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You Can Go Your Own Way: Washington’s Cannabis License Residency Requirement Upheld, Breaking the Chain of Contrary Decisions

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Oh Daddy! It’s not “Rumours” or one of your “Dreams” – although it may be “Second Hand News” to our most knowledgeable readers: A federal court in Washington recently upheld the state’s cannabis residency requirement for operators.

The Federal Government’s Current Position

If you’re reading this, you surely already know: Marijuana is a Schedule I drug under federal law, meaning that Americans (with extremely limited exceptions) may not grow, process, sell, or possess marijuana. At the same time, however, approximately 40 states and territories permit medical marijuana and more than half of those allow adult-use (i.e., “recreational”) marijuana.

We previously wrote about this dichotomy, suggesting its insanity. While the federal government has not legalized cannabis, it has not thwarted the states’ ability to do so. But this post has a narrower focus. There are approximately 40 medical cannabis regimes and approximately 40 different sets of rules. A common rule in cannabis legislation is to require that some portion of the licensee be owned by a resident of the state. There are a number of purported benefits of these so-called residency requirements, but the residency requirements have come under fire lately for allegedly violating the dormant Commerce Clause. Stick with us – it gets interesting.

WTH Is the Dormant Commerce Clause?

Generally speaking, the dormant Commerce Clause prohibits states from treating in-state business interests differently than out-of-state business interests in a discriminatory way. For example, in Tennessee Wine & Spirits Retailers Association v. Thomas, 139 S. Ct. 2449, the U.S. Supreme Court held that Tennessee’s residency requirement for retail liquor store licenses violated the dormant Commerce Clause. In that case, Tennessee required applicants for a retail liquor store license to reside within the state for at least two years prior to submitting the application. The Supreme Court found that “the residency requirement [was] not needed to enable the State [of Tennessee] to maintain oversight over liquor store operators.” Rather, the residency requirement was found to be discriminatory for no other reason but to prevent out-of-state competition. This kind of discrimination is not permitted under the dormant Commerce Clause.

Cannabis law jurisprudence has most often seen this clause applied to challenge residency requirements embedded in state cannabis laws. Let’s say a state with a medical cannabis program prevents a person who has not lawfully resided in the state for at least six months prior from obtaining a business license to produce, process, research, deliver, or sell cannabis. Litigants have argued that residency requirements such as this one treat in-state businesses differently than out-of-state businesses in a discriminatory way that violates the dormant Commerce Clause.

Federal courts in Maine, New York, Missouri, Michigan, and Illinois deciding this issue have agreed that certain residency requirements for a cannabis business license violate the dormant Commerce Clause. Most recently, the U.S. Court of Appeals for the First Circuit held that a Maine residency requirement violated the dormant Commerce Clause.

Just as a trend of finding in favor of out-of-state residents seemed to be developing, another federal court recently went the other direction and reminded those paying attention that the CSA continues to apply in this space.

A Brief Description of the New Washington Decision

Washington legalized adult-use cannabis in 2012. On February 7, 2023, in Brinkmeyer v. Washington State Liquor & Cannabis Bd.,a Washington federal court rejected an Idaho resident’s dormant Commerce Clause argument, finding no violation when his cannabis business license was denied based on Washington’s residency requirement.

Todd Brinkmeyer, an Idaho resident, sought to own a cannabis retail store in Washington. Brinkmeyer previously provided debt financing for his friend’s cannabis retail stores in Washington. His friend desired Brinkmeyer to become a partial owner of and to invest in his cannabis retail stores. In Washington, the Washington State Liquor and Cannabis Board (LCB) issues cannabis business licenses. The LCB confirmed that it would not issue Brinkmeyer a cannabis license because he was not a resident of Washington.

Brinkmeyer filed suit in Washington federal court arguing, among other things, that Washington’s residency requirement was “unconstitutional because [it] discriminates, without justification, against out-of-state citizens,” and therefore, violated the dormant Commerce Clause.

The court held that since Congress holds the power to “deem certain substances federally illegal” and that the there is “no legal interstate market” for cannabis, the dormant Commerce Clause did not apply. Thecourt also noted that “citizens do not have a legal interest in participating in a federally illegal market.” Consequently, the court granted the LCB’s motion for summary judgment and dismissed Brinkmeyer’s suit.

Why Does Any of This Matter?

