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Here’s to a relaxing holiday with family and friends.
Enjoy the holiday! We will be back next week with our regular programming.
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One of the main reasons why I am such a vocal supporter of written cannabis contracts is allocation of risk and liabilities. Parties to a cannabis contract have a number of ways that they can allocate risks and liabilities that they just won’t have in a “handshake” deal. Today I’ll explore six of the top ways to allocate risk in a cannabis contract.
If you’ve ever read through a cannabis contract, there’s a good chance you’ve seen disclaimers of representations, warranties, or guarantees. By making a disclaimer, a party is refusing to make an express or implied warranty (promise) about a certain condition. If a seller sells a piece of equipment on an as-is basis and disclaims all warranties about the product, then if the product does not perform as desired, the buyer may not have recourse (except for warranties that can’t be disclaimed by law). Without the disclaimer, there may be implied warranties that give the buyer recourse against the seller.
Disclaimers can be general, such as a disclaimer of any warranty not specifically made in the contract. Even more generally, “as-is” language can serve as a disclaimer of sorts (i.e., “buyer acquires the asset as-is, with all faults, and without any warranty from seller”). They can also be specific, such as a specific disclaimer of the implied warranty of merchantability. In many cases, you’ll see both the general disclaimer, followed by non-exclusive carveouts of warranties.
A savvy counterparty will often push back against one-sided disclaimers. In most cannabis contracts where cannabis products are transferred (intellectual property licenses, white label contracts, distribution agreements, manufacturing agreements, supply agreements, etc.), the buyer or transferee will insist that the manufacturer/supplier/seller makes certain representations explicitly, such as that the products will be fit for human consumption, comply with applicable laws, and so on. I see lots of negotiation around these provisions, as they can make or break a cannabis contract.
Cannabis contracts can also force certain parties to assume specific risks. Risk assumption comes up frequently in contracts with percentage splits. Imagine a cannabis distribution contract where a distributor agrees to sell a manufacturer’s products in exchange for 15% of the profits. Usually, when the distributor sells the goods and is paid, it pockets its cut and remits the rest to the manufacturer.
These kinds of arrangements involve some deal of trust by the manufacturer – trust that the distributor will sell the goods, will sell them at the desired purchase price, will promptly collect payment, and will promptly remit payment. Most of this can be dealt with in a contract. However, the first part – making promises about sales levels – obviously is a risk for many distributors.
I have seen plenty of cannabis contracts like this where one party assumes the risk that some of the above things will not happen right. For example, if the distributor has to buy the cannabis goods from the manufacturer, it will assume the risk that it won’t resell the goods. If the contract is a consignment arrangement, the manufacturer may take the financial hit if the manufacturer can’t sell the goods.
Often, risk assumption is not expressed affirmatively but happens by virtue of assignment of specific obligations to a specific party, or even through warranty disclaimers as noted above. To really do a good job here, the parties will need to think of every step in performance of the contract, what could go wrong at each step, and who should be on the hook if/when things do go south. I’ve been writing these kinds of cannabis contracts consistently for more than five years now and can tell you that there are tons of blind spots that can lead to massive financial hurt if parties don’t consider these impacts early on.
Related to the last point, in purchase and sale or commercial-type contracts where products are sold or transported from one party to another, the concepts of risk of loss and transfer of title are immensely important. Our firm does a lot of international work and has seen first-hand the massive adverse impacts of failure to address these provisions in international shipping. But because cannabis deals don’t involve international (or even interstate) shipment, cannabis companies overlook these basic concepts, often to their downfall. I’ll go over why they are important now.
First, let’s talk title. Title to a good means ownership of that good. One can hold title to a good without being in possession of that good. If you lend your friend your phone, your friend possesses the phone but doesn’t hold title to it (you do). In some distribution contexts, the manufacturer may hold title to the good, while the distributor transports it to a retailer. This is consignment. In the consignment cannabis contract, the manufacturer will sell the good directly to the retailer, at which point title will transfer from the manufacturer to the retailer. The distributor will never hold legal title, will only possess the good while performing services, and will generally be paid as a service provider. Keep in mind that the parties can negotiate a different transfer of title, i.e., upon pickup by the distributor.
