Recreational Cannabis

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J.B. Pritzker (Democrat) won the election for Governor of Illinois and will be sworn into office in January 2019. Based on Governor-elect Pritzker’s statements on the campaign trail and the current acquisition market in Illinois, the cannabis industry appears to believe that legalized adult use recreational marijuana is a foregone conclusion and that Pritzker will sign a marijuana legalization bill shortly after taking office, which will legalize recreational marijuana in Illinois.

Pritzker has stated that adult use recreational cannabis could generate as much as $700 million per year in annual taxes. Because Illinois has one of the strictest medical marijuana programs in the country, it is uniquely situated to have an explosive recreational market while also avoiding the perceived negative costs of legalization. Illinois has a real opportunity to become a leader in the industry and to also positively address the unfortunate reality that minorities are disproportionately arrested and incarcerated for marijuana possession.

Assuming Pritzker keeps his campaign promises, Illinois’ cannabis industry is set to take off and become one of the largest markets in the country.

Fox’s own Jennifer Benda, William Bogot and Joshua Horn are paving the way in this new and rapidly developing sector.

The National Law Journal has recognized Fox’s own Jennifer Benda, William Bogot and Joshua Horn as Trailblazers in Cannabis Law. This national distinction identifies attorneys who are paving the way in this new and rapidly developing sector.

 Josh and Bill are co-chairs of Fox’s nationwide Cannabis Law Practice – one of the largest in the nation with more than 50 attorneys experienced in a range of regulatory issues. They counsel growers, distributors, processors, investors and others, including suppliers of ancillary products and services, in corporate, regulatory, mergers and acquisitions, litigation and tax matters.

 Jennifer is a seasoned tax attorney, skilled litigator and former Certified Public Accountant who forged a niche practice handling complex tax and business problems for a diverse roster of clients in the cannabis industry. By combining a decade of working experience in accounting with years of tax planning advice and tax litigation, she delivers a rare depth of business strategy, pragmatism and efficiency to emerging, regulated markets.

 The three trailblazers have also been on the forefront of thought leadership in the legalized cannabis industry. In addition to speaking at a range of events, the group has published several valuable resources including a National Survey on Marijuana Laws and Regulations – a state-by-state survey of marijuana laws; a Cannabis Industry State Tax Guide; and Employment Compliance in the Age of Legalized Marijuana, which provides information and guidance on employment relationships affected by the legalization of marijuana in certain states.

Construction siteAll employers face challenges in navigating issues surrounding legalized marijuana. For construction industry employers, the challenges are particularly difficult given the necessary emphasis on safety.

Last week, my colleague Jeff Polsky, co-chair of Fox’s Labor and Employment Department, recorded a 90-minute webinar for Lorman addressing the issues construction employers face in jurisdictions that have legalized medical or recreational marijuana. Jeff discussed developments in state law, conflicts between state and federal laws, drug testing, maintaining a drug-free workplace, and responding to employees’ requests for accommodation of marijuana-related disabilities. You can purchase the webinar here.

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.