Neat idea, Canna Bumps: Thanks for keeping marijuana illegal

The maker of cannabis-based 'cocaine' pulled the product on Monday, but its harm will live on for years.

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Star signs and cannabis strains: May 2021 horoscopes

It's May 2021 and time for new stars and strains to guide your way. Prepare to blow smoke in your foes' faces with updates from the skies.

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Death Valley Park Rangers Discover 40-Acre Illegal Cannabis Grow

It's far from the first illegal cannabis grow to be found in Death Valley.

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New York Updates Off-Duty Conduct Law To Protect Employees Who Use Cannabis Off The Clock

The Empire State's off-duty conduct law now protects employees who use legal cannabis outside of work hours.

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FREE Webinar Tomorrow, May 4! Cannabis in New York: Intro to the Marijuana Regulation and Taxation Act

Register HERE!

New York just became the latest state to legalize recreational cannabis. It will likely be several months before industry regulations are released and license applications are possible, but NOW is the time to start preparing.

Join Harris Bricken’s lead New York cannabis attorney, Simon Malinowski for a FREE hour-long, Q&A webinar, TOMORROW Tuesday, May 4th, at 2 pm EDT/ 11 am PDT to learn about New York’s Marijuana Regulation and Taxation Act and New York’s cannabis industry. This event will be moderated by Harris Bricken’s cannabis practice chair, Hilary Bricken.

Simon will cover the available license types, the framework for the license application process, and details about New York’s social and economic equity plan, among many other topics. Please submit any questions you have regarding New York’s Marijuana Regulation and Taxation Act when you register.

See you tomorrow, May 4th!

Register HERE!

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California Cannabis Changes: What Might We See From the DCC?

In January 2020, Governor Newsom announced that he intended to have the Bureau of Cannabis Control (BCC), California Department of Food and Agriculture’s CalCannabis Program (CDFA), and California Department of Public Health’s Manufactured Cannabis Safety Branch (CDPH), consolidated into a single cannabis agency: the Department of Cannabis Control (DCC) (as summarized in the Governor’s 2021 budget summary). Consolidation was slated to be completed by July 2020 in order to enforce cannabis regulations and oversee licensees in California. That effort was stalled by the advent and continuing impact of COVID-19.

The 2021 budget summary generally covers what the trailer bill will do regarding California cannabis, and shoots for July of this year for the proposed consolidation into the DCC. Not surprisingly, all of the regulations now in play under the Medicinal and Adult-Use Cannabis Regulation and Safety Act will automatically be adopted by the DCC upon its creation unless and until repealed, replaced, amended, etc. It’s no secret that some of the current MAUCRSA regulations need serious revisions to ensure that licensees are successful and that the regulations are actually clear. So, when the DCC comes to life, while no one really knows what’s around the corner (although we recently wrote about how at least cannabis contracts will be affected by the consolidation), here are some of the regulatory fixes (rather than statutory) we think we might see:

1. Transfer of Licenses. Right now, California doesn’t allow for state license transfers. Instead, the BCC, CDPH, and CDFA force cannabis licensees to engage in business purchases if a cannabis license is to change hands at all. These business purchases are tortured by regulatory ambiguities around the concept and definitions of “owners” and “financial interest holders” and original owners having to remain with the entity for the preservation of “continuity of operations”. And it seems like every time you interact with one of these agencies, you get a different response from every single analyst about what is and is not allowed in the definitive acquisition document. If the DCC is wise, it will take a page out of the books of Oregon and Washington and do away with the current change of ownership regulations, and it will allow for straight license transfers. The ability for third parties to just acquire state licenses would lighten the load for cannabis businesses and regulators alike, and it would put a stop to the arbitrary regulatory back and forth and oftentimes bad buyer and seller behavior we see around changes of ownership.
2. Better Enforcement and Interpretation Consistency. Thankfully, we are bound to see consistent enforcement priorities and interpretations from a single agency. What’s annoyed licensees is that all three agencies right now seem to approach seemingly identical rules in a multitude of ways around enforcement and interpretation. Maybe more than an outright regulatory fix, the emphasis on this “might see” is that one regulator will definitely limit the number of wild legal and regulatory takes we’ve seen. Of course, different DCC analysts may also give different interpretations around various DCC regulations, but at least we’ll know that between cultivators, manufacturers, distributors, labs, and retailers that legal and regulatory licensing definitions will all be the same across the board.
3. IP Licensing Clarity. With its final adoption of the current regulations, the BCC really muddied the waters to a certain extent regarding party disclosures around intellectual property licensing agreements (before that, the agency caused an industry freak-out around the topic). To tie things up, we have a lone “fact sheet” where the BCC tells us the following: “Licensees may enter into intellectual property licensing agreements with unlicensed entities. However, the intellectual property holder cannot exert control over the licensee’s commercial cannabis operations. If the intellectual property holder is exerting control over the licensee’s commercial cannabis operation, then the intellectual property holder must be disclosed as an owner on the license.” The fun part is that “control” is not defined, so there’s been myriad confusion around whether “owner” disclosure is necessary when IP licensing agreements come into play in California. And of course the IP licensor exercises some level of control relative to the licensee’s cannabis operations where the IP licensing agreement will dictate what the licensee can and cannot do with the licensed intellectual property. As a result, the DCC should really clean up the issue once and for all once it comes into power where California cannabis branding is big business and getting more serious all the time.
4. Borderless Delivery Solution. Another California cannabis debacle is the borderless delivery rule that the BCC adopted as part of the final rules. It was a heavily followed lawsuit when the BCC defended its borderless delivery regulation in Fresno County Superior Court in 2020. See here. The end result of the fight was that, even though the BCC maintains a regulation that retailers can deliver cannabis into any city or county in California, cities and counties remain free to ban delivery anyway (which was already the case because California has such strong local control limits when it comes to cannabis). In turn, while the BCC won’t bust retailers for engaging in delivery in jurisdictions that ban it, those retailers can still get into major trouble in those cities and counties. I wouldn’t be shocked if the DCC tries to revisit this issue through rulemaking where retailers would certainly benefit by being able to deliver anywhere without legal consequence.
5. Billboards. I was recently interviewed on KCRW about the dueling billboard bills in Sacramento. In 2020, a San Luis Obispo County judge ruled that Prop. 64 bans cannabis billboard ads on California’s interstate highways (here’s the BCC mandatory notice to licensees on the result in the case). Now, AB 273 (which recently failed in session but could be reconsidered) would ban all cannabis billboards, and AB 1302 would allow them with certain restrictions around interstate highways and California borders. No matter how this one shakes out, will likely see the DCC react with corresponding regulations in the future, and that’s going to affect the marketing decisions of hundreds of licensees.
6. Limitations on Type 3 Cultivation Licenses and Beyond. CDFA exercised its authority to limit cultivators to one Type 3 license per premises. To get around that, large scale cultivators just stack unlimited, smaller license types on multiple premises to aggregate literally acres of canopy. As a result, there’s a possibility that DCC just ditches the current one Type 3 limitation and gets with reality. Further, Type 5s will be available in 2023 and we have zero regulation around those license types, so the DCC may well just get into Type 5 limitations once it comes to power.

Definitely be sure to stay tuned as this massive consolidation comes to fruition.

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Cannabis Litigation: Third-Party Subpoenas and the Illegality Defense

This post discusses the use of the federal “illegality defense” in connection with third-party subpoenas in litigation.

Let’s start with a review of the illegality defense. 

Cannabis litigators, investors, and companies who decide to filing lawsuit arising out of a business transaction likely are familiar with the “illegality defense.” An initial question is choosing a forum for a cannabis dispute. The forum may be federal court, state court, or an arbitration if there is an agreement to arbitrate disputes.

Filing in federal court is not an option (or at least not the best option) in most instances because marijuana is a controlled substance under federal law. This means a contract concerning marijuana may be found void for public policy reasons, i.e., unenforceable, by a federal court on the ground that the subject of the contract (marijuana) is illegal. My colleague Vince Sliwoski neatly summarized the illegality defense in Federal Courts are Going Backward on Cannabis, as follows:

The touchstone ruling here is found in Mann v. Gullickson, 2016 WL 6473215 (N.D. Cal. Nov. 2, 2016). In that case, the court observed that “[n]o principle of law is better settled than that a party to an illegal contract cannot come into a court of law and ask to have his illegal objects carried out…” (quoting Wong v. Tenneco, Inc., 39 Cal. 3d 126, 135 (1985)). That makes sense, right? For example, if Party A pays Party B to start a forest fire, but Party B pockets the cash and skips town, no court would require Party B to return and start the fires. The contract would be void for public policy reasons.

There is some “wiggle room,” as Vince notes, and exactly what contracts and on what occasions a federal court may enforce (or not) a contract related to marijuana is an evolving area of law.