Second, let’s talk risk of loss. This just refers to who bears responsibility if a good is stolen, damaged, destroyed, lost, etc. In the foregoing example, let’s assume that the manufacturer and retailer sign a sales agreement before the distributor picks up the good for transport. The manufacturer may want risk of loss to transfer to the retailer upon the distributor’s pickup, whereas the retailer will want risk of loss to transfer upon delivery. The reason for this should be clear – neither party will want to bear the risk that the distributor loses the good. But, somebody will have to. One way to address this is to pick a time to allocate risk of loss between manufacturer and retailer, and separately have distributor bear responsibility in the distribution contract.
Third, let’s talk about acceptance and rejection. These concepts are not the same as risk of loss and transfer of title, but often are mixed in and/or in the same part of the contract. In the example I’ve used, when the retailer receives the goods, it will have some fixed period of time (say 48 hours) to inspect the goods, and will be able to reject the goods for a specific set of reasons within that period. Title and risk of loss likely would already have transferred to the retailer, but upon rejection, the goods will be returned to the manufacturer.
As you can imagine, there are endless possibilities of ways to allocate risks and liabilities in the context of risk of loss and title. Inspection and rejection adds far more criteria. Cannabis contracts that are silent on these provisions are just begging to wind up in litigation.
I explained indemnification in an earlier post, which I’ll quote here:
If you’re not familiar with indemnification, let’s go back to the purchase example. Say a retailer purchases edibles from a manufacturer, and customers get sick when they eat the edibles. And say those customers sue the retailer. The retailer didn’t make the edibles, so it would want the manufacturer to foot the bill for its defense and any damages that are awarded. This is called “indemnification.”
Here’s another example: Party A licenses its trademarks to Party B, a manufacturer and distributor, to make and sell branded goods. Party C decides that it is the real owner of these trademarks and sues Party B. Party B is going to be upset because it did not intend to infringe Party C’s trademarks and was probably promised in the cannabis contract that Party A actually owned the goods. With a good IP indemnification clause, Party B can force Party A to engage defense counsel and pay any costs associated with Party B’s defense.
Nobody wants to get hauled into court because the other party to a cannabis contract did something wrong. Indemnification is the gold standard for dealing with risks caused by a contracting party.
I also explained these clauses in my earlier post:
If you’ve ever looked at a written contract, you’ve probably seen a provision about halfway through in all caps with a heading that reads, “LIMITATION OF LIABILITY.” As the name suggests, these provisions are intended to narrow or eliminate liabilities of one or both parties. They generally include provisions that carve out things like consequential and incidental damages (i.e., damages that are not a direct result of a breach) and punitive damages (i.e., damages that are intended to punish a wrongdoer). But limitations of liability may also place caps on one or both parties’ damages, which can be a big advantage in a dispute.
Generally speaking, contract disputes do not lead to punitive damages, which are damages that are intended to punish a wrongdoer. These are usually reserved for certain “torts” like battery, interference with a third-party contract, etc. Some cases may involve both contract and tort claims where punitive damages may be on the table. A carefully crafted limitation of liability clause in a cannabis contract may be able to touch on both (depending on applicable state law).
That said, even if punitive damages are not available in contract disputes, incidental and consequential damages may be on the table, though they are often hard to get. Imagine that a cannabis company has a water leak and hires a plumber to fix it. The plumber does not perform work in accordance with the contract and the business floods overnight. The business is forced to shut down for a week and loses tens of thousands of revenues. The direct damages in the dispute will be fixing the negligent repair and maybe even some of the damage to the premises. The incidental and consequential damages may be the loss of revenue. While again, this can be hard to prove, it is very easy to disclaim those types of damages in a written contract so as to never need to worry about complex battles over damages.
Caps are also a great way to shift risks. Caps can be used in all sorts of contexts. Limitation of liability clauses may have caps on damages in addition to damage carve outs. For example, a distribution contract may provide that except for certain cases of willful misconduct, the distributor’s maximum liability to the manufacturer may be the amounts paid by the manufacturer to the distributor in X period of time.
Indemnification provisions also often have caps. This comes up a lot when buying and selling businesses or business assets – and it’s usually the seller that pushes for them. Imagine selling a business for $750,000. If indemnification clauses are unlimited, and a dispute arises that requires seller-side indemnification, the seller may end up paying the buyer more than it was paid for the business. So as you can imagine, sellers will often push to cap indemnification at some percentage of the purchase price. In my experience in non-cannabis deals, the percentage is often relatively low. In cannabis deals, I often see a much higher percentage. That tends to be due to the fact that there are often (not always) many more potential issues for buying a cannabis business than most other kinds of businesses.
