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It is not often when an employer defends a FLSA lawsuit by asserting that it is in an illegal business and therefore immune to suit. Sound funny? Well, that is precisely what a Colorado employer that furnishes security services to legal cannabis growers/sellers has pressed on the Tenth Circuit. The employer’s theory is that the workers are not entitled to allegedly unpaid overtime under the Fair Labor Standards Act because their work is illegal under federal law. The case is entitled Kenney v. Helix TCS, and was argued before the Court of Appeals for the Tenth Circuit.

The Company’s counsel argued that the collective action cannot proceed as the FLSA only applies to legal businesses. The lawyer claimed that all job functions engaged in by the workers amount to trafficking in illegal drugs. This case is fascinating because it highlights the tension between a state legalizing cannabis and its continuing illegality under federal law. The lawyer for the Company argued that this controversy entered the “legally ambiguous” sphere in which legal cannabis businesses operate.

The named plaintiff, an armed security guard who guarded growers and sellers, claimed he worked overtime many weeks and was not paid properly. He sought class certification for all such guards, going back three years. The Company moved to dismiss, arguing that the employee’s work (as he was dealing with a Schedule 1 drug under federal law) violated the federal Controlled Substances Act and was thus outside of FLSA coverage.

The district court Judge denied the motion and observed that other courts have not endorsed this concept. The Judge noted that in other cases involving businesses that violate federal laws, e.g. immigration, courts have ruled that these violations did not mean the businesses could not comply with other federal laws. However, the Judge certified the ruling for immediate appeal and thus it went (quickly) to the Tenth Circuit.

The lawyer for the plaintiff asserted that the FLSA does not have a requirement that employees subject to its jurisdiction must be engaged in “only” legal businesses. There was no outright mention of “lawfulness” in the law and there was nothing in the state statute that voided the dictates of the FLSA.

The Takeaway

Maybe Congress should make an exception to the FLSA for this industry, but it has not done so. Consider the implications of granting the employer’s motion to dismiss—it would be giving a business illegal under federal law an advantage over legal businesses by sanctioning the avoidance of paying overtime.

Hmm. Food for thought…

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.

As I’ve posted before, here and here, Florida has struggled with its roll out of Amendment Two (medical marijuana) with delays in issuing licenses, processing patient i.d. cards, etc.

Now comes news that Tetra Health Company, a California based company which quickly opened several medical marijuana clinics in Florida, is now, just a few months later, closing up most of their Florida locations.  Tetra is not affiliated with a state licensed Medical Marijuana Treatment Center (Florida has a vertical integrated license structure which means licensed Medical Marijuana Treatment Centers grow, distribute and sell medical marijuana) but instead has a business model that provides medical marijuana certification doctors that guide patients through the Florida state registration process.  Once the patients receive their i.d. cards from the State of Florida they can go to any medical marijuana dispensary.

Tetra’s Tampa, Florida location will remain open.

Dori K. Stibolt is a West Palm Beach, Florida based partner with Fox Rothschild LLP.  She focuses her practice on litigation and labor and employment issues and has taken a special interest in the cannabis business.  You can contact Dori at 561-804-4417 or dstibolt@foxrothschild.com.

Venture capital is playing a growing role in the country’s emerging legal cannabis industry. Attorneys Emily J. Yukich and Matthew R. Kittay of Fox Rothschild’s Emerging Companies & Venture Capital Practice will conduct a panel discussion with industry insiders during the American Bar Association Business Law Section’s annual meeting in Chicago.

Cannabis leafThe Angel Venture Capital Subcommittee, which Yukich and Kittay co-chair, will present an in-depth 360-degree examination of venture capital investing in cannabis companies, featuring:

Panelists:

  • Jeremy Unruh, general counsel and director of external communications at PharmaCann, a medical cannabis provider based in Oak Park, Illinois.
  • Charlie Bachtell, founder and CEO of Cresco Labs, LLC, a Chicago-based medical cannabis cultivating and manufacturing company.
  • William Bogot, co-chair of the Cannabis Practice Group at Fox Rothschild LLP.

