With momentum growing for legal adult-use cannabis in Illinois following the election of J.B. Pritzker to the governorship, the Illinois General Assembly is already proposing legislation that would loosen regulations governing the cannabis industry.

On February 15, 2019, Sen. Heather A. Steans introduced SB 2023, which would amend the Illinois Banking Act and the Illinois Credit Union Act to prevent the Secretary of Financial and Professional Regulation from taking various punitive actions against banks for providing financial services to legitimate cannabis-related businesses.  The proposed bill would also prevent the Secretary from recommending or incentivizing a bank to decline, downgrade or cancel financial services for an individual or entity solely because such individual or entity is engaged in a legitimate cannabis-related business, or becomes engaged in such a business, or the financial institution discovers that such individual or entity is engaged in such a business.  Senator Steans, together with Representative Kelly Cassidy, is also leading the charge on the legislation to legalize cannabis for recreational adult use in Illinois.

Proponents in the Illinois cannabis industry hope that the proposed bill will provide greater comfort for banks to provide financial services to cannabis-related businesses, since most banks in Illinois and other states have been hesitant to do so in the face of the federal prohibition on cannabis and certain actions taken by the current leadership at the Department of Justice that indicated greater hostility towards the cannabis industry.

On January 4, 2018, the Department of Justice withdrew the August 2013 Cole Memorandum, which had discouraged the federal prosecution of individuals and entities operating cannabis-related businesses in accordance with state laws, and the February 2014 Cole Memorandum, which applied the principals of the initial Cole Memorandum to financial institutions providing services to entities operating cannabis-related businesses in accordance with state law.  As a result of these actions by the Department of Justice, Springfield Bank, a downstate bank which had been operating as the main source of financial services for the Illinois medical cannabis industry, stopped providing services to the industry in the spring of 2018.  Although some smaller financial institutions continue to work with cannabis-related businesses, the industry is still severely underserved.  Since the federal issues that chilled banking activity have not yet been resolved conclusively, the proposed Illinois bill is unlikely to solve the issue on its own, but it would be a good first step in giving greater comfort to banks that wish to get involved in the industry.

Fox Rothschild will continue to track the status of SB 2023, as well as the expected recreational adult-use bill once it is introduced in the General Assembly.  For the full text of SB 2023, please see the website of the Illinois General Assembly.

Field of Hemp

Late last year, Congress passed the Agriculture Improvement Act of 2018 (the “Farm Bill”). While the passage of a Farm Bill is a common occurrence for Congress, the 2018 version is significant because it removes hemp from the list of controlled substances, leading many (including us!) to project a boom in the U.S. Hemp Industry.

More recent developments have given some in the industry pause, including a December 20, 2018 Statement from the Commissioner of the Food and Drug Administration making clear that the FDA had regulatory authority over products containing CBD, even if those products were derived from hemp. The Statement seemed to indicate that the FDA would focus on food products containing CBD and products marketed as having certain medical or therapeutic properties. Furthermore, operators in the industry must also be aware of, and compliant with, state laws and regulations governing the production of industrial hemp. We recently blogged on this topic as well.

The Hemp Industry may get more clarity this month, as the U.S. Department of Agriculture announced a “listening session” during which the Agricultural Marketing Service will discuss “a new program to regulate hemp production” and receive comments from attendees to assist the Department in devising such a program. The Listening Session will occur on March 13, 2019 from 12:00 p.m. – 3:00 p.m. EST, and requires pre-registration to attend.

While this is merely the first step in what could be a long rulemaking process, it is a good sign to see the federal government moving quickly in response to questions and uncertainty in this newly invigorated industry. For more information, see the official statement and information on the session from the USA Website.

Here is the full Summary from the USDA’s Statement: In preparing to implement the Agriculture Improvement Act of 2018 (commonly referred to as the 2018 Farm Bill), the Agricultural Marketing Service (AMS) will host a listening session for initial public input about a new program to regulate hemp production. The listening session will provide interested parties with an opportunity to assist the Agency’s future rulemaking efforts by sharing their views on how the United States Department of Agriculture (USDA) can partner with agriculture agencies representing states, territories, and Indian tribes to implement a nationwide program for overseeing the production of industrial hemp.