As an aside, M&A transactions sometimes also include deductibles as well. In those cases, a party seeking indemnification won’t be entitled to indemnification unless it has some minimum threshold of losses. If that number is $50,000, and the buyer seeking indemnification only had $40,000 in damages, it won’t be indemnified. Once it hits that $50,000 mark, it can either (depending on the cannabis contract’s terms) be indemnified for the entire basket of damages, or only for what’s over the $50,000 mark.
Parties to cannabis contracts have myriad tools at their disposal when it comes to shifting risks and liabilities. Of course, this can really only be done well in a written contract.
The post Risk Allocation in Cannabis Contracts appeared first on Harris Sliwoski LLP (Formerly Harris Bricken).
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A common way to get and retain employees is to issue them options or equity securities like corporate stock. But like with everything else, issuing securities is heavily regulated. Today, we’ll look at a few key issues for cannabis businesses that want to offer equity incentives.
There are two common ways that cannabis companies offer equity incentives: First, companies may create an equity incentive plan (or EIP). Second, companies may offer equity incentives via a written contract, such as an employment or consulting agreement. In either case, the company will, if done right, use the plan or contract to detail things like:
When employees terminate their relationships with a company, things can often sour quickly. Equity incentive plans or contracts can get incredibly complicated, and we have seen things go south quickly with poorly drafted plans or agreements that did not contemplate common employment issued.
Any time equity incentives come into play, cannabis companies must be cognizant of federal securities laws and registration exemption. Fortunately, when it comes to equity incentives, the federal exemption tends to be a lot simpler than other exemptions (such as Regulation A or Regulation D). Securities and Exchange Commission (SEC) Rule 701 provides the key exemption to registration for equity incentives, and states in part as follows:
This section exempts offers and sales of securities (including plan interests and guarantees pursuant to paragraph (d)(2)(ii) of this section) under a written compensatory benefit plan (or written compensation contract) established by the issuer, its parents, its majority-owned subsidiaries or majority-owned subsidiaries of the issuer’s parent, for the participation of their employees, directors, general partners, trustees (where the issuer is a business trust), officers, or consultants and advisors, and their family members who acquire such securities from such persons through gifts or domestic relations orders. This section exempts offers and sales to former employees, directors, general partners, trustees, officers, consultants and advisors only if such persons were employed by or providing services to the issuer at the time the securities were offered. In addition, the term “employee” includes insurance agents who are exclusive agents of the issuer, its subsidiaries or parents, or derive more than 50% of their annual income from those entities.
That’s a lot to chew on, but it essentially says that certain equity incentives are exempt from the federal securities registration requirements. Rule 701 goes on to say in part that it may extend to persons other than just employees:
This section is available to consultants and advisors only if:
(i) They are natural persons;
(ii) They provide bona fide services to the issuer, its parents, its majority-owned subsidiaries or majority-owned subsidiaries of the issuer’s parent; and
(iii) The services are not in connection with the offer or sale of securities in a capital-raising transaction, and do not directly or indirectly promote or maintain a market for the issuer’s securities.
So, Rule 701 may provide an exemption for a consultant’s equity incentive, if the consultant is not an entity, provides real services to the company, and doesn’t act as any kind of securities broker.
I should mention though that Rule 701 is limited to the issuance of restricted securities, meaning that the securities are subject to resale limitations.
Rule 701 does not preempt state law. States are free to impose additional requirements on the issuance of equity securities, and many do. When determining which state’s law applies, a company will need to look at the state of residence of each applicable employee. This makes life more difficult for companies in the remote work era.
State laws can be vary widely here. Some states have no specific notice requirement. California requires companies to submit a form to the Department of Financial Protection and Innovation within 30 days after the initial issuance, whereas Washington has different requirements depending on whether the plan meets certain Internal Revenue Code provisions. This can all get incredibly complicated.
One other thing to point out here is that while Rule 701 itself can exempt transactions with consultants (in qualifying situations), state law does not have to do that. An equity incentive plan that meets the Rule 701, in other words, may not meet the requirements of each state. That’s yet another reason why companies should consider state law well in advance of the issuance.
Equity incentive plans and contracts are immensely popular. Like all companies, cannabis businesses that want to follow the law should be aware of the filing requirements and understand what needs to go in a contract well in advance of any actual issuances.
The post Equity Incentives and Cannabis Businesses appeared first on Harris Sliwoski LLP (Formerly Harris Bricken).
