CANNABIS INDUSTRY: POLITICAL UPDATES AND INSIGHTS

A D R I A N S N E A D , E S Q .

CANNABIS INDUSTRY: POLITICAL UPDATES AND INSIGHTS

ABAChicago, Illinois

September 19, 2019

ADRIAN SNEAD, ESQ.

Attorney JD, The George Washington University Law School BA, The University of Texas at Austin

Counsel to U.S. Senate Jeff Merkley (D-OR) 2014-2017Drafted 2/3 of marijuana reform legislation passed by

Senate, both through Appropriations CommitteeDrafted Marijuana Business Access to Banking Act (114th)

and SAFE Banking Act (115th)Founded Senate Cannabis Staff Working Group

Currently Associate at Whiteford, Taylor & Preston, LLP (Washington, D.C.)Contact: [email protected], 202.659.6771

mailto:[email protected]

CANNABIS LEGALIZATION IN U.SMEDICINAL AND RECREATIONAL STATES

Recreational Use Approved

Medical Use Approved

CBD Use Approved

Illegal

Source: National Conference of State Legislatures

SHIFTING ATTITUDES ON CANNABIS

33 States have some form of legalized cannabis use11 States + DC allow recreational sales95 percent of Americans live in a state with some

form of legalized cannabis (including CBD)61 percent of Americans approve of cannabis

legalization 71 percent of Americans would oppose a federal

crackdown on legal cannabis93 percent are in favor of legalization of cannabis

for medical purposes

HIGH RISK

Schedule I Drug under the Controlled Substances Act (CSA)Growers and distributors of cannabis face long

prison sentences, six-figure fines, and seizure of all cannabis-related assets, as well as assets that have been commingled with cannabis-related assets.Great trouble accessing banking system making this

a cash-based business.Must pay federal taxes but cannot deduct business

expenses. Question of whether contracts made are

enforceable.

HIGH REWARD

—Nielson (CPG, FMCG & RETAIL | 07-26-2019)

OBAMA ADMINISTRATION

DEALING WITH A NEW REALITY

The “Cole Memo”Set prosecutorial priorities

The 2014 FinCEN GuidanceGave guidance to financial institutions wishing to

service the industry

***Neither had force or protection of law******Trump Admin Revoked Cole Memo***

TRUMP ADMINISTRATION

Tough Talk BUT Benign Neglect

Tough talk from former A.G. Sessions and Revocation of Cole Memo in Jan. 2018.

A.G. Barr favors “lenient” approach and a single Federal rather than state-centric policy. April 10, 2019, Sen. Approp. Comm. Hr’g. “I am accepting the Cole Memorandum for now, but I have generally

left it up to the U.S. Attorneys in each state to determine what the best approach is in that state,” A.G. Barr further testified during the hearing. "I haven’t heard any complaints from the states that have legalized marijuana."

DEA still strongly opposed to legalization of cannabis.

No Real Enforcement.

COLE MEMO

• Issued August 29, 2013 by then-Deputy General James Cole to all USAs.

• Set out 8 DOJ enforcement priorities RE: Cannabis• 1. Prevent distribution to minors• 2. Prevent revenue from reaching organized crime/gangs• 3. Prevent interstate diversion of “legal” cannabis• 4. Prevent “legal” cannabis covering up other illegal activity• 5. Prevent violence in cultivation/distribution of cannabis• 6. Prevent “drugged-driving” & protect public health• 7. Prevent cultivation on public lands• 8. Prevent possession/use on Federal property.

• While revoked, Cole Memo still has persuasive affect on USAs and DOJ.

2014 FINCEN GUIDANCE

FIN-2014-G001:•Reiterates that marijuana is still federally illegal.•Details DOJ focus on individuals or organizations that violate Cole Memo priorities.•States that the decision to open/close MRBs should be made by the financial institution (FI). •Covers due diligence recommendations for FIs.•Requires marijuana SAR filings (Limited, Priority, Termination)•Identifies MRB red flags.**If you are not familiar with FIN-2014-G001, you should read the 7-page document in its entirety. ***

CONGRESSIONAL RESPONSE

Consolidated Appropriations Act of 2017, Sec. 537:

None of the funds made available to the Department of Justice may be used…to prevent any of [the States with cannabis legalization laws] from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.--Rohrabacher-Farr Amendment in House/Mikulski Amendment in Senate

Limitations

Only protects medical marijuana.Must be passed every year to be effective against DOJ enforcement.President has threatened to ignore the provision based on his constitutional authority “to take care that the laws be faithfully executed.”

TWO INDUSTRIES, EASILY CONFUSED

HEMP UNDER THE FARM BILL

2014 FARM BILL•Excluded from CSA Hemp Produced Under Limited to State Sponsored Research Pilot Programs•Most State Programs dormant•Hemp & Hemp Products to remain inside the states

2018 FARM BILL•Removes “hemp” from the definition of “marihuana”•Defines “Hemp” as cannabis with 0.3% THC.•Applies to cannabis “seeds thereof and all derivatives, extracts, cannabinoids. . . .”•Requires USDA to develop national hemp regulations.•Allows states to have “primary regulatory authority”•Does not preempt contrary state laws.

CBD PRODUCTS

What?•Can be derived either from marijuana or hemp.•Varying levels of THC content depending on derivation.•CBD considered a drug because of Epidiolex, now Schedule 5.•FDA Commissioner recommended regulations to allow for hemp based CBD products in February 2019.

Where?• Now available in stores

such as CVS and Whole Foods.

• In products like tinctures and food products like drinks.

• Regulated by FDA, which says it is illegal to market CBD as a dietary supplement.

UNDERSTANDING THE INDUSTRY:“TOUCH THE PLANT” VS. “ANCILLARY” BUSINESSES

“Touch the Plant”

Growers

Distributors

Dispensaries

“Ancillary Businesses”

Security Solutions (Safe Companies, Private Security)

Professional Services (CPAs, Attorneys, Compliance)

Banking & Finance

Real Estate and Utilities(Estimated that 50% of all growth in electrical utility industry is related to cannabis production).

***ALL RISK HAVING BANK ACCOUNTS SHUT DOWN***

MAJOR ISSUES FACING INDUSTRY

• Unclear regulatory landscape

• Numerous Federal, State, and Local Laws

• Lack of Access to Traditional Banks and Financing• This includes for ancillary business and staff.

• Cannot Deduct Business Expenses From Taxes

• Extremely Expensive to Operate Because Of Unclear Legal Framework

CONGRESSIONAL REPRESENTATION115TH

CONGRESSIONAL REPRESENTATION115TH

MAJOR COMMITTEES OF JURISDICTION (115TH)

HOUSE

Ways and Means 25/40 (62%) of members are from

cannabis-legal statesJudiciary

28/43 (65%) of members are from cannabis-legal states

Energy and Commerce 37/55 (67%) of members are from

cannabis-legal statesVeterans’ Affairs

16/24 (66%) of members are from cannabis-legal states

SENATE

Finance 13/26 (50%) of members are

from cannabis-legal statesJudiciary 10/20 (50%) of members are

from cannabis-legal statesBanking, Housing, and

Urban Affairs 11/23 (48%) of members are

from cannabis-legal statesVeterans’ Affairs 9/16 (56%) of members are

from cannabis-legal statesAppropriations 21/31 (68%) of members are

from cannabis-legal states

CONGRESSIONAL CANNABIS CAUCUS

The Caucus is a bipartisan, pro-cannabis group of members of Congress.Members include: Reps. Blumenauer (D-OR), Perlmutter (D-CO), Polis (D-CO), Rohrabacher (R-CA), and Don Young (R-AK).The Senate has an unofficial bi-partisan staff level working group.

MAJOR CANNABIS BANKING LEGISLATION

SAFE BANKING ACT (2018)•S. 1200 (32)/ H.R. 1595 (207)

• Moved out of House Financial Services • Hearing in Senate Banking Committee two weeks ago.

•Would provide a safe harbor for financial institutions serving Cannabis businesses. •Protects ancillary businesses.•Protects Federal Reserve Banks•Prohibits Forfeitures•Not end Cannabis SARs•Requires The Financial Institutions Examination Council to develop uniform guidance and examination procedures for depository institutions banking cannabis•Protections are tied to state and local cannabis laws

QUESTIONS?

This panel will examine the issues unique to starting up a cannabis business. The issues are similar to those facing any other business, except this is a

new industry that is covered in layers of regulation that vary state- to-state and it is illegal federally. The panel will address lack of banking, inability to

deduct ordinary business expenses under IRC 280 and licensing. In addition, the panel will discuss the practical issues of siting a cannabis

business, zoning, building regulations, residency restrictions, competition in medical states and fundraising for the client.

Advising Your Client on How to Build a Cannabis Business

PANELISTS• Adam Fayne, Saul Ewing Arnstein & Lehr, Chicago, IL

• Brian Tannenbaum, Tannenbaum, Trost & Burk LLC, Denver, CO

• Scott Seder, Law Office of Scott P. Seder, Chicago, IL

• Gail Rand, Chief Financial Officer, ForwardGro, Stevensville, MD

• MODERATOR: Richard L. Vanderslice, Richard L. Vanderslice, P.C., Philadelphia, PA

1060 W Addison St, Chicago, IL 60613SITING A CANNABIS BUSINESS

Quick Hits

Quick Hits

• MJTodayDaily podcast

• Visual ping to monitor regulatory changes and meetings

• Trade Association initially to protect licenses and educate medical providers and patients

© 2019 Day Pitney LLP

Navigating the Rapidly Emerging Fields of Cannabis and Hemp Law

Presented by: Steven A. Cash, Esq.

Page 2 | September 19, 2019 | Navigating the Rapidly Emerging Fields of Cannabis and Hemp Law

The Plant: Cannabis sativa Usually referred to as “marijuana” “Hemp” is a “cultivar” of cannabis sativa

The contents: Cannabinoids -- includes THC (Tetrahydrocannabinol) – psychoactive CBD (Cannabidiol) – not as psychoative

Definitions


30 States have some form of legalized cannabis use 11 States + D.C. allow legal recreational sales 26 States have decriminalized personal use recreational

33 States + D.C. have some form of legalized medical marijuana

95+ percent of Americans live in a state with some form of legalized cannabis (including CBD)

63 percent of Americans approve of cannabis legalization

93 percent are in favor of legalization of cannabis for medical purposes

Shifting Attitudes on Cannabis (Sept. 2019)


From 2014 to 2015, legal cannabis sales in the U.S. climbed 17%, to $5.4 billion

2015 to 2016 saw growth of 25% to reach $6.7 billion 2016 to 2017 saw growth of 37% to $9.2 billion. By one estimate, the marijuana industry could grow

$22 billion by 2020, if no other states legalize in the interim Estimated that 50% of all growth in electrical utility

industry is related to cannabis production Multiple funds are investing hundreds of millions of

dollars in the industry

Big Business



Federal Legal Status Marijuana still a Schedule I drug along with

heroin, LSD and MDMA Bank Secrecy Act criminalizes doing business

with a “marijuana-related business” Federal Reserve recently refused to work with a

newly-chartered credit union that included the banking of marijuana businesses in its business plan


Schedule I Drug under the Controlled Substances Act (CSA)

Growers and distributors of cannabis face long prison sentences, six-figure fines, and seizure of all cannabis-related assets, as well as assets that have been commingled with cannabis-related assets

Must pay federal taxes but cannot deduct business expenses

Question of whether contracts made are enforceable

Federal Status, continued…


In 2018 Congress passed the “Farm Bill,” which legalized “Industrial Hemp” (meaning – Hemp) under some conditions THC content less than .3% Conforms with State regulations

CBD (among other things) can be made from Hemp, and thus, CBD now effectively legalized… But…… while DEA (which regulates illegal drugs) is

out of the picture… FDA stepping in (where CBD used medicinally)

Federal Status, continued… 2018 Farm Bill


Two major pieces of guidance came out during the Obama administration that allowed the industry to thrive: The Cole Memo and the 2014 FinCEN Guidance.

The “Cole Memo” told federal prosecutors not focus on persons and entities acting in accordance with state cannabis laws, but to focus on: Preventing distribution to minors Preventing sales by gangs, criminal enterprises, and cartels Preventing violence relating to the cultivation and distribution of cannabis, and Preventing possession or use on federal property.

The 2014 FinCEN Guidance Provided financial institutions with cannabis clients guidance on what

suspicious activity reports to file and generally provided some leeway in banking the industry.

***Neither have or had force or protection of law***

Shifting Federal Prosecutorial Priorities


January 4, 2018, Attorney General Sessions issued a memorandum rescinding the Cole memoranda.

Without providing specific guidance on whether or how the DoJ will approach prosecuting marijuana related activities, the memo instructs prosecutors to apply the departments established general principals

BUT…. In April 2019, Attorney General said DoJ will follow the Cole Memoranda…

Recent Department of Justice Stance


Cannabis (except for Industrial Hemp) is federally illegal….

In some states it is “State-legal” ---

Which means:

Possession, sale, growth, distribution of cannabis is illegal everywhere in the US - Despite State Law to the contrary

Is it ever “legal” – dual sovereignty doctrine


Consolidated Appropriations Act of 2017, Sec. 537:

None of the funds made available to the Department of Justice may be used…to prevent any of [the States with cannabis legalization laws] from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.--Rohrabacher-Farr Amendment in House/Mikulski Amendment in Senate

Limitations Only protects medical

marijuana Must be passed every year to

be effective against DOJ enforcement

President has threatened to ignore the provision based on his constitutional authority “to take care that the laws be faithfully executed.”

Thin Line Protecting Medical Cannabis –Nothing Protects Recreational

Presenter

Presentation Notes

At the moment, this is the industry’s ONLY protection.


1. Perform EDD to ensure appropriate licensing and registration. This would include requesting and verifying with the appropriate state authorities whether the business is appropriately licensed and registered.

2. Develop an understanding of the normal and expected activity for the business. The key is whether the business is serving medicinal or recreational customers and taking into consideration the products sold.

3. Implement ongoing monitoring of publically available sources for adverse information about the businesses and related parties.

Enhanced Obligations Under FinCENGuidance


Will a federal court enforce a contract involving the sale of state-legal marijuana? Loans?

Bankruptcy – how would a federal court handle disposition of a bankrupt’s assets, if the asset in question is marijuana?

Ethics – does it matter if people are knowingly violating a federal law in a state-legal jurisdiction?

Some implications of dual sovereignty…


Questions?


Thank You

Steven Cash represents individual and corporate clients in criminal, commercial litigation and national security matters. Steven has broad experience at the federal and state level in the executive, legislative and judicial branches. He was Chief Counsel and Staff Director (Minority) to the U.S. Senate's Judiciary Committee, Subcommittee on Terrorism, Technology, and Homeland Security, and Chief Counsel to Senator Dianne Feinstein. He has also served as Chief of Staff to the Director of Intelligence, Department of Energy; as Staff Director to the U.S. House of Representative's Select Committee on Homeland Security; and as a Professional Staff Member and Counsel to the Senate Select Committee on Intelligence. Steven was deeply involved in much of the legislation developed after the 9/11 attacks, including the USA-Patriot Act, the Department of Homeland Security Act and the Intelligence Reform and Terrorism Prevention Act, which created the position of Director of National Intelligence. Steven also served as an Intelligence Officer with the Central Intelligence Agency, first as an Assistant General Counsel and then, with the Directorate of Operations.

Before joining federal service, Steven served as an Assistant District Attorney in the Rackets Bureau and Trial Division of the New York County District Attorney's Office in Manhattan. There, he investigated and tried numerous cases, ranging from violent crime to industry corruption.

Steven was a law clerk to the Honorable Thomas P. Griesa in the Southern District of New York.

STEVEN A. CASH

COUNSEL

555 11th Street NW 605 Third AvenueSuite 400 New York, NY 10036Washington, DC 20005 T: (212) 297 5800 T: (202) 218 3912 F: (212) 916 2940F: (202) 354 4911

[email protected]

RELATED SERVICES

Anti-Corruption and SanctionsCompliance Officer ServicesCybersecurity and Data ProtectionNational Security LawGeneral Criminal DefenseGovernment Enforcement and White

Collar Defense Internal InvestigationsSecurities Enforcement DefenseRegulates Substance


Lisa L. Pittman, Esq.

Down on the Farm: The Farm Bills, Hemp, CBD, the

USDA & FDA

500 Capital of Texas Highway NorthBuilding 8, Suite 100Austin, Texas 78746(512) 637-4483 (phone)[email protected]


What is Hemp? Comes from plant species Cannabis Sativa L., which has 250+ compounds.

THC (if plant has >.3% THC, considered “Marijuana”)

CBD

CBG

CBN

CBDA

Naturally lower in THC, the only compound that causes a mental “high.”

Usually shorter & stockier than “Marijuana” plants.

Can be bred to be higher in certain CBDs and terpenes for specific therapeutic benefits.

CBDs work with body’s endo-cannabinoid system to address the cause of inflammation, tremors, tumors, etc., rather than band-aid for symptom.

No CBD receptor in brain stem, thus, never a cannabis overdose.

476% increase in hemp licenses from 2018

2019: – 511,442 acres licensed

2018: – 78,176 acres grown

2017: – 25,713 acres grown

2016: – 9,770 acres grown

2019 Estimate that only 230,000 acres of hemp will actually be planted, and 50-60% of that will NOT be harvested due crop failure, non-compliant crops and other factors resulting in 115,000-138,000 acres of harvested hemp.

Processing Licenses up 483%

In 2019, states reported 2,880 processing licenses

Not all states require licensing of processors - currently

U.S. CBD Market to Triple by 2022

The hemp-derived CBD market is estimated to grow from a $390 million-dollar U.S. market in 2018, to a $1.3 billion market (or 3.3x) by 2022, representing a 27.2% 5-year Compound Annual Growth Rate.

By 2022, mass-market CBD alone estimated to grow to $430 million in sales.

Traditionally an importer of hemp, the U.S. hemp market is expected to lead the global hemp industry by 2020, representing 32% of a 5.7 billion global market in 2020.

2014 Farm Bill Limited Research Pilot Programs

Industrial Hemp Programs

Most State Programs dormant

Hemp & Hemp Products to remain inside the states

Continues to Govern Until USDA Makes Rules Under 2018 Farm Bill

Leading State Producers in 2018:

Montana

Colorado

Kentucky

Oregon

Research Programs Colorado SB 184 (2014): state universities research and develop hemp

strains best suited for industrial applications and develop new seed strains.

Colorado SB 109 (2017): created a group to study the feasibility of hemp products' use in animal feed.

Kentucky: studies environmental benefit or impact of hemp, the potential use of hemp as an energy source or biofuel, and studies soil management and crop production worldwide.

North Carolina: studies the best practices for soil conservation and restoration in collaboration with two state universities.

Hemp is known for environmental sustainability – soil phyto-remediation, reduction of atmospheric carbons, substitute for paper, cotton, steel, fuel, building materials: hempcrete, wood.

2018 Farm Bill Hemp Farming Act initiated by Mitch McConnell of Kentucky. Removes “hemp” from the definition of “marihuana” under

the CSA – but must contain no more than .3% THC on a dry-weight basis.

Requires USDA to expeditiously develop national hemp regulations Public Hearing was on March 13, 2019. Rules expected Fall 2019

Allows states to submit hemp regulation plans to USDA on: THC testing procedures Annual inspection procedures Bookkeeping procedures Plans for disposal of “hot” crops (>.3% THC)

2018 Farm Bill Continued USDA may approve or reject state hemp regulations within 60

days.

Provides for federally backed crop insurance.

Allows USDA one year to study and “determine the economic viability of the domestic production and sale of industrial hemp” and submit findings to Congress.

Bans hemp cultivation by those with drug felonies in past 10 years.

Prevents farmers who produce hot crops 3 times in 5 years from growing hemp for 5 years.

Many states have activated or initiated hemp programs post 2018 Farm Bill, but still have criminal background attached to obtaining a license.

2018 Farm Bill Continued Allows hemp and hemp products to cross state lines and be

imported/exported like any other crop – Specifically, DEA no longer has authority over hemp and states are not supposed to prevent interstate commerce, but currently, local police are.

Because of continued state interference, Mitch McConnell says he’ll push further legislation if necessary.

USDA likely to come up with verifiable transport manifest system for hemp.

U.S. Postal Service issued advisory that hemp can now be placed in U.S. Mail and its workers should be aware of this.

FDA retains authority over CBD Products.

The FDA and CBD What is CBD? 250+ therapeutic compounds in cannabis plant.

Statement on December 20, 2018:

CBD considered a drug and cannot be marketed as a dietary supplement, or infused into food products that are placed in interstate commerce.

CBD considered a drug because of Epidiolex, now Schedule 5.

Labeling and marketing issues regarding “claims.”

FDA Commissioner recommended regulations to allow for hemp based CBD products in February 2019.

Legislative Action May Be Necessary. Regulations could take years.

Workgroup Formed in April.

Public Hearing May 31, 2019, comments until July 16, 2019.

FDA Commissioner resigned, but still talking about it.

Hemp CBD Seizures States have their own Controlled Substances Acts.

Numerous states have amended their CSAs to remove hemp from definition of “Marijuana” to follow suit with Farm Bill.

Rapidly evolving law - local law enforcement and public confusion – guilty until proven innocent.

Caution in current retail and distribution – seizures still occurring: Texas, Louisiana, Florida – stores and consumers

Oklahoma, Idaho - shipments

California banned hemp infused edibles despite popularity.

Hemp production or marijuana legalization ≠ reception to CBD products: Kentucky

500 Capital of Texas Highway NorthBuilding 8, Suite 100Austin, Texas 78746(512) 637-4483 (phone)[email protected]

Lisa L. Pittman, Esq.


INSURANCE COVERAGE FOR CANNABIS OPERATIONS:

HOW TO GET IT & HOW TO KEEP IT

Daniel F. Gourash

Daniel F. Gourash

(216) 566-8200

[email protected]

www.sseg-law.com

Daniel F. Gourash is a partner in the law firm Seeley,Savidge, Ebert & Gourash Co., LPA located in Westlake,Ohio. He is Director of the SSEG Regulated ProductsDivision and the Insurance Coverage Division.

Coverage IssuesInsurable Interest/void as against public policy

• Is there an insurable interest in marijuana plants? Is a policy enforceable when it would provide coverage for illegal activity under the Controlled Substances Act?

• Both issues were addressed in Tracy v. USAA Casualty Insurance Company,2012 WL 928186, U.S.D.C. Hawaii• Insurable interest means any lawful and substantial economic interest

in the safety or preservation of the subject of the insurance free from loss, destruction, or pecuniary damage.• Tracy submitted a claim for theft of 12 marijuana plants grown at

home pursuant to Hawaii medical marijuana law• Homeowner’s policy provided coverage for theft of “trees, shrubs,

and other plants on the premise”• Court held there was an insurable interest BUT• Citing Gonzales v. Raich, 545 U.S. 1 (2005), the Court found that the

possession and cultivation of marijuana for medical use to be illegal under federal law, even when permitted under state law.

• Held that because the cultivation of marijuana, even for state-authorized medical use, violates federal law and the enforcement of an insurance policy under this circumstance is contrary to public policy.

Coverage Issues

Public Policy 2.0

• The USDC Colorado in Green Earth Wellness Ctr., LLC v. Atain Specialty Ins. Co., 163 F. Supp 821 (2016) declined to follow Tracy.

• Relied upon statements made in the Cole Memorandum that “reflected an ambivalence towards enforcement of the Controlled Substances Act in circumstances where a person or entity’s possession and distribution of marijuana was consistent with well-regulated state law.”

• The Court held that it would not render the policy unenforceable given the “continued erosion of any clear and consistent federal public policy in this area.”

• Whether federal policy will change under Attorney General Barr is unknown, but his statements seem to mean DOJ will remain hands-off in states where cannabis is legal

• Representative David Joyce sponsoring amendment to budget bill continuiing the former Rohrbacher-Blumenauer Amendment providing no funding for DOJ enforcement in this area

Coverage Issues

•Business Personal Property includes “Stock”

• Green Earth sought to recover for two types of marijuana:

• Mother plants and clones

• Harvested buds and flowers

• Stock defined as “merchandise held in storage or for sale, raw materials and in process or finished goods.”

• Harvested buds and flowers indisputably “stock” as the saleable marijuana was “merchandise” held in storage for sale.

• Court held issue of fact whether growing mother plants and clones were “raw materials,” but this did not end the inquiry.

Coverage issues

“Growing Crops” Exclusion

• Green Earth policy excluded “Land (including land on which the property is located), water, growing crops or lawns.”

• Green earth argued that “crops” by definition must grow in outdoor soil (i.e., “Land”), and that plants raised indoors in containers –such as mother plants and clones– do not fit that definition.

• Court relied on Oxford English Dictionary definition of “crops”–“the produce of the land, either while growing or when gathered”– to find that plants rise out of soil (i.e. “the land”) and that it did not matter whether the soil was outdoors or indoors.

• Court also relied on cases in which the term “crops” referred to plants growing in controlled indoor environments to hold that the “growing crops” exclusion barred coverage for damage to the mother plants and clones.

Coverage Issues

Contraband Exclusion

• The Court in Green Earth held that the contraband exclusion was rendered ambiguous by the difference between the federal government’s de jure and de facto public policies regarding state-regulated medical marijuana.

• The uncertainty in federal policy continues to be cited in cases following Green Earth

• Extrinsic evidence showed that the insurer knew Green Earth was operating a marijuana business and issued a policy that extended coverage for its inventory of saleable marijuana.

• The Court further found that the parties mutually intended the policy would cover Green Earth’s marijuana inventory and that the Contraband exclusion would not apply

Green Earth Has Been Followed

• Several Courts have adopted the reasoning of Green Earth in a variety of disputes• Mann v. Gullickson, 2016 U.S. Dist. Lexis 152125 (N.D. Calif. 2016)

• rejected defense of “illegality” and enforced purchase agreement for MJ consulting business

• “Given the federal government’s wavering policy on medical marijuana in states that regulate the substance, and California’s expressed policy interest in allowing patients to obtain medical marijuana, the purported illegality here is not one the court finds to mandate non-enforcement of the parties’ contract.”

See Also

• Greenwood v. Green Leaf Lab, LLC., 2017 U.S. Dist. Lexis 125143 (USDC Ore.)• Rejected defense of illegality by defendant claiming not subject to FLSA because MJ

business illegal under federal law.

• Tan v. Det-Co., Inc., 2018 U.S. Dist. Lexis 25294 (USDC Colo.)• Denied MTD based on defense of illegality of purchase agreement for MJ business

• Green Cross Med., Inc. v. Gally, 242 Ariz. 293 (Ct. App. 2017)• Rejected defense of illegality and enforced lease for MJ dispensary

The Commentators Agree with Green Earth

• Federal Marijuana Policy: Homage to Federalism in Form; Potemkin Federalism in Substance, 63 Wayne L. Rev. 215 (2018), Mathew Melone, Professor of Law, Lehigh University

• Budding Torts: Forecasting Emerging Tort Liability in the Cannabis Industry, 30 Loy. Consumer L. Rev. 338 (2018), John Campbell, Professor of Law, University of Denver Storm School College of Law

• E/insuring the Marijuana Industry, 49 The U. of Pac. L. Rev. 43 (2017), Francis J. Mootz, Professor of Law, University of The Pacific, McGregor School of Law

Nuisance/RICO Claims

• Safe Streets Alliance v. Hickenlooper, 859 F. 3d 865 (10th Cir. 2017)

• Indoor cultivation facility in Colorado

• Adjoining Landowners sued alleging nuisance from noxious odors stemming from federally criminal activity

• Held Landowners stated a viable cause of action under FRCP 12 (b)(6)

• Question: Will there be Personal Injury coverage for such claims?

Wes Gilbreath

Wes Gilbreath

(240)305-9444

[email protected]

Chief Financial Officer and Head of Corporate Development

Continental Heritage Insurance Co. Beachwood, Ohio240.305.9444


What coverages are needed?