Joseph McNelis works in Fox Rothschild’s Blue Bell, PA office and focuses his practice on labor and employment matters. Joe also tracks legal developments in the cannabis industry in Pennsylvania and nationwide. Joe can be contacted at 610-397-2332 or jmcnelis@foxrothschild.com.

Jennifer Benda, a Partner in Fox’s Denver, CO office, is an experienced tax attorney who handles tax controversy and income tax planning and compliance matters. She has significant experience assisting companies in the cannabis industry with tax planning, transactional matters, IRS examinations, and other tax compliance matters. Over at Fox Rothschild’s Tax Controversy and Financial Crimes Report Blog, Jennifer provides analysis on a recent decision from the Tenth Circuit Court of Appeals concerning the type of evidence cannabis businesses need to substantiate their “costs of goods sold” under the tax code, and the limits court will apply to these calculations.

In Feinberg v. Comm’rT.C. Memo 2017-211, the U.S. Tax Court previously ruled that the taxpayer failed to substantiate its cost of goods sold when instead of submitting documentary evidence, the taxpayer provided an expert report, asking the court to make a determination of cost of goods sold based on industry averages. The Tenth Circuit Court of Appeals affirmed this decision in a February 26, 2019 ruling.

As Jennifer explains, this opinion also has important implications for cannabis businesses who may seek to assert the Fifth Amendment privilege against self-incrimination in response to discovery requests in audits or tax court matters. For more analysis and takeaways from the Tenth Circuit’s decision, check out Jennifer’s post.

Recently Congress passed the Agricultural Improvement Act of 2018 (the “2018 Farm Bill”), which legalized activities pertaining to industrial hemp on the federal level. So now we can begin cultivating, processing, and selling industrial hemp, right? The short answer: No.

The 2018 Farm Bill legalized the cultivation and processing of industrial hemp, provided that the hemp used meets the following definition:

“[T]he plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.”

Essentially, the United States Department of Agriculture (“USDA”) categorized industrial hemp as an agricultural commodity and removed it as Scheduled I controlled substance. (Note: Any product derived from “hemp” that falls outside of the above definition as set forth by the USDA, is considered a Schedule I drug and therefore still illegal under Federal Law.)

Field of Hemp

Great news, right? No so fast.  What most people do not understand is that following this legalization, it becomes the responsibility of each State to regulate such industrial hemp activities. The states must now codify its own legislation, and the respective state department of food and agriculture must create regulations to support commercial activities concerning industrial hemp.

For example, California has codified general statutes pertaining to industrial hemp. See FAC Sec. 81000 et al. Specifically, Sec. 81003 provides that for one to engage in the commercial cultivation of industrial hemp, it must be registered with the County Agricultural Commissioner in which the commercial hemp cultivation will take place. This means that the individual counties in the state of California must implement rules and regulations regarding the industrial hemp activities.

However, it is up to the California Department of Food and Agricultural (the “CDFA”) to first draft and approve general regulations concerning industrial hemp, such as registration fees and sampling procedures. Thus, most County Agricultural Commissioners in California have not opened county registration, as they are awaiting the CDFA to adopt final regulations before they create their own, at least at the local level. While the CDFA is currently in the active rule making process, industrial hemp regulations have yet to be drafted and approved.

As another example, the state of Florida recently hired a new Cannabis Director who has stated that her initiatives include creating regulations pertaining to industrial hemp activities. However, because those regulations are not currently in place, commercial activities relating to industrial hemp remains illegal under Florida law.

Thus, despite industrial hemp being legal on the federal level, most states still have not adopted regulations addressing industrial hemp activities, and therefore, engaging in these activities are still prohibited at the state level. The regulatory drafting and approval process at the state and county levels will require time.

Some states are using either their cannabis regulatory division or their Department of Food and Agriculture to regulate the industrial hemp state programs. If you want to know more about industrial hemp in your state, make sure you check both regulatory agencies…especially before engaging in such activities.

 

 

Chambers USA researches and compiles a list each year of the country’s top lawyers and law firms. This year, Fox Rothschild’s Cannabis Practice Group and 3 of its attorneys made the list!

The firm was included in the 2019 Chambers USA guide for Cannabis Law, as were three of its attorneys: Jennifer Benda, Joshua Horn, and Matthew Kittay.