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We are helping build out another marijuana banking program here in Oregon. My law firm has done a series of these for credit unions (“CU”s) and other financial institutions (“FIs”) going back to 2014. We have also handled a good bit of hemp banking work– mostly in 2019 and 2020 before that industry cratered. In this post, I’ll sketch out some considerations for FIs looking at banking marijuana-related businesses – or, as they are known in the common parlance, “MRBs”. And I apologize in advance for all the acronyms. That’s banking.
The term “MRB” is used pervasively in cannabis banking, yet this term is not defined in the moldering 2014 Financial Crimes Enforcement Network “FinCEN” Guidance. It’s also not defined in the 2020 National Credit Union Administration Guidance on banking hemp-related business (“HRB”s) (which we helped write) or the 2020 FinCEN Guidance on that related topic.
The lone federal definition we have is from a 2018 Small Business Administration (“SBA”) Policy Notice, as revised, which categorizes MRBs as “direct marijuana businesses”, “indirect marijuana businesses”, and “hemp-related businesses.” Here is my shorthand:
I have written on this blog that “all businesses are marijuana businesses” in the MRB context. In that piece, I also explained that FIs don’t really use the SBA definitions set forth above. Instead, early, state-chartered CUs began using a three-tiered system to analyze potential MRB clients within the FinCEN framework. That system was first expounded in 2016 by Steve Kemmerling of CRB Monitor, before “hemp” was removed from the definition of “marihuana” under federal law. The CRB Monitor system involved the following categories (which SBA probably referenced):
It’s worth noting that CRB Monitor revised and further parsed its definitions in 2020, but in my experience, most FIs keep it simple with the legacy framework or something similar. It isn’t a legal framework, after all. It’s just an expedient model that has been adopted widely by FIs given the federal leadership vacuum.
The bottom line here is that any FI looking at banking MRBs – or HRBs, for that matter – needs to come up with definitions and criteria for what an MRB or HRB actually is and does. That criteria can be shared with potential clients, or not, during the screening and ongoing KYC processes for industry accounts. In my experience, drawing lines around “indirect marijuana businesses” / “ancillary businesses” / Tier III MRBs is the most challenging area here.
Inside and outside the MRB context, FinCEN requires FIs to track and report “beneficial owners” of the businesses they bank. Beneficial ownership reporting is a core industry requirement, with a new rule coming down the pike January 1, 2024, in fact. A “beneficial owner” for FinCEN purposes is anyone who: (a) has significant responsibility to control, manage or direct a legal entity customer; or (b) directly or indirectly owns or controls 25% or more of a company’s equity. (Again, my shorthand.)
In the MRB context, FIs often hold clients to a heightened disclosure standard. This isn’t merely due to the nature of the industry. Most state marijuana programs have ownership disclosure standards which require disclosure of anyone: (a) with control over the cannabis business, or (b) who owns equity in a cannabis business. The thresholds tend to be lower than the “beneficial owner” numbers– sometimes 20%, 10%, or even lower. Disclosure doesn’t always mean vetting, but the names must be surrendered.
An FI should want to know at least as much about the ownership of its member or customer as state cannabis regulators– especially in the absence of federal industry regulation on that topic. Typically, the FI will shortcut this inquiry by requiring the MRB to produce its application and license records with the state. And the FI will not open an account until the state has actually issued a marijuana regulatory license, in most cases. Which brings me to my next point.
FIs that wish to bank MRBs need to request and receive records from state regulators on a regular basis. This ties into KYC considerations, which include not relying on the customer (or member) representations to the FI. In the cannabis context, FIs have an obligation via FinCEN to double-check state regulators’ work, essentially.
State regulators do tend to publish basic information on their licensees: the company name, type of license it holds, license number, and sometimes published decisions or disciplinary proceedings. However, I don’t know of any state that publishes information on the ownership structure of its cannabis licensees. This means that information which isn’t statutorily subject to redaction (e.g. social security numbers, site security plans) will be available only via a public records request.
Public records requests can be time-intensive and expensive. From experience, cannabis regulators may struggle to fulfill them regardless of legal requirements. Thus, FIs that wish to bank MRBs generally enter into information-sharing agreements with the relevant state regulator(s). At this point, many state agencies are accustomed to such arrangements.