The central question of the dormant Commerce Clause analysis in these cases – whether a state has the authority to impose residency requirements in its cannabis regime – is hugely consequential for the cannabis industry both within any given state and on a national level. On the one hand, states understandably want control of their cannabis programs, and voters and legislatures typically want to ensure their own people benefit from the program.

On the other hand, allowing non-residents to operate cannabis businesses has its benefits. For example, the amount of capital available is substantially greater if out-of-state operators are allowed to participate, and well-capitalized operators are more likely to have the wherewithal to survive during difficult market conditions and ensure that quality is not sacrificed to save money. In addition, out-of-state operators are almost by definition more experienced in the industry and best able to provide safe and effective product to patients.

State residency requirements aren’t the only ones in the dormant Commerce Clause’s crosshairs. For example, a licensee in Oregon’s cannabis program sued Oregon officials, seeking to use the dormant Commerce Clause to invalidate Oregon’s prohibition on in-state operators from exporting cannabis to other states.

And the case may impact California’s new Senate bill 1326, which creates a process for the interstate shipment of California-produced cannabis to other states, and more recent efforts by California officials to have the state’s attorney general weigh in on that effort.

What Now?

Brinkmeyer further muddies the already murky water as to how federal courts will employ constitutional doctrines in the cannabis space. From one perspective, the decision certainly provides ammunition for state officials seeking to uphold cannabis residency requirements. From another perspective, it is a single decision from a single federal court in Western Washington – one that represents a minority position when viewed against recent decisions nationwide.

Will the issue continue to divide federal courts, or will there be some judicial resolution? For the latter to occur, it is likely that the Ninth Circuit Court of Appeals (or some other federal appellate court) would have to side with the Brinkmeyer rationale and create a federal circuit court split that could be decided by the United States Supreme Court. We suspect that Court would be reluctant to wade into these waters, but it would certainly bring much-needed clarity.

In the meantime, the inconsistent and fascinating interplay between the federal government’s treatment of cannabis and its state-created legality across the country continues. We’ll continue to monitor the situation as it unfolds, and cannabis operators and investors around the country would be wise to do the same. Put another way, and with our thanks for sticking with all of the Fleetwood Mac references, “Don’t Stop Thinking About Tomorrow.”



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Wait? My CBD Business May Be Racketeering? A Potential Existential Crisis We Have Been Warning About

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Even the most responsible hemp operator should understand that it operates in a world full of risk. But I doubt many of them believe they might be accused of racketeering. Last week, the U.S. Supreme Court heard arguments about whether to sanction a commercial trucker’s attempt to bring a racketeering claim against CBD companies, whose allegedly mislabeled products the trucker claims led to his firing.

As always, Sam Reisman at Law360 distills the issue nicely:

The case concerns an allegation that companies sold CBD products with detectable amounts of THC, purportedly costing plaintiff Douglas J. Horn his job as a commercial trucker after he tested positive on a drug test. Oral arguments on Tuesday hinged largely on whether Horn’s claims stemmed from a personal injury — which would be excluded from the Racketeer Influenced and Corrupt Organizations Act, or RICO — or whether his firing was an economic injury and therefore redressable under RICO.

In taking the case, the U.S. Supreme Court could resolve a 3-2 circuit split over whether the civil prongs of the RICO statute allow a plaintiff to seek damages for economic harms stemming from injuries to their person.

Again, from Reisman:

During oral arguments on Tuesday, the liberal wing of the high court expressed skepticism with the CBD companies’ rendering of the case, which they said foregrounded Horn’s ingestion of the product as the source of the injury, as opposed to his firing for a positive drug test.

Lisa Blatt, an attorney for the CBD companies, told the justices that agreeing with Horn’s interpretation of the statute would open the door for virtually limitless personal injury cases under civil RICO, as long as plaintiffs could allege some connection between their ingestion of a product and a loss to their business or property: “Respondent’s rule also leaves the personal exclusion [in civil RICO] toothless, since virtually all personal injuries result in monetary loss,” Blatt said. “It is utterly implausible that Congress federalized every slip-and-fall involving RICO predicates. Personal injuries are serious and may support state tort claims, but they are not the stuff of RICO.”

On the other side, conservative justices attempted to discern how to draw a line between bona fide economic claims and personal injury claims pleaded as economic claims.

Easha Anand, arguing on behalf of Horn, said the vast majority of personal injury claims, such as those alleging pain and suffering or emotional distress, would still be excluded even if Horn was permitted to pursue his RICO claim against the CBD companies: “In your average slip-and-fall case, you’re not going to be able to prove a predicate act, let alone a pattern of predicate acts, let alone a pattern carried on through a racketeering enterprise,” Anand said.