  • Jennifer Benda, a Partner in Fox’s Denver, CO office, is an experienced tax attorney who handles tax controversy and income tax planning and compliance matters. She has significant experience assisting companies in the cannabis industry with tax planning, transactional matters, IRS examinations, and other tax compliance matters.
  • Joshua Horn is the Co-Chair of Fox’s Cannabis Practice Group and is a sought-after authority on complex cannabis law issues. He advises companies in the cannabis industry on all aspects of their business, including licensing, banking, mergers and acquisitions, corporate finance and structure, securities, lending. intellectual property, advertising, and litigation.
  • Matthew Kittay is a Partner in Fox’s New York, NY office who focuses his practice on corporate law, particularly venture capital, private equity and private M&A. Matt regularly advises on venture capital financings, restructurings, lending transactions and operations for companies and funds in the cannabis industry and cannabis industry service providers.

Last week, North Carolina regulators followed the lead of public health officials in several other states and began cracking down on CBD-infused products. Cannabidiol, better known as CBD, is one of over 100 cannabinoids, such as THC, found in the cannabis plant. Unlike THC, it doesn’t have consciousness-altering effects and can’t give you a “high.” Many believe CBD consumption has a variety of health benefits, from relieving pain and anxiety to treating epilepsy, which has recently made CBD a popular food and drink additive. While the 2018 Farm Bill made the sale and production of hemp-derived CBD oil legal, the FDA has stated that it is unlawful to add CBD to food or dietary supplements, regardless of whether it is hemp-derived. In the past week, New York, Ohio, and Maine have banned the sale of CBD edibles. Now the North Carolina Department of Agriculture (NCDA) has started sending out warning letters to businesses selling food, drinks or animal food containing CBD and notifying them that doing so violates state and federal law. It is the NCDA’s position that CBD oil can’t be added to human or animal food for sale and CBD products can’t make health claims, such as curing or preventing a disease. For now, the NCDA will take an “educate before regulate” approach, informing businesses that sell these products about the NCDA’s stance on them before taking a more assertive approach in the future, if necessary, that could potentially result in seizures and embargos, or fines and penalties.

A recent case out of Pennsylvania serves as a good reminder that even in states where medical marijuana is legal, individuals cannot “self-prescribe” and then seek to claim protections that might be available to properly registered medical marijuana users.

In this case, the employee applied for and was granted leave under the Family Medical Leave Act (FMLA) in order to undergo and recover from foot surgery. Several months after returning from leave, the employee was selected for a random drug test in accordance with the employee’s drug testing policy, and tested positive for marijuana. Based on this positive test, the employer placed the employee into a drug assistance program, after which the employee returned to work and participated in a “fact-finding” hearing with the employer to determine if there was a legitimate explanation for the positive drug test.

At the hearing, the employee admitted that he was using marijuana he obtained on his own to treat pain from his foot condition. He testified that he had consulted with a doctor in Delaware regarding a certification for medical marijuana, but did not receive a certification or recommendation from the Delaware doctor to use marijuana. He also admitted that he was not certified to use medical marijuana in Pennsylvania and had not consulted a Pennsylvania doctor about medical marijuana use.

After the fact-finding hearing, the employee was terminated for failing the drug test, which was consistent with the employer’s drug testing policy. The court granted the employer’s motion for summary judgment and dismissed the employee’s claims that his termination was the result of disability discrimination and/or retaliation.

The Takeaway – This case should ultimately be read as a disability discrimination decision. In fact, neither the employee nor the Court raised the Pennsylvania Medical Marijuana Act as a defense or explanation for the employee’s positive drug test. But it does offer an important lesson for employees, employers, and businesses as more states legalize medical marijuana.

Even though medical marijuana may be “legal” in your state, nearly all states experience an extended period of time between legalization and full implementation. For example, Pennsylvania passed the Medical Marijuana Act in April 2016, and it was not until almost two years later (February 2018) that the first registered patients received medical marijuana from licensed dispensaries. Furthermore, even when a state’s medical marijuana program is fully implemented, only those individuals who are properly certified under the state’s program can legally use medical marijuana, and must do so as it is recommended to them by their doctor.