FIs will have various intake forms for all potential members and customers. These forms must be tailored for MRB and HRB applicants, and supplemented to boot. Here’s a typical universe of forms an FI will send to any cannabis industry applicant:
The forms, in turn, will require various submissions by the applicant, from regulatory license packets on down. Here at the law firm, I expect we will revisit many of these forms for FI clients in the near future, owing to changes in the hemp space under the 2023 Farm Bill. And perhaps again with respect to marijuana if moved to Schedule III.
The federal government has put FIs in a truly awkward position on MRBs. Bank Secrecy Act / Anti-Money Laundering (“BSA/AML”) compliance is a significant undertaking for FIs even outside the cannabis space. However, the FinCEN Guidance bumps things up a level by essentially deputizing FIs as federal law enforcement auditors. FinCEN requires FIs to monitor their MRB customers and members perpetually, including what they sell and to whom, and to watch for indicia of adverse information.
These FI obligations commence immediately and ensue perpetually. Specifically, the FI is required to file an initial SAR within 30 days of onboarding. The FI must also file continuing SARs every 90 days after that, in addition to “marijuana limited”, “marijuana priority” and “marijuana termination” SAR filings, as needed, based on any number of events – or suspected events – set forth in the 2014 FinCEN Guidance. To say nothing of all the currency transaction reports (“CTRs”).
These filing obligations, and all of the software and training that goes with them, are frequently cited by FIs as a primary justification for the increased fees paid by MRBs. Law enforcement may hardly be acting on them, but FIs need to comply.
Most FIs that work with MRBs offer limited services, or basic depository accounts. That said, we’ve worked with a couple of CUs that offer a full suite of banking and lending services. There are limits, of course, to what even the most enterprising FIs can do. They cannot offer bank card transaction processing for cannabis purchases (at least, not anymore). If the FI is smaller, like many state-chartered CUs, it will be limited in its deposit carrying capacity; this makes for an awkward constraint in a cash-laden industry.
Many FIs that get into cannabis banking are pulled into the space by one or two high-net-worth customers. Then, they will slowly branch out to a wider client base and often a wider suite of offerings. Others are more intentional, and set out to target the industry.
I mentioned the Farm Bill is up for renewal this year, directly affecting banking for HRBs, and that “marijuana” may also move to Schedule III sometime in 2024. In addition, the specter of legislative reform is forever hanging about the industry (via the SAFE Banking Act, though I’ve called it oversold). Locally, new state cannabis programs continue to come online. This sometimes results in modest state-level legislation to insulate FIs from local prosecution for banking cannabis, even if such changes do not create a federal safe harbor or touch on BSA/AML strictures.
Overall, any FI that moves into this space should be prepared to roll with some changes over the next couple of years. Those changes are happening, however, because the cannabis industry is growing. It’s not a bad time to get in right now. It’s probably better than ever, in fact.
The post Cannabis Banking Today appeared first on Harris Sliwoski LLP (Formerly Harris Bricken).
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On November 8, 2023, the Florida Supreme Court held oral arguments on the validity of a constitutional amendment initiative to legalize adult-use cannabis (case number SC2023-0682). The Florida Constitution requires the state’s attorney general to request an advisory opinion from the Court on the validity of any ballot initiatives. The Attorney General has taken the position that the proposed amendment does not meet statutory requirements.
Oral arguments largely centered on two issues, the first being whether the ballot summary is misleading for stating that it would “allow[] [existing] Medical Marijuana Treatment Centers [MMTCs], and other state licensed entities” to engage in the sale of and other activities involving adult-use cannabis. In the Attorney General’s view, as expressed during oral arguments by Florida’s Chief Deputy Solicitor General, this constitutes a “promise” that the amendment by itself cannot deliver, since additional legislative action would be required for “other state licensed entities” to exist. Stated differently, if adopted, the amendment would give rise to a new legal situation under which MMTCs could immediately sell adult-use cannabis, but any non-MMTC entity would still need to undergo a licensure process. As the passage of the amendment by itself would not bring about “other state licensed entities”, the Attorney General’s reasoning goes, the ballot summary is misleading.
The justices that intervened did not appear receptive to the Attorney General’s stance. Chief Justice Muñiz stressed that Florida law requires that the ballot summary be “an explanatory statement … of the chief purpose of the measure.” He was skeptical as to whether any voters that otherwise support adult-use cannabis legalization might vote against the measure just because the Legislature might not eventually make provisions for licensure of non-MMTC entities. In response, the Attorney General suggested that voters who “oppose monopolies” might take a principled stand against an MMTC-only regime, even if they otherwise support legalization. Whether this is a credible proposition or not, it certainly is a rich one, considering the high barriers to entry Florida has established for the medical cannabis industry.