Justice Neil Gorsuch observed, “There’s a failure to warn that this product contains ingredients that your client didn’t know about and should have known about and had a right to know about. I would have thought that that would have been kind of a classic personal injury.”

The Takeaway

This is pretty scary stuff for CBD and other hemp operators. RICO is no joke and carries very serious penalties (both civil and criminal depending on who is bringing the suit).

From the perspective of a CBD manufacturer, it seems unfair to hold the manufacturer responsible to control how its products are used and, as in this case, the implications of that use (here, an alleged economic injury).

If the Court rules that CBD and other hemp manufacturers are subject to RICO charges simply by selling their products to people who do things outside of the manufacturers’ control, it could pose an existential crisis to the industry with potentially unlimited civil (and maybe even criminal) liability. We have warned about this before.

That said, while it’s always difficult to predict how the Supreme Court will vote on any issue, I do not believe the Court will push the hemp industry to the brink. I suspect the Court will either rule that the claims in the present case are personal injury claims excluded from RICO and/or provide guidance for how lower courts should examine such “mixed” claims.

We’ll of course provide additional information once we hear from the Court. Stay tuned.



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What ‘material’ about therapeutic goods is considered advertising?

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It is important to note that advertising health services is subject to different regulations than advertising therapeutic products. Consequently, advertisers, manufacturers and sponsors must evaluate whether their business name could be interpreted as an advertisement for therapeutic goods. If so, they should consider whether the business name, including company or trading names, could be viewed as a ‘reference’ that draws the audience’s attention to medicinal cannabis, as any mention or similar terms to ‘cannabis’ are likely to have that effect. It is essential to recognise that the impact of promoting the use or supply of medicinal cannabis does not depend on a single promotional element but rather on the overall promotion. This includes all components of the promotional information and materials that accompany the name or branding. Advertising can result from the combination of separate statements, images or designs that collectively promote the use or supply of therapeutic goods.

Advertising

The prohibition on advertising medicinal cannabis to the public is determined by the context in which the material is perceived. When evaluating whether information about therapeutic goods qualifies as advertising, it is essential to consider the broader context of the material’s presentation. This encompasses various factors that influence the conveyed message, including the context of the information or activity, the intended audience and their likely interpretation of the message, as well as the presence of non-verbal and unwritten cues, such as visual elements. These factors can significantly affect communication and may alter the message perceived by consumers. 

For example, if an advertisement for a health service, such as a pain treatment service, includes references to medicinal cannabis, even in the company name or trading name, a reasonable consumer may conclude that the advertisement seeks to promote both the use of medicinal cannabis for pain relief and the pain treatment service itself. Including a disclaimer, such as advising the consumer to consult a health professional regarding suitable treatment options, does not exempt the advertiser from complying with legislative requirements.

The distinction between promoting a health service and the therapeutic product utilised in its delivery can be nuanced. Therefore, it is crucial for advertisers to consider how a typical consumer might perceive their advertisement in relation to the promotion of the therapeutic product.

Legal Compliance

To ensure legal compliance in promoting a business or service, advertisers should focus on the health services they provide and avoid referencing medicinal cannabis. For instance, stating “Our clinic offers consultations related to pain management” is a more compliant approach. The Therapeutic Goods Administration’s interpretation of advertising for medicinal cannabis is broad, covering all methods of promoting its use or supply. This includes company names, product names, abbreviations such as CBD and THC, colloquial terms, and any imagery related to cannabis. Any combination of statements or images that implies medicinal cannabis can be considered advertising, even in the absence of explicit promotional language.

Summary

In summary, it is prohibited to mention prescription medications in advertisements for therapeutic goods. If content discusses health conditions and consumers can reasonably infer, either from the context or through direct or indirect references, that medicinal cannabis or any other prescription medication is intended for use concerning these conditions, the content may be deemed an unlawful advertisement for therapeutic goods. Not all information related to therapeutic goods is classified as advertising. However, if the content aligns with the definition of ‘advertise’ as outlined in the Therapeutic Goods Act 1989 (Cth)—which includes anything that is directly or indirectly intended to promote the use or supply of therapeutic goods—then the relevant legislative requirements for advertising such goods must be complied with.

