijuana-related offenses.

Finally, the bill creates a “Community Investment Fund” of $500 million for communities that Senator Booker describes as having been “disproportionately impacted” by the enforcement of current laws.  Senator Booker would have the community investment fund available to finance job training, reentry services, expenses related to expungement of marijuana-related convictions, community centers, and libraries.

Although the bill has been described as a “long shot” in the Republican-controlled Congress, given the ever-increasing presence of the legal cannabis industry, it is one worth following.  You can learn more about the bill in the press release on Senator Booker’s website, and watch the Facebook Live video of Senator Booker discussing the bill:

In advance of a Senate Judiciary Committee hearing held June 19, 2017, New Jersey State Senator Nick Scutari released the text of Senate, No. 3195, or SB 3195, the long-awaited bill legalizing cannabis in New Jersey. In a statement announcing the bill in mid-May, Senator Scutari, the bill’s sponsor, stated, “Now is the time to begin shaping New Jersey’s recreational marijuana program. We will have a new governor next year and we should be prepared to move forward with a program that ends the prohibition on marijuana and that treats our residents fairly and humanely.”

New Jersey map outline
Copyright: adamgolabek / 123RF Stock Photo

Governor Chris Christie, an ardent opponent of legalization, once famously remarked that tax revenue generated by legalization of marijuana should be considered “blood money.” As a result, the legislature is not expected to vote on the bill until 2018, when Governor Christie is out of office.

Senator Scutari and other New Jersey legislators took trips to Colorado to see their legalization framework firsthand. The effect is a bill that closely resembles Colorado’s version. SB 3195 proposes the following:

  • Legalizing the possession of one ounce of marijuana flower, seven ounces of concentrate, 16 ounces of edible products infused with cannabis, seven grams of cannabis concentrate, and 72 ounces of infused liquid for adults over 21 years of age
  • Elimination of sales tax on medical cannabis purchases and installing a staggered sales tax schedule on recreational purchases. The tax rate the first year is proposed to be 7%, 10% in year two, and then increase by 5% each year after that until reaching 25%
  • Expunging criminal charges related to possession of marijuana
  • Creating a new division within the Office of the Attorney General that would be specifically charged with overseeing the legalization program

As drafted, SB 3195 prohibits home cultivation of cannabis. While stating that he would be open to negotiating that element of the bill, Senator Scutari noted the difficulties that Colorado and other states have experienced in regulating and controlling home cultivation. Those states impose limits on home cultivation, but enforcement of those limits has proven challenging.

A study by New Jersey Policy Perspective and New Jersey United for Marijuana Reform estimated that legalizing cannabis could bring $300 million in new tax revenue in year one.