Discussion then turned to whether the summary was misleading because it states that it would “allow[] adults … to possess, purchase, or use marijuana … for non-medical personal consumption,” even though, as the Attorney General’s August 2 brief argues, given continuing federal prohibition, “not a single instance of recreational marijuana use will be lawful.” Although the summary also clarifies that the amendment “applies to Florida law; does not change, or immunize violations, of federal law,” the state considers this language is insufficient to eliminate “the confusion caused by [the term] “allow[].”
Reactions by the justices to this argument were mixed. Justice Canady said he was “baffled” by the suggestion that a voter could somehow conclude that the relevant conduct that would be legal under federal law. On the other hand, Justice Sasso took issue with the assertion by the initiative sponsor’s (Smart & Safe Florida) counsel that the summary “explicitly” limited the amendment’s impact to Florida law. In one of the proceedings’ highlight reel moments, Smart & Safe Florida’s counsel replied that “we expect voters to be able to read things in context.”
There was also some discussion about whether the initiative might violate Florida’s single-subject requirement for constitutional amendment initiatives. Lining up with the state against the placement of the initiative on the ballot, counsel for the Florida Chamber of Commerce (“Chamber”) argued that, if approved, the initiative would bring about the “hidden result” of creating an “immediate oligopoly” for MMTCs, with no timeline in place for licensure of non-MMTC entities. Justice Canady seemed particularly unreceptive to this argument, stating that the Chamber’s “fundamental position here is that this is just not a proper subject for the … initiative process, it is a policy matter [and that] there is really no way that the citizens could act in this arena via the initiative process effectively.” He added that the single-subject requirement is “turning into … a straitjacket on the people.”
After hearing today’s arguments and more generally tracking the development of this case, it is hard not to conclude that the Attorney General just wants to keep adult-use cannabis illegal in Florida, throwing anything at the wall to see what sticks. In this sense, it was encouraging to see at least some justices pushing back on some of the more tortuous arguments being made by the Attorney General and its allies. There seemed to be a sense that, at least for some justices, the endless hairsplitting over cannabis initiatives has gone too far. And indeed it has: It is time the people of Florida had a voice when it comes to adult-use legalization.
The post Florida Court Ponders Cannabis Legalization appeared first on Harris Sliwoski LLP (Formerly Harris Bricken).
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I’ve been representing clients in California’s cannabis industry since 2018. Our firm has been representing businesses in the space for many years before that, in states with more mature licensing programs. One of the most common mistakes we see in new cannabis markets is businesses that rely too much on federal legalization happening.
For example, lots of businesses back in 2018 in California took the view that they could expand at all costs and grab market share, because federal legalization (and investor capital) was inevitable. Federal legalization still hasn’t happened, and investor capital dried up in most cases a few years ago (more on that below). Indeed, just like when these states started licensing, cannabis is still on Schedule I of the Controlled Substances Act (CSA), 280E is still a nuisance, big banks still won’t bank cannabis money, and so on.
As I’m sure all of our readers are aware, the Department of Health and Human Services (HHS) apparently made a recommendation to DEA to move cannabis to Schedule III of the CSA recently. I say “apparently” because HHS’s letter to DEA is redacted to the point of uselessness. But in any case, a change within the federal government appears to be on the horizon.
Based on the announcement of the potential rescheduling alone, we’ve already seen an uptick in investments. In general, the industry seems to be doing better than it was, say, a year ago. Here’s just one example of California cultivators selling out of harvested inventory. It is hard to say whether that’s a result of the rescheduling potential, or something else. I tend to think it’s something else, but who knows.
Either way, it’s worth pointing out that federal legalization is not here yet, and that a rescheduling to Schedule III of the CSA would not be federal legalization. As to the first point, all that has happened (at least all that has been made public) is the apparent rescheduling recommendation. DEA has not formally acted on the recommendation, and cannabis remains on Schedule I for now. That means it is as federally illegal now as it was in 1972, 1998, or 2017, even if the federal government looks the other way.
It’s also worth pointing out that this is all administrative. There are a few different ways that the federal government can deal with federal legalization, and Congress has shown itself completely incapable of doing anything. Don’t expect federal regulators like DEA to entertain anything like complete legality. Even if HHS makes a recommendation, DEA is not required to listen.