“Indirect intent” in this context does not refer to the explicit intention of the party responsible for the content, but rather to what a reasonable consumer might infer as the intent behind the content. Terms such as “plant-based medicine,” “plant medicine,” “cannabidiol” and “CBD oil,” which relate to medical cannabis products, may be considered promotional if they suggest a connection to medicinal cannabis. Businesses promoting a health service must ensure they do not inadvertently advertise a prescription medicine in their marketing materials. If the consumer is encouraged to seek out a health service based on the therapeutic goods available, the content is likely to be regarded as an advertisement for those therapeutic goods.

For additional information, the Therapeutic Goods Administration has established the Medicinal Cannabis Hub, accessible at https://www.tga.gov.au/products/unapproved-therapeutic-goods/medicinal-cannabis-hub, and has also provided advertising guidance for businesses involved in the medicinal cannabis sector, which can be found at https://www.tga.gov.au/sites/default/files/advertising-guidance-businesses-involved-medicinal-cannabis-products.pdf. These resources are designed to assist both consumers and industry professionals in understanding their obligations.



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Federal Appeals Court: Pay That Man His Money, Unless That Money Is Illegal Marijuana Money

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Good news, bad news if you’re a cannabis operator that owes money to a creditor. But probably bad news for the rule of law.

A federal appellate court has ruled that a cannabis operator is obligated to repay his debts to an ex-business partner, but it raised questions about whether the money used to repay the debt could violate federal marijuana laws.

What does this mean for a cannabis operator and potential investors?

The Facts

As usual, our friends at Law360 set the stage:

A Tenth Circuit panel has rejected a cannabis entrepreneur’s attempt to undo a $6.4 million judgment in a dispute with an ex-business partner, but it ordered a district court to revisit an enforcement order that could require the entrepreneur to violate federal drug law to pay the damages.

A Maryland federal judge entered a $6.4 million damages award against Mackie A. Barch and his company Trellis Holdings Maryland Inc. for failing to restore David Joshua Bartch’s stake in a Maryland cannabis cultivation and dispensary business, Culta Inc.

When they failed to pay up, Bartch filed suit in the District of Colorado seeking an order that would require Barch and Trellis to sell off their equity in Culta to satisfy the judgment, which the court granted.

Barch and Trellis claimed that their ex-partner lacked standing to seek enforcement of the judgment because the order would require them to engage in conduct in violation of the Controlled Substances Act. Cultivating and selling marijuana is legal under Colorado and Maryland laws, but still prohibited under the federal Controlled Substances Act.

The Ruling

The three-judge panel sided, in a divided decision, against Barch and Trellis. According to the court, Barch and Trellis have no path for relief from the judgment because the law only allows a party to seek such relief for violations of due process.

The rift between the majority and the dissent came down to questions of enforceability and practicality. As Law360 wrote:

The dissent argued that Culta’s business practices – which are illegal under the Controlled Substances Act – should have doomed Bartch’s breach of contract suit from the start. By validating the parties’ contract, the majority has instead decided to “ignore the elephant in the room that is the federally illegitimate business enterprise known as Culta,” Judge Baldock wrote.

“Plaintiff’s cause of action is based entirely upon an illegal contract to establish Culta, notably an enterprise in which federal law recognizes no property interest. I simply do not understand why a federal court would lend legitimacy to any of this,” according to the dissent.

The majority recognized that the trial court’s order could potentially require the violation of federal law but were not willing to overturn the order based on that mere possibility. The majority reasoned that because the order did not specifically require Barch and Trellis to cultivate or sell marijuana, it was at least possible that the debt could be repaid without violating federal law. The case was remanded for further instructions and clarity from the trial court on this point.

The Takeaway

Let’s start with one really obvious point and one just regularly obvious point. First, investors should be extremely cautious when providing funds to marijuana companies. This case illustrates how difficult it can be to recover funds when the source of repayments may largely be the result of federally illegal activity. Second, the marijuana industry is replete with unsavory characters. Sure, many marijuana companies are operated by upstanding businesspeople, but the very nature of the industry and its legal status over the decades make it ripe for those who might not feel compelled to follow the strict letter of the law.

Should you choose to invest in a marijuana company, you should do so with the advice of competent, experienced counsel and you should insist that there are legal methods of recovering your funds should that prove necessary. Doing so may seem a tall task, but with a little diligence you may be able to ensure that your funds are secured by assets that are not subject to the same types of challenges in this case.

And, as with any investment, trust but verify.

Source:  https://www.buddingtrendsblog.com/2024/09/federal-appeals-court-pay-that-man-his-money-unless-that-money-is-illegal-marijuana-money/



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