• Products Liability• Product Recall• Professional Liability**• D&O**• Commercial Auto• Hired/Non-Owned Auto and

Goods-in-Transit**• Stock Throughput• Event Insurance**

• Commercial Property• General Liability• Crop• Cyber Liability**• Employment Practices**• Worker’s Compensation• Surety Bonds• Builder’s Risk Coverage

**Remains difficult to acquire

• Low limits

• $1/$2m occurrence/aggregate are commonplace for GL and PL

• High premiums

• Product liability premiums are generally 80% higher than for “analogue” products

• Minimum earned premiums of 25% to 50%

• Carriers are looking to offset initial costs of underwriting since licensees can and do quickly flip and companies can liquidate or be shut down

• Defense costs inside of limits

• Majority of policies include defense cost and containment within limits of the policy

• Numerous restrictive endorsements (examples on next two pages)

Overview of common policy features

Common policy exclusions

• Territorial limitations– Coverage doesn’t extend beyond the state of insured’s operations

• Noncompliance with laws— No claims arising out of non-compliance with any laws, regulations, ordinances, rules, etc.

• Track & trace warranty— Claims excluded unless, as a condition precedent, track and trace system is functioning to the required level of specificity and all intermediaries in value chain are properly licensed

• Government acts & criminal activities— Excludes claims resulting from investigations, fines, or prosecutions brought by the federal government…

• RICO— Claims brought under RICO or state laws that allow for property claims based on interference with the enjoyment of property

Common policy exclusions (cont’d)

• Mold, Fungi and Bacteria—Excludes claims resulting from viruses, fungi, mold, mildew or bacteria

• Pesticides- Any claim based on exposure to pesticides

• Carcinogens— Any claim based on exposure to carcinogens

• Illness or Communicable Disease- Excludes claims involving cancer, cardiovascular diseases, prenatal injuries, depression, addiction or dependence

• Banned Substance— Excludes any product that contains an ingredient banned by the FDA or a sports authority (e.g. NFL) (with the exception of cannabis)

Underwriting “hot topics”

• Unsubstantiated medical or health claims

• Class actions via state consumer protection laws

• Medical vs. adult-use: what’s the bigger risk?

• Medical customers covered under HIPAA?

• Inadequate, inaccurate packaging and labeling

• Products that appeal to children

• Severe respiratory illness / vitamin E acetate

• Product contamination (solvents, pesticides, mold)

• Intoxicated driving (esp. when combined with alcohol)

• Correlation of heavy cannabis use and schizophrenia

• Vaping apparatuses and batteries

Underwriting “hot topics” (cont’d)

Chantal M. Roberts, CPCU, AIC, RPA

Chantal M. Roberts, CPCU, AIC, RPA

(913)335-0612

[email protected]

www.cmrconsulting.net

Expert Witness on Insurance Claim Handling

CMR ConsultingOlathe, KS913-335-0612


Bad Faith is still possible

National Association of Insurance Commissioners (NAIC) sets model rules for insurers• Idea of ‘Unfair Claims Settlement Practices’

• Misrepresenting pertinent facts or insurance policy provisions relating to coverages;

• Failing to provide an explanation of the basis in the insurance policy and in relation to the facts for denial of a claim or for the offer of a compromise settlement.

• “On first-party claims if a settlement of a claim is less than the amount claimed, or if the claim is denied, the insurer must provide to the insured a reasonable written explanation of the basis of the lower offer or denial within 30 days after the investigation and determination of liability is completed. See Ill. Admin. Code tit. 50, § 919.50(a)(1)

• What has the insurer represented as being covered?

Questions?Daniel F. Gourash

(216) 566-8200

[email protected]

www.sseg-law.com

Chantal M. Roberts

(913)335-0612

[email protected]

www.cmrconsulting.net

Wes Gilbreath

(240)305-9444

[email protected]




THE VIEW FROM INSIDE: EXECUTIVE ROUNDTABLE

From Regs to Riches: Navigating the Rapidly Emerging Field of Cannabis & Hemp LawLEGAL COUNSEL I STEM HOLDINGS INC.

Moderator: Jessica Feingold – Stem Holdings, Inc., Senior Legal Counsel

Panelists:Cassandra Farrington – Marijuana Business Daily, Chief Executive Officer & Co-FounderJohn Lord - LivWell Enlightened Health, Chief Executive OfficerDean Heizer – LivWell Enlightened Health, Executive Director and Chief Legal StrategistJeremy Unruh – PharmaCann, Director of Regulatory & External AffairsJohn Sullivan – Cresco Labs, Senior Vice President of Government AffairsTravis Moyer - GrassRoots Cannabis, Legal Counsel & Director of Special Projects

QUESTIONS?

THANK YOU!

Outline of Panel Discussion

I. Amendment 20, 2000: Medical Marijuana Legalized.

II. Cole Memo, 2009:

a. Issued by Justice Department and stated that the Federal Government would not enforce federal marijuana prohibition in states that "legalized marijuana in some form and ... implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale, and possession of marijuana," except where a lack of federal enforcement would undermine federal priorities (such as preventing violence in marijuana cultivation and distribution, preventing cannabis impaired driving, and preventing marijuana revenues from going to gangs and cartels).

b. Thereafter, cultivations and stores began to pop up.

III. Establishment of Marijuana Enforcement Division and Promulgation of Regulations. 2010-2012

a. Goals:

i. Regulation of Controlled Substance ii. Prevention of Organized Crime

b. Principal Regulations

i. Ownership and Investment limited to Colorado Residents

ii. Vertical Integration and Tracking

IV. Amendment 64 (2012): Retail Marijuana Legalized

V. Regulatory Evolution and Maturation (2013-2018)

a. Expansion of Jurisdiction and number of business activities requiring licensure: i. Cultivation

ii. Sale iii. Processing iv. Testing v. Transport and Distribution

vi. Storage vii. Research and Development

viii. Third Party Business Operation and Receivership

b. Expansion of Investment Types i. Indirect Beneficial Interests

1. Creditors 2. Royalty Holders/Intellectual Property Licensure

ii. Permitted Economic Interests 1. Options and Warrants 2. Other future interests

iii. Out of State Resident Background Checks

VI. Opening of Barriers to Entry (2018-2019)

a. HB-1090 i. Removes Previous limitations on:

1. Out of State Residency 2. Number of Owners

ii. Allows Investment by Publicly Traded Companies

b. Loosening of Vertical Integration

Suggested Reading Materials:

Amendment 20, Colorado Constitution. Article XVIII, Section 14:

https://www.colorado.gov/pacific/sites/default/files/Section%2014%20-%20Medical.pdf Cole Memorandum:

https://www.justice.gov/iso/opa/resources/3052013829132756857467.pdf

Amendment 64:

https://www.colorado.gov/pacific/sites/default/files/Section%2016%20- %20%20Retail.pdf

Colorado Marijuana Code:

Medical Rules

https://www.colorado.gov/pacific/sites/default/files/1%20CCR%20212-1%20Correct%20Med%20Rules%20Effective%2001012019.pdf

Retail Rules

https://www.colorado.gov/pacific/sites/default/files/1%20CCR%20212-2%2001012019.pdf

Colorado HB 1090:

https://leg.colorado.gov/sites/default/files/2019a_1090_signed.pdf

https://www.colorado.gov/pacific/sites/default/files/Section%2014%20-%20Medical.pdf

https://www.justice.gov/iso/opa/resources/3052013829132756857467.pdf

https://www.colorado.gov/pacific/sites/default/files/Section%2016%20-%09%20%20Retail.pdf

https://www.colorado.gov/pacific/sites/default/files/Section%2016%20-%09%20%20Retail.pdf





https://leg.colorado.gov/sites/default/files/2019a_1090_signed.pdf

July 2019

Cannabis Law

In Recreational Cannabis Law, Illinois Charts Plan to Issue Range of New Licenses By William Bogot, Donna B. More and Andrew M. Halbert

With the General Assembly’s passage of the Cannabis Regulation and Tax Act, Illinois is now poised to become one of the country’s most active markets for new cannabis businesses as state regulators prepare to issue licenses to scores of new dispensaries, cultivation centers and others to prepare for consumer sales beginning in January 1, 2020.

The 610-page act establishes a framework for licensing recreational cannabis dispensaries and new cultivation and processing facilities, as well as licensing for craft growers, infuser organizations and transportation organizations. It took effect on June 25, 2019.

In the pages that follow, we summarize some of the most important provisions in the bill, with an emphasis on the details that matter most to businesses. We also note key provisions on advertising, enforcement and the cannabis purchaser excise tax.

For ease of use, our summary tracks the numbering system used in the bill.

Article 5. Authority Article 7. Social Equity Program Article 10. Personal Use of Cannabis Article 15. License And Regulation of Dispensing Organizations Article 20. Adult Use Cultivation Centers Article 30. Craft Growers Article 35. Infuser Organization Article 40. Transporting Organizations. Article 45. Enforcement and Immunities Article 55. General Provisions Article 65. Cannabis Purchaser Excise Tax Article 900. Amendatory Provisions Article 999. Miscellaneous Provisions

WILLIAM BOGOT Co-Chair, Cannabis Law Tel: 312.517.9205 [email protected]

DONNA B. MORE Partner Tel: 312.517.9215 [email protected]

ARTICLE 5. AUTHORITY (pages 19-28) The Illinois Department of Agriculture (DOA) has oversight of cultivation centers, craft growers, infuser organizations and transporting organizations and it will establish limits on potency and serving size. The Department of Financial & Profession Regulation (IDFPR) will have oversight of dispensing organizations and agents. Section 5-20. Background Checks (pages 21-22)

* Cannabis business establishments (cultivation centers, craft growers, processing organizations, dispensing organizations or transporting organizations) must have principal officers, board members and agents submit fingerprints to State Police and get the results prior to submitting the application. Infuser organizations are subject to the same background checks per Section 35-35. ARTICLE 7. SOCIAL EQUITY PROGRAM (pages 28-38)

* Cannabis Development Fund – used to provide low-interest-rate loans to Social Equity Applicants and job training. Funded by payments required to be made in connection with those applying for Early Approval licenses, as well as payments required to be made in connection with transfers of licenses from Social Equity Applicants to non-Social Equity Applicants. $12,000,000 is to be transferred to this Fund from the Compassionate Medical Cannabis Fund as soon as practicable after July 1, 2019.

* “Social Equity Applicant” means an Illinois resident that meets at least one of the following criteria: (i) at least 51% ownership and control by individuals that have lived in a Disproportionately Impacted Area1 for at least 5 of the last 10 years; (ii) at least 51% ownership and control by one or more individuals who have been arrested for, convicted of, or adjudicated delinquent for any offenses eligible for expungement2 under the Act or that are members of an

1 Disproportionately Impacted Area is defined as one that (1) meets at least one of the following criteria: (a) the area has a poverty rate of at least 20% according to the latest federal decennial census; or (b) 75% or more of the children in the area participate in the federal free lunch program according to reported statistics from the State Board of Education; or (c) at least 20% of the households in the area receive assistance under the Supplemental Nutrition Assistance Program; or (d) the area has an average unemployment rate, as determined by the Illinois Department of Employment Security, that is more than 120% of the national unemployment average, as determined by the U.S. Department of Labor, for a period of at least 2 consecutive calendar years preceding the date of the application; and (2) has high rates of arrest, conviction, and incarceration related to the sale, possession, use, cultivation, manufacture, or transport of cannabis. The Department of Commerce and Economic Development and Illinois Criminal Justice Authority must specify these areas within 60 days of the effective date of the Act.

2 Offenses eligible for expungement under the Cannabis Regulation and Tax Act include possession of cannabis up to 500g or the manufacturing and delivery of up to 30g of cannabis.

impacted family3; or (iii) for applicants with at least 10 full-time employees, at least 51% of the current employees currently reside in a Disproportionately Impacted Area or have been arrested for, convicted of, or adjudicated delinquent for any offenses eligible for expungement under the Act.

* Illinois Department of Commerce will establish grant and loan programs.

* IDFPR and DOA shall waive 50% of nonrefundable license fees, any nonrefundable fees associated with purchasing a license, and any surety bond or other financial requirements for Social Equity Applicants that also meet the following criteria: (i) applicant, including all individuals and entities with 10% or greater ownership and all parent companies, subsidiaries and affiliates, has less than a total of $750,000 of income in the previous calendar year; and (ii) applicant, including all individuals and entities with 10% or greater ownership and all parent companies, subsidiaries and affiliates, has no more than 2 other licenses for cannabis business establishments in the State of Illinois. If, within 5 years, the Social Equity Licensee sells or transfers its license, the new licensee must pay back any waived fees and outstanding loans, as well as the full amount of any grants – unless the new licensee also qualifies under the Social Equity Program. ARTICLE 10. PERSONAL USE OF CANNABIS (pages 38-63) Section 10-10. Possession Limits (pages 41-42)

* Possession limits for residents are: 30 grams of cannabis flower, no more than 500 mg of THC contained in cannabis-infused product; 5 grams of cannabis concentrate; plus any amounts produced by cannabis plants properly cultivated at home under the Act.

* Possession limits for non-residents are: 15 grams of cannabis flower; no more than 250 mg of THC contained in cannabis-infused product; 2.5 grams of cannabis concentrate. ARTICLE 15. LICENSE AND REGULATION OF DISPENSING ORGANIZATIONS (pages 63-161) Section 15-15. Early Approval Adult Use Dispensing Organization Licenses (pages 64-72)

* Any licensed medical marijuana dispensary can, within 60 days of the effective date of the Act, apply for an Early Approval Adult Use Dispensing Org License to serve recreational purchasers at its existing medical dispensing location. The applicant must be the same as already licensed – so no new people or entities. Payment of a nonrefundable fee of $30,000. A nonrefundable development fee equal to 3% of the dispensing organization’s total sales between June 1, 2018 and June 1, 2019 or $100,000 whichever is less.

3 “Member of impacted family” means an individual who has a parent, legal guardian, child, spouse, or dependent, or was a dependent of an individual who, prior to the effective date of the Act, was arrested for, convicted of, or adjudicated delinquent for any offense that is eligible for expungement under this Act.

* The early approval applicant in its application must identify and follow one of the following (each, a “Social Equity Inclusion Plan”), to be completed by March 31, 2021:

make a contribution of 3% of total sales from June 1, 2018 to June 1, 2019 or $100,000 whichever is less to the cannabis development fund (in addition to the 3% required above);

make a grant of 3% based on the June 2018 to June 2019 sales or $100,000 whichever is less to a cannabis training or educational program at an Illinois community college;

make a contribution of $100,000 to a job training program in a disproportionately impacted area;

participate in a cannabis incubator program and provide a loan of at least $100,000 and mentorship to a Social Equity Applicant, provided that the sponsor cannot take an ownership stake of greater than 10% in any entity receiving incubator services;

participate in a sponsorship program for at least 2 years and provide an interest free loan of at least $200,000 to a Social Equity Applicant, provided that the sponsor cannot take any ownership stake in any cannabis business receiving the sponsorship.

* If the early approval applicant meets all the requirements, IDFPR shall issue the license

within 14 days of receiving a completed application UNLESS: (i) the licensee or a principal officer is deficient in filing tax returns with Illinois; (ii) the Secretary of IDFPR determines, based on documented compliance violations, that the licensee should not be entitled to an Early Approval License; or (iii) any principal officer fails to register and remain in compliance with the Act or the medical cannabis pilot program.

* The early approval license is valid until March 31, 2021. The license will be renewed

within 60 days of submitting the complete renewal application, provided that all existing licenses are in good standing, and the licensee submits a renewal application, pays a nonrefundable $30,000 fee to the Cannabis Regulation Fund, and has completed the Social Equity Inclusion Plan it identified in connection with its application. The renewal of the license is valid until March 31, 2022, at which point the licensee can apply for an Adult Use Dispensing Organization License, which will be granted if all criteria of Section 15-36 are met.

* Early approval dispensaries must maintain an adequate supply of products for medical

cannabis patients and caregivers (comparable in type and quantity to that maintained for 6 months prior to the effective date of the Act), and are required to prioritize their medical cannabis patients and caregivers in the event of a shortage.

Section 15-20. Early Approval Adult Use Dispensing Organization License; Secondary Site (pages 72-83)

* Within 60 days of the effective date of the Act, any existing medical dispensary can apply

to operate a second dispensary within any BLS Region4 that shares territory with the dispensing organization district to which the medical dispensing organization is assigned. A Secondary Site cannot be within 1500 feet of another medical cannabis dispensing organization or adult use dispensing organization.

* If the licensee can’t find a site in its approved area within 360 days of the effective date of

the Act, because no jurisdiction within that area permits the operation of an adult use dispensary, IDFPR can waive the geographic restrictions and specify another BLS Region in which the licensee can locate its secondary site.

* Must pay a $30,000 application fee for the second site, plus a $200,000 fee to the

development fund and a commitment to one of the Social Equity Inclusion Plans.

Section 15-25. New Dispensary Licenses Issued Prior to Jan. 2021 (pages 83-92)

* IDFPR shall issue up to 75 conditional dispensing licenses before May 1, 2020.

* Applications will be available no later than Oct. 1, 2019 and applications due by January 1, 2020.

* Licenses awarded by BLS Region (See the June 25, 2019 post on the In the Weeds blog

for dispersion of licenses).

* $5,000 application fee per license, to be deposited into the Cannabis Regulation Fund.

* Scoring of applications up to 250 points, based on criteria described in Section 15-30. Can receive up to 2 bonus points for a plan to engage with the community. Social Equity Applicant status is worth 50/250 points.

* An applicant who receives a conditional adult use dispensing license has 180 days from

the date of award to identify a physical location for the dispensary storefront. If can’t secure a location within 180 days, IDFPR may extend by an additional 180 days if the licensee demonstrates concrete attempts to secure a location and a hardship. If extension denied or location not secured within 360 days, license goes to next highest-scoring applicant in same region. If can’t secure a location because no jurisdictions within applicable BLS area permit an adult use dispensary, IDFPR can authorize the license-holder to transfer its license to another region.

4 BLS Region means a region in Illinois used by the U.S. Bureau of Labor Statistics to gather and categorize certain employment and wage data. The 17 such regions in Illinois are: Bloomington, Cape Girardeau, Carbondale-Marion, Champaign-Urbana, Chicago-Naperville-Elgin, Danville, Davenport-Moline-Rock Island, Decatur, Kankakee, Peoria, Rockford, St. Louis, Springfield, Northwest Illinois nonmetropolitan area, West Central Illinois nonmetropolitan area, East Central Illinois nonmetropolitan area and South Illinois nonmetropolitian area.

https://cannabislaw.foxrothschild.com/2019/06/illinois-adult-use-recreational-marijuana-dispensaries-coming-january-1-2020/

Section 15-30. Selection Criteria for Conditional Licenses Awarded Under Section 15-25 (pages 92-99)

* IDFPR will rank applicants using the following scale:

Suitability of Employee Training Plan (15 points) Security and Record Keeping (65 points) Business Plan, Financials, Operating Plan, and Floor Plan (65 points)5 Knowledge and Experience in Cannabis or Related Fields (30 points) Status as a Social Equity Applicant (50 points) Labor and Employment Practices (5 points) Environmental Plan (5 points) Illinois Owner (5 points) Status as a Veteran (5 points) Diversity Plan (5 points) Total: 250 points

* Can also receive bonus points for including a plan to engage with the community, but bonus

points serve only to break a tie between two equally-scoring applicants. * Should the applicant be awarded a license, the information and plans provided in the

application shall become a condition of licensure. * Licensees have one year to be operational, otherwise the license will be awarded to the

next highest scoring applicant if they are still interested.

Section 15-35. Conditional Adult Use Dispensing Organization License after January 1, 2021 (pages 99-101)

* IDFPR shall issue up to 110 additional licenses, under same process described for licenses

issued prior to January 1, 2021, provided that IDFPR can issue rules modifying the process if they deem it necessary for the public interest, safety and welfare.

Section 15-36. Adult Use Dispensing Organization License (pages 102-104)

* Entities receiving conditional permits cannot purchase, possess, sell or dispense cannabis or cannabis-infused products until they receive an Adult Use Dispensing Organization License. Will not receive that license until (i) IDFPR has inspected the proposed dispensary site; and (ii) registration fee of $60,000, or a prorated amount accounting for difference of time between when final license is issued and March 31 of the next even-numbered year, has been paid.

5 These plans include policies and procedures required by Section 15-65 regarding administration of the dispensary.

* No single person or entity can have a direct or indirect financial interest in more than 10 Early Approval Adult Use Dispensing Organization Licenses, Conditional Adult Use Dispensing Organization Licenses, or Adult Use Dispensing Organization Licenses. Section 15-45. Renewals (pages 109-110)

* All Adult Use Dispensing Organization Licenses expire on March 31 of even-numbered years, and the renewal fee is $60,000. Licensee may not renew if it is delinquent on any taxes owed to Illinois.

Section 15-55. Financial Responsibility (pages 113-115)

* Applicant or Licensee must demonstrate financial responsibility for issuance, maintenance

or reactivation of a license. This requirement can be fulfilled by one of the following: (i) escrow/surety account in a financial institution in the amount of $50,000, with escrow terms approved by IDFPR providing that it shall be payable to IDFPR upon circumstances outlined in the Act; or (ii) surety bond in the amount of $50,000, naming the dispensing organization as principal of the bond, with terms approved by IDFPR stating that bond defaults to IDFPR upon circumstances outlined in the Act.

Section 15.60. Changes to a dispensing organization (pages 115-118)

* Can only add principal officer with prior approval of IDFPR.

* Written notice of removal of an officer within 5 days of the removal. * Cannot assign a license. * Cannot transfer a license without prior approval and without the same commitments from

the new owner. * Must apply to sell the dispensing organization, application materials will include, among

other things, a $5,000 change of ownership fee to be deposited in the Cannabis Regulatory Fund. * Before remodeling, expansion, reduction or other physical, non-cosmetic alteration of a

dispensary, must notify IDFPR and confirm that alterations will be in compliance with the Act.

Medical cannabis dispensing organization exemption can be found in Section 15-10 (page 64) Dispensing organization agent identification card/training can be found in Section 15-40 (pages 104-109) Disclosure of Ownership and Control requirements can be found in Section 15-50 (pages 110-113) Administration requirements for dispensaries can be found in Section 15-65 (pages 118-124)

Operational requirements for dispensaries can be found in Section 15-70 (pages 124-129)

Inventory Control System requirement can be found in Section 15-75 (pages 129-133) Storage requirements can be found in Section 15-80 (page 133-134) Dispensing cannabis procedures can be found in Section 15-85 (pages 134-136) Disposal and destruction of cannabis procedures can be found in Section 15-90 (pages 136-137) Change of agent in charge procedures can be found in Section 15-95 (pages 137-141) Security requirements for dispensaries can be found in Section 15-100 (pages 141-149) Record-keeping requirements can be found in Section 15-110 (pages 149-150) Closure of a dispensary procedures can be found in Section 15-120 (pages 150-151) Ability to have fee modification by rule – Section 15-135 (pages 151-152) Investigation procedures by the State can be found in Section 15-135 (pages 151-152) Grounds for discipline can be found in Section 15-145 (pages 153-157) Temporary suspension procedures can be found in Section 15-150 (pages 157-158) Consent order information can be found in Section 15-155 (page 158) Notice of violation/hearing/rehearing information and procedures can be found in Sections 15-160, 15-165, 15-170 and 15-175 (pages 158-161)

ARTICLE 20. ADULT USE CULTIVATION CENTERS (pages 161-192)

Section 20-5. Issuance of Licenses after July 1, 2021 (pages 162-163)

* On or after July 1, 2021, DOA can change the number of available cultivation center

licenses, but at no time shall the number exceed 30. In determining whether to grant additional licenses DOA must consider:

the percent of cannabis sales not in the regulated market; whether adequate supply to serve medical patients; whether adequate supply to serve adult purchasers; is there an oversupply; population increases/shifts; changes to federal law;

security risks; security records of cultivation centers; the capacity of the DOA to appropriately regulate additional licensees; findings of the study on barriers to entry to be prepared by the Illinois Cannabis

Regulation Oversight Officer; and any other information that the DOA deems relevant.

Section 20-10. Early Approval of Adult Use Cultivation Center Licenses (pages 164-171)

* Any current licensee in good standing can, within 60 days of the effective date of the Act

but no later than 180 days, apply for an Early Approval Adult Use Cultivation Center License to produce cannabis and cannabis infused products at its existing facilities. The form of application will be provided by the DOA and will include, among other things: (i) payment of a nonrefundable application fee of $100,000 to be deposited into the Cannabis Regulation Fund; (ii) a nonrefundable fee equal to 5% of the center’s total sales between June 2018 and June 2019 or $750,000, whichever is less (subject to a minimum of $250,000) to be deposited into the Cannabis Business Development Fund; and (iii) a commitment to complete one of the following Social Equity Inclusion Plans before the expiration of the Early Approval Adult Use Cultivation Center License:

contribution of 5% of the center’s total sales between June 2018 and June 2019 or $100,000, whichever is less, to the Cannabis Business Development Fund, a cannabis industry training or education program at an Illinois community college, or a program that provides job training services to recently incarcerated persons or that operates in a Disproportionately Impacted Area; or

participate in a cannabis incubator program and provide a loan of at least $100,000 and mentorship to a Social Equity Applicant; provided that the sponsor cannot take an ownership stake of greater than 10% in any entity receiving incubator services.

* DOA will issue Early Approval cultivation license within 14 days of receiving a completed

application, unless the licensee, principal officer, board member or person having a financial interest of 5% or greater in the licensee is (ii) delinquent in filing any required tax returns or paying any amounts owed to the State of Illinois; or (iii) the Director of Agriculture determines, based on an inordinate number of documented violations, that the licensee is not entitled to an Early Approval cultivation license; or (iv) the licensee fails to commit to a Social Equity Inclusion Plan.

* Early use license valid until March 31, 2021. DOA will grant renewal within 60 days of

the submission of a renewal application including a $100,000 fee, provided that the DOA has not suspended or revoked the current license and the cultivation center has completed its Social Equity Inclusion Plan. Renewal will be for 1 year.

* An early use licensee can begin producing product once the license is approved and it may

begin selling product to a dispensary on December 1, 2019.

Section 20-15. Conditional Adult Use Cultivation Center Application (pages 171-178)

* If DOA makes additional licenses available, it will set a license fee and establish a new form of application designed to obtain the information listed in Section 20-15.

Section 20-20. Conditional Adult Use License scoring applications (pages 178-180)

* Scoring of new applications will be as follows: suitability of proposed facility; suitability

of employee training plan; security and recordkeeping; cultivation plan; product safety and labeling plan; business plan; status as a social equity applicant (no less than 20% of the available points); labor and employment practices (no less than 2% of available points); environmental plan; majority ownership by Illinois residents (for past 5 years); majority ownership by veterans; diversity plan. Can also receive bonus points for including a plan to engage with the community, but bonus points serve only to break a tie between two equally-scoring applicants.

* Fee is $100,000. Renewal fee the same.

Section 20-21. Adult Use Cultivation Center License (pages 180-181)

* Only eligible to receive a final Adult Use Cultivation license if have first been awarded a

Conditional Adult Use Cultivation license or have renewed its Early Approval Cultivation Center license. No final license will be issued until the Department of Agriculture has inspected the cultivation center site and the cultivation center has paid a registration fee of $100,000 (or a prorated amount accounting for the difference of time between when the Adult Use Cultivation license is issued and March 31 of the next even-numbered year).

Cultivation center requirements and prohibitions can be found in Section 20-30 (pages 182-186)

Section 20-50. Cultivator taxes (pages 191-192)

* 7% of gross receipts from sale by a cultivator to a dispensing organization. * Paid by the cultivator and is not the responsibility of the dispensing organization,

qualifying patient or purchaser. This tax is in addition to all other occupation/privilege taxes imposed by Illinois or any municipal corporation or political subdivision thereof.