Let’s assume that that cannabis is rescheduled. Would that mean that federal legalization has happened? No. No state-level cannabis licensee is compliant with CSA. I highly doubt you’ll see any state-level pushes to try to rewrite rules to comply with the CSA, which wouldn’t even be possible for recreational markets. [As an aside, I also don’t really foresee the federal government relaxing cannabis’s scheduling and then suddenly enforcing Schedule III requirements, when it hasn’t enforced Schedule I requirements on state-compliant cannabis businesses in a decade.]
If cannabis is moved to Schedule III, the big benefit is that 280E will go away. Otherwise, not a lot will change. The industry won’t be legal overnight. Banks won’t be forced to work with cannabis companies. Things will likely be relatively similar. It could go slightly better if the courts step in and shield intrastate cannabis traffickers, but the CSA would still remain in place.
All of this is to say that federal cannabis legalization has not happened, and won’t happen any time soon. As we have seen historically, businesses that banked on this happening often got way over their skis and ended up in bad places. Businesses that want to survive the coming few years would be best served by operating under the assumption that nothing will change – until something does.
The post Federal Cannabis Legalization Isn’t Here Just Yet appeared first on Harris Sliwoski LLP (Formerly Harris Bricken).
Ohio voted on November 7 to legalize adult-use cannabis, but state lawmakers can tweak or even appeal the measure.
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Cycling Frog is offering a free bag of their best-selling hemp THC+CBD gummies, you just cover the cost of shipping.
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95 percent or caretakers reported improved quality of life.
The post Autistic life quality rose in rare study of customized cannabis treatments appeared first on Leafly.
The lawsuit filed on October 26 against Merrick Garland to “end federal cannabis prohibition” wouldn’t really end federal cannabis prohibition. If you had that impression, it may be because reporting on this topic has been subpar. Many of the headlines are incomplete or downright misleading. Some stories take several paragraphs to explain the actual nature of the challenge, and some don’t get to it at all. Here are some prominent examples:
Here’s the deal. Even if the plaintiffs prevail on all counts – and I hope they do!– the Controlled Substances Act would remain intact entirely. It would still be illegal to ship a single gram of marijuana from New York to New Jersey, from California to Oregon, or from Michigan to Minnesota. Or from anywhere to Canada. The focus of this lawsuit, instead, is application of the federal Controlled Substances Act (“CSA”) to intrastate – and not interstate — marijuana activity and actors. A victory would help cannabis operators who are drawing within the lines, as long as they stay within those lines. It would help them enormously, in fact.
But how do I know the lawsuit wouldn’t actually end prohibition? Here I must confess I haven’t actually read the complaint; I just skipped to the end. On the penultimate page is the REQUEST FOR RELIEF. A request for relief is exactly what it sounds like: it’s where the plaintiffs describe what they’re asking the court to do. These particular plaintiffs are asking the court to:
Again, if plaintiffs get what they’re asking for it would be enormously helpful. This press release from the plaintiffs’ law firm explains why. In short, state-legal marijuana businesses would be treated more like other businesses, outside of the frustrating prohibition on marijuana crossing state lines. They would get similar access to banking, SBA loans, and federal tax treatment, for starters. I do foresee potential issues with access to trademarks and bankruptcy — which no one seems to be talking much about — but those are topics for another day.
Again, I really hope these plaintiffs win. The lawyers are supremely talented and their press release outlines some promising arguments. They’ve also been thinking about this for a while – I actually previewed this filing with Andrew Smith back in June of 2022.
My secondary hope is that the litigation somehow compels Congress to act. The ultimate prize is not leveling the field for cannabis businesses who sell only locally, as this lawsuit seeks. It’s also not moving marijuana to Schedule III, as Health and Human Services recently recommended. For the playing field to be leveled truly, marijuana must be removed from the CSA entirely. If that’s not happening, though, this would be a nice consolation.
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For other posts on lawsuits seeking to end federal cannabis prohibition, check out the following:
The post The Lawsuit to End Federal Cannabis Prohibition Wouldn’t Really End Federal Cannabis Prohibition appeared first on Harris Sliwoski LLP (Formerly Harris Bricken).