The illegality defense often asserted is by a defendant at the outset of litigation to seek dismissal of a federal court case. The defense also is available in state courts where marijuana is illegal. But the defense typically is not raised in state courts that have legalized marijuana under that state’s laws. State courts in California, Oregon, Washington regularly hear disputes involving marijuana and the illegality defense is not going to be successful. Indeed, a California statute expressly declares the defense is not available.

Third-party subpoenas

With that brief review, let’s turn to third-party subpoenas. In many lawsuits, a party needs to collect relevant documents from persons or entities who are not parties to the lawsuits (third parties) and a party may desire to depose a third-party. This part of the discovery process typically occurs by the court, or the attorney as authorized by relevant rules, serving a subpoena on a third-party that compels the productions documents or appearance at a deposition. (Subpoenas also are used to compel appearance at trial to testify, but that won’t be discussed here). Failing to obey a subpoena without sufficient cause may lead to a further court order and sanctions up to and including contempt of court.

Disobeying a subpoena is no small matter. The how, when, and where of subpoenas are governed by procedural rules. Each state has its own set of rules and the federal courts have the Federal Rules of Civil Procedure. The procedure for serving a subpoena on a non-party located within the state or within the jurisdiction where the litigation is taking place is straightforward.

Subpoenas are more complicated when the third-party is located in another state or federal judicial district. (The federal rules, however, were amended in 2013 to greatly simplify that process.) When a party in Oregon, for example, wants to serve a subpoena on a third-party in another state, North Dakota, for example, the subpoena must comply with the Oregon rules and the rules and process established in North Dakota for the service of a “foreign” subpoena. (The term “foreign” here means any subpoena from a court or judicial body located outside of North Dakota). In some states, a party seeking to serve a “foreign” subpoena must formally file documents to initiate a case that requests the court to authorize service of the foreign subpoena. Other states require the party to submit a “letter rogatory” or seek a “commission,” to serve the foreign subpoena. Although less formal than initiating a case, they can be cumbersome in practice.

Generally, courts allow the service of out-of-state subpoenas without fuss – i.e., without any hearing or examination of the underlying lawsuit. A third-party who receives a subpoena may object to the subpoena and may move to “quash” the subpoena. A motion to quash asks court to rule that the subpoenaed party need not comply with the subpoena in some or all respects. These motions usually argue that the compliance with the subpoena would impose undue burdens or hardships, or that the subpoena does not comply with applicable rules.

Can a third-party located in a state where marijuana is a controlled substance make use of the illegality defense to quash a subpoena from a state where marijuana is legal under the illegality defense?  

The question is an open one, as far I know. (If you know differently, please email me.) Let’s continue to use Oregon and North Dakota as an example. Suppose litigation filed in Oregon concerns marijuana and assume the nature of the litigation is such that the illegality defense would apply without question in federal court. Assume a key third-party witness is located in North Dakota (where marijuana isn’t legal) and has no interest in cooperating with either party. So the witness asks her lawyer to try and fight the subpoena. What are the odds of successfully moving to quash the subpoena using the illegality defense?

An initial question is where the motion to quash must be filed. In the example above, the motion to quash must be filed in the county court where the discovery is to be conducted. N.D. Civ. P. R. 5.1(b). So this means a North Dakota judge, not an Oregon judge will decide. North Dakota is not a state known for its friendliness to marijuana.

Another question is whether the rules allow a non-party to raise the illegality defense in a motion to quash. The rules of procedure do not expressly list the defense, but the rules do allow a motion to quash on the ground that the subpoena “subjects a person to an undue burden.” So does compelling a person to appear a deposition related to an “illegal” contract subject a person to an undue burden? It is at least conceivable that a non-party should not be required to give testimony related to an “illegal” contract.

The question likely turns on principles of interstate comity. That underlying principle is that states should respect and enforce the laws and judgments of other states and their state courts. Interstate comity is a keystone of our constitutional system and cooperation is manifested in interstate compacts, reciprocity statutes, uniform laws, and informal practices derived from a substantial number of common law judicial decisions on the subject. So perhaps the North Dakota court says, look, although marijuana is not legal in this state, it is in Oregon, ergo the non-party may not prevail on the argument that it is an undue burden to be deposed in connection with a contract that would be unenforceable in North Dakota. But perhaps not. Perhaps the North Dakota court takes the view that although comity is important, comity does not require the North Dakota court to authorize and sanction the use of its powers to compel a North Dakota resident to testify on a dispute subject to the illegality defense under the laws of North Dakota and at the federal level.

This may be an interesting topic for a law review article … for any law students in our readership.

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