ARTICLE 30. CRAFT GROWERS (pages 200-225) Section 30-5. Issuance of licenses (pages 200-203)

* DOA shall issue up to 40 craft grower licenses by July 1, 2020. Craft grower means a facility operated by a business that is licensed by the DOA to cultivate, dry, cure, and package cannabis and perform other necessary activities to make cannabis available for sale at a dispensing organization or use at a processing organizations. A craft grower may contain up to 5,000 square feet of canopy space on its premises for plants in the flowering state. The DOA may authorize an increase or decrease of flowering stage cultivations space in increments of 3,000 square feet by rule based on market need, craft grower capacity, and the licensee’s history of compliance or noncompliance, with a maximum space of 14,000 square feet for cultivating plants in the flowering

stage, which must be cultivated in all stages of growth in an enclosed and secure space. A craft grower may share premises with a processing organization or a dispensing organization or both, provided each licensee stores currency and cannabis or cannabis-infused products in a separate secured vault to which the other licensee does not have access or all licensees sharing a vault share more than 50% of the same ownership.

One license per person and the licensee cannot sell that license until after December 21, 2021.

* By December 21, 2021, DOA shall issue up to 60 additional craft licenses. A person getting

a license under this subsection shall not hold more than 2 craft licenses.

* Prior to issuing licenses, the DOA can adopt rules to modify/raise the number of craft grower licenses assigned to each region and modify/change the licensing application process to reduce or eliminate barriers to entry, subject to substantially similar considerations described in Section 20-5 regarding authorization of additional cultivation licenses.

* After January 1, 2022, DOA can by rule modify or raise the number of craft licenses

assigned to each region, but at no time can there be more than 150 licenses and no person may hold more than 3 licenses. Section 30-10. Application (pages 203-210)

* Along with application including typical requirements/provisions, craft grower required to submit a nonrefundable application fee of $5,000 (subject to change by the DOA after January 1, 2021), to be deposited into the Cannabis Regulation Fund. Section 30-15. Scoring Applications (pages 210-212)

* Scoring of new applications will be as follows: suitability of proposed facility; suitability of employee training plan; security and recordkeeping; cultivation plan; product safety and labeling plan; business plan; status as a social equity applicant (no less than 20% of the available points); labor and employment practices (no less than 2% of available points); environmental plan; majority ownership by Illinois residents (for past 5 years); majority ownership by veterans; diversity plan. Can also receive bonus points for including a plan to engage with the community, but bonus points serve only to break a tie between two equally-scoring applicants. Section 30-20. Issuance of license to certain persons prohibited (pages 212-213)

* A craft grower cannot hold a cultivation license nor can any entity owning a craft license have more than a 10% interest in a cultivation license. The only exception is that a principal officer, agent, or human may own 5% or less of public stock in a cultivation licensee.

Section 30-30. Craft grower requirements; prohibitions (pages 214-219)

* Craft growers can only sell to a cultivation center, another craft grower, an infuser

organization or a dispensing organization. Need a transport license to transport cannabis or

cannabis products. There are certain exceptions (i.e., in Cook County do not need a transport licensee if the receiver is within 2000 feet of the craft grower).

Section 30-50. Craft grower taxes (pages 224-225)

* 7% of gross receipts from sale by a cultivator to a dispensing organization. * Paid by the craft grower who makes the first sale, and is not the responsibility of the

dispensing organization, qualifying patient or purchaser. This tax is in addition to all other occupation/privilege taxes imposed by Illinois or any municipal corporation or political subdivision thereof.

ARTICLE 35. INFUSER ORGANIZATIONS6 [AND PROCESSOR LICENSES] (pages 225-247)

Section 35-5. Issuance of licenses (pages 225-228)

* DOA will issue up to 40 infuser licenses no later than July 1, 2020. Applications will be available on January 7, 2020 and the deadline is March 15, 2020. $5000 application fee. $5000 license fee.

* By December 21, 2021, DOA may issue up to 60 additional licenses. * Prior to issuing licenses, the DOA can adopt rules to modify/raise the number of infuser

licenses and modify/change the licensing application process to reduce or eliminate barriers to entry, subject to substantially similar considerations described in Section 20-5 regarding authorization of additional cultivation licenses. Section 35-10. Application (pages 228-232)

* Along with application including typical requirements/provisions, infuser required to submit a nonrefundable application fee of $5,000 (subject to change by the DOA after January 1, 2021), to be deposited into the Cannabis Regulation Fund. Section 35-15. Issuing Licenses (pages 232-234)

* DOA required to develop a scoring system by rule to rank applications. Scoring of new applications will be as follows: suitability of proposed facility; suitability of employee training plan; security and recordkeeping; infusing plan; product safety and labeling plan; business plan; status as a social equity applicant (no less than 20% of the available points); labor and employment practices (no less than 2% of available points); environmental plan; majority ownership by Illinois residents (for past 5 years); majority ownership by veterans; diversity plan. Can also receive bonus

6 Infuser organization means a facility operated by an organization or business that is licensed by the DOA to directly incorporate cannabis or cannabis concentrate into a product formulation to produce a cannabis-infused product.

points for including a plan to engage with the community, but bonus points serve only to break a tie between two equally-scoring applicants.

* If applicant receives a license, it is required to pay a fee of $5,000 to the Cannabis

Regulation Fund prior to receiving the license.

Section 35-25. Infuser organization requirements; prohibitions (pages 235-239)

* Restrictions on transportation similar to craft growers, with exemptions based on county population. Infusers not permitted to extract cannabis concentrate from cannabis flower.

* An infuser may only sell to a dispensing organization.

Section 35-31. Ensuring an adequate supply of raw materials [processor licenses] (pages 241-244) * If in 2022 DOA determines that infusers do not have access to an adequate supply of reasonably affordable raw cannabis material (i.e., cannabis oil, distillate or extract), then DOA may by rule adopt measures to ensure infusers have access to an adequate supply of reasonably affordable raw materials necessary for the manufacture of cannabis-infused cannabis products, including (i) requiring cultivation centers and craft growers to set aside a minimum amount of raw materials for the wholesale market , or (ii) enabling infusers to apply for processor licenses to extract raw materials themselves from cannabis flower. ARTICLE 40. TRANSPORTING ORGANIZATIONS (pages 247-261)

Section 40-5. Issuance of licenses (page 247)

* DOA will issue licenses no later than July 1, 2020. Applications will be available on Jan. 7, 2020 and due no later than March 15, 2020. Thereafter, applications will be available on January 7 of each year and due on March 15 of each year.

Section 40-15. Issuing licenses (pages 250-253)

* $5000 application fee. $10,000 license fee. $10,000 renewal fee.

Transportation organization requirements and prohibitions can be found in Section 40-25 (pages 254-257) ARTICLE 45. ENFORCEMENT AND IMMUNITIES (pages 261-267) Section 45-5. License suspension; revocation; other penalties (pages 261-263)

* Maximum fines are as follows: $50,000 for each violation of the Act by a cultivation center or cultivation center agent; $15,000 for each violation of the Act by a craft grower or craft grower agent, dispensing organization or dispensing organization agent, infuser organization or infuser organization agent; or transportation organization or transportation organization agent.

ARTICLE 55. GENERAL PROVISIONS (pages 271-308) Section 55-20. Advertising and promotions (pages 275-277)

* Cannabis businesses prohibited from engaging in advertising or promotion that contains any statement or illustration that:

is false or misleading; promotes overconsumption of cannabis products; depicts the actual consumption of cannabis products; depicts a person 21 or under consuming cannabis; makes any health, medicinal or therapeutic claims about cannabis or cannabis-

infused products; includes the image of a cannabis leaf or bud; and includes images likely to appeal to minors, including cartoons, toys, animals, etc.

* Also not permitted to advertise within 1,000 feet of a playground/rec center/child care

center/public park/public library, or in a public transit vehicle or public transit shelter.

* Also not permitted to encourage the sale of cannabis or cannabis products by giving away cannabis products, by conducting games or competitions related to the consumption of cannabis or cannabis products, or by providing promotional materials or activities that would be appealing to children.

Packaging and labeling requirements can be found in Section 55-21 (pages 277-283) Section 55-25. Local Ordinances (pages 283-285)

* In general, through zoning ordinances a municipality may prohibit or significantly limit the location of cannabis businesses. Such ordinances must not conflict with the Act or rules adopted to govern time, place, manner and the number of cannabis businesses. If a municipality chooses to permit cannabis businesses to locate and operate within its borders, it may also enact reasonable zoning regulations.

Section 55-28 Restricted Cannabis Zones (pages 285-288)

* There section explains the “opt out” provision. Only a precinct within a municipality of 500,000 registered voters may “opt out.” So in short, only a precinct within Chicago can even consider opting out.

* The process is so difficult that it would be hard for a precinct to opt out. The legal voters

in a precinct may petition their alderman to introduce an ordinance establishing the precinct as a restricted zone. The process is as follows: a person must file a Notice of Intent to file a petition on a form provided by the city clerk; the notice shall include a description of the affected area and the scope of the restriction sought – i.e. prohibit home cultivation, one or more types of cannabis

businesses or both; then the clerk posts the Notice online. The petition must contain the requisite number of valid signatures (25% of the registered voters of the precinct) and all signatures must be obtained within 90 days of the date that the clerk posts the Notice. The petition is submitted to the clerk who will post it for a 30 day comment period. The clerk verifies the legal sufficiency of the petition. Following the comment period, the clerk will post the petition as accepted or rejected. If rejected, the clerk shall state the reasons for rejection. If the petition is rejected as legally insufficient, another petition in the precinct cannot be filed for at least 12 months.

* If the petition with the valid number of signatures is legally sufficient following the posting

(not sure what legally sufficient means), the clerk shall notify the alderman. The alderman will then assess various factors within the precinct such as geography, density and character, prevalence of residentially zoned property, the number of current licensed cannabis businesses in the precinct and the prevailing viewpoint with regard to the issue raised in the petition. Then the alderman MAY introduce an ordinance to the city council creating a restricted cannabis zone in the precinct.

* The city council may enact an ordinance creating a restricted zone. The ordinance shall;

identify the precinct boundaries; the specific prohibition; be in effect for 4 years – unless repealed earlier; and can be renewed by ordinance vs a new petition process. Section 55-30. Confidentiality (pages 288-291)

* Information received by and records kept by DOA, IDFPR, Illinois Department of Public

Health or Illinois State Police for the purpose of administering the Act are exempt from disclosure under FOIA except as provided in the Act and not subject to disclosure to any individual or private entity.

* Each agency that will issue licenses will list ownership licensee info on its website,

including the name and address of the person or entity holding the licensee. * Formal complaints and disciplinary orders will be public records unless otherwise

prohibited by law.

Section 55-35. Administrative rulemaking (pages 291-295)

* Agencies required to adopt permanent rules no later than 180 days after the effective date of the Act. Section 55-65. Financial institutions (pages 299-301)

* Financial institutions providing services to entities under the Act are exempt from criminal law as it relates to cannabis-related conduct.

ARTICLE 65. CANNABIS PURCHASER EXCISE TAX (pages 318-340) Section 65-10. Tax imposed (pages 320-321)

* Beginning Jan. 1, 2020 any cannabis (other than a cannabis-infused product) that has THC

level below 35% is taxed at 10% of the purchase price. If product above 35% THC tax is 25%. * Cannabis infused products taxed at 20% of purchase price.

Please be mindful that possessing, using, distributing and/or selling marijuana is a federal crime, and no legal advice we give is intended to provide any guidance or assistance in violating federal law nor will it provide any guidance or assistance in complying with federal law. Attorney Advertisement © 2019 Fox Rothschild LLP. All rights reserved. All content of this publication is the property and copyright of Fox Rothschild LLP and may not be reproduced in any format without prior express permission. This publication is intended for general information purposes only. It does not constitute legal advice.

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mcle.mywsba.org/IO/print.aspx?ID=1682 1/5

Advisory Opinion: 201501

Year Issued: 2015

RPC(s): RPC 1.1, 1.2, 1.2(d), 1.8(a), 8.4, 8.4(b), 8.4(i), 8.4(k), 8.4(n)

Subject: Providing Legal Advice and Assistance to Clients Under WA State Retail Marijuana Law, I-502, and the Cannabis Patient Protection Act; Lawyer Participation in Retail andMedical Marijuana Business; Lawyer Purchase of Marijuana in Compliance with State Law

FACTS:

A. Background Facts Regarding I-502 and the Cannabis Patient Protection Act

In November 2012, Washington voters passed Washington Initiative Measure No. 502 (“I-502”), which allows creation of a system for the production, processing, and retail sale of marijuana for recreational useunder state law.[n.1] As stated in Section 1 of I-502, one purpose of I-502 was “to stop treating adult marijuana use as a crime and to try a new approach that * * * (3) Takes marijuana out of the hands of illegal drugorganizations and brings it under a tightly regulated, state-licensed system similar to that for controlling hard alcohol.” Since 2012, much governmental and private effort has been devoted to the establishment of alicensing and regulatory system for the retail marijuana business under the jurisdiction of what is now known as the Washington State Liquor and Cannabis Board (the “WSLCB”).

In April 2015, the Washington State Legislature passed and Governor Inslee signed the Cannabis Patient Protection Act (the “CPPA”), which substantially updated prior Washington law regarding medical uses ofmarijuana. [n.2] The CPPA is effective July 24, 2015.

Both I-502 and the CPPA were adopted in the shadow of the federal Controlled Substances Act, 21 USC §§ 801-904 (the "CSA"), which, on its face, prohibits the production, possession, sale, and use of marijuanafor any purpose. [n.3] Under the CSA, and the “Supremacy Clause” contained in Article VI, Section 2 of the United States Constitution, federal authorities may prosecute people in Washington for violating the CSA,even if their conduct complies with state law, because a state law cannot override federal law. [n.4]

In spite of the tension between Washington state law on the one hand and the CSA on the other, both the Washington Attorney General and the United States Attorney General have devoted considerable time andeffort to crafting Washington state law provisions regarding I-502 and what is now the CPPA subject to certain federal guidelines described further below. See, e.g., Press Release, Joint statement from Gov. Insleeand AG Ferguson regarding update from AG Eric Holder on implementation of Washington’s voter-approved marijuana law (Aug. 29, 2013), available at http://www.atg.wa.gov/news/news-releases/joint-statement-gov-inslee-and-ag-ferguson-regarding-update-ag-eric-holder; Press Release, Justice Department Announces Update to Marijuana Enforcement Policy (Aug. 29, 2013), available athttp://www.justice.gov/opa/pr/justice-department-announces-update-marijuana-enforcement-policy. In addition:

• The Washington Governor and Attorney General have testified about the care that will be taken to implement I-502 in a way that will not conflict with federal priorities. See, e.g., Written Testimony of WashingtonGovernor Jay Inslee and Washington Attorney General Bob Ferguson (Sep. 10, 2013), available at http://www.governor.wa.gov/sites/default/files/documents/testimony_20130910.pdf. In addition, one of theprincipal reasons for the adoption of the CPPA was to provide additional state-level regulation that was not present under prior Washington medical marijuana law. [n.5]

• The federal government has issued several public statements over the years to the effect that, while reserving ultimate federal authority, it does not wish to impede retail sales of medical or recreational marijuanapursuant to a state regulatory system unless the sales implicate other federal concerns such as money-laundering, sales to minors, sales outside of the state regulatory system and the like. See, e.g., Memorandumfrom David W. Ogden, Deputy Attorney General, to Selected United States Attorneys, re Investigations and Prosecutions in States Authorizing the Medical Use of Marijuana (Oct. 19, 2009), available athttp://www.justice.gov/sites/default/files/opa/legacy/2009/10/19/medical-marijuana.pdf (underlining in original); Memorandum from James M. Cole, Deputy Attorney General, to United States Attorneys, re GuidanceRegarding the Ogden Memo in Jurisdictions Seeking to Authorize Marijuana for Medical Use (June 29, 2011) (underlining in original), available at http://www.justice.gov/oip/docs/dag-guidance-2011-for-medical-marijuana-use.pdf; Memorandum from James M. Cole, Deputy Attorney General, to All United States Attorneys, re Guidance Regarding Marijuana Enforcement (Aug. 29, 2013), available athttp://www.justice.gov/iso/opa/resources/3052013829132756857467.pdf (underlining in original) (“Cole Memorandum”).

• The executive branch of Washington State Government—including Washington’s Governor, Washington’s Attorney General, and the WSLCB—is actively involved in implementing both I-502 and what is now theCPPA.

• Since at least the adoption of I-502, neither the United States Attorney General nor any of the United States Attorneys in Washington have sought to impair or impede the operation of I-502 and what is now theCPPA. [n.6]

Although the CSA itself has not been amended insofar as medical and retail marijuana sales are concerned, there has been one additional federal development. Pursuant to the Consolidated and FurtherContinuing Appropriations Act, 2015, H.R. 83, 113th Cong. § 538 (2014), Congress has prevented the Justice Department from using any funds made available to the Department of Justice by the Act "to prevent[Washington or any other state with medical marijuana laws] from implementing their own State laws that authorize the use, distribution, possession, or cultivation of medical marijuana.” In other words, it appearsthat Congress has, at least for the time being, prohibited the Department of Justice from enforcing the CSA in a manner that prevents implementation of state law-based medical marijuana provisions such as arereflected in the CPPA.

B. Proposed Lawyer Conduct

Lawyer A wishes to give Client A legal advice about how to comply with I-502 and/or the CPPA.

Lawyer B wishes to advise Client B to form a business entity and then provide legal advice and assistance to Client B in the formation and operation of that entity so as to comply with I-502 and/or the CPPA.

Lawyer C wishes personally to own and operate a business in compliance with I-502 and/or the CPPA and any regulations issued thereunder.

Lawyer D wishes to purchase marijuana in compliance with I-502 and/or the CPPA.

Lawyer E is a government lawyer engaged in the implementation of and I-502 and/or the CPPA. Lawyer E also wishes to purchase marijuana in compliance I-502 and/or the CPPA.

QUESTIONS:

1. May Lawyer A advise Client A about the interpretation of and compliance with I-502 and the CPPA without violating the Washington Rules of Professional Conduct (the “RPCs”)?

2. May Lawyer B provide legal advice and assistance to Client B in the formation and operation of a business entity so as to comply with I-502 and the CPPA without violating the RPCs?

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3. May Lawyer C own and operate an independent business in compliance with I-502 and the CPPA without violating the RPCs?

4. Assuming that Lawyer D's need for and consumption of medical or retail marijuana do not otherwise affect Lawyer D's substantive competence or fitness to practice as a lawyer, may Lawyer D purchase andconsume marijuana in compliance with I-502 and the CPPA without violating the RPCs?

5. May Lawyer E engage in the implementation of I-502 the CPPA and, if Lawyer E’s competence and fitness to practice as a lawyer is not affected, purchase marijuana subject to I-502 and the CPPA withoutviolating the RPCs?

CONCLUSIONS:

1. Yes, qualified.

2. Yes, qualified.

3. Yes, qualified.

4. Yes, qualified.

5. Yes, qualified.

DISCUSSION:

A. Lawyer A: Giving Legal Advice to Client A About I-502 and the CPPA

Pursuant to the RPCs, Lawyer A is entitled to advise Client A about whether particular conduct would or would not violate I-502 or the CPPA regardless of whether that conduct would violate the CSA. RPC 1.2(d)provides that:

A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows [n.7] is criminal or fraudulent, but a lawyer may discuss the legal consequences of any proposed course of conductwith a client and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning or application of the law.

Absent a limiting construction or exception to this rule (such as is contained in Washington Comment [18] to RPC 1.2, which is discussed in Section B below), a lawyer cannot advise or recommend (i.e., counsel) aclient to engage in any conduct that the lawyer knows is criminal or fraudulent and also cannot materially help the client engage in (i.e., assist) any conduct that the lawyer knows is criminal or fraudulent. Inaddition, it makes no difference whether the conduct in question is criminal or fraudulent at a federal level or at a state level. On the other hand, Client A is entitled to receive, and Lawyer A is entitled to give, adviceabout whether Client A's “proposed course of conduct” would violate Federal or state law even if it is a foregone conclusion that the conduct violates federal criminal law—as long as Lawyer A does not go furtherand advise or recommend that Client A engage in conduct that Lawyer A knows violates federal criminal law and does not help Client A violate federal criminal law. As noted in RPC 1.2 cmt. 9, RPC 1.2 does notprohibit analyzing the consequences of a client’s proposed course of conduct:

Paragraph (d) * * * does not preclude the lawyer from giving an honest opinion about the actual consequences that appear likely to result from a client’s conduct. Nor does the fact that a client uses advice in acourse of action that is criminal or fraudulent of itself make a lawyer a party to the course of action. There is a critical distinction between presenting an analysis of legal aspects of questionable conduct andrecommending the means by which a crime or fraud might be committed with impunity.

This analysis does not extend, however, to allowing Lawyer A knowingly to advise Client A about how to violate or conceal any violations of I-502 or the CPPA. Similarly, this portion of the analysis does not allowLawyer A knowingly to advise Client A about how to violate or conceal any violations of the CSA. See RPC 1.2 cmts 10 [n.8], 13 [n.9]. That is because such advice would constitute counseling and/or assistingClient A in criminal conduct. In addition, and pursuant to the duty of competent representation that Lawyer A owes to Client A under RPC 1.1, [n.10] Lawyer A must advise Client A not only about the direct orindirect risks to Client A under state law as a result of engaging in a state-regulated marijuana business but about the direct or indirect risks to Client A as a result of the CSA. [n.11]

B. Lawyer B: Advising Client B to Engage in Business Under I-502 and the CPPA or Assisting Client B in Doing So

Unlike Lawyer A and Client A, Lawyer B proposes to advise Client B to engage in business consistently with I-502 and the CPPA notwithstanding what is assumed to be ostensibly controlling federal law to thecontrary and to assist Client B in doing so. In other words, Lawyer B's conduct goes beyond the mere expression of a legal opinion as to what is or is not lawful as a matter of state law. Lawyer B’s conduct thusrequires us to take several further steps and to consider whether or how to apply the prohibitions contained in RPC 1.2(d), which are discussed above in Section A. In addition, and since Lawyer B’s conduct inadvising or assisting Client B could itself be considered to be a violation of the CSA, it is also necessary to look at RPC 8.4, which provides in pertinent part that:

It is professional misconduct for a lawyer to:

* * * * (b) commit a criminal act that reflects adversely on the lawyer’s honesty, trustworthiness or fitness as a lawyer in other respects;

* * * * (i) commit any act involving moral turpitude, or corruption, or any unjustified act of assault or other act which reflects disregard for the rule of law, whether the same be committed in the course of his or her conductas a lawyer, or otherwise, and whether the same constitutes a felony or misdemeanor or not; and if the act constitutes a felony or misdemeanor, conviction thereof in a criminal proceeding shall not be a conditionprecedent to disciplinary action, nor shall acquittal or dismissal thereof preclude the commencement of a disciplinary proceeding * * *.

* * * * (k) violate his or her oath as an attorney [in which an attorney swears to abide by the laws of both the state and United States. APR 5(e)]

* * * * (n) engage in conduct demonstrating unfitness to practice law;

At least for as long as the federal government continues to take the same approach to I-502 and the CPPA, Lawyer B’s conduct and legal advice does not violate these rules. Although, as noted below, our opinionrelies substantially upon Washington Comment [18] to RPC 1.2, which is discussed later in this section, we believe it appropriate to begin with a more general analysis of the circumstances that we believe providethe foundation for that comment.

As a general matter, and as noted in Official Comment 14 to the Preamble and Scope of the Washington Rules of Professional Conduct:

The Rules of Professional Conduct are rules of reason. They should be interpreted with reference to the purposes of legal representation and of the law itself.

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RPC 1.2(d) and 8.4(b), (i), (k), and (n) are designed to ensure that lawyers do not undermine the rule of law, whether through assisting clients in or their own acts of criminal behavior. [n.12] In this unprecedentedsituation, it would be the failure to allow lawyers to advise their clients rather than allowing them to do so, that would undermine the rule of law. The State of Washington has expressly approved the activities inquestion, and the United States Department of Justice has expressly adopted a policy that “enforcement of state law by state and local law enforcement and regulatory bodies should remain the primary means ofaddressing marijuana-related activity.” (Cole Memorandum.) In a memorandum to United States Attorneys, the United States Deputy Attorney General has stated:

In jurisdictions that have enacted laws legalizing marijuana in some form and that have also implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale, andpossession of marijuana, conduct in compliance with these laws and regulations is less likely to threaten the federal priorities set forth above. Indeed, a robust system may affirmatively address these priorities * * *

(Cole Memorandum.)

The State of Washington has, without question, enacted regulatory measures expressly directed at addressing just these federal concerns. Moreover, the predominant purpose of lawyer discipline is to protect thepublic. See, e.g., In re Disciplinary Proceeding Against Kuvara, 149 Wash.2d 237, 257, 66 P.3d 1057 (2003) (quoting In re Disciplinary Proceeding Against Noble, 100 Wash.2d 88, 95, 667 P.2d 608 (1983)).Washington voters approved I-502 and the Legislature passed and the Governor signed the CPPA. Given as well the clear and sustained efforts being made by federal authorities to allow the implementation ofthese laws as long as stated federal concerns (e.g., about the risk of sales to minors or the risk of unregulated sales or other criminal conduct such as money laundering) are adequately addressed, it is plain thatthe Washington public does not need protection against lawyers who choose to provide legal advice and assistance to clients regarding compliance with I-502 and the CPPA, consistently with those federalconcerns. [n.13] To the contrary, the Washington public needs protection to assure that the boundaries of I-502 and the CPPA are enforced, and that requires allowing lawyers to do their work. Clients who wish tocomply with I-502 and the CPPA necessarily require assistance with, for example, drafting contracts, forming limited liability companies, retaining employees, and performing several other business functions thatbenefit from sound legal advice. RPC 1.2(d) and 8.4(b), (i), (k), and (n) exist to ensure that lawyers do not undermine the rule of law, whether through assisting clients in or their own acts of criminal behavior. [n.14]

This analysis is consistent with the logical basis for Washington Comment [18] to RPC 1.2, which was adopted by the Washington Supreme Court in November 2014, and which provides that:

Special Circumstances Presented by Washington Initiative 502 (Laws of 2013, Ch. 3):

[18] At least until there is a subsequent change of federal enforcement policy, a lawyer may counsel a client regarding the validity, scope and meaning of Washington Initiative 502 (Laws of 2013, Ch. 3) and mayassist a client in conduct that the lawyer reasonably believes is permitted by this statute and the other statutes, regulations, orders and other state and local provisions implementing them.

Although this comment is limited by its terms to I-502, we conclude that the comment is, and necessarily must be, broad enough to cover legal advice and assistance with regard to the CPPA as well. Nonetheless,three caveats must be noted.

First, the “safe harbor” established by Comment 18 to RPC 1.2 will only last for as long as present federal enforcement policies last. If, for example, the federal government were to disavow its present positions andannounce that it would thereafter prosecute any and all violators including but not limited to those purporting to act pursuant to I-502 or the CPPA, it could well be that any protections offered by Comment 18 wouldbe at an end.

Second, and as we already noted with respect to Lawyer A, Lawyer B must, as a matter of the duty of competent representation under RPC 1.1, advise Client B about the full range of legal risks that can result fromparticipation in a state law-regulated marijuana business.

Third, a lawyer has a different range of freedom of action when assisting clients with regard to I-502 or the CPPA than when assisting clients in other legally gray areas. As already noted, for example, the generalstate of mind requirement for a violation of RPC 1.2(d) is that the lawyer know that the conduct in question is illegal. Under Comment 18 to RPC 1.2, a lawyer who knows that the conduct in question would violatethe CSA is not in violation of the RPCs if, but only if, the lawyer reasonably believes that state law authorizes the conduct on or in connection with which the lawyer is assisting the client. In other words, a lawyerwho reasonably believes that state law authorizes the conduct in question is not in violation of the RPCs even if the lawyer knows that the conduct would violate the CSA.

C. Lawyer C: Engaging in Businesses Under I-502 or the CPPA

Subject to exceptions not pertinent hereto, lawyers are generally free to engage in businesses to the same extent as other members of the public. Since Lawyer C’s business under I-502 or the CPPA is separateand apart from Lawyer’s practice of law, we see no reason to prohibit Lawyer C from engaging in businesses pursuant to I-502 or the CPPA to the same extent that non-lawyers may so long as Lawyer C is incompliance with the Rules of Professional Conduct. In our opinion, it would be inappropriate to interpret RPC 8.4(b)(criminal acts reflecting adversely on honesty, trustworthiness, or fitness to practice), RPC 8.4(i)(disregard for the rule of law), RPC 8.4(k)(oath of office swearing to abide by both state and federal law), or RPC 8.4(n)(conduct demonstrating unfitness to practice law) as prohibiting activities permitted by I-502 orthe CPPA unless and until there is a change in federal enforcement policy that puts compliance with I-502 or the CPPA in jeopardy.