Dr. Andrew Whelton, once a Professor of Medicine at The Johns Hopkins University School of Medicine, is not just a distinguished medical professional but also a man with a mission. His decades of experience in drug development and safety, coupled with his remarkable service during the Vietnam War, where he established the first combat renal […]
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One of the best insurance policies a cannabis business can get is a written contract. Paying a lawyer a little bit up front can save hundreds of thousands when things go south. A lot of folks in the cannabis industry are still doing deals on a handshake basis (you can see some of our older posts on handshake deals below). In this post, I’ll outline a few of the best reasons why written contracts beat handshake deals 99% (if not 100% of the time).
The Statute of Frauds is a legal doctrine that requires certain types of contracts to be in writing. If they are not in writing, they are generally not enforceable. For example, California’s Statute of Frauds requires written contracts for, among other things, agreements that cannot be performed within a year, for leases for a year or longer, and for loans over $100,000 in certain cases. If the parties try to do a handshake deal for something within the Statute of Frauds, one or both of them may be in for a rude awakening if there is ever a contract dispute if the court refuses to enforce the agreement.
In very simple contracts, a written contract may not be necessary. For example, imagine the following agreement: “I will mow your lawn on Saturday at 10:00 AM for $20.” I say “may” here because even agreements with relatively basic terms like this one could be subject to different interpretation – how short will the grass be mowed, how long will it take, will the homeowner provide the mower, etc.?
But most agreements in the cannabis industry are much more complex than this. Imagine an agreement to buy one single delivery of cannabis products. The parties would need to agree at least on (1) what type(s) of products would be purchased, (2) how many units of each type of product would be purchased, (3) when the products would be delivered, and (4) how the products would be delivered. But in many purchase arrangements, there are a host of other things that parties put in a written contract, such as: (5) inspection and rejection procedures, (6) recall procedures, (7) product warranties, (8) indemnification provisions, (9) liability limitations, (10) dispute resolution provisions, and so on. And keep in mind that this only relates to one-time purchases. In most cases, cannabis transactions are much more complex than this.
The human memory is only capable of storing so much information in a competent way. It is just not possible to accurately remember each deal term. In a complex arrangement, the parties may recall the main terms but it is inevitable that there will be disagreements based on inability to recollect key deal points.
Do you want to litigate a cannabis dispute in federal court? Probably not. If you don’t have a written contract and there is a reason for the dispute to be removed to federal court, it’s going to be removed.
Do you want a dispute in arbitration? If you don’t have a written contract, you don’t get to arbitration.
Do you want the prevailing party in a dispute to recover its attorneys’ fees? If you don’t have a written contract, that’s not going to happen (unless there are some other claims beyond breach of contract where the winner gets its fees).
The bottom line here is that it is easy to set the parameters for dispute resolution in a written contract. Conversely, without a written contract, the parties have to chance it and may end up shooting themselves in the foot.
If you’re not familiar with indemnification, let’s go back to the purchase example. Say a retailer purchases edibles from a manufacturer, and customers get sick when they eat the edibles. And say those customers sue the retailer. The retailer didn’t make the edibles, so it would want the manufacturer to foot the bill for its defense and any damages that are awarded. This is called “indemnification.” In some cases, parties can seek indemnification without a written contract. But it is much clearer and easier if there is a written contract provision that spells out indemnification procedures and coverage.
Indemnification provisions are usually among the most heavily negotiated contractual provisions, and for good reason. They can be the difference between a business-ending lawsuit and survival. This is yet another reason why written contracts with clear indemnification provisions are such a good idea.
If you’ve ever looked at a written contract, you’ve probably seen a provision about halfway through in all caps with a heading that reads, “LIMITATION OF LIABILITY.” As the name suggests, these provisions are intended to narrow or eliminate liabilities of one or both parties. They generally include provisions that carve out things like consequential and incidental damages (i.e., damages that are not a direct result of a breach) and punitive damages (i.e., damages that are intended to punish a wrongdoer). But limitations of liability may also place caps on one or both parties’ damages, which can be a big advantage in a dispute. Again, without a written contract, a party won’t be able to shield itself from many liabilities.
As mentioned, here’s a list of some of our older posts on problems with handshake deals:
The post Five Reasons Written Contracts Beat Handshake Deals appeared first on Harris Sliwoski LLP (Formerly Harris Bricken).
SFV OG x Chemdog might be the sleeper hit of the year.
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HelloMD is offering Leafly readers an exclusive $25 savings when you get approved for a medical card online.
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Phew! After a bit of celestial chaos, November and Scorpio season promise to bring more tranquil vibes to the Zodiac. This month pairs succulent strains that help every sign embrace the watery mystique of Scorpio.
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