Since marijuana is still classified as a Schedule 1 controlled substance under the federal Controlled Substance Act, medical marijuana users (and business operating in the medical marijuana industry) must comply with all provisions of a State’s medical marijuana program in order to receive any rights or protections granted by that law.

A link to the Court’s full decision can be found here.


Joseph McNelis works in Fox Rothschild’s Blue Bell, PA office and focuses his practice on labor and employment matters. Joe also tracks legal developments in the cannabis industry in Pennsylvania and nationwide. Joe can be contacted at 610-397-2332 or jmcnelis@foxrothschild.com.

Despite the fact that oral arguments were just held in the appellate case involving the State of Florida’s appeal of a court decision legalizing smoking medical marijuana, new Florida Governor has announced and hinted at big changes to Florida’s regulatory and legal structure for medical marijuana.

First, Gov. De Santis recently stated that he wants Florida’s legislature to strip the ban on smoking from the medical marijuana law, but if that doesn’t happen he will drop the State’s appeal of a lower court ruling which permitted smoking medical marijuana.  If the State of Florida abandons the appeal that would effectively legalize smoking in Florida.

Second, and more importantly for those in the industry, Gov. De Santis heavily criticized the current licensing structure in Florida which is limited to 14 vertical licenses which require seed to sale for those companies that own a license.  Gov. De Santis called the current license structure a cartel.

They created a cartel essentially, I don’t know that the amendment necessarily prohibits that, but that is not good policy.

A change in licensing structure would open up competition and reduce prices for consumers and permit smaller companies to get involved in the industry.  On the other hand, a change in licensing structure would negatively impact the value of the current licenses.

 

 


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.

Despite the rumor that Florida’s new governor (Ron De Santis) will be friendlier to medical marijuana than Rick Scott, oral arguments were held earlier this week and the attorneys representing the State of Florida vigorously argued to uphold the current smoking ban.  Leon County Circuit Judge Karen Gievers had previously agreed with the plaintiffs and struck down the smoking ban, but her decision had been stayed after the State of Florida appealed.

During oral argument, the appellate panel of judges raised the question of whether the Florida legislature has the political power to veto what the people have passed.

The Florida Department of Health attorneys argued that the immunity set forth in Florida’s Amendment Two was for medical use only.  Since smoking causes cardiovascular and respiratory health problems, the Florida legislature was well within its rights to limit delivery methods that would negatively impact health.

Regarding the section set forth in Amendment Two which provides for restriction on where medical marijuana patients can smoke marijuana, which restricts smoking in public, the DOH attorneys argued that section did not create a conflict because the section was set forth in the limitation section.

Attorneys for People United for Medical Marijuana (“People United”) and Catherine Jordan argued that since the definition of medical marijuana included smokable medical marijuana, the legislature could not restrict that method of delivery in its regulation without creating a constitutional conflict.

Additionally, attorneys for People United argued that the language permitting the Florida legislature to regulate for safety meant that issues like pesticides and the like could be regulated, but that safety regulations could not conflict with the constitutional amendment language which did not restrict delivery methods.

Counsel for People United made an emotional argument regarding patient Cathy Jordan who has suffered from ALS since 1986 and was given 3-5 years to live back in 1986.  Ms. Jordan claims that smoking medical marijuana has kept her alive.

Cathy Jordan is not trying to have a good time, she is trying to live.

A video of the oral arguments can be viewed here.


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.

On January 15, 2019, Fox Rothschild attorneys Josh Horn and Joseph McNelis will present Employment Compliance in the Age of Legalized Marijuana to the Greater Valley Forge HR Association in King of Prussia, PA.

Joshua Horn, Partner, Fox Rothschild LLP

Joseph A. McNelis III, Associate, Fox Rothschild LLP

The presentation will discuss the challenges Pennsylvania employers face given the dichotomy between state and federal laws governing cannabis. Josh and Joe will will provide an overview of federal and state marijuana laws (particularly the Pennsylvania Medical Marijuana Act), discuss specific aspects of the employment relationship affected by the legalization of marijuana, and offer practical guidance for employers on how to navigate this new and developing area of the law.

For more information and to attend the event, click here.

Also–don’t forget to check out our “White Paper” on the same topic, which provides a great overview and important takeaways for employers.