If however, if Lawyer C does plan to enter into such a business with one or more of Lawyer C’s clients, Lawyer C would have to comply with RPC 1.8(a), which provides that:

A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client unless:

(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client;

(2) the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; and

(3) the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer’s role in the transaction, including whether the lawyer is representing the client in the transaction.

See, e.g., LK Operating, LLC v. Collection Grp., LLC, 181 Wash.2d 48, 331 P.3d 1147 (2014); In re Disciplinary Proceeding Against Hall, 180 Wash.2d 821, 329 P.3d 870 (2014).

For substantially the same reasons noted in Section B, it is also our opinion that a lawyer going into a business with a client that complies with I-502 and the CPPA would not, without more, constitute either a“criminal act that reflects adversely on the lawyer’s honesty, trustworthiness or fitness as a lawyer in other respects,” RPC 8.4(b), or an “act involving moral turpitude, or corruption, or any unjustified act of assault orother act which reflects disregard for the rule of law,” RPC 8.4(i). Where, as here, all involved parties are working to appropriately implement I-502 and the CPPA, this conduct does not reflect adversely on alawyer’s fitness to practice, does not involve moral turpitude and does not reflect disregard for the rule of law. It also is not a violation of the lawyer’s oath of office.

D. Lawyer D: Purchasing Marijuana Under I-502 or the CPPA

Our analysis of the first three questions leads us to conclude as well that subject to the same limitations and as long as Lawyer D is able to provide competent legal advice and otherwise comply with the RPCs,Lawyer D may purchase and consume marijuana consistently with I-502 and the CPPA to the same extent that non-lawyers may generally do so.

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In this context, we again see no substantial public purpose in considering conduct unrelated to the practice of law in which members of the public are free to engage a violation of the RPCs. [n.15] At the risk ofrepetition, it would be inappropriate in our opinion to interpret RPC 8.4(b) (criminal acts reflecting adversely on honesty, trustworthiness, or fitness to practice), RPC 8.4(i) (disregard for the rule of law), RPC 8.4(k)(oath of office swearing to abide by both state and federal law), or RPC 8.4(n) (conduct demonstrating unfitness to practice law), as prohibiting activities permitted by I-502 or the CPPA unless and until there is achange in federal enforcement policy that puts compliance with I-502 or the CPPA in jeopardy.

E. Lawyer E: Government Lawyer Implementing I-502 and the CPPA or Purchasing Marijuana Pursuant Thereto

Without question, the implementation of I-502 and what is now the CPPA has required and will continue to require a great deal of cooperation between government lawyers and lawyers in private practice. Given ourconclusion that a private practice lawyer’s actions in support of a client’s business or the lawyer’s own business or interests under I-502 or the CPPA does not violate the RPCs as long as done consistently with thisopinion and with federal guidelines, we also conclude that the parallel actions of government lawyers do not violate the RPCs. [n.16]

F. Final Observations

This opinion does not state or imply that lawyers are free in any other circumstance to disregard the law or to disregard conflicts between federal and state law. [n.17] It does, however, conclude that theextraordinary, and in our view unprecedented, combination of factors present here, including the Washington Supreme Court’s express recognition of these special circumstances in Comment 18 to RPC 1.2,requires an extraordinary and unprecedented analysis under the RPCs. We also caution that Comment 18 expressly notes that if the federal government changes its position and again seeks to enforce the CSAagainst the kinds of activities made lawful under I-502 and the CPPA as a matter of state law, the application of the RPCs may have to be reconsidered.

Endnotes:

1. The full text of I-502 can be found online at http://lcb.wa.gov/publications/Marijuana/I-502/i502.pdf. Technically speaking, I-502 amended or added sections to Chapters 69.50 RCW, 46.61 RCW, 46.20 RCW and46.04 RCW.

2. See, Senate Bill (SB) 5052 2015-16, Sec. 2. Legislative history available at http://app.leg.wa.gov/billinfo/summary.aspx?year=2015&bill=5052; see also Final Bill Report 2SSB 5052 (2015), available athttp://lawfilesext.leg.wa.gov/biennium/2015-16/Pdf/Bill%20Reports/Senate/5052-S2%20SBR%20FBR%2015.pdf. For further information on pre-CPPA Washington law regarding medical marijuana, see VitaliyMkrtchyan, Initiative 692, Now and Then: The Past, Present, and Future of Medical Marijuana in Washington State, 47 Gonz. L. Rev. 839 (2012); Cannabis Action Coalition v. City of Kent, No. 90204-6 (Wash. filedMay 21, 2015), 180 Wn. App. 455, 322 P.3d 1246 (2014); RCW 69.51A.030 (making health care professionals not subject to criminal or professional penalties or liabilities for advising or authorizing the medical useof cannabis); Washington State Department of Health, Medical Marijuana Authorization Guidelines (2014), available at http://www.doh.wa.gov/Portals/1/Documents/2300/2014/631053.pdf.

3. See, e.g., 21 USC §§ 841(a)(1), 844(a); Gonzales v. Raich, 545 US 1, 22, 125 S. Ct. 2195, 162 L. Ed. 2d 1 (2005) (upholding, against a Commerce Clause challenge, the constitutionality of the CSA as applied tomedical marijuana sales under California law); cf. Gonzales v. Oregon, 546 US 243, 266-268, 126 S. Ct. 904, 163 L. Ed. 2d 748 (2006) (CSA does not authorize the United States Attorney General to prohibitdoctors from issuing assisted suicide prescriptions pursuant to the Oregon Death with Dignity Act).

4. See, e.g., Mutual Pharmaceutical Co., Inc. v. Bartlett, 570 US __ (2013), Docket No. 12-142, 133 S. Ct. 2466, 2472-73, 186 L. Ed. 2d 607 (2013).

5. See SB 5052, Sec. 2.

6. For additional Federal memoranda on this subject, see Monte Wilkinson, Director, Executive Office of U.S. Attorneys, Policy Statement Regarding Marijuana Issues in Indian Country, October 28, 2014; James M.Cole, Deputy U.S. Attorney General, Memorandum re: Guidance Regarding Marijuana Related Financial Crimes, February 14, 2014; Department of the Treasury, Financial Crimes Enforcement Network, Guidancere: BSA Expectations Regarding Marijuana-Related Businesses, February 14, 2014.

7. RPC 1.0(f) provides that:

“Knowingly,” “known,” or “knows” denotes actual knowledge of the fact in question. A person’s knowledge may be inferred from circumstances.

8. RPC 1.2 cmt. 10 provides that:

When the client’s course of action has already begun and is continuing, the lawyer’s responsibility is especially delicate. The lawyer is required to avoid assisting the client, for example, by drafting or deliveringdocuments that the lawyer knows are fraudulent or by suggesting how the wrongdoing might be concealed. A lawyer may not continue assisting a client in conduct that the lawyer originally supposed was legallyproper but then discovers is criminal or fraudulent. The lawyer must, therefore, withdraw from the representation of the client in the matter. See Rule 1.16(a). In some cases, withdrawal alone might be insufficient. Itmay be necessary for the lawyer to give notice of the fact of withdrawal and to disaffirm any opinion, document, affirmation or the like. See Rule 4.1.

9. RPC 1.2 cmt. 13 provides that:

If a lawyer comes to know or reasonably should know that a client expects assistance not permitted by the Rules of Professional Conduct or other law or if the lawyer intends to act contrary to the client’sinstructions, the lawyer must consult with the client regarding the limitations on the lawyer’s conduct. See Rule 1.4(a)(5).

10. RPC 1.1 provides that:

A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.

11. Cf. Montana Caregivers Ass’n, LLC v. U.S., 841 F.Supp. 2d 1147, 1148 (D. Mont. 2012) (although plaintiff’s conduct may have been legal under state marijuana laws, it was illegal under the federal ControlledSubstances Act). Without in any way attempting a full list of the potential legal consequences of a CSA violation, we note that the consequences could include not only the risk of federal criminal prosecution butalso a host of civil law questions such as the potential effect of illegality under the CSA on the enforcement of marijuana-related contracts.

12. Cf. Restatement (Third) of the Law Governing Lawyers § 23, cmt. c (2000) (“Lawyers who exercise their skill and knowledge so as to * * * obstruct the legal system subvert the justifications of their calling”).

13. The Congressional decision to prohibit the Department of Justice from using any funds to prevent state law medical marijuana systems strongly suggests that, at least as to medical marijuana, Congress is ofthe same view.

14. If lawyers could not give legal advice to clients about how to conform their conduct to the requirements of I-502 and the CPPA as well as related federal concerns, then no one could do so. See, e.g., RCW2.48.180 (broadly defining the unauthorized practice of law); RPC 5.5(a) (“A lawyer shall not * * * assist another” in the unauthorized practice of law).

15. If, on the other hand, Lawyer D’s consumption of marijuana causes Lawyer D to engage in conduct otherwise prohibited by the RPCs, Lawyer D would be no less subject to discipline than a lawyer whoseimpermissible performance is caused by excessive consumption of alcohol. Cf. In re Disciplinary Proceeding Against Curran, 115 Wash.2d 747, 801 P.2d 962 (1990).

16. We assume that government attorneys will comply with any and all conflict of interest statutes or regulations that apply to investment in or ownership of businesses which are regulated by their governmentclients.

17. For related authorities and discussions, see Colorado Supreme Court Rule Change 2014(05) (March 24, 2014) (adopting new comment 14 to Colorado RPC 1.2); Nevada Supreme Court Order Adopting

8/27/2019 Opinion 201501


Comment [1] to Nevada RPC 1.2, May 7, 2014; Amendments to Connecticut RPC 1.2 & RPC 8.4 Comment, approved June 19, 2014; Amendments to Oregon RPC 1.2(d) [adopted 2/19/15]; State of Arizona EthicsOp. 11-01 (2011) (lawyer may counsel or assist client in legal matters permissible under medical marijuana act); Colorado Judicial Ethics Advisory Board Op. 2014-01 (judge’s use of marijuana); Colorado BarAssociation Formal Ethics Op. 125 (2013) (The Extent to Which Lawyers May Represent Clients Regarding Marijuana-Related Activities)[withdrawn 5/17/2014]; Colorado Bar Association Formal Opinion 124 (2012)(A Lawyer’s Medical Use of Marijuana); Connecticut Bar Association Informal Opinion 2013-02 (Providing Legal Services to Clients Seeking Licenses Under The Connecticut Medical Marijuana Law); Maine EthicsOp. #199 (2010) (Advising clients concerning Maine’s Medical Marijuana Act); We reach a different end result than North Dakota Ethics Opinion No. 14-02 (Aug. 12, 2014), available athttp://www.sband.org/UserFiles/files/pdfs/ethics/Opinion%2014-02.pdf.

***

Advisory Opinions are provided for the education of the Bar and reflect the opinion of the Committee on Professional Ethics (CPE) or its predecessors. Advisory Opinions are provided pursuant to the authorizationgranted by the Board of Governors, but are not individually approved by the Board and do not reflect the official position of the Bar association. Laws other than the Washington State Rules of Professional Conductmay apply to the inquiry. The Committee's answer does not include or opine about any other applicable law other than the meaning of the Rules of Professional Conduct.

Ethics – Keeping Your License and Your Cannabis Clients

September 19-20, 2019

American Bar Association Tort Trial & Insurance Practice Section

From Regs to Riches:

Navigating the Rapidly Emerging Fields of Cannabis & Hemp Law

Kristen A. Cooke Swanson Martin & Bell, LLP

330 N. Wabash Avenue, Suite 3300 Chicago, IL 60611

(312) 321-9100

I. Introduction

The growth of the cannabis industry provides new and exciting opportunities for

lawyers to expand their practices to provide legal services to users and suppliers of

medical and recreational marijuana. However, the legal landscape of this emerging

industry is complex and in flux creating ethical uncertainty for attorneys who want to

provide legal services to the cannabis industry. Lawyers who wish to keep their licenses

and their clients must comply with the rules of professional conduct in each jurisdiction in

which he or she is licensed to practice law. This paper will discuss the ethical obligations

for the practicing cannabis lawyer with an emphasis on Illinois Rules of Professional

Conduct.

II. Rule 1.1: Competence

ABA Model Rule of Professional Conduct 1.1 states:

A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.1

MODEL RULES OF PROF’L CONDUCT R. 1.1 (2018).

A lawyer endeavoring to practice cannabis law must possess the requisite

knowledge and skill to handle cannabis matters. Presumably, the “required proficiency is

that of a general practitioner” and a lawyer is not required to have special training or prior

experience to handle new or unfamiliar legal matters. MODEL RULES OF PROF’L CONDUCT

R. 1.1 cmt. (2018). Competent representation can be provided through association with

a lawyer of established competence and through study. Id. Whether you are a

knowledgeable and skilled cannabis lawyer or just beginning, it is incumbent on you to

1 IL RULES OF PROF’L CONDUCT R. 1.1 mirrors MODEL RULES OF PROF’L CONDUCT R. 1.1 (2018).

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educate yourself about the legal and policy landscape of the cannabis industry and keep

abreast of the constantly evolving field of cannabis law and your jurisdiction’s rules of

professional conduct.

As of July 2, 2019, fifteen states have addressed the ethical issues of providing

legal services to the cannabis industry through either or both rule changes and ethics

opinions. Dennis A. Rendleman, Ethical Issues in Representing Clients in the Cannabis

Business: “One toke over the line?,” The Prof’l Lawyer, Vol. 26, No.1, July 2, 2019.2

Lawyers licensed in Alaska, Arizona, California, Colorado, Connecticut, Florida, Hawaii,

Illinois, Maine, Massachusetts, Minnesota, Nevada, New Jersey, New Mexico, North

Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, Vermont and Washington should

familiarize themselves with the applicable rule changes or ethics opinions in the foregoing

jurisdictions. Id.

II. Rule 1.2(d): Scope of Representation & Allocation of Authority between

Client and Lawyer

The ABA Model Rules of Professional Conduct do not prohibit lawyers from

counseling or assisting clients in the cannabis industry. Id.

Model Rule of Professional Conduct 1.2(d) states:

A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent, but a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning or application of the law. MODEL RULES OF PROF’L CONDUCT R. 1.2(d) (2018). Comment [9] expands on 1.2(d):

2 Available at https://www.americanbar.org/groups/professional_responsibility/publications/professional_lawyer/26/1/ethical-issues-representing-clients-the-cannabis-business-one-toke-over-line

3

Paragraph (d) prohibits a lawyer from knowingly counseling or assisting a client to commit a crime or fraud. This prohibition, however, does not preclude the lawyer from giving an honest opinion about the actual consequences that appear likely to result from a client’s conduct. Nor does the fact that a client uses advice in the course of action that is criminal or fraudulent of itself make a lawyer a party to the course of action. There is a critical distinction between presenting an analyses of legal aspects of questionable conduct and recommending the means by which a crime or fraud might be committed with impunity. MODEL RULES OF PROF’L CONDUCT R. 1.2(d) cmt. [9](emphasis added).

If your state has legalized marijuana in some form, be it the use of marijuana for

medical or recreational purposes or the production, processing and sale of marijuana,

you may be called upon to represent a client in the cannabis industry. Regardless of the

legality of your client’s cannabis activities under state law, marijuana is a Schedule 1

substance governed by the Controlled Substances Act (CSA), 21 U.S.C. §§ 801, et seq.

The manufacture, distribution and possession of marijuana are criminal offenses. Id. at

§ 841 and § 844. Due to the conflict between state and federal law and the prohibitions

set forth in MRPC 1.2(d), a lawyer who counsels or assists cannabis industry clients may

be at risk for discipline by the bar depending on the standards of professional conduct

governing his or her jurisdiction and the ethics opinions interpreting same.

Prior to the implementation of the Compassionate Use of Medical Cannabis Pilot

Program Act, 410 ILSC 130/5 et seq., (“Act”), the Illinois State Bar Association’s Standing

Committee on Professional Conduct (“Committee”) addressed the situation in which a

lawyer provides services to a client whose conduct conforms to state law, but violates

federal law. IL Comm. on Prof’l Conduct, Advisory Op. 14-7. In October 2014, it issued

Advisory Opinion No. 14-07, finding that an Illinois lawyer may provide services to a client

on legal matters generated by the Act. Id. In considering the question of providing legal

4

services to clients in the medical marijuana business, the Committee examined Illinois

Rule of Professional Conduct 1.2(d) which provided as follows:

A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent, but a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good-faith effort to determine the validity, scope, meaning or application of the law. Id. (citing IL RULES OF PROF’L CONDUCT R. 1.2(d)(2010)).

The Committee found that the text of the rule required two separate inquiries: (1)

whether a lawyer may provide services that are strictly advisory to a client involved in the

medical marijuana business and (2) whether a lawyer may provide services that go

beyond the provision of legal advice to medical marijuana clients. Id. Regarding the first

issue, the Committee stated “[s]ince the rule provides an exception for counseling a client

concerning a proposed course of conduct and the application of the law, it is the

Committee’s opinion that the provision of legal advice to clients involved in the medical

marijuana trade falls squarely within that exception.” Id. Noting that “[t]he statutory and

regulatory scheme governs an industry that is brand new to Illinois as a legally sanctioned

activity. It presents a classic example of a business in serious need of legal advice and

counsel.” Id. Further, “[g]iven the conflict between federal and state law on the subject of

marijuana, as well as the accommodation provided by the Department of Justice,3 the

provision of legal advice to those engaged in nascent medical marijuana businesses is

far better than forcing such businesses to proceed by guesswork.” Id.

The Committee also looked to the State Bar of Arizona’s Ethics Opinion 11-01

(February 2011) at Section IV which states:

3 See Section III below.

5

A state law now expressly permits certain conduct. Legal services are necessary or desirable to implement and bring to fruition that conduct expressly permitted under state law. In any potential conflict between state and federal authority, such as may be presented by the interplay between the Act and federal law, lawyers have a critical role to perform in the activities that will lead to the proper resolution of the controversy. Although the Act may be found to be preempted by federal law or otherwise invalid, as of this time there has been no such judicial determination.

Id. The Committee agreed stating: when a new statuary and regulatory system is

promulgated by the State of Illinois, Illinois lawyers must be permitted to advise client on

how to conform their conduct to the law. Id. Turning to the issue of whether a lawyer may

provide services that go beyond the provision of legal advice to medical marijuana clients,

the Committee noted that any attorney who negotiated contracts and drafted legal

documents for such clients would be assisting a client in conduct that violates federal

criminal law. Id. However, pursuant to 1.2(d), a lawyer may provide such counsel or

assistance if the lawyer is assisting the “client to make a good-faith effort to determine the

validity, scope, meaning or application of the law.” Id.

Citing the Preamble to the Illinois Rules of Professional Conduct which states that

“[t]he Rules of Professional Conduct are rules of reason,” the Committee concluded that

“it is reasonable to permit Illinois lawyers, whose expertise in draftsmanship and

negotiations is of great value to the public, to provide services to medical marijuana clients

that that they provide to other businesses.” Id. (citation omitted). The Committee also

cautioned4 Illinois lawyers regarding “the importance of the client’s conformity with the

4 This caution is also emphasized in the preamble to the opinion which states: This Advisory Opinion expresses an interpretation of Illinois Rule of Professional Conduct 1.2(d) for the situation in which a lawyer provides services to a client whose conduct conforms to Illinois law but violates federal law. The ISBA believes this Advisory Opinion, narrowly tailored to the fact presented, is based upon sound policy and a good faith interpretation of the Illinois Rules of Professional Conduct. However, the ISBA has no role in lawyer regulation or discipline and a lawyer’s reliance on this Advisory Opinion may not serve as a defense to allegations of misconduct in the situation presented.

6

[state] law and regulations” when advising cannabis clients regarding conduct governed

by Illinois law. Id. “The safe harbor of the DOJ memorandum depends, in part, on “whether

the operation is demonstrably in compliance with a ‘strong and effective state regulatory

system.’” Id. The Committee further cautioned, “guidance on prosecutorial discretion

provided by the DOJ memorandum is subject to change.” Id. However, under the state

of affairs at the time, “it is the opinion of the Committee that the provision of legal services

to clients involved in the medical marijuana business is consistent with the Rules of

Professional Conduct.” Id.

One year later, following the issuance of Advisory Opinion No. 14-07, the Illinois

Supreme Court amended its Rule of Professional Conduct 1.2 to allow attorneys to advise

medical marijuana businesses. Illinois Rule of Professional Conduct 1.2(d) states:

A lawyer shall not counsel a client to engage, or assist a client, in conduct the lawyer knows is criminal or fraudulent, but a lawyer may:

(1) discuss the legal consequences of any proposed course of conduct with a client, (2) counsel or assist a client to make a good-faith effort to determine the validity,

scope, meaning or application of the law, and (3) counsel or assist a client in conduct expressly permitted by Illinois law that may

violate or conflict with federal or other law, as long as the lawyer advised the client about that federal or other law and its potential consequences.

IL RULES OF PROF’L CONDUCT R. 1.2(d) (2016). The Illinois Supreme Court’s comment [9] regarding criminal, fraudulent and

prohibited transactions states:

Paragraph (d) prohibits a lawyer from knowingly counseling or assisting a client to commit a crime or fraud. This prohibition, however, does not preclude the lawyer from giving an honest opinion about the actual consequences that appear likely to result from the client’s conduct. Nor does the fact that a client uses advice in a course of action that is criminal or fraudulent of itself make a lawyer a party to the course of action. There

7

is a critical distinction between presenting an analysis of legal aspects of questionable conduct and recommending the means by which a crime or fraud might be committed with impunity. IL RULES OF PROF’L CONDUCT R. 1.2 cmt. [9] (2016).

The Illinois Supreme Court’s comment [10] regarding criminal, fraudulent and

prohibited transactions states:

Paragraph (d)(3) was adopted to address the dilemma facing a lawyer in Illinois after the passage of the Illinois Compassionate Use of Medical Cannabis Pilot Program Act effective January 1, 2014. The Act expressly permits the cultivation, distribution, and use of marijuana for medical purposes under the conditions stated in the Act. Conduct permitted by the Act may be prohibited by the federal Controlled Substances Act, 21 U.S.C. §§801-904 and other law. The conflict between state and federal law makes it particularly important to allow a lawyer to provide legal advice and assistance to a client seeking to engage in conduct permitted by Illinois law. In providing such advice and assistance, a lawyer shall also advise the client about related federal law and policy. Paragraph 3(d) is not restricted in its application to the marijuana law conflict. A lawyer should be especially careful about counseling or assisting a client in other contexts in conduct that may violate or conflict with federal, state or local law. IL RULES OF PROF’L CONDUCT R. 1.2 cmt. [10] (2016).

There is no question that Advisory Opinion 14-07 and the Illinois Supreme Court’s

amendments to Rule 1.2(d) make it clear that Illinois lawyers may provide advice and

assistance to clients in the cannabis industry. The lack of prohibitions against Illinois

lawyers providing advice and assistance to cannabis industry clients is particularly

important given that Illinois recently became the 11th state in the country to legalize the

recreational use of marijuana, effective on January 1, 2020. See the Illinois Cannabis

Regulation and Tax Act, HB 1438-SFA 2).

III. Cole, Sessions and the Current State of Federal Affairs

While lawyers in some jurisdictions may ethically be permitted to provide advice

and legal services to cannabis industry clients, lawyers “should tread carefully over the

8

legal terrain.” See Advisory Opinion 14-07. Lawyers practicing cannabis law run not only

the risk of committing ethical violations, but also committing crimes. For example, at the

time of publication of Advisory Opinion No. 14-07, the Department of Justice

memorandum issued by Deputy Attorney General James M. Cole was in place. See

Memorandum from James M. Cole, Deputy Attorney General, U.S. Dep’t. of Justice, to

All U.S. Attorneys (Aug. 29, 2013) (“Cole Memorandum”). The Cole Memorandum stated

that given its “limited investigative and prosecutorial resources” the Department of Justice

would not focus its efforts on marijuana enforcement in “jurisdictions that have enacted

laws legalizing marijuana in some form and that have also implemented strong an

effective regulatory and enforcement systems to control the cultivation, distribution, sale

and possession of marijuana.” Id. “[C]onduct in compliance with those laws and

regulations is less likely to threaten federal priorities listed above.”5 Id. However, “[e]ven

in jurisdictions with strong and effective regulatory systems, evidence that particular

conduct threatens federal priorities will subject the person or entity to federal enforcement

action, based on the circumstances.” Id.

Attorney General Jeff Sessions rescinded the Cole Memorandum on January 4,

2018. Jefferson B. Sessions, Attorney General, U.S. Dep’t. of Justice, to All U.S.

Attorneys, (Jan. 4, 2018). “[P]revious nationwide guidance specific to marijuana

enforcement is unnecessary and is rescinded, effective immediately.” Id. Sessions’s

rescission of the Cole Memorandum left the cannabis industry and attorneys practicing

5 Federal priorities under the Cole Memorandum include: Preventing the distribution of marijuana to minors; preventing revenue from the sale of marijuana from going to criminal enterprises, gangs and cartels; preventing the diversion of marijuana from states where it is legal under state law in some form to other states; preventing state-authorized marijuana activity form being used as a cover or pretext for the trafficking or other illegal drugs or other illegal activity.

9

within the industry in an unpredictable legal landscape. However, Sessions’s November

7, 2018, resignation gave hope for restoration of the Cole Memorandum and federal

legislation that could potentially fortify legal protections for the cannabis industry and

lawyers that wish to advise and assist clients in the industry. In August, the American Bar

Association’s House of Delegates passed a resolution calling on Congress to enact

legislation to exempt from the Controlled Substances Act any production, distribution,

possession, or use of marijuana carried out in compliance with state laws and to remove

marijuana from Schedule 1 of the Controlled Substances Act. Current cannabis

legislation in Congress, the STATES Act,6 which recognizes each state’s right to legalize

cannabis, and the SAFE Banking Act,7 which creates protections for banks that provide

financial services to cannabis-related legitimate businesses and service providers, may

also impact the ethical and legal consequences for lawyers providing advice and

assistance to the cannabis industry.

IV. Conclusion

Lawyers wishing to engage in counseling or assisting clients in the cannabis

industry must educate themselves regarding the ethical and legal consequences for their

actions. While lawyers in some jurisdictions are not ethically prohibited from providing

advice and assistance to cannabis industry clients, the lack of prohibitions is not without

ethical or legal risk. Clear communication with your client regarding state and federal laws

and policies and the conflicts between same is required if a lawyer wishes to keep his or

her license and continue to practice law.

6 S.3032: STATES Act 7 H.R. 1595: SAFE Banking Act of 2019

December 11, 2018 FEATURE

The Hemp Revolution Will Not be Televised . . . Yet

By Lisa L. Pittman

While cannabis legalization is sweeping the nation and the spotlight, either through medical programs in 33 states and the District of Columbia, adult use programs in 10 states and the District of Columbia, or decriminalization measures undertaken in many metropolitan cities, hemp is the emerging giant of this new industry, which all burgeons from the same cannabis plant. In contrast to cannabis, which is tightly regulated from a law enforcement perspective because of its status on Schedule 1 of the U.S. Controlled Substances Act (CSA), hemp, which derives from the nonflowering portions of the cannabis plant containing low tetrahydrocannabinol (< 0.3% THC, the compound in the plant causing euphoria), is subject to much less regulation. Currently, enormous market potential and public awareness of the benefits of cannabidiol (CBD, the compound in the plant possessing a plethora of therapeutic benefits) are increasing exponentially, particularly among those discovering its capabilities to reduce inflammation, pain, and anxiety. See, e.g., Alex Williams, Why Is CBD Everywhere?, New York Times, Oct. 27, 2018.

Despite the increasing popularity of CBD, hemp, and hemp-derived CBDs, legal status currently is extremely limited, due to their inclusion in the definition of “marihuana” under the CSA. Technically, neither cannabis nor hemp-derived CBD extracts are legal to ship across state lines or are permitted in some states, and, as noted, their possession and use are in violation of federal law. So, why do we see hemp-derived and infused CBD products, from creams to tinctures to edibles and beverages, in mainstream commercial outlets and online?

A Short History of Hemp

Before 1937, industrial hemp was legal and was used most often for clothing, paper, rope, and lamp oil. But in 1937, Congress passed the Marihuana Tax Act, which made all species of the Cannabis sativa L. plant illegal, including hemp. While the purported purpose was to eliminate the use of cannabis as a drug, some theorists posit that the real intent of the Act was to eliminate the competition hemp posed to paper and steel manufacturers by referring to cannabis as “marijuana” as a scare tactic in relation to its use as a drug. Fast forward to 2014, and under the Agricultural Improvement Act, known as the “Farm Bill,” hemp finally was permitted to be grown again, but only if in conjunction with a state’s industrial hemp program, or with a license by a public university for a research pilot program. However, to the misconception of many, in neither of these instances were hemp or the products made from hemp allowed to cross those states’ lines.

In just a few short years, licensed (and unlicensed) hemp producers began to multiply in states such as Colorado, Oregon, Kentucky, and South Carolina. Extracts derived from hemp plants can be infused into a variety of products to produce therapeutic effects sometimes rivaling or surpassing pharmaceutical counterparts, with none of the side effects of pharmaceutical drugs. As the public experiments and becomes more aware, businesses have been aggressively pursuing market share by peddling their own versions of hemp and CBD products for humans and pets across all types of marketing platforms . . . yet, all the while, the products are still federally illegal. The FDA sends out warning letters to companies making unsubstantiated claims about what CBD can treat or cure. Product seizures are made, usually by local law enforcement, but hemp-derived CBD is a low enforcement priority of the Drug Enforcement Authority (DEA), whose resources to thwart state-compliant hemp are limited by the Farm Bill, and currently are more focused on the opioid epidemic, the movement of cannabis across state lines, and cartel activity.

Industrial hemp plants can be used to produce thousands of products, including textiles, paper, paints, clothing, plastics, cosmetics, foodstuffs, insulation, animal feed, fiberglass, replacement for wood products, bio-fuel, and detergents. Over 30 countries around the world have some sort of industrial hemp industry in place, and in fact, the United States has been importing some of these materials because the CSA forbids their growth and production domestically. For example, both BMW and Mercedes use hemp fiber for their seats made in the United States.

Hemp Distinguished from Marijuana

After several lawsuits challenging the status of the hemp plant within the definition of “marihuana” under the CSA, the DEA issued a “Clarification of the New Drug Code (7350) for Marihuana Extract” in May. The DEA clarified that certain materials or products are excluded from the definition of marijuana, to wit: exempt plant materials such as stalks, fibers, oil and cake from seeds, and sterilized seed may be sold and otherwise distributed throughout the United States—and even may be imported into the United States and exported—as long as the laws of the country from which the products are imported or exported are in favor of such commerce. These plant materials and products made from them are arguably okay for interstate sale under current law. The DEA’s 2016 Statement of Principles on Industrial Hemp indicates that industrial hemp products may be sold in and among states with agricultural pilot programs but also directs that industrial hemp plants and seeds may not be transported across state lines. As a result, it appears that hemp-based products may be sold between states, as long as both states have enacted laws allowing the sale of hemp, but the interstate transportation of the actual hemp plants and their seeds is federally illegal, regardless of the hemp laws of the states. Confused yet?

Other Conundrums Related to Hemp

Adding to the confusion, state law enforcement agents intervene and frequently are unclear about the legality of the substance they may discover in a customer’s or distributor’s vehicle or even on the shelves of a health food store. Many clients I advise are navigating these ever-shifting and difficult-to-interpret conflicting state and federal laws because raw or finished hemp products are very lucrative. Moreover, they may be sourced from one state, but manufactured in another, and perhaps sold out of a third—just like many other businesses. And their labeling must comply with FDA requirements as much as possible.

The interstate prohibitions present the conundrums, along with the overarching federal illegality of most cannabis and hemp products on the market. For example, cannabis and hemp social media channels have been taken down by Facebook and YouTube because of the products’ federal illegality, even if the channels are doing nothing more than providing information or education. In January, the IRS amended its rules to disallow recognition of nonprofit status for cannabis advocacy groups. And, under IRC 280(e), cannabis businesses cannot take ordinary business deductions, although the application of the provision to legal state hemp businesses is more complicated. FDIC-insured banks will not touch a cannabis- or hemp-related business account, even in states where hemp is legal; a business must find a state-chartered bank or credit union to service its accounts, and its employees are subject to bank account closures if their paychecks reflect a cannabis or hemp entity. Yet, despite these obstacles, farmers, investors, manufacturers, wholesalers, retailers, and the public are willing to risk pushing the envelopes for acceptance of hemp-derived CBD products. While the hemp revolution has been bubbling under the radar thus far, it is becoming more ubiquitous, and the push for its legalization separate from cannabis is emerging on a bipartisan basis.

2018 Farm Bill Stalls

The times are changing. On June 13, the Senate Agriculture Committee passed the Agriculture Improvement Act of 2018, known as the “2018 Farm Bill.” The Hemp Farming Act, introduced by Senate Majority Leader Mitch McConnell and included in the Senate’s updated version of the 2018 Farm Bill, would remove industrial hemp from the CSA and legalize growing industrial hemp as an agricultural crop nationwide, subject to state approvals. The bill also would specifically authorize hemp CBD extractions to cross state lines, allow hemp farmers to get crop insurance and access to federal water rights, and even protect from prosecution those hemp farmers who grow plants with slightly elevated THC content. This legislation would be a gamechanger for the industry, but no resolution on the proposed legislation was reached before Congress recessed at the end of September, mostly due to conflict over a provision in the House version of the bill pertaining to food stamps—the hemp aspect was not controversial. Thus, technically the 2014 Farm Bill expired, but some of its provisions continue to govern due to appropriations made under other programs. The hemp industry is proceeding under the assumption that the murky waters of the 2014 Farm Bill continue to apply and eagerly await action on the 2018 Farm Bill when Congress reconvenes. Congress is expected to make the 2018 Farm Bill a priority, while momentum continues to mount regarding the legitimacy and eventual legality of hemp-derived CBD products.

Epidiolex Rescheduled after FDA Approval

Finally, in a landmark move, the DEA rescheduled Epidiolex, a cannabis-derived CBD drug for the treatment of seizures that is manufactured by a pharmaceutical company based in the United Kingdom. Epidiolex recently was approved by the FDA, but no doctor could prescribe it because of its Schedule 1 status, which designates the drug as having “no currently accepted medical use.” Despite many case studies, particularly in Israel, demonstrating that cannabis possesses powerful curative properties for certain ailments, research in the United States has been prohibited because of the drug’s Schedule 1 status, leading to circular reasoning by the DEA in maintaining cannabis as a Schedule 1 drug alongside heroin and LSD. But in late September, the DEA rescheduled CBD drugs approved by the FDA to Schedule 5 under circumstances that applied only to Epidiolex. That does nothing to help all the manufacturers whose products have not undergone FDA approval, but it signals one of the first recognitions by the U.S. government that the cannabis plant possesses medicinal properties, and more are expected to come.

Adding to the complicated question of which laws govern hemp products intended for human consumption, the application for and approval of Epidiolex resulted in the consideration of CBD by federal agencies as a definitive “drug,” rather than the botanical dietary or health supplement category CBD inhabited before this approval. This categorization means that efforts now must be made on labeling not to make claims or to even state that the product contains “CBD.” Instead, “hemp oil” or “hemp extract” are used on labels in an attempt not to frustrate the FDA’s new authority to regulate CBD. Manufacturers are struggling to achieve the fine balance of ensuring that the consumer will

realize a product contains hemp-derived CBD without raising red flags to the FDA, DEA, and other federal agencies and their state counterparts.

Hemp Movement on the Rise

From both an agricultural and medicinal standpoint, the hemp movement—largely unbeleaguered by the crushing compliance and taxing obligations of cannabis businesses—is on an exponential rise in the United States and internationally. A leading trade industry publication states that CBD was at least a $350 million industry last year, and some estimates suggest that by 2020, annual sales of CBD products could top $1 billion. Jenel Stelton Holtmeier, Chart: Opportunity in CBD-only stores limited, but strong growth expected for other channels, Hemp Industry Daily, Oct. 18, 2018. The magnitude and swiftness of these transactions, coupled with the uncertain nature of the laws, results in many situations and business lawsuits of all kinds between farmers, buyers, sellers, and brokers, as well as intellectual property battles and regulatory issues, along with the interplay of federal law and cross-state and cross-border investment.

Stay tuned; the evolution of law is taking place before our very eyes, in an area unthinkable only five years ago. Eventually, you will see an ad for a CBD product on television (or in a pop-up to your YouTube video). CBD products already may be available in your local convenience store or health food store. Walmart is selling CBD products in Canada, and they were briefly on the shelves of 7-Eleven and Target stores in the United States. CBD products definitely are available online, even from Amazon—but after reading this article, you may notice that your search term for CBD will yield results for “hemp” products as manufacturers forego or dance around the CBD moniker until the laws catch up to the market demand.

Author:

By Lisa L. Pittman Lisa L. Pittman is special counsel at Tannenbaum, Trost & Burk, LLC, in Denver, Colorado, where she represents a wide range of clients engaged in the legal cannabis and hemp industry across the United States and globally by applying knowledge gained from litigating a range of commercial disputes over 17 years in Texas and Colorado. She is a vice-chair of TIPS’s Business Litigation, Corporate Counsel and In-House Professionals, and Products Liability Committees, and is a member of the Cannabis Law and Policy Task Force’s Steering Committee. She may be reached at [email protected].

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‘‘(2) a State cooperative institution. ‘‘(e) AUTHORIZATION OF APPROPRIATIONS.—There is authorized

to be appropriated to carry out this section $5,000,000 for each of fiscal years 2019 through 2023.’’. SEC. 7127. UNIVERSITY RESEARCH.

Section 1463 of the National Agricultural Research, Extension, and Teaching Policy Act of 1977 (7 U.S.C. 3311) is amended by striking ‘‘2018’’ each place it appears in subsections (a) and (b) and inserting ‘‘2023’’. SEC. 7128. EXTENSION SERVICE.

Section 1464 of the National Agricultural Research, Extension, and Teaching Policy Act of 1977 (7 U.S.C. 3312) is amended by striking ‘‘2018’’ and inserting ‘‘2023’’. SEC. 7129. SUPPLEMENTAL AND ALTERNATIVE CROPS; HEMP.

Section 1473D of the National Agricultural Research, Exten-sion, and Teaching Policy Act of 1977 (7 U.S.C. 3319d) is amend-ed—

(1) in subsection (a)— (A) by striking ‘‘2018’’ and inserting ‘‘2023’’; and (B) by striking ‘‘crops,’’ and inserting ‘‘crops (including

canola),’’; (2) in subsection (b)—

(A) by inserting ‘‘for agronomic rotational purposes and as a habitat for honey bees and other pollinators’’ after ‘‘al-ternative crops’’; and

(B) by striking ‘‘commodities whose’’ and all that fol-lows through the period at the end and inserting ‘‘commod-ities.’’; (3) in subsection (c)(3)(E), by inserting ‘‘(including hemp (as

defined in section 297A of the Agricultural Marketing Act of 1946))’’ after ‘‘material’’; and

(4) in subsection (e)— (A) in paragraph (1), by striking ‘‘and’’ at the end; (B) in paragraph (2), by striking the period at the end

and inserting ‘‘; and’’; and (C) by adding at the end the following new paragraph:

‘‘(3) $2,000,000 for each of fiscal years 2019 through 2023.’’. SEC. 7130. NEW ERA RURAL TECHNOLOGY PROGRAM.

Section 1473E of the National Agricultural Research, Exten-sion, and Teaching Policy Act of 1977 (7 U.S.C. 3319e) is amend-ed—

(1) in subsection (b)(1)(B)— (A) in clause (ii), by striking ‘‘and’’ at the end; (B) in clause (iii), by striking the period at the end and

inserting ‘‘; and’’; and (C) by adding at the end the following:

‘‘(iv) precision agriculture.’’; and (2) in subsection (d), by striking ‘‘2008 through 2012’’ and

inserting ‘‘2019 through 2023’’. SEC. 7131. CAPACITY BUILDING GRANTS FOR NLGCA INSTITUTIONS.

Section 1473F(b) of the National Agricultural Research, Exten-sion, and Teaching Policy Act of 1977 (7 U.S.C. 3319i(b)) is amend-ed by striking ‘‘2018’’ and inserting ‘‘2023’’.

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SEC. 7413. NATURAL PRODUCTS RESEARCH PROGRAM. Section 7525(e) of the Food, Conservation, and Energy Act of

2008 (7 U.S.C. 5937(e)) is amended by striking ‘‘2018’’ and inserting ‘‘2023’’. SEC. 7414. SUN GRANT PROGRAM.

Section 7526(g) of the Food, Conservation, and Energy Act of 2008 (7 U.S.C. 8114(g)) is amended by striking ‘‘2018’’ and inserting ‘‘2023’’.

Subtitle E—Amendments to Other Laws SEC. 7501. CRITICAL AGRICULTURAL MATERIALS ACT.

(a) HEMP RESEARCH.—Section 5(b)(9) of the Critical Agricul-tural Materials Act (7 U.S.C. 178c(b)(9)) is amended by inserting ‘‘, and including hemp (as defined in section 297A of the Agricultural Marketing Act of 1946)’’ after ‘‘hydrocarbon-containing plants’’.

(b) AUTHORIZATION OF APPROPRIATIONS.—Section 16(a)(2) of the Critical Agricultural Materials Act (7 U.S.C. 178n(a)(2)) is amended by striking ‘‘2018’’ and inserting ‘‘2023’’. SEC. 7502. EQUITY IN EDUCATIONAL LAND-GRANT STATUS ACT OF

1994. (a) 1994 INSTITUTION DEFINED.—

(1) IN GENERAL.—Section 532 of the Equity in Educational Land-Grant Status Act of 1994 (7 U.S.C. 301 note; Public Law 103–382) is amended to read as follows:

‘‘SEC. 532. DEFINITION OF 1994 INSTITUTION. ‘‘In this part, the term ‘1994 Institution’ means any of the fol-

lowing colleges: ‘‘(1) Aaniiih Nakoda College. ‘‘(2) Bay Mills Community College. ‘‘(3) Blackfeet Community College. ‘‘(4) Cankdeska Cikana Community College. ‘‘(5) Chief Dull Knife College. ‘‘(6) College of Menominee Nation. ‘‘(7) College of the Muscogee Nation. ‘‘(8) D–Q University. ‘‘(9) Dine College. ‘‘(10) Fond du Lac Tribal and Community College. ‘‘(11) Fort Peck Community College. ‘‘(12) Haskell Indian Nations University. ‘‘(13) Ilisagvik College. ‘‘(14) Institute of American Indian and Alaska Native Cul-

ture and Arts Development. ‘‘(15) Keweenaw Bay Ojibwa Community College. ‘‘(16) Lac Courte Oreilles Ojibwa Community College. ‘‘(17) Leech Lake Tribal College. ‘‘(18) Little Big Horn College. ‘‘(19) Little Priest Tribal College. ‘‘(20) Navajo Technical University. ‘‘(21) Nebraska Indian Community College. ‘‘(22) Northwest Indian College. ‘‘(23) Nueta Hidatsa Sahnish College. ‘‘(24) Oglala Lakota College.

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SEC. 7604. ASSISTANCE FOR FORESTRY RESEARCH UNDER THE MCINTIRE-STENNIS COOPERATIVE FORESTRY ACT.

Section 2 of Public Law 87–788 (commonly known as the ‘‘McIntire-Stennis Cooperative Forestry Act’’) (16 U.S.C. 582a–1) is amended in the second sentence—

(1) by striking ‘‘and’’ before ‘‘1890 Institutions’’; and (2) by inserting ‘‘and 1994 Institutions (as defined in sec-

tion 532 of the Equity in Educational Land-Grant Status Act of 1994 (7 U.S.C. 301 note; Public Law 103–382)) that offer an associate’s degree or a baccalaureate degree in forestry,’’ before ‘‘and (b)’’.

SEC. 7605. LEGITIMACY OF INDUSTRIAL HEMP RESEARCH. (a) IN GENERAL.—Section 7606 of the Agricultural Act of 2014

(7 U.S.C. 5940) is amended— (1) by redesignating subsections (a) and (b) as subsections

(b) and (a), respectively, and moving the subsections so as to ap-pear in alphabetical order;

(2) in subsection (a) (as so redesignated)— (A) by redesignating paragraph (3) as paragraph (4);

and (B) by inserting after paragraph (2) the following:

‘‘(3) STATE.—The term ‘State’ has the meaning given such term in section 297A of the Agricultural Marketing Act of 1946.’’;

(3) in subsection (b) (as so redesignated), in the subsection heading, by striking ‘‘IN GENERAL’’ and inserting ‘‘INDUSTRIAL HEMP RESEARCH’’; and

(4) by adding at the end the following: ‘‘(c) STUDY AND REPORT.—

‘‘(1) IN GENERAL.—The Secretary shall conduct a study of agricultural pilot programs—

‘‘(A) to determine the economic viability of the domestic production and sale of industrial hemp; and

‘‘(B) that shall include a review of— ‘‘(i) each agricultural pilot program; and ‘‘(ii) any other agricultural or academic research

relating to industrial hemp. ‘‘(2) REPORT.—Not later than 12 months after the date of

enactment of this subsection, the Secretary shall submit to Con-gress a report describing the results of the study conducted under paragraph (1).’’. (b) REPEAL.—Effective on the date that is 1 year after the date

on which the Secretary establishes a plan under section 297C of the Agricultural Marketing Act of 1946, section 7606 of the Agricultural Act of 2014 (7 U.S.C. 5940) is repealed. SEC. 7606. COLLECTION OF DATA RELATING TO BARLEY AREA PLANT-

ED AND HARVESTED. For all acreage reports published after the date of enactment of

this Act, the Secretary, acting through the Administrator of the Na-tional Agricultural Statistics Service, shall include the State of New York in the States surveyed to produce the table entitled ‘‘Barley Area Planted and Harvested’’ in those reports.

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SEC. 10113. HEMP PRODUCTION. The Agricultural Marketing Act of 1946 (7 U.S.C. 1621 et seq.)

is amended by adding at the end the following:

‘‘Subtitle G—Hemp Production ‘‘SEC. 297A. DEFINITIONS.

‘‘In this subtitle: ‘‘(1) HEMP.—The term ‘hemp’ means the 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.

‘‘(2) INDIAN TRIBE.—The term ‘Indian tribe’ has the mean-ing given the term in section 4 of the Indian Self-Determination and Education Assistance Act (25 U.S.C. 5304).

‘‘(3) SECRETARY.—The term ‘Secretary’ means the Secretary of Agriculture.

‘‘(4) STATE.—The term ‘State’ means— ‘‘(A) a State; ‘‘(B) the District of Columbia; ‘‘(C) the Commonwealth of Puerto Rico; and ‘‘(D) any other territory or possession of the United

States. ‘‘(5) STATE DEPARTMENT OF AGRICULTURE.—The term ‘State

department of agriculture’ means the agency, commission, or department of a State government responsible for agriculture in the State.

‘‘(6) TRIBAL GOVERNMENT.—The term ‘Tribal government’ means the governing body of an Indian tribe.

‘‘SEC. 297B. STATE AND TRIBAL PLANS. ‘‘(a) SUBMISSION.—

‘‘(1) IN GENERAL.—A State or Indian tribe desiring to have primary regulatory authority over the production of hemp in the State or territory of the Indian tribe shall submit to the Sec-retary, through the State department of agriculture (in con-sultation with the Governor and chief law enforcement officer of the State) or the Tribal government, as applicable, a plan under which the State or Indian tribe monitors and regulates that production as described in paragraph (2).

‘‘(2) CONTENTS.—A State or Tribal plan referred to in para-graph (1)—

‘‘(A) shall only be required to include— ‘‘(i) a practice to maintain relevant information re-

garding land on which hemp is produced in the State or territory of the Indian tribe, including a legal de-scription of the land, for a period of not less than 3 cal-endar years;

‘‘(ii) a procedure for testing, using post- decarboxylation or other similarly reliable methods, delta-9 tetrahydrocannabinol concentration levels of hemp produced in the State or territory of the Indian tribe;

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‘‘(iii) a procedure for the effective disposal of— ‘‘(I) plants, whether growing or not, that are

produced in violation of this subtitle; and ‘‘(II) products derived from those plants;

‘‘(iv) a procedure to comply with the enforcement procedures under subsection (e);

‘‘(v) a procedure for conducting annual inspections of, at a minimum, a random sample of hemp producers to verify that hemp is not produced in violation of this subtitle;

‘‘(vi) a procedure for submitting the information described in section 297C(d)(2), as applicable, to the Secretary not more than 30 days after the date on which the information is received; and

‘‘(vii) a certification that the State or Indian tribe has the resources and personnel to carry out the prac-tices and procedures described in clauses (i) through (vi); and ‘‘(B) may include any other practice or procedure estab-

lished by a State or Indian tribe, as applicable, to the ex-tent that the practice or procedure is consistent with this subtitle. ‘‘(3) RELATION TO STATE AND TRIBAL LAW.—

‘‘(A) NO PREEMPTION.—Nothing in this subsection pre-empts or limits any law of a State or Indian tribe that—

‘‘(i) regulates the production of hemp; and ‘‘(ii) is more stringent than this subtitle.

‘‘(B) REFERENCES IN PLANS.—A State or Tribal plan re-ferred to in paragraph (1) may include a reference to a law of the State or Indian tribe regulating the production of hemp, to the extent that law is consistent with this subtitle.

‘‘(b) APPROVAL.— ‘‘(1) IN GENERAL.—Not later than 60 days after receipt of a

State or Tribal plan under subsection (a), the Secretary shall— ‘‘(A) approve the State or Tribal plan if the State or

Tribal plan complies with subsection (a); or ‘‘(B) disapprove the State or Tribal plan only if the

State or Tribal plan does not comply with subsection (a). ‘‘(2) AMENDED PLANS.—If the Secretary disapproves a State

or Tribal plan under paragraph (1)(B), the State, through the State department of agriculture (in consultation with the Gov-ernor and chief law enforcement officer of the State) or the Trib-al government, as applicable, may submit to the Secretary an amended State or Tribal plan that complies with subsection (a).

‘‘(3) CONSULTATION.—The Secretary shall consult with the Attorney General in carrying out this subsection. ‘‘(c) AUDIT OF STATE COMPLIANCE.—

‘‘(1) IN GENERAL.—The Secretary may conduct an audit of the compliance of a State or Indian tribe with a State or Tribal plan approved under subsection (b).

‘‘(2) NONCOMPLIANCE.—If the Secretary determines under an audit conducted under paragraph (1) that a State or Indian tribe is not materially in compliance with a State or Tribal plan—

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‘‘(A) the Secretary shall collaborate with the State or Indian tribe to develop a corrective action plan in the case of a first instance of noncompliance; and

‘‘(B) the Secretary may revoke approval of the State or Tribal plan in the case of a second or subsequent instance of noncompliance.

‘‘(d) TECHNICAL ASSISTANCE.—The Secretary may provide tech-nical assistance to a State or Indian tribe in the development of a State or Tribal plan under subsection (a).

‘‘(e) VIOLATIONS.— ‘‘(1) IN GENERAL.—A violation of a State or Tribal plan ap-

proved under subsection (b) shall be subject to enforcement sole-ly in accordance with this subsection.

‘‘(2) NEGLIGENT VIOLATION.— ‘‘(A) IN GENERAL.—A hemp producer in a State or the

territory of an Indian tribe for which a State or Tribal plan is approved under subsection (b) shall be subject to sub-paragraph (B) of this paragraph if the State department of agriculture or Tribal government, as applicable, determines that the hemp producer has negligently violated the State or Tribal plan, including by negligently—

‘‘(i) failing to provide a legal description of land on which the producer produces hemp;

‘‘(ii) failing to obtain a license or other required authorization from the State department of agriculture or Tribal government, as applicable; or

‘‘(iii) producing Cannabis sativa L. with a delta-9 tetrahydrocannabinol concentration of more than 0.3 percent on a dry weight basis. ‘‘(B) CORRECTIVE ACTION PLAN.—A hemp producer de-

scribed in subparagraph (A) shall comply with a plan es-tablished by the State department of agriculture or Tribal government, as applicable, to correct the negligent viola-tion, including—

‘‘(i) a reasonable date by which the hemp producer shall correct the negligent violation; and

‘‘(ii) a requirement that the hemp producer shall periodically report to the State department of agri-culture or Tribal government, as applicable, on the compliance of the hemp producer with the State or Tribal plan for a period of not less than the next 2 cal-endar years. ‘‘(C) RESULT OF NEGLIGENT VIOLATION.—A hemp pro-

ducer that negligently violates a State or Tribal plan under subparagraph (A) shall not as a result of that violation be subject to any criminal enforcement action by the Federal Government or any State government, Tribal government, or local government.

‘‘(D) REPEAT VIOLATIONS.—A hemp producer that neg-ligently violates a State or Tribal plan under subparagraph (A) 3 times in a 5-year period shall be ineligible to produce hemp for a period of 5 years beginning on the date of the third violation. ‘‘(3) OTHER VIOLATIONS.—

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‘‘(A) IN GENERAL.—If the State department of agri-culture or Tribal government in a State or the territory of an Indian tribe for which a State or Tribal plan is ap-proved under subsection (b), as applicable, determines that a hemp producer in the State or territory has violated the State or Tribal plan with a culpable mental state greater than negligence—

‘‘(i) the State department of agriculture or Tribal government, as applicable, shall immediately report the hemp producer to—

‘‘(I) the Attorney General; and ‘‘(II) the chief law enforcement officer of the

State or Indian tribe, as applicable; and ‘‘(ii) paragraph (1) of this subsection shall not

apply to the violation. ‘‘(B) FELONY.—

‘‘(i) IN GENERAL.—Except as provided in clause (ii), any person convicted of a felony relating to a controlled substance under State or Federal law before, on, or after the date of enactment of this subtitle shall be in-eligible, during the 10-year period following the date of the conviction—

‘‘(I) to participate in the program established under this section or section 297C; and

‘‘(II) to produce hemp under any regulations or guidelines issued under section 297D(a). ‘‘(ii) EXCEPTION.—Clause (i) shall not apply to any

person growing hemp lawfully with a license, registra-tion, or authorization under a pilot program author-ized by section 7606 of the Agricultural Act of 2014 (7 U.S.C. 5940) before the date of enactment of this sub-title. ‘‘(C) FALSE STATEMENT.—Any person who materially

falsifies any information contained in an application to participate in the program established under this section shall be ineligible to participate in that program.

‘‘(f) EFFECT.—Nothing in this section prohibits the production of hemp in a State or the territory of an Indian tribe—

‘‘(1) for which a State or Tribal plan is not approved under this section, if the production of hemp is in accordance with sec-tion 297C or other Federal laws (including regulations); and

‘‘(2) if the production of hemp is not otherwise prohibited by the State or Indian tribe.

‘‘SEC. 297C. DEPARTMENT OF AGRICULTURE. ‘‘(a) DEPARTMENT OF AGRICULTURE PLAN.—

‘‘(1) IN GENERAL.—In the case of a State or Indian tribe for which a State or Tribal plan is not approved under section 297B, the production of hemp in that State or the territory of that Indian tribe shall be subject to a plan established by the Secretary to monitor and regulate that production in accord-ance with paragraph (2).

‘‘(2) CONTENT.—A plan established by the Secretary under paragraph (1) shall include—

‘‘(A) a practice to maintain relevant information re-garding land on which hemp is produced in the State or

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territory of the Indian tribe, including a legal description of the land, for a period of not less than 3 calendar years;

‘‘(B) a procedure for testing, using post-decarboxylation or other similarly reliable methods, delta-9 tetrahydrocannabinol concentration levels of hemp pro-duced in the State or territory of the Indian tribe;

‘‘(C) a procedure for the effective disposal of— ‘‘(i) plants, whether growing or not, that are pro-

duced in violation of this subtitle; and ‘‘(ii) products derived from those plants;

‘‘(D) a procedure to comply with the enforcement proce-dures under subsection (c)(2);

‘‘(E) a procedure for conducting annual inspections of, at a minimum, a random sample of hemp producers to verify that hemp is not produced in violation of this sub-title; and

‘‘(F) such other practices or procedures as the Secretary considers to be appropriate, to the extent that the practice or procedure is consistent with this subtitle.

‘‘(b) LICENSING.—The Secretary shall establish a procedure to issue licenses to hemp producers in accordance with a plan estab-lished under subsection (a).

‘‘(c) VIOLATIONS.— ‘‘(1) IN GENERAL.—In the case of a State or Indian tribe for

which a State or Tribal plan is not approved under section 297B, it shall be unlawful to produce hemp in that State or the territory of that Indian tribe without a license issued by the Secretary under subsection (b).

‘‘(2) NEGLIGENT AND OTHER VIOLATIONS.—A violation of a plan established under subsection (a) shall be subject to enforce-ment in accordance with paragraphs (2) and (3) of section 297B(e), except that the Secretary shall carry out that enforce-ment instead of a State department of agriculture or Tribal gov-ernment.

‘‘(3) REPORTING TO ATTORNEY GENERAL.—In the case of a State or Indian tribe covered by paragraph (1), the Secretary shall report the production of hemp without a license issued by the Secretary under subsection (b) to the Attorney General. ‘‘(d) INFORMATION SHARING FOR LAW ENFORCEMENT.—

‘‘(1) IN GENERAL.—The Secretary shall— ‘‘(A) collect the information described in paragraph (2);

and ‘‘(B) make the information collected under subpara-

graph (A) accessible in real time to Federal, State, terri-torial, and local law enforcement. ‘‘(2) CONTENT.—The information collected by the Secretary

under paragraph (1) shall include— ‘‘(A) contact information for each hemp producer in a

State or the territory of an Indian tribe for which— ‘‘(i) a State or Tribal plan is approved under sec-

tion 297B(b); or ‘‘(ii) a plan is established by the Secretary under

this section;

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‘‘(B) a legal description of the land on which hemp is grown by each hemp producer described in subparagraph (A); and

‘‘(C) for each hemp producer described in subpara-graph (A)—

‘‘(i) the status of— ‘‘(I) a license or other required authorization

from the State department of agriculture or Tribal government, as applicable; or

‘‘(II) a license from the Secretary; and ‘‘(ii) any changes to the status.

‘‘SEC. 297D. REGULATIONS AND GUIDELINES; EFFECT ON OTHER LAW. ‘‘(a) PROMULGATION OF REGULATIONS AND GUIDELINES; RE-

PORT.— ‘‘(1) REGULATIONS AND GUIDELINES.—

‘‘(A) IN GENERAL.—The Secretary shall promulgate reg-ulations and guidelines to implement this subtitle as expe-ditiously as practicable.

‘‘(B) CONSULTATION WITH ATTORNEY GENERAL.—The Secretary shall consult with the Attorney General on the promulgation of regulations and guidelines under subpara-graph (A). ‘‘(2) REPORT.—The Secretary shall annually submit to the

Committee on Agriculture of the House of Representatives and the Committee on Agriculture, Nutrition, and Forestry of the Senate a report containing updates on the implementation of this subtitle. ‘‘(b) AUTHORITY.—Subject to subsection (c)(3)(B), the Secretary

shall have sole authority to promulgate Federal regulations and guidelines that relate to the production of hemp, including Federal regulations and guidelines that relate to the implementation of sec-tions 297B and 297C.

‘‘(c) EFFECT ON OTHER LAW.—Nothing in this subtitle shall af-fect or modify—

‘‘(1) the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 301 et seq.);

‘‘(2) section 351 of the Public Health Service Act (42 U.S.C. 262); or

‘‘(3) the authority of the Commissioner of Food and Drugs and the Secretary of Health and Human Services—

‘‘(A) under— ‘‘(i) the Federal Food, Drug, and Cosmetic Act (21

U.S.C. 301 et seq.); or ‘‘(ii) section 351 of the Public Health Service Act

(42 U.S.C. 262); or ‘‘(B) to promulgate Federal regulations and guidelines

that relate to the production of hemp under the Act de-scribed in subparagraph (A)(i) or the section described in subparagraph (A)(ii).

‘‘SEC. 297E. AUTHORIZATION OF APPROPRIATIONS. ‘‘There are authorized to be appropriated such sums as are nec-

essary to carry out this subtitle.’’.

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SEC. 10114. INTERSTATE COMMERCE. (a) RULE OF CONSTRUCTION.—Nothing in this title or an

amendment made by this title prohibits the interstate commerce of hemp (as defined in section 297A of the Agricultural Marketing Act of 1946 (as added by section 10113)) or hemp products.

(b) TRANSPORTATION OF HEMP AND HEMP PRODUCTS.—No State or Indian Tribe shall prohibit the transportation or shipment of hemp or hemp products produced in accordance with subtitle G of the Agricultural Marketing Act of 1946 (as added by section 10113) through the State or the territory of the Indian Tribe, as applicable. SEC. 10115. FIFRA INTERAGENCY WORKING GROUP.

Section 3(c) of the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. 13a(c)) is amended by adding at the end the following:

‘‘(11) INTERAGENCY WORKING GROUP.— ‘‘(A) DEFINITION OF COVERED AGENCY.—In this para-

graph, the term ‘covered agency’ means any of the fol-lowing:

‘‘(i) The Department of Agriculture. ‘‘(ii) The Department of Commerce. ‘‘(iii) The Department of the Interior. ‘‘(iv) The Council on Environmental Quality. ‘‘(v) The Environmental Protection Agency.

‘‘(B) ESTABLISHMENT.—The Administrator shall estab-lish an interagency working group, to be comprised of rep-resentatives from each covered agency, to provide rec-ommendations regarding, and to implement a strategy for improving, the consultation process required under section 7 of the Endangered Species Act of 1973 (16 U.S.C. 1536) for pesticide registration and registration review.

‘‘(C) DUTIES.—The interagency working group estab-lished under subparagraph (B) shall—

‘‘(i) analyze relevant Federal law (including regu-lations) and case law for purposes of providing an out-line of the legal and regulatory framework for the con-sultation process referred to in that subparagraph, in-cluding—

‘‘(I) requirements under this Act and the En-dangered Species Act of 1973 (16 U.S.C. 1531 et seq.);

‘‘(II) Federal case law regarding the intersec-tion of this Act and the Endangered Species Act of 1973 (16 U.S.C. 1531 et seq.); and

‘‘(III) Federal regulations relating to the pes-ticide consultation process; ‘‘(ii) provide advice regarding methods of—

‘‘(I) defining the scope of actions of the covered agencies that are subject to the consultation re-quirement referred to in subparagraph (B); and

‘‘(II) properly identifying and classifying ef-fects of actions of the covered agencies with respect to that consultation requirement; ‘‘(iii) identify the obligations and limitations under

Federal law of each covered agency for purposes of pro-

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(i) to determine when the use of methyl bromide is required; and

(ii) to authorize such use; (B) a risk-benefit analysis of authorizing the Secretary,

in accordance with appropriate requirements and criteria, such as the recommendations developed under subpara-graph (E)—

(i) to determine when the use of methyl bromide is required; and

(ii) to authorize such use; (C) a historic estimate of situations occurring on or

after September 15, 1997, that could have been deemed emergency events;

(D) a detailed assessment of the adherence of the United States to international obligations of the United States with respect to the prevention of ozone depletion; and

(E) an assessment and recommendations on appro-priate requirements and criteria to be met to authorize the use of methyl bromide in response to an emergency event (including any recommendations for revising the definition of the term ‘‘emergency event’’ in subsection (a)) in a man-ner that fully complies with the Montreal Protocol on Sub-stances that Deplete the Ozone Layer, including Decision IX/7 of the Ninth Meeting of the Conference of the Parties to the Montreal Protocol on Substances that Deplete the Ozone Layer.

(c) REPORT.—Not later than 2 years after the date of enactment of this Act, the Secretary shall submit a report on the study under subsection (b) to the Committee on Agriculture of the House of Rep-resentatives and the Committee on Agriculture, Forestry, and Nutri-tion of the Senate.

TITLE XI—CROP INSURANCE SEC. 11101. DEFINITIONS.

Section 502(b) of the Federal Crop Insurance Act (7 U.S.C. 1502(b)) is amended—

(1) by redesignating paragraphs (6), (7), (8), (9), (10), and (11) as paragraphs (7), (8), (10), (11), (12), and (13) respectively;

(2) by inserting after paragraph (5) the following: ‘‘(6) COVER CROP TERMINATION.—The term ‘cover crop ter-

mination’ means a practice that historically and under reason-able circumstances results in the termination of the growth of a cover crop.’’; and

(3) by inserting after paragraph (8) (as so redesignated) the following:

‘‘(9) HEMP.—The term ‘hemp’ has the meaning given the term in section 297A of the Agricultural Marketing Act of 1946.’’.

SEC. 11102. DATA COLLECTION. Section 506(h)(2) of the Federal Crop Insurance Act (7 U.S.C.

1506(h)(2)) is amended— (1) by striking ‘‘The Corporation’’ and inserting the fol-

lowing:

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‘‘(iii) Research and development for a new policy or plan of insurance, or endorsement, for commodities with existing policies or plans of insurance, such as dollar plans.’’;

(3) in subparagraph (B), in the subparagraph heading, by striking ‘‘ADDITION OF NEW CROPS’’ and inserting ‘‘REPORT’’; and

(4) by striking subparagraphs (C) and (D). SEC. 11106. INSURANCE PERIOD.

Section 508(a)(2) of the Federal Crop Insurance Act (7 U.S.C. 1508(a)(2)) is amended by striking ‘‘and sweet potatoes’’ and insert-ing ‘‘sweet potatoes, and hemp’’. SEC. 11107. COVER CROPS.

Section 508(a) of the Federal Crop Insurance Act (7 U.S.C. 1508(a)) is amended—

(1) in paragraph (3)(B), in the subparagraph heading, by inserting ‘‘DETERMINATION REVIEW’’ after ‘‘PRACTICES’’; and

(2) by adding at the end the following: ‘‘(11) COVER CROPS.—

‘‘(A) IN GENERAL.—The voluntary practice of cover cropping shall be considered a good farming practice under paragraph (3)(A)(iii) if the cover crop is terminated in ac-cordance with subparagraph (B).

‘‘(B) TERMINATION.— ‘‘(i) IN GENERAL.—The termination of a cover crop

shall be carried out according to— ‘‘(I) guidelines established by the Secretary; or ‘‘(II) an exception to the guidelines approved

under clause (ii). ‘‘(ii) EXCEPTION TO GUIDELINES.—The Corporation

shall approve an exception to the guidelines under clause (i)(I) if that exception is recommended by—

‘‘(I) the Natural Resources Conservation Serv-ice; or

‘‘(II) an agricultural expert, as determined by the Corporation, unless the exception is determined to be unreasonable by the Corporation.

‘‘(C) INSURABILITY OF SUBSEQUENT CROP.—Cover crop termination shall not affect the insurability of a subse-quently planted insurable crop if the cover crop is termi-nated in accordance with subparagraph (B).

‘‘(D) SUMMER FALLOW.—In a county in which summer fallow is an insurable practice, a cover crop in that county that is terminated in accordance with subparagraph (B) shall be considered as summer fallow for the purpose of in-surability.’’.

SEC. 11108. UNDERSERVED PRODUCERS. Section 508(a)(7) of the Federal Crop Insurance Act (7 U.S.C.

1508(a)(7)) is amended— (1) in the paragraph heading, by inserting ‘‘AND UNDER-

SERVED PRODUCERS’’ after ‘‘STATES’’; (2) in subparagraph (A)—

(A) by striking the designation and heading and all that follows through ‘‘the term’’ and inserting the following:

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paid under those policies for each intended use shall not be consid-ered to be for the same loss for the purposes of section 508(n).’’. SEC. 11110. ADMINISTRATIVE BASIC FEE.

Section 508(b)(5)(A) of the Federal Crop Insurance Act (7 U.S.C. 1508(b)(5)(A)) is amended by striking ‘‘$300’’ and inserting ‘‘$655’’. SEC. 11111. ENTERPRISE UNITS.

Section 508(e)(5) of the Federal Crop Insurance Act (7 U.S.C. 1508(e)(5)) is amended by adding at the end the following:

‘‘(E) ENTERPRISE UNITS ACROSS COUNTY LINES.—The Corporation may allow a producer to establish a single en-terprise unit by combining an enterprise unit with—

‘‘(i) 1 or more other enterprise units in 1 or more other counties; or

‘‘(ii) all basic units and all optional units in 1 or more other counties.’’.

SEC. 11112. CONTINUED AUTHORITY. Section 508(g) of the Federal Crop Insurance Act (7 U.S.C.

1508(g)) is amended by adding at the end the following new para-graph:

‘‘(6) CONTINUED AUTHORITY.— ‘‘(A) IN GENERAL.—The Corporation shall establish—

‘‘(i) underwriting rules that limit the decrease in the actual production history of a producer, at the elec-tion of the producer, to not more than 10 percent of the actual production history of the previous crop year pro-vided that the production decline was the result of drought, flood, natural disaster, or other insurable loss (as determined by the Corporation); and

‘‘(ii) actuarially sound premiums to cover addi-tional risk. ‘‘(B) OTHER AUTHORITY.—The authority provided under

subparagraph (A) is in addition to any other authority that adjusts the actual production history of the producer under this Act.

‘‘(C) EFFECT.—Nothing in this paragraph shall be con-strued to require a change in the administration of any provision of this Act as the Act was administered for the 2018 reinsurance year.’’.

SEC. 11113. SUBMISSION OF POLICIES AND MATERIALS TO BOARD. Section 508(h) of the Federal Crop Insurance Act (7 U.S.C.

1508(h)) is amended— (1) in paragraph (1)(B)—

(A) by redesignating clauses (i) through (iii) as sub-clauses (I) through (III), respectively, and indenting appro-priately;

(B) in the matter preceding subclause (I) (as so redesig-nated), by striking ‘‘The Corporation shall’’ and inserting the following:

‘‘(i) IN GENERAL.—The Corporation shall’’; (C) in clause (i)(I) (as so redesignated), by inserting

‘‘subject to clause (ii),’’ before ‘‘will likely’’; and (D) by adding at the end the following:

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‘‘(ii) WAIVER FOR HEMP.—The Corporation may waive the viability and marketability requirement under clause (i)(I) in the case of a policy or pilot pro-gram relating to the production of hemp.’’; and

(2) in paragraph (3)(C)— (A) in clause (ii), by striking ‘‘and’’ at the end; (B) in clause (iii), by striking the period at the end and

inserting ‘‘; and’’; and (C) by adding at the end the following:

‘‘(iv) in the case of reviewing policies and other ma-terials relating to the production of hemp, may waive the viability and marketability requirement under sub-paragraph (A)(ii)(I).’’.

SEC. 11114. CROP PRODUCTION ON NATIVE SOD. Section 508(o)(2)(A) of the Federal Crop Insurance Act (7 U.S.C.

1508(o)(2)(A)) is amended— (1) by striking ‘‘During the’’ and inserting the following:

‘‘(i) FIRST 4 CROP YEARS.—During the’’; (2) in clause (i) (as so designated), by striking ‘‘after the

date of enactment of the Agricultural Act of 2014’’ and inserting ‘‘beginning on February 8, 2014, and ending on the date of en-actment of the Agriculture Improvement Act of 2018’’; and

(3) by adding at the end the following: ‘‘(ii) SUBSEQUENT CROP YEARS.—Native sod acre-

age that has been tilled for the production of an insur-able crop after the date of enactment of the Agriculture Improvement Act of 2018 shall be subject to a reduc-tion in benefits under this subtitle as described in this paragraph for not more than 4 cumulative years—

‘‘(I) during the first 10 years after initial till-age; and

‘‘(II) during each of which a crop on that acre-age is insured under subsection (c).’’.

SEC. 11115. USE OF NATIONAL AGRICULTURAL STATISTICS SERVICE DATA TO COMBAT WASTE, FRAUD, AND ABUSE.

Section 515 of the Federal Crop Insurance Act (7 U.S.C. 1515) is amended—

(1) in subsection (d)(1)— (A) in subparagraph (B), by striking ‘‘and’’ at the end; (B) in subparagraph (C), by striking the period at the

end and inserting ‘‘; and’’; and (C) by adding at the end the following: ‘‘(D) using published aggregate data from the National

Agricultural Statistics Service or any other data source to— ‘‘(i) detect yield disparities or other data anomalies

that indicate potential fraud; and ‘‘(ii) target the relevant counties, crops, regions,

companies, or agents associated with that potential fraud for audits and other enforcement actions.’’; and

(2) in subsection (f)(2)(A), by striking ‘‘pursuant to’’ each place it appears and inserting ‘‘under’’.

SEC. 11116. SUBMISSION OF INFORMATION TO CORPORATION. Section 515(g) of the Federal Crop Insurance Act (7 U.S.C.

1515(g)) is amended—

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SEC. 11118. PROGRAM ADMINISTRATION. Section 516(b)(2)(C)(i) of the Federal Crop Insurance Act (7

U.S.C. 1516(b)(2)(C)(i)) is amended by striking ‘‘$9,000,000’’ and in-serting ‘‘$7,000,000’’. SEC. 11119. AGRICULTURAL COMMODITY.

Section 518 of the Federal Crop Insurance Act (7 U.S.C. 1518) is amended by inserting ‘‘hemp,’’ before ‘‘aquacultural species’’. SEC. 11120. MAINTENANCE OF POLICIES.

(a) IN GENERAL.—Section 522(b) of the Federal Crop Insurance Act (7 U.S.C. 1522(b)) is amended—

(1) in paragraph (1), by amending subparagraph (B) to read as follows:

‘‘(B) REIMBURSEMENT.— ‘‘(i) IN GENERAL.—An applicant who submits a pol-

icy under section 508(h) shall be eligible for the reim-bursement of reasonable research and development costs if the policy is approved by the Board for sale to producers.

‘‘(ii) REASONABLE COSTS.—For the purpose of reim-bursing research and development and maintenance costs under this section, costs of the applicant shall be considered reasonable costs if the costs are based on—

‘‘(I) for any employees or contracted personnel, wage rates equal to not more than 2 times the hourly wage rate plus benefits, as provided by the Bureau of Labor Statistics for the year in which such costs are incurred, calculated using the for-mula applied to an applicant by the Corporation in reviewing proposed project budgets under this section on October 1, 2016; and

‘‘(II) other actual documented costs incurred by the applicant.’’; and

(2) in paragraph (4)— (A) in subparagraph (C), by striking ‘‘approved insur-

ance provider’’ and inserting ‘‘applicant’’; and (B) in subparagraph (D)—

(i) in clause (i), by striking ‘‘determined by the ap-proved insurance provider’’ and inserting ‘‘determined by the applicant’’; and

(ii) by adding at the end the following: ‘‘(iii) REVIEW.—After the Board approves the

amount of a fee under clause (ii), the fee shall remain in effect and not be reviewed by the Board unless—

‘‘(I) the applicant petitions the Board for re-consideration of the fee;

‘‘(II) a substantial change is made to the pol-icy, as determined by the Board; or

‘‘(III) there is substantial evidence that the fee is inhibiting sales or use of the policy, as deter-mined by the Board.’’.

(b) APPLICABILITY.— (1) IN GENERAL.—The amendments made by this section

shall apply to reimbursement requests made on or after October 1, 2016.

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(2) RESUBMISSION OF DENIED REQUEST.—An applicant that was denied all or a portion of a reimbursement request under paragraph (1) of section 522(b) of the Federal Crop Insurance Act (7 U.S.C. 1522(b)) during the period between October 1, 2016, and the date of the enactment of this Act shall be given an opportunity to resubmit such request.

SEC. 11121. REIMBURSEMENT OF RESEARCH, DEVELOPMENT, AND MAINTENANCE COSTS.

Section 522(b) of the Federal Crop Insurance Act (7 U.S.C. 1522(b)) is amended—

(1) in paragraph (2), by adding at the end the following: ‘‘(K) WAIVER FOR HEMP.—The Board may waive the vi-

ability and marketability requirements under this para-graph in the case of research and development relating to a policy to insure the production of hemp.’’; and (2) in paragraph (3)—

(A) by striking ‘‘The Corporation’’ and inserting the fol-lowing:

‘‘(A) IN GENERAL.—Subject to subparagraph (B), the Corporation’’; and

(B) by adding at the end the following: ‘‘(B) WAIVER FOR HEMP.—The Corporation may waive

the marketability requirement under subparagraph (A) in the case of research and development relating to a policy to insure the production of hemp.’’.

SEC. 11122. RESEARCH AND DEVELOPMENT AUTHORITY. Section 522(c) of the Federal Crop Insurance Act (7 U.S.C.

1522(c)) is amended— (1) by striking paragraphs (7) through (18) and (20)

through (23); (2) by redesignating paragraphs (19) and (24) as para-

graphs (7) and (8), respectively; (3) in paragraph (7) (as so redesignated) (entitled ‘‘Whole

farm diversified risk management insurance plan’’), by adding at the end the following:

‘‘(E) REVIEW OF MODIFICATIONS TO IMPROVE EFFECTIVE-NESS.—

‘‘(i) IN GENERAL.—Not later than 18 months after the date of enactment of the Agriculture Improvement Act of 2018—

‘‘(I) the Corporation shall hold stakeholder meetings to solicit producer and agent feedback; and

‘‘(II) the Board shall— ‘‘(aa) review procedures and paperwork re-

quirements on agents and producers; and ‘‘(bb) modify procedures and requirements,

as appropriate, to decrease burdens and in-crease flexibility and effectiveness.

‘‘(ii) FACTORS.—In carrying out items (aa) and (bb) of subclause (i)(II), the Board shall consider—

‘‘(I) removing caps on nursery and livestock production;

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servation and management of the fish or wildlife described in subsection (c).

SEC. 12618. DATA ON CONSERVATION PRACTICES. Subtitle E of title XII of the Food Security Act of 1985 (16

U.S.C. 3841 et seq.) is amended by adding at the end the following: ‘‘SEC. 1247. DATA ON CONSERVATION PRACTICES.

‘‘(a) DATA ON CONSERVATION PRACTICES.—The Secretary shall identify available data sets within the Department of Agriculture re-garding the use of conservation practices and the effect of such prac-tices on farm and ranch profitability (including such effects relating to crop yields, soil health, and other risk-related factors).

‘‘(b) REPORT.—Not later than 1 year after the date of enactment of the Agriculture Improvement Act of 2018, the Secretary shall sub-mit to the Committee on Agriculture of the House of Representatives and the Committee on Agriculture, Nutrition, and Forestry of the Senate a report that includes—

‘‘(1) a summary of the data sets identified under subsection (a);

‘‘(2) a summary of the steps the Secretary would have to take to provide access to such data sets by university research-ers, including taking into account any technical, privacy, or ad-ministrative considerations;

‘‘(3) a summary of safeguards the Secretary employs when providing access to data to university researchers;

‘‘(4) a summary of appropriate procedures to maximize the potential for research benefits while preventing any violations of privacy or confidentiality; and

‘‘(5) recommendations for any necessary authorizations or clarifications of Federal law to allow access to such data sets to maximize the potential for research benefits.’’.

SEC. 12619. CONFORMING CHANGES TO CONTROLLED SUBSTANCES ACT.

(a) IN GENERAL.—Section 102(16) of the Controlled Substances Act (21 U.S.C. 802(16)) is amended—

(1) by striking ‘‘(16) The’’ and inserting ‘‘(16)(A) Subject to subparagraph (B), the’’; and

(2) by striking ‘‘Such term does not include the’’ and insert-ing the following: ‘‘(B) The term ‘marihuana’ does not include—

‘‘(i) hemp, as defined in section 297A of the Agricultural Marketing Act of 1946; or

‘‘(ii) the’’. (b) TETRAHYDROCANNABINOL.—Schedule I, as set forth in sec-

tion 202(c) of the Controlled Substances Act (21 U.S.C. 812(c)), is amended in subsection (c)(17) by inserting after ‘‘Tetrahydrocannabinols’’ the following: ‘‘, except for tetrahydrocannabinols in hemp (as defined under section 297A of the Agricultural Marketing Act of 1946)’’.

And the Senate agree to the same.

total of the Federal funds provided does not exceed the 30 percent limitation. (Section 7120) The Senate amendment contains no comparable provision. The Conference substitute adopts the House provision. (Section 7125) (16) Supplemental and alternative crops

The House bill amends section 1473D of NARETPA to reauthorize appropriations through fiscal year 2023 for the competitive grants program to develop supplemental and alternative crops. It amends the program to include canola and alternative crops “for agronomic rotational purposes and for use as a habitat for honey bees and other pollinators”. (Section 7124) The Senate amendment is substantially similar to the House bill and also provides that the Secretary may award grants and enter into agreement or other arrangements to conduct research related to the development of industrial hemp as well as the development of new and emerging commercial products derived from hemp. (Section 7125) The Conference substitute adopts the Senate provision with an amendment to increase the authorization of appropriations to $2 million for each of fiscal years 2019 through 2023. (Section 7129) (17) New era rural technology program The Senate amendment amends section 1473E of NARETPA to reauthorize the New Era Rural Technology Program for fiscal years 2019 through 2023 and adds precision agriculture to the areas of technology development, applied research, and training supported under the program. (Section 7126)

The House bill contains no comparable provision. The Conference substitute adopts the Senate provision. (Section 7130) (18) Agriculture advanced research and development authority pilot (AGARDA) The Senate amendment adds a new section 1473H to NARETPA to establish the Agriculture Advanced Research and Development Authority (AGARDA) under the Office of Chief Scientist. “Advanced research and development” is defined as activities to overcome long-term and high-risk research challenges in agriculture and food through acceleration of innovative agricultural research or the development of qualified products and projects or agricultural technologies. The Senate amendment directs the Secretary to develop a strategic plan for AGARDA and disseminate the information in the plan to those who can best contribute to the activities described in the strategic plan. It permits the Secretary to use “other transaction authority” to expedite awarding grants and entering into contracts. The provision permits the Secretary to appoint highly qualified individuals without regard to certain sections of the U.S. Code governing appointments in the competitive service and without regard to the General Schedule pay rates and authorizes establishment of the AGARDA Fund in the U.S. Treasury administered by the Chief Scientist to carry out this section. The provision permits the Secretary to accept and deposit monies received from cost recovery or contribution into the AGARDA Fund. The authority under this new section terminates on September 30, 2023. (Section 7128)

The House bill contains no comparable provision. The Conference substitute adopts the Senate provision with amendments that (1)

Similar to the House bill, the Senate amendment expands the specialty crop research and extension initiative to include additional production practices and technologies. (Section 7305) The Conference substitute adopts the Senate provision. (Section 7305)

The Managers recognize that the funding for research programs for specialty crops should generally be made available to all specialty crops and not include carve-outs or set-asides for any one particular specialty crop. The Managers also acknowledge the unique challenges presently facing the citrus industry in the United States with respect to HLB and the Asian Citrus Psyllid vector. In direct response to a joint request from the leadership of the citrus industry and other specialty crop stakeholders, the Managers have agreed to establish a Citrus Trust Fund to support the Emergency Citrus Disease Research and Extension Program for one additional five-year period. The Managers intend for this program to address this challenge at this particular time and do not intend for such program to continue in perpetuity.

The Managers are aware of concerns that prioritizing grants that are multi-state, multi-institutional, or multi-disciplinary disproportionately impacts the funding success of projects for certain commodities grown only in one state. The Managers encourage the Secretary to take appropriate steps to ensure that meritorious proposals are not denied solely because they lack one of the enumerated priorities.

(35) Critical agricultural materials act

The House bill reauthorizes appropriations for fiscal years 2019 through 2023. (Section 7501)

The Senate amendment specifies that hemp, as defined in section 297A of the Agricultural Marketing Act of 1946, is eligible for funding under the Critical Agricultural Materials Act. The Secretary shall conduct, sponsor, promote, and coordinate basic and applied research for the development of critical agricultural materials from agricultural crops having strategic and industrial importance, including for hemp. The Senate amendment also reauthorizes appropriations for fiscal years 2019 through FY 2023. (Section 7401) The Conference substitute adopts the Senate provision. (Section 7501) (36) Equity in Educational Land-Grant Status Act of 1994

The House bill amends section 532 of the Equity in Educational Land-Grant Status Act of 1994 to add to and update the defined list of 36 tribal colleges as “1994 Institutions.” The House bill reauthorizes endowment funding, capacity-building grants, and research grants for the 36 tribal colleges for fiscal years 2019 through 2023. (Section 7502)

The Senate amendment is substantially similar to the House bill with technical differences. The Conference substitute adopts the House provision with an amendment specifying that the effective date for the updated list shall be the date of enactment. (Section 7502) (37) Research Facilities Act

baccalaureate degree in forestry to be eligible for assistance for forestry research. (Section 7414)

The House bill contains no comparable provision. The Conference substitute adopts the Senate provision. (Section 7604)

(47) Legitimacy of industrial hemp research

The Senate amendment amends section 7606 of the Agricultural Act of 2014 to require the Secretary to conduct a study on the hemp research pilot program that includes a review of the economic viability of the domestic production and sale of industrial hemp and hemp products, and to submit a report describing the study to Congress within 120 days. The provision also repeals the hemp research pilot programs one year after the Secretary publishes a final regulation allowing for full-scale commercial production of hemp as provided in section 297C of the Agricultural Marketing Act of 1946. (Section 7415)

The House bill contains no comparable provision. The Conference substitute adopts the Senate provision with an amendment that requires the Secretary to submit a report describing the study not later than 12 months after the date of enactment. (Section 7605) (48) Collection of data relating to barley area planted and harvested

The Senate amendment directs the National Agricultural Statistics Service to include New York in the states surveyed for the table entitled “Barley Area Planted and Harvested” in certain reports. (Section 7416)


(49) Collection of data relating to the size and location of dairy farms

The Senate amendment requires the Administrator of the Economic Research Service (ERS) to update the report entitled ‘‘Changes in the Size and Location of US Dairy Farms’’ published in September 2007. As part of the update, it requires that the Secretary include an expanded Table 2 containing the full range of herd sizes detailed in Table 1. The report shall be updated no later than 120 days after the date of enactment. (Section 7417)

The House bill contains no comparable provision. The Conference substitute adopts the Senate provision with an amendment

specifying that the report shall be updated not later than 60 days after the 2017 Census of Agriculture is released. Instead of requiring an expanded Table 2, the substitute directs that the Secretary, to the maximum extent practicable, use the same reporting measurement of the full range of herd sizes in Tables 1 and 2 while protecting the confidentiality of individual producers. (Section 7607) (50) Agriculture innovation center demonstration program

The House bill reauthorizes appropriations for the Agriculture Innovation Center Demonstration Program through fiscal year 2023. (Section 6502)

The Senate amendment strikes subsection (g) of section 6402 of the Farm Security and Rural Investment Act of 2002 to eliminate the requirement for the Secretary to use $300,000 to support research on the effects of projects for value-added agricultural

(8) Hemp production The Senate amendment provision amends the Agricultural Marketing Act of 1946

to allow States to regulate hemp production based on a state or tribal plan. The amendment requires that such plan includes information on locations of hemp production, testing for THC concentration, disposal of plants that are out of compliance, and negligence or other violations of the state or tribal plan. It requires the Secretary to establish a plan, in consultation with the U.S. Attorney General, for States and tribes without USDA approved plans to monitor and regulate hemp production. The section clarifies that nothing in this subtitle affects or modifies the Federal Food, Drug, and Cosmetic Act or authorities of the HHS Secretary and FDA Commissioner and clarifies that nothing in this title authorizes interference with the interstate commerce of hemp. (Sections 10111 & 10112) The House bill contains no comparable provision. The Conference substitute adopts the Senate provision with amendment, including auditing authority and a grandfather clause regarding program participation. (Sections 10113 and 10114) In Sec. 297A, the Managers intend to clarify, within the hemp production subtitle, that hemp is defined as the plant cannabis sativa L, or any part of that plant, including seeds, derivatives, and extracts, with a delta-9 tetrahydrocannabinol (THC) concentration of not more than 0.3 percent on a dry weight basis. In Sec. 297B, the Managers intend to authorize states and tribal governments to submit a state plan to the Secretary for approval to have primary regulatory authority over the growing and production of hemp. The Managers do not intend to limit what states and tribal governments include in their state or tribal plan, as long as it is consistent with this subtitle. For example, states and tribal governments are authorized to put more restrictive parameters on the production of hemp, but are not authorized to alter the definition of hemp or put in place policies that are less restrictive than this title. Within 60 days of receiving a state or tribal plan, the Secretary must approve or deny the plan. The Secretary is required to consult with the Attorney General regarding the approval or denial of state plans, but the Managers intend for the final decision to be made by the Secretary. The consultation with the Attorney General should not alter the 60 day requirement to approve or deny a plan. The Managers authorized the Secretary to audit state and tribal compliance with an approved plan and take corrective action, including revoking approval, based on a state or tribal government’s noncompliance, as appropriate. The Managers intend to allow state and tribal governments to appeal decisions by the Secretary pertaining to a state or tribal plan for hemp production and do not intend to preclude a state or tribal government from resubmitting a new state or tribal plan for consideration at a later date. If a state or tribal plan is denied or revoked, the Managers intend for hemp production in that state or tribal area to fall under the Secretary’s jurisdiction as authorized in section 297C. The Secretary is authorized to provide technical assistance to states and Indian tribes to aid in the development of a state or tribal plan. The Managers define negligent and other types of producer violations that require enforcement under a state or tribal plan. The Managers also set limits on who may participate in state or tribal plans. Any person convicted of a felony relating to a controlled substance shall be ineligible to participate under the state or tribal plan for a

10-year period following the date of the conviction. However, this prohibition shall not apply to producers who have been lawfully participating in a state hemp pilot program as authorized by the Agricultural Act of 2014, prior to enactment of this subtitle. Subsequent felony convictions after the date of enactment of this subtitle will trigger a 10-year nonparticipation period regardless of whether the producer participated in the pilot program authorized in 2014. Additionally, anyone who materially falsifies any information in their application to participate in hemp production through a state, tribal, or USDA plan shall be ineligible. In Sec. 297C, the Managers intend to require the Secretary to develop a USDA plan or plans to be implemented in states and tribal territories that forego developing and submitting a state or tribal hemp production plan. The Managers expect the USDA plan or plans to meet the same content requirements as state and tribal plans in Sec. 297B. The USDA plan may contain, as determined by the Secretary, additional practices and procedures that are otherwise consistent with this subtitle. It is the Managers intent that the Secretary have discretion regarding the appropriate number of plans, one or more than one, needed to implement Sec. 297C. The Managers require the Secretary to collect, maintain, and make accessible to Federal, state, territorial, and local law enforcement, real-time information regarding the status of a license or other authorization for all hemp producers, whether participating under a state, tribal, or USDA plan. The Managers encourage the Secretary to develop a memorandum of understanding with Federal law enforcement agencies to define the parameters of this system and to potentially share the costs of such information sharing system. In Sec. 297D, the Managers clarify that the Secretary has the sole authority to issue guidelines and regulations regarding the production of hemp. However, nothing in this subtitle shall affect or modify the authority granted to the Food and Drug Administration and the Secretary of Health and Human Services under the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 301 et seq.) or section 351 of the Public Health Service Act (42 U.S.C. 262), including for hemp-derived products. The Secretary is required to consult with the Attorney General on the promulgation of regulations, but ultimately, the regulations shall only be issued by the Secretary of Agriculture. To ensure that the Secretary moves forward with issuing regulations in as timely a fashion as possible, the Secretary shall periodically report to Congress with updates regarding implementation of this title.

While states and Indian tribes may limit the production and sale of hemp and hemp products within their borders, the Managers, in Sec. 10112, agreed to not allow such states and Indian tribes to limit the transportation or shipment of hemp or hemp products through the state or Indian territory. (9) Recognition and role of State lead agencies

The House bill amends section 2(aa) of the Federal Insecticide, Fungicide, and Rodenticide Act (“FIFRA”) to include a definition of “State lead agency” for the purposes of FIFRA. It amends section 22(b) of FIFRA by limiting regulations to those promulgated by the EPA or within the authority of a State lead agency. The subsection further amends section 23(a)(1) of FIFRA to authorize States or Tribes to establish and maintain uniform regulation of pesticide through cooperative agreement with the Administrator of the EPA (“Administrator”). The section further amends section 24(a) of

Title XI – Crop Insurance (1) Definitions

The Senate amendment defines “cover crop termination” and “hemp” as used in the Federal Crop Insurance Act (the “Act”). (Section 11101)

The House bill contains no comparable provision. The Conference substitute adopts the Senate amendment. (Section 11101) (2) Data collection

The Senate amendment amends section 506(h)(2) of the Act to require appropriate data collected by the National Agricultural Statistics Service (NASS) and through the Noninsured Crop Disaster Assistance Program (NAP) be provided to the Federal Crop Insurance Corporation (FCIC). The data must be provided in an aggregate form. (Section 11102)

The House bill contains no comparable provision. The Conference substitute adopts the Senate amendment. (Section 11102)

The Managers intend that any additional information made available from the Farm Service Agency (FSA) related to NAP records, which could assist with new product development, be shared with the applicants under section 11103. (3) Sharing of records

The Senate amendment amends section 506(h)(3) of the Act to require the Secretary to share records with private developers of crop insurance products who have received payment under section 522(b)(2)(E) related to crop insurance policy research and development costs. (Section 11103)

The House bill contains no comparable provision. The Conference substitute adopts the Senate amendment. (Section 11103) The Managers intend that the sharing of records be limited to policies directly being developed by the applicants. (4) Use of resources

The Senate amendment amends section 507(f) of the Act to update the resources, data, boards, and the committees the Board should use within the Department, including sharing information to support the transition of crops from NAP to crop insurance. (Section 11104)

The House bill contains no comparable provision. The Conference substitute adopts the Senate amendment with modifications that

add board discretion and remove certain assessment requirements. (Section 11104) The Managers recognize that the Risk Management Agency (RMA), Natural Resources Conservation Service (NRCS) and FSA serve a significant number of common program participants. The Managers expect the agencies to coordinate to avoid duplication, streamline or create common processes, and make participants aware of opportunities even if the participants are outside that particular agency. For example, a producer may have some crops that are eligible for Federal Crop Insurance and others that are eligible for FSA’s NAP. The Managers encourage USDA to establish procedures in both agencies to make sure producers are informed of all of their options for coverage without regard to which agency the producers interact with first.

(5) Specialty crops coordinator

The Senate amendment amends section 507(g) of the Act to require the Specialty Crops Coordinator to designate a Specialty Crop Liaison in each regional field office, and to establish a website focused on the efforts of the FCIC to provide and expand crop insurance for specialty crop producers. (Section 11105(a))

The House bill contains no comparable provision. The Conference substitute adopts the Senate amendment with a modification to

remove specific requirements for the website. (Section 11105) The Managers intend for the website required under new section 507(g)(5) of the Act to include an online mechanism to provide comments relating to specialty crops and a calendar publishing opportunities to provide comments at specialty crop events or public forums. The Managers also encourage the Specialty Crops Coordinator to publish on the website a plan, with projected completion dates, for expanding existing policies or plans of insurance for specialty crops to new crops, new areas, and by adding new revenue options or endorsements. (6) Addition of specialty crops and other value-added crops

The Senate amendment amends section 508(a)(6) of the Act to require the manager of the FCIC to annually prepare, to the maximum extent practicable, at least 2 of each of the following: (1) research and development for a policy or plan of insurance for a new crop; (2) expansion of an existing policy or plan of insurance to additional counties or states (including malting barley); and (3) research and development for a policy or plan of insurance, or endorsement, for crops with existing policies or plans of insurance, such as dollar plans. (Section 1105(b)) The House bill contains no comparable provision.

The Conference substitute adopts the Senate amendment with a technical modification replacing a description and an amendment to decrease the number of required actions from 2 of each to 1 of each. (Section 11105)

The Managers intend for this provision to be implemented in coordination with other changes that improve data sharing between FSA and RMA. The Managers intend for NAP data to be used to support expanding Federal Crop Insurance to additional crops and, for existing insurable crops, to additional counties. The Managers recognize that Federal Crop Insurance provides significantly better risk protection for producers and expect the combination of these changes with the annual review under this section to act as an “on-ramp” for producers to more robust risk management options. (7) Insurance period

The Senate amendment amends section 508(a)(2) of the Act to add hemp. (Section 11106) The House bill contains no comparable provision.

The Conference substitute adopts the Senate amendment. (Section 11106) (8) Cover crops

The Senate amendment amends section 508(a)(3) of the Act to include a conservation activity or enhancement (including cover crops) that is approved by the Natural Resources Conservation Service or an agricultural expert. Requires that

The Conference substitute adopts the House provision with technical modifications to clarify the provision allows producers to purchase separate policies for each intended use, as determined by the FCIC, and any indemnity paid under those policies for each intended use shall not be considered to be for the same loss for the purposes of section 508(n) of the Act. (Section 11109) The Managers note there are a suite of programs administered by FSA or offered by RMA that address risks faced by livestock owners and forage producers. The Managers believe the Secretary should take into consideration the different causes of loss covered by these programs when carrying out the limitation on multiple benefits for the same loss. (15) Pasture, rangeland, and forage policy for members of Indian tribes

The Senate amendment amends section 508(e)(7) of the Act to provide premium subsidy at the rate of 90 percent for a member of an Indian tribe for the first purchase of Pasture, Rangeland, and Forage insurance. (Section 11111)

The House bill contains no comparable provision. The Conference substitute deletes the Senate amendment. (16) Continued authority

The House bill amends section 508(g) to require FCIC to establish: (1) underwriting rules to provide producers with an election to limit the decrease in actual production history (APH) to not more than 10 percent of the prior crop year’s APH, provided that the production decline was the result of drought, flood, natural disaster, or other insurable loss; and (2) actuarially sound premiums to cover the additional risk. (Section 10005) The Senate amendment contains no comparable provision. The Conference substitute adopts the House provision. (Section 11112)

The Managers note that RMA has a long history of offering producers protection from a decrease of more than 10% in their APH. The Managers intend for RMA to continue offering this option to producers in conjunction with other APH adjustments in statute. (17) Submission of policies and materials to the board The Senate amendment amends section 508(h) of the Act to authorize the FCIC Board, in the case of a policy, pilot program, and other materials relating to the production of hemp, to waive the viability and marketability requirements under section 508(h). (Section 11112)

The House bill contains no comparable provision. The Conference substitute adopts the Senate amendment. (Section 11113) (18) Whole farm revenue agent incentives

The Senate amendment amends section 508(k) of the Act to provide an additional reimbursement to an agent that sells a Whole Farm Revenue Policy. (Section 11113

The House bill contains no comparable provision.

The House bill contains no comparable provision. The Conference substitute deletes the Senate amendment. (25) Program administration

The House bill reduces the amount that FCIC may use under section 516(b)(2)(C)(i) to not more than $7 million per fiscal year. (Section 11119)

The Senate amendment contains no comparable provision. The Conference substitute adopts the House provision. (Section 11118)

(26) Agricultural commodity

The Senate amendment adds hemp to the list of commodities enumerated in section 518. (Section 11120)

The House bill contains no comparable provision. The Conference substitute adopts the Senate amendment. (Section 11119) The Managers expect that in determining the insurability of a crop of hemp under

the Act, and in providing insurance options to hemp producers, RMA will collaborate with the appropriate USDA, state, or tribal authorities as necessary to do so consistent with the regulations and guidelines established in subtitle G of the Agricultural Marketing Act of 1946. The Managers note that USDA or the appropriate state or tribal authority, and not AIPs, agents, or loss adjusters, bear the responsibility of determining that a crop grown as hemp complies with the applicable regulations and guidelines under Subtitle G.

The Managers also intend for “aquacultural species” to include algae species as determined appropriate by the Board. (27) Maintenance of policies; Reimbursement of research, development, and maintenance costs

House bill section 10007(a) amends section 522(b) of the Act to— (1) allow for reimbursement of “reasonable and actual research and development costs” for policies that have been approved by the FCIC Board; (2) require that costs of the applicant shall be considered “reasonable and actual costs” if the costs are based on— (A) wage rates equal to 2 times the hourly wage rate plus benefits, as provided by the Bureau of Labor Statistics; or (B) actual documented costs incurred by the applicant; (3) designate the applicant (as opposed to the AIP) authority to determine whether to maintain a policy, and to establish the fee to be paid for maintenance of the policy; (4) require the FCIC Board to approve the amount of a fee unless the Board determines, based on substantial evidence in the record, that the amount of the fee unnecessarily inhibits the use of the policy; and (5) prohibit the FCIC Board from disapproving a user fee based on its comparison to a maintenance fee, or on the potential for the fee to result in a financial gain or loss to the applicant.

The House bill also provides that the amendments shall apply to reimbursement requests made on or after October 1, 2016, and that requests for reimbursement previously denied between October 1, 2016, and the date of enactment of this Act may be resubmitted. (Section 10007). The Senate amendment contains no comparable provision.

The Conference substitute adopts the House provision with amendments to clarify reasonable costs apply to any employees or contracted personnel costs. The amendment also modifies the requirements for the Board to approve or disapprove the amount of a maintenance fee, by including that the fee shall remain in effect and not be reviewed by the Board unless specified criteria are met. (Section 11120)

The Managers believe the remuneration provided to the submitters of policies developed under the 508(h) process ensures that underserved commodities have a fair opportunity to benefit from innovative risk management solutions. The Managers expect RMA and the FCIC Board to work with private submitters and those maintaining the policies developed to determine fair compensation for work on these policies. (28) Maintenance of policies; reimbursement of research, development, and maintenance costs

The Senate amendment amends 522(b) of the Act to waive the viability and marketability requirements for hemp under paragraphs (2) and (3). (Section 11121)

The House bill contains no comparable provision. The Conference substitute adopts the Senate amendment. (Section 11121) (29) Research and development priorities and authorities

The House bill amends paragraph (7) of the Act (as redesignated from current paragraph (19)) to define “beginning farmer or rancher” for purposes of research and development of whole farm insurance plans as having actively operated and managed a farm or ranch for less than 10 years. This is longer for these purposes than the Act’s underlying definition as having actively operated and managed a farm or ranch for up to 5 years. (Section 10008) The Senate amendment amends paragraph (7) (as redesignated from current paragraph (19)) of the Act to require FCIC, within 2 years, to hold stakeholder meetings to solicit feedback, review and modify procedures and paperwork requirements to decrease burdens, and increase flexibility and effectiveness. (Section 11122) The Conference substitute adopts both provisions with amendments to include additional factors the FCIC Board shall consider during review of the whole farm revenue protection policy. (Section 11122)

The Managers note the continued growth of Whole Farm Revenue Policies (WFRP). The Managers believe that this policy has the potential to provide vital risk management to producers who are underserved by crop insurance and enhance options for existing policy holders. The Managers note that WFRP has the potential to provide meaningful risk protection for non-traditional agricultural commodities (e.g. aquaculture) or production and marketing systems (e.g. urban, local food, or greenhouses), that are not served as well under current yield or revenue-based policies for individual crops.

The Managers believe that RMA should make WFRP policies more effective. In carrying out the review described in new section 522(c)(7)(E) of the Act, the Managers urge RMA to expedite the analysis of removing the cap on livestock and nursery revenue, incorporating crop insurance indemnities and NAP payments into historical revenue, and allowing all producers, regardless of total average revenue, to insure up to the maximum amount of liability. Additionally, the Managers expect RMA to solicit input from the diverse group of producers participating in WFRP and take appropriate steps to


(65) Conforming changes to controlled substances act

The Senate amendment amends the existing exemptions to include hemp as defined in section 297A of the Agricultural Marketing Act of 1946 and tetrahydrocannabinols in hemp (as defined under section 297A of the Agricultural Marketing Act of 1946). (Section 12608)


(66) National flood insurance program reauthorization

The Senate amendment extends financing authority of the program through January 31, 2019 and extends the program through January 31, 2019. (Section 12609) The House bill contains no comparable provision.

The Conference substitute does not adopt the Senate provision. (67) Eligibility for operators on heirs property land to obtain a farm number

The Senate amendment defines “eligible documentation” to include: (1) in states that have adopted the Uniform Partition of Heirs Property Act, a court order verifying the land meets the definition of heirs property or certification from the local recorder of deeds that the recorded landowner is deceased and not less than one heir has initiated a procedure to retitle the land; (2) a tenancy-in-common agreement that sets out ownership rights and responsibilities among all of the land owners; (3) tax returns for the preceding five years; (4) self-certification that the farm operator has control of the land; and (5) any other documentation identified by the Secretary as an alternative form of eligible documentation.

The Senate provision also requires the Secretary to provide for the assignment of a farm number to any farm operator who provides an form of eligible documentation, for purposes of demonstrating that the farm operator has control of the land for purpose of defining that land as a farm, and requires the Secretary to identify alternative forms of eligible documentation that a farm operator may provide in seeking the assignment of a farm number. (Section 12623) The House bill contains no comparable provision.

The Conference substitute adopts the Senate provision. (Section 12615) The Managers recognize that farm operators on land that has been passed down

through multiple generations without formal probate proceedings may not have clear title to the land. The Managers intend for this section to ensure operators of such land, commonly referred to as heirs’ property, who provide certain documentation to the Secretary are eligible to receive farm numbers for the purposes of accessing programs offered by the Farm Service Agency, Natural Resources Conservation Service, and Risk Management Agency. In determining States that have enacted or adopted the Uniform Partition of Heirs Property Act, the Managers intend that USDA consider “State” to mean any of the 50 States, the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands of the United States, Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, Republic of Palau, Federated States of Micronesia, and the Republic of the Marshall Islands.

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CULTIVATION SNAPSHOT

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Exclusive findings into useful trends in supply, price and market outlook for producers, retailers and investors in hemp.

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CULTIVATION SNAPSHOTU.S. Hemp Prices and Supply

Copyright 2019, Hemp Industry Daily, a division of Anne Holland Ventures Inc. You may NOT copy this report, or make public the data and facts contained herein, in part or in whole. For more copies or editorial permissions, contact [email protected] or call 720.213.5992 ext. 1.

3

From the EditorWelcome to the first edition of the Cultivation Snapshot: U.S. Wholesale Hemp Prices and

Supply, produced by the research team at Hemp Industry Daily.

It’s an exciting time as we near the first harvest season for hemp since the plant was removed from the Controlled Substances Act.

But even though low-THC cannabis varieties are free of many of the legal barriers still dogging the marijuana industry, one negative hangover from the black market remains. Entrepreneurs across the hemp supply chain—from farmers putting seeds in the ground to manufacturers buying large quantities of hemp for extraction to retailers selling finished hemp products—have no reliable commodities index to gauge appropriate pricing.

The result is that the fast-growing hemp industry is rife with scammers and opportunists looking to capitalize on the scarcity of reliable market data. Some private tracking firms are trying to fill this void, and we hope this Cultivation Snapshot along with other sources will help you make quality business decisions.

How did we get these numbers?

The old-fashioned way—by picking up the telephone and surveying hemp farmers and purchasers to find out the wholesale prices they’re seeing in their states.

This Cultivation Snapshot shared that collective intelligence from the top 10 hemp states by acreage licensed in 2018:

Kristen NicholsHemp Industry Daily

Editor

Laura DrotleffReporter

Kristen NicholsEditor

• Colorado • Kentucky • Montana • Nevada • New York

• North Carolina • North Dakota• Oregon • Tennessee• Wisconsin

As the hemp industry matures and becomes a national commodity, state-to-state differences in wholesale prices will decrease if not disappear. A major benefit of hemp legalization is that it frees producers and buyers alike to compare across state lines and make the best deals for themselves.

But right now, savvy hemp entrepreneurs know that wholesale hemp markets show regional variability.

This report doesn’t take into account seasonal price swings, seen in every agricultural commodity. These prices are current as of late spring 2019 and might change by the fall.

So, with all those caveats in mind, we hope you’ll find this Cultivation Snapshot a valuable addition to the market-research resources you’re already using.

We’re desperate for new sources of pricing information, and we need to hear from you! Please let us know how closely this Cultivation Snapshot matches the landscape in your state.

Thanks in advance for your questions and feedback!

Laura DrotleffHemp Industry Daily

Reporter

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8

Hemp farmers in Colorado say what the state may lack in an ideal cultivation climate, it makes up for with a supportive regulatory landscape.

Colorado established itself as a leader five years ago when it launched one of the first successful pilot hemp programs in the U.S. Now, following the passage of new industry-supporting laws, the state is taking further steps to develop its leadership position by establishing the new CHAMP initiative (Colorado Hemp Advancement and Management Plan), looking at all angles of cultivation, testing, research, processing, finance and economics to define a well-structured supply chain for hemp and establish a strong market for the state.

Colorado expects another record year of hemp farming with triple the number of acres from 2018 and an influx of new companies expanding into the state.

COL0RADO

COLORADO CULTIVATION SNAPSHOTColorado’s arid, low-humidity climate and high sunlight typically causes parched crops and a need for more irrigation during peak farming season, from planting in May to harvest in October. This year, however, Colorado farmers have an abundance of water—but it hasn’t been all good news.

Heavy rains in parts of the state hampered early planting, and cold, wet conditions caused some farmers to rework their fields multiple times, which has impeded planting timelines.

Northern Colorado is also prone to hailstorms, so early crops may suffer. In 2018, farmers lost a significant percentage of their hemp crops to hail in the spring. Outdoor hemp has a short growing season in the state, so severe weather is always a concern for the harvest.

SUPPLY (as of June 2019)

Licensed acres: 80,000

Licensed indoor square footage: 9 million

Licensed growers: 2,300 active registrations

PRICES BY PRODUCTHemp flower: $200-$500 per pound

Whole-plant biomass: $25-$60 per pound

OUTLOOKFarmers that started in Colorado are expanding into new hemp states such as New Mexico, Oklahoma and Texas, as they find the similar arid growing climates allow them to streamline production with the same varieties and practices.

Colorado farmers are seeing massive demand for high-quality flower to supply the new smokable hemp flower trend, especially from Eastern states that weren’t open for hemp production until this year. Nationwide, manufacturers of products ranging from tinctures to topicals to infused products are also seeking CBD isolate and distillate extracted from experienced Colorado hemp producers.



9

KENTUCKYWith broad support and advocacy from state and national lawmakers, Kentucky has been on the forefront of the hemp revival. Senate Majority Leader Mitch McConnell, a Republican from Kentucky, has become hemp’s self-proclaimed federal champion and was largely responsible for hemp’s inclusion in the 2018 Farm Bill. Since that victory, McConnell has continued advocating for hemp businesses to receive equal treatment as legitimate agricultural businesses, including access to banking, financing and crop insurance.

Eager to capitalize on its hemp heritage, Kentucky was the first state to submit its state regulation plan to the U.S. Department of Agriculture, and this year it approved five times more hemp farmers and triple the acreage over 2018. The state has also seen rapid entry of large, vertically integrated hemp companies and processors in the past months, as well as tobacco companies and Canadian cannabis companies looking to gain a foothold in the state.

KENTUCKY CULTIVATION SNAPSHOTIt’s been a wet spring throughout the Southeast, but Kentucky farmers say the state has been especially soggy with nearly three times more rain than normal, making the growing climate there quite challenging this year. Farmers who planted early have seen the best growing conditions, but those who got started late have had difficulty getting seeds in the ground. Wet, humid weather will mean farmers will need to check early and often for mold and other fungal diseases throughout planting season and harvest.

From the hills and hollers in the east that are ideal for high-quality, small-plot CBD farming to the larger tracts of row crops in western Kentucky, the state’s rich, well-drained soil, gently rolling hills, climate and adequate rainfall have historically created ideal conditions for hemp production. As a state with a rich agricultural economy in tobacco and other commodities, Kentucky has built-in infrastructure for growing hemp for cannabinoid production, food and industrial uses.

SUPPLY (as of March 2019)


Licensed indoor square footage: 6 million

Licensed growers: 1,047



OUTLOOKKentucky’s diverse hemp industry includes an ecosystem of producers, processors and ancillary businesses ranging in specialty from CBD oil and extracts to hemp hearts and oil to hemp fiber. As a result, hemp farmers are looking to diversify their crops to capitalize on increasing demand for hemp-derived products from all parts of the plant.

Processors look for consistent quality and supply of floral material with a CBD range of 7% to 10%, while CBD retailers are interested in tinctures, softgel caps and topicals. One of the most popular products is unadulterated CBD oil, or true, raw full-spectrum extract tinctures.

Kentucky-grown hemp hearts, hemseed oil and hemp protein originating from Kentucky are in high demand, and the state’s bourbon and craft beer industries are even adding hempseeds to their mash or grain bills.



10

MONTANAThe top-producing hemp state by acreage in 2018 plans to double production this year. Montana went from 542 planted hemp acres in 2017 to 22,000 planted acres in 2018. The state, known for grain production, hopes increasing hemp acreage will alleviate some of the pressures Montana’s farmers have seen due to tariffs, thinning profit margins on traditional crops and a soft spring.

Three new laws signed by Gov. Steve Bullock encourage growth of the state’s industry by exempting hemp-processing equipment from property taxes, removing background-check requirements for hemp growers and creating a new “Montana-grown hemp” certification.

Montana wants to attract more businesses, particularly processors, to keep hemp in state rather than exporting the crop to neighboring states for processing. Montana also puts the onus on farmers to decide for themselves how many acres they will plant for the season and extended the licensing deadline to allow for expanded production this year.

MONTANA CULTIVATION SNAPSHOTBordering Canada, Montana’s short summer means crops must be planted in May once the ground reaches 55 degrees and harvest started in August before frosts hit.

Hemp grows well in Montana’s dry, arid climate, but irrigation woes had been an issue until state agriculture authorities helped hemp farmers secure water rights from the U.S. Bureau of Reclamation in 2018. Still, farmers must receive permission to use the federal resource on a case-by-case basis.

Traditionally, Montana farmers have been known for growing wheat, malt barley and other staple grains. Their vast knowledge and application of agricultural production and harvesting practices to hemp should help Montana farmers maintain a leadership position in the market.


Licensed acres: More than 40,000 acres

Licensed indoor square footage: unknown

Licensed growers: More than 250



OUTLOOKNearby Idaho and South Dakota opted out of hemp programs for 2019, which should offer more regional opportunities for Montana’s hemp farmers and businesses.

The state’s “Montana-grown hemp” certification will establish a marketing label, similar to it’s natural beef program, and requires laboratory testing to meet safety and labeling laws. But the hope among proponents of the program is that the seal of approval will differentiate Montana’s hemp products and help farmers and businesses more effectively market their products.



11

NEVADAA business obstacle for some can become a business opportunity for others. That seems to be the case for Nevada, where hemp growers are seeing healthy profits in part because of slow-going hemp development in neighboring California.

Wholesale hemp prices in Nevada have been consistently higher than processers see in other states. Nevada hemp producers say they have no trouble finding buyers for flower varieties of hemp, even when the flower varieties aren’t especially rich in CBD.

NEVADA CULTIVATION SNAPSHOTNevada growers say they’ve had little trouble adapting foreign hemp cultivars to thrive in dry, hot weather. That is, as long as the hemp producer has water rights. Hemp can thrive in dry climates, but irrigation dramatically boosts production and is a necessity for Nevada hemp farmers to be profitable.

SUPPLY (as of May 2019)


Licensed indoor square footage: 1.27 million

Licensed growers: 154



OUTLOOKNevada hemp producers have good reason for optimism. California’s patchwork hemp-regulation woes are likely to continue through much of 2019, and Nevada’s arid climate deters white mold and other pests that can devastate hemp grown in rainy climates.

Still, there’s a reason Nevada is not a powerhouse agricultural state. Irrigation isn’t cheap, and potential hemp producers need to line up water rights to guarantee a profitable harvest.

Nevada has seen hemp investment coming from well-capitalized Canadian cannabis producers in the past year. Once some of those larger outfits get established in the market, wholesale hemp prices will likely head downward.



12

NEW YORKBig and bold is how New York likes to approach things, and the hemp market is no exception. Where some states have waited for federal direction on how to allow hemp cultivation, New York has made deep investments to attract hemp manufacturers—a strategy that paid off when the world’s largest cannabis company by market cap, Canadian giant Canopy Growth, chose New York to start its U.S. expansion strategy.

Canopy’s $150 million plan to build a network of New York hemp growers for cannabinoid extraction is having a significant impact on the state. The company already started work converting a former vacuum-cleaner factory into a CBD production site and is lining up grower contracts, speeding New York’s rise as a significant hemp producer and processor.

NEW YORK CULTIVATION SNAPSHOTNew York’s hemp farmers have had more success than new hemp growers in other states. That’s likely because its environment is closer to the European climates where many certified seed cultivars originate. As in other states, most hemp farmers here are looking for CBD-rich flower varieties, but New York also has producers successfully growing food products (even edible greens) and selling fiber for animal bedding.



Licensed indoor square footage: not available




OUTLOOKNew York’s many hemp advantages don’t erase the fact the state’s ultimate position in the U.S. hemp market will likely be as a manufacturing hub, not a production hub.

High land and labor costs coupled with a relatively short growing season leave New York at a disadvantage to some other hemp-producing states. The same agronomic forces at play in other commodity crops affect hemp, of course, making New York’s investment in manufacturing infrastructure, rather than cultivation, a wise bet.

Already there are signs that major processors such as Canopy are driving down New York’s wholesale hemp prices, with manufacturing giants able to secure contract prices that smaller processors can’t. The result may be a squeeze on small and midsize producers, though consumer interest in craft cannabis and locally grown products will leave room for New York hemp producers catering to big-city sophisticates.



13

NORTH CAROLINANorth Carolina’s rich tobacco history is playing an oversized role in its current hemp industry. Producers and buyers say they’re seeing enormous market interest in whole hemp-flower buds, which are being dried and sold as smokable products in shops called dispensaries that sell no marijuana, only hemp.

North Carolina has seen little activity in the production or sale of hemp fibers or grains—perhaps a result of the interest in smokable hemp. The few hemp entrepreneurs buying fiber and grain varieties say they are buying material grown outside the state.

North Carolina authorized hemp production in 2017 and, like many states, has seen an explosion of farming and processing activity. The state saw nearly a tenfold increase in growers from 2017 to 2019, with more coming on board each month. The state has no cap on growers or acreage and licenses new hemp producers throughout the year.

NORTH CAROLINA CULTIVATION SNAPSHOTUndeterred by setbacks both natural and manmade, North Carolina’s hemp producers report exponential growth. North Carolina’s first growing season in 2017 was hindered by federal delays in authorization to import hemp clones from Colorado; the 2018 growing season was marred by heavy losses from Hurricane Florence.

North Carolina farmers have brushed off those concerns and are growing more hemp in 2019 than in the previous two years combined. The state reports nearly 10 times more licensed hemp producers than in 2017, and growers see lively interest from hemp processors and retailers looking to capitalize on the CBD boom in a region with limited access to medical or adult-use marijuana.



Licensed indoor square footage: 4,540,925




OUTLOOKNorth Carolina’s hope that hemp could prove a profitable alternative to tobacco is playing out—for now. The state has abundant rainfall, cheap land and a cost-competitive workforce, making it a logical production hotbed.

However, farmers will be watching to see whether hemp runs into the same problems tobacco did—oversupply followed by health concerns and a government crackdown in the form of steep taxes and limits on who can buy smokable hemp flower. North Carolina lawmakers this year adopted a ban on smokable hemp products. The ban doesn’t take effect until next year. But it could be a harbinger of increased government oversight and a signal of how closely regulators are prepared to see the hemp market mirror the tobacco market.



14

NORTH DAKOTANorth Dakota went the wrong way on hemp in 2018, dropping in overall licensed acres and falling far behind nearby Montana and Colorado. The reason was simple: North Dakota limited its hemp farmers to selling only fiber and grain products, cutting them entirely out of the CBD boom.

That changed in 2019, when Gov. Doug Burgum signed a law eliminating that restriction and allowing his state’s farmers to sell flower and whole biomass for cannabinoid extraction. The same law lowered per-acre licensing fees for producers, showing a decidedly industry-friendly turn in a state wanting to reclaim its place among the nation’s top hemp producers.

NORTH DAKOTA CULTIVATION SNAPSHOTA lot of products sold as “hemp oil” are really other types of oil with cannabinoid molecules added. North Dakota makes the real stuff, using its extensive oilseed infrastructure to pivot to pressing hempseeds and manufacturing hemp hearts for snacking. Light in cannabinoids but loaded with healthy omega fats, hempseeds and oils give producers access to nationwide distribution without waiting on federal action on the legality of those CBD-infused oils. Still, new opportunities in hemp don’t yet pose any significant threat to flaxseed production here.

North Dakota farmers have been producing oilseeds since prairie sod was first broken. Just as in other markets, though, the state’s hemp farmers say they’re experimenting with flower production to see if the higher value afforded CBD-rich flowers will translate to higher profits.



Licensed indoor square footage: unknown


PRICES BY PRODUCTHemp flower: N/A (not legal until 2019)

Hemp seed: 45 to 60 cents a pound

Whole-plant biomass: N/A (extraction not legal until 2019)

OUTLOOKIf North Dakota’s regulators are smiling on the hemp industry, Mother Nature is harder to read. Parts of the state saw significant flooding in the spring of 2019, delaying spring planting. The state climatologist has pronounced the floods not as severe as those seen in recent history. Still, the growing season for outdoor hemp in North Dakota is short, as is the season for other crops, so soggy fields can have significant ramifications.



15

OREGONThe state has been a leader in marijuana production since 2015, so Oregon’s farmers want to take that experience and drive it into an ambitious hemp crop nearly five times larger than in 2018. Marijuana prices continue to sink to new lows amid a product glut, so some growers are looking to diversify their revenue stream by turning to hemp.

Oregon’s state agriculture department expects the hemp industry to be more lucrative than its largest agricultural industry, greenhouse and nursery, which was worth $947 million in 2017.

With such promise, Oregon is committing to the crop by building the nation’s largest research center devoted to its study at Oregon State University, which will be the first and only university in the United States to certify hempseed. The seed will be available for the state’s licensed hemp farmers to plant.

The Global Hemp Innovation Center will be part of the university’s College of Agricultural Sciences, with more than 40 faculty members directing research focused on plant research, food innovation, pharmacy, public health, public policy, business and engineering.

OREGON CULTIVATION SNAPSHOTAlthough April was one of the wettest on record in Oregon, the higher-than-average rainfall improved drought conditions throughout the state. Following that, the spring growing season started out warm and sunny, and farmers say those who planted early may see large plants at harvest.

With good access to water, fertile valleys and a reliably dry, hot summer season, Oregon’s climate is ideal for hemp production. Coastal air cools soil temperatures at night, allowing root systems to restore, then sunny, hot days allow plants to thrive.

Oregon’s farmers are eager to capitalize on these growing conditions, with nearly a fivefold increase of acreage registered in 2019 over last year’s 11,754 growing acres.



Licensed indoor square footage: 7,741,934




OUTLOOKFamous for overproducing marijuana, it’s possible that Oregon could make the same mistake with hemp. But unlike marijuana, which is constricted by state borders, Oregon’s farmers have been shipping high-quality hemp flower to Eastern states since the smokable hemp trend revealed itself over the past year. Oregon’s farmers say they continue to see large interest in their product from Texas, Florida and the Mid-Atlantic—regions with limited access to cannabis products, large aging populations and affluent city centers.

Significant hemp processing capacity is also being built in Oregon; last year, much of the state’s hemp crop moved to Colorado or Kentucky for processing. The state’s agriculture department registered nearly 350 handlers, compared with 189 in 2018. Farmers report early demand from processors for high-quality flower and whole-plant biomass.



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TENNESSEEBuilding on a rich agricultural heritage of traditional crops such as tobacco and cotton, Tennessee farmers have become overtly enthusiastic about growing hemp, with its many positive aspects and uses. Following passage of the 2018 Farm Bill, the state approved 12 times the number of production applications for 2019 as it did the previous year. Tennessee also changed its hemp rules to allow farmers to apply year-round and eliminated the need for processors to register with the agriculture department.

Existing tobacco harvesting and drying infrastructure allows that crop’s former farmers to more seamlessly switch over to hemp production and capitalize on the demand for high-quality smokable flower. Tennessee producers also report increased demand for tinctures, as well as CBD-infused goods such as edibles, topicals and pet products.

TENNESSEE CULTIVATION SNAPSHOTIn Tennessee’s notoriously warm climate with high humidity and more than 50 inches of rain annually, hemp farmers have had issues with finicky varieties better suited for arid markets. In pilot growing years, Tennessee hemp farmers have lost crops to Fusarium wilt, gray mold and botrytis, diseases that attack cannabis plants grown in wet, humid conditions.

This spring has been warmer and wetter than the past few, but it hasn’t deterred Tennessee farmers from planting. With more knowledge of the four distinct microclimates in Tennessee, hemp farmers have learned that the state’s latitude, light photoperiods and fertile terroir allow for multi-staggered crops, especially in middle Tennessee.



Licensed indoor square footage: 2,643


PRICES BY PRODUCTHemp flower: $300-$1,1000 per pound


OUTLOOKDespite disappointing crop results and all-out failures in previous years, Tennessee farmers and businesses say they are energized about developing hemp as a viable agricultural commodity in their state. With a strong history in hemp, government officials have shown enthusiasm for helping the industry, eager to reclaim hemp market share from neighboring Kentucky.

Farmers in the state are producing hemp for fiber, seed and CBD extraction, and lawmakers have considered allowing the plant’s use in animal feed to open more opportunity. Consumers are also becoming more educated about hemp and its derived products, farmers say, showing increasing demand recently for smokable flower.



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WISCONSINNowhere reveals the way that global economic trends change farming quite like Wisconsin. Hemp excitement here can’t be separated from its gloomy cause—the collapse of the global dairy industry.

Wisconsin lost an estimated 700 dairy farms last year, victims of overproduction and falling export markets that have sent wholesale prices plummeting, according to the state's agriculture regulators.

The downturn has an increasing number of Wisconsin farmers looking to hemp. The state was once a top hemp-fiber producer, and optimism about hemp’s potential is evident across the dairylands, where farmers are eager to cash in on a 2017 law allowing commercial cultivation.

WISCONSIN CULTIVATION SNAPSHOTWisconsin’s hemp renaissance has fallen short of expectations so far. Grain growers suffered total failure in 2018, when a rainy summer led to 100% of the cultivated grain being lost to white mold. Mold also destroyed about 75% of Wisconsin’s hemp fiber market last year, one industry association predicted. (The state did not keep accurate numbers on hemp fiber losses.)

Some small-scale flower producers reported healthy prices for trimmed flower, but the state’s hemp landscape remains decidedly uncertain.


Licensed acres: 16,100 (combined outdoor/indoor)




OUTLOOKMold concerns aren’t going away in Wisconsin. Some areas of the state saw more than 15 inches of rain in both April and May, delaying spring planting and throwing into question how this year’s crop would withstand the conditions.

Still, the state is recording enormous interest from farmers wanting to try the new crop. State agriculture authorities produced free how-to cultivation videos and are rooting for hemp to give Wisconsin farmers a much-needed economic boost.

August 16, 2019

Re: Hemp Fast Facts - 2018 Farm Bill Update to “The Hemp Revolution Will Not Be Televised … Yet”

The Hemp Farming Act, introduced by Republican Senate Majority Leader Mitch McConnell, was included in the Agriculture Improvement Act (the 2018 Farm Bill), which was signed on December 20, 2018 by President Trump. Before the signing of this Bill, hemp was included in the definition of “marihuana,” a Schedule One Controlled Substance under the United States Controlled Substances Act (CSA) – illegal for any purpose. By way of background, under the 2014 Agricultural Improvement Act (the 2014 Farm Bill), hemp was only permitted to be grown in two limited situations: in conjunction with a state’s industrial hemp program or under a contract with a university’s research pilot program. In neither of these instances were hemp or extracts made from hemp allowed to leave those states’ lines. The 2018 Farm Bill changes the way hemp is handled legally as follows:

• Removes “hemp” from the definition of “marihuana” under the CSA – but must

contain no more than .3% THC on a dry-weight basis. • Requires USDA to expeditiously develop national hemp regulations. • Allows states to voluntarily submit hemp regulation plans to USDA on:

o THC testing procedures o Annual inspection procedures o Bookkeeping procedures o Plans for disposal of “hot” crops (>.3% THC)

• USDA may approve or reject state hemp regulations within 60 days. • Provides for federally backed crop insurance. • Allows USDA one year to study and “determine the economic viability of the

domestic production and sale of industrial hemp” and submit findings to Congress.

• Bans hemp cultivation by those with drug felonies in past 10 years. • Prevents farmers who produce “hot” crops (>.3% THC) 3 times in 5 years from

growing hemp for 5 years. • Allows hemp and hemp products to cross state lines and be imported/exported

like any other crop – Specifically, DEA no longer has authority over hemp and states are not supposed to prevent interstate commerce, but currently, some are.

• Retains FDA authority over food, drugs, and cosmetics. On the same day the Farm Bill was signed, the FDA issued a statement reminding that CBD is now considered a drug and cannot be marketed as a dietary supplement or infused into food products placed in interstate commerce.1

1 https://www.fda.gov/newsevents/newsroom/pressAnnouncements/ucm628988.htm.

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1

“Down on the Farm: The Farms Bills, Hemp, CBD, the USDA and the FDA”

September 18, 2019

The ABA National Cannabis and Hemp Law Conference

Chicago, Illinois

2

James R. (Jim)Prochnow

Shareholder

Greenberg Traurig, LLP

1144 15th Street, Suite 3300, Denver, CO 80202

303-572-6546

“Copyright 2019 American Bar Association”

3

Reflections on the Positive Future of CBD And

The Need NOW for Remedial Legislation

by Jim Prochnow

TALKING POINTS

[1] The Exclusionary Clause does NOT apply to an entire class of products, rather it is oriented toward determinations on a product by product basis, not on a class of ingredients basis. Therefore, the FDA’s declaration that all CBD-containing products are illegal except if prior use can be proven, was ill advised and wrong.

[2] Federal legislation is needed to amend the Exclusionary Clause of DSHEA and the comparable conventional food provision because possible FDA regulation will be unsatisfactory, both in terms of timeliness and substance, due to the Agency’s predicable, conservative response to the revolutionary Farm Act of 2018. This effort may be a part of a partial overhaul to DSHEA, in light of the fact that it is now 25 years old. This legislative effort does not have to be a battle with the FDA; in my experience, many Agency personnel want “to do the right thing,” and every effort should be made to work with the FDA in this regard.

[3] More industry leadership, company by company, must immediately step forward in a powerful, vocal, financial and influential way to accomplish that legislative objective and, secondarily, to influence the contours of possible FDA regulatory effort.

[4] Each CBD-related company should engage in credible, reliable clinical testing in order to provide confidence to the consuming public and the FDA/FTC about efficacy and safety. of CBD-containing products.

The enactment of the Agriculture Improvement Act of 2018, aka the 2018 U. S. Farm Bill, on December 20, 2018, reflected the will of the American people and the political shrewdness of Senator Mitch McConnell, remarkably similar to what occurred in 1994 when Senator Orrin Hatch championed the formal recognition of dietary supplements. This legislation ignited a surge of sales of products (i.e. public demand) derived from Industrial Hemp and spawned a myriad of practical, daily issues such as (i) the testing of unharvested and harvested hemp biomass for its

4

THC content and (ii) the design, carrying out, and publication (perhaps) of substantial credible reliable clinical efficacy studies and (iii) import detentions of products labeled as CBD. This paper is not geared to addressing these specific, important issues.

The Farm Bill indisputably, dramatically and favorably changed the legal landscape in the United States with respect to the manufacturing, distribution and sale of hemp and hemp derivatives, including CBD. Among other things, the act: (A) legally distinguishes hemp from marijuana by defining “hemp” as the Cannabis sativa L. plant (or any part of the plant) and extracts of it, that contain no more than 0.3% THC (as calculated on a dry weight basis); (B) exempts “hemp” from both DEA interference and the restrictions imposed by the CSA; and (C) precludes the states from prohibiting the transportation or shipment of hemp or hemp products and makes it clear that nothing in the 2018 Act prohibits the interstate shipment of hemp products.

The FDA’s immediate response to the 2018 Act was predictable, unwelcome and self-protective in nature -it declared all CBD-containing products to be illegal, while at the same time dribbling out cautious optimism about the future use of CBD in foods and dietary supplements. Commissioner Gottlieb publicly acknowledged the effect of the new law, but commented that the FDA will regulate CBD-containing products as “we do other FDA-regulated products.” He noted, among other things, that food products remain subject to two closely-related provisions in the FDCA – one applicable to dietary supplements and the other to conventional (general) food, which I prefer to call “the Draconian Clause or Provision” although it is commonly and gently referred as the Exclusionary Clause. That Clause is an integral part of a complicated, somewhat ambiguous statute, 21 U.S.C § 321 (ff) (3). The DEA, on the other hand, has rarely exhibited any voluntary recognition of this new statute.

The FDA’s current position, as reflected in public statements and in Warning Letters, is that the Clause automatically transforms a dietary supplement into an unapproved new drug by declaring that CBD cannot be a dietary ingredient, a status that CBD must have for it to be legally included as a dietary supplement, unless the role of CBD is that of a non-bioactive ingredient. The FDA’s sole publicly announced “out” for the industry is if an entity or individual has credible evidence that CBD

5

(the article) was marketed (sold) as a dietary supplement or as a food before it was authorized for study as a potential new drug.

By its actions to date, the FDA has (i) caused serious reluctance on the part of lenders and investors to provide needed financing to industrial-hemp associated companies and (ii) caused other disturbances in the conventional food and dietary supplement industries that result in the consuming public being deprived of more CBD-containing products.

In my judgment, the FDA violated its important responsibility to the public and industry by its petulant, wrongful declaration of illegality for several reasons: [1] The FDA has no authority to criminalize any act or product without specific authority from the Congress; an FDA declaration that some act or product is illegal, does not make it so as a matter of law. For example, an herbal extract that contains CBD may not, based on the lessons from Pharmanex v. Shalala, be the article(CBD) that is the centerpiece of the Exclusionary Clause.

The FDA now has an obligation to both accelerate the exercise of its authority to issue a regulation that allows the use of CBD in conventional foods and dietary supplements and to work with industry and the public to enact remedial legislation. That authority exists in a “difficult to understand” language which appears at the end of the Clause. It reads:

“…unless the Secretary, in the Secretary’s discretion, has issued a regulation, after notice and comment, finding that the article would be lawful under this Act.”

It is likely, however, that the FDA will interpret this text very cautiously and conservatively.” Logic would dictate that such language means that CBD should be allowed to be included in a dietary supplement if it meets all of the other requirements of 21 U.S.C § 321(ff), which is the definition of dietary supplement, just as all other compounds are treated by the FDA. Nonetheless, the FDA is likely to “test the waters” by continuing to study the challenges of regulating CBD as a special compound, followed by a draft Guidance and by watered-down regulations in a couple of years

6

In light of all the above, it is imperative that the public, the beverage and dietary supplement industries, and state governments band together, through trade associations and much smaller groups, to (i) work with GW Pharmaceutical; (ii) share data with respect to the safety of herbal extracts and CBD and (iii) demand a legislative change to the Draconian Clause, just as what occurred in 1994 when the dietary supplement Bill of Rights was enacted as DSHEA. It took an army of interested citizens to pressure the Congress to respond and in 2018 when The Hemp Farming Act was included in the 2018 Farm Bill.

There are many options available to the Congress, which would afford some reasonable protection to the pharmaceutical industry (dollars invested in scientific research) and allow the inclusion of CBD ingestibles. Some options are these:

[1] The protection afforded the drug candidate company (“the sponsor”) would expire five years after the FDA’s approval of a New Drug Application;

[2] The protection afforded the drug candidate company (“the sponsor”) would expire eight years after the FDA’s authorization (non-objection) of a clinical study of a new drug;

[3] The protection afforded the drug candidate company (“the sponsor”) could be waived by the sponsor of the clinical study.

A fascinating and illuminating discourse on this subject appeared in a May 2019, 21-page excellent interview by Stephen Daniells of NutraIngredients -USA, entitled “DSHEA at 25: In conversation with Scott Bass and Loren Israelson.” There, the interviewees, when speaking of potential legislation commented that “if we’re really going to put a table out, invite people to sit there and say, what do you think? We better come prepared with some very clear and specific ideas of what we think the future should look like in terms of a statutory framework. I would be intrigued to see to what degree the industry reveals its populist side in that, which will be there. It is always there...more quiet than other times. To see if there’s a new generation of leaders who would arise because there’s an opportunity now to be a leader in a new way. It’s an old saying of some sort, is that sergeants, colonels and generals are made in the battlefield and that will be true here.”

ACTIVE 45640979v4

Memorandum

TO: INTERESTED PERSONS: THE ABA CBD CONFERENCE IN CHICAGO

FROM: Jim Prochnow, Greenberg Traurig, LLP Office: 303-572-6546 Mobile: 720-212-4994 E-mail: [email protected]

DATE: September 17, 2019

RE: Important Analysis of the August 30, 2019 Federal Appellate Decision in United States v. Hi-Tech Pharmaceuticals, Inc. and Jared Wheat

OVERVIEW

This August 30, 2019, 22-page Order, which I shall refer to as a Decision, Opinion or Order, of a three-judge panel of the Eleventh Circuit (Atlanta) affirmed an Order of Summary Judgment in favor of the FDA. The core issue was and is this: Is synthetically produced DMAA a “dietary ingredient” as defined within the definition of “dietary supplement,” 21 U.S.C. §321(ff)(1)(C)? The Court said NO because Hi-Tech had not provided enough evidence to show that DMAA was actually present in nature in more than a trace amount. The Court explained the reach of its Decision in plain language as follows at page 14:

The fact that DSHEA provides a rebuttable presumption of safety as to botanicals, but not to synthetic substances

“...does not mean that DSHEA applies only to products derived from plants, not those artificially manufactured. If a product is indeed a dietary supplement because it contains a qualifying dietary ingredient – including, for example, an herb or other botanical – a manufacturer may take the dietary ingredient from nature or produce it artificially. But there must be a qualifying dietary ingredient.”

This was a 2-1 decision authored by Gerald Tjoflat [89 years old, appointed in 1975 by

President Ford] and Robert L. Hinkle (a federal district court N.D. Fla, sitting by designation), who is a 1996 Clinton appointee. Because of the long-standing reputation of Judge Tjoflat and the excellent reputation of the dissenter (see page 2), this was really a 1-1 battle, in which age or seniority prevailed over glamour. Although the ingredient involved in the Hi-Tech case was DMAA, not CBD, its impact on CBD products is positive and significant. In my opinion, (i) the FDA is likely to pause and hesitate before taking any aggressive action against any artificial CBD that is contained in any dietary supplement product because of this Decision and (ii) the impact of this Decision will be felt beyond the context of (ff)(1)(C).

September 13, 2019 Page 2

ACTIVE 45640979v4

This Decision did not address the issue of whether an artificial substance could be deemed to be a dietary ingredient within the meaning of 21 U.S.C. §321(ff)(1)(E), the “catch-all clause” which permits the use of a dietary ingredient to “supplement the diet by increasing the total dietary intake.” The Court (the majority opinion) also noted that DMAA would be an unapproved food additive if it decided, as it did, that DMAA was not a dietary ingredient. The Court determined that Hi-Tech had not provided sufficient evidence to create a genuine issue of fact as to the GRAS status of DMAA, a status unsuccessfully advocated for by Hi-Tech and opposed by the FDA.

Judge