Date: Thursday, Sept. 14

Time: 10 a.m. to 11 a.m.

Venue: Chicago Ballroom VIII, Ballroom Level, Sheraton Grand, Chicago, Illinois.

Cannabis business owners in California should take note if they are unaware that Proposition 65 applies to them.  Among other requirements, Proposition 65 (aka the Safe Drinking Water and Toxic Enforcement Act of 1986) requires that businesses refrain from knowingly and intentionally exposing individuals to any of the chemicals contained on a state-published list of chemicals which are known to cause cancer or reproductive harm.  Marijuana smoke has been included on the list since 2009.

Cannabis leaf
Copyright: wabeno / 123RF Stock Photo

In addition to enforcement by the California Attorney General and certain other public enforcers, private parties may bring an action to enforce Proposition 65 on public interest grounds.  Private parties must comply with certain requirements, the first of which is serving a 60-day notice on the alleged violator with details of the alleged violation, relief sought and other details.  A spate of these 60-day notices have been served on California cannabis businesses in 2017.  The notices typically request that the business enter into a written agreement to provide warnings compliant with Proposition 65, pay a penalty, and either recall products already sold or attempt to provide health hazard warnings to those who purchased the products.  It is unclear what the end result will be with respect to the current batch of notices, but it is clear that some private parties have an eye on enforcing Property 65 against cannabis businesses.

In November 2016, Florida voters overwhelmingly approved, with more than 70% voting yes, expanded medical marijuana by passing Amendment 2.

Now comes the tough work of implementing Amendment 2.  One bill, Florida Senate Bill 614, proposes to throw out the current medical marijuana system (created in 2015 to grow, process and distribute low-THC cannabis oil) which strictly capped the number of businesses allowed to participate in the medical marijuana business in Florida.

37140040 - florida state flag on cannabis background. drug policy. legalization of marijuana

St. Petersburg Republican Jeff Brandes, the proponent of SB 614, calls the current system “state sanctioned cartel” that limits competition and results in higher prices.  At present, the Florida medical marijuana system is limited to only seven vertical license holders.  A “vertical license” means that the license holder must do it all and grow, process and distribute the product.  And, by maintaining the current system it will obviously severely restrict businesses who want to be involved in what will be big business under Amendment 2.

Senator Brandes’ plan would get rid of the vertical license system and instead create four types of licenses:  one to grow marijuana, one to process marijuana, one to transport marijuana, and one for retail centers.  Each county, and Florida is a large state with 67 counties, could have one retail center per 25,000 residents, or nearly 800 statewide.  But, the bill still permits local governments to outright ban retail dispensaries.

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Dori K. Stibolt is a West Palm Beach, Florida based partner with the law firm of Fox Rothschild LLP.  She focuses her practice on litigation and labor and employment issues.  You can contact Dori at 561-804-4417 or dstibolt@foxrothschild.com.

The Maryland House of Delegates this past week censured one of its members for using his legislative position to influence the medical cannabis regulators in favor of his client for who he was a paid consultant. The 138-0 resolution was the result of Joint Committee on Legislative Ethics finding that the actions violated the spirit if not the letter of state ethics laws.

The issue surrounded the failure of the legislator to tell the General Assembly’s ethics advisor that he was appearing before the medical cannabis commission to advocate policy while, at the same time, advocate for his would-be dispensary client.

Maryland’s licensing process and procedures has already come under some scrutiny for its selection process. This may put a dark mark on this process even further. So why do potential licensees in other should states care about Maryland?

There is a valuable lesson to be learned here, especially in those states where using political consultants is the norm. If you use such a consultant, you want to be certain that you know the state laws regarding disclosure of such use.

At the same time, you need to know who employs the consultant. Using Maryland as the example, there would likely have been no censure if the legislator disclosed as the state ethics laws required. His failure to do so not only hurt him but potentially his client as well.

Using a political consultant is fine. Just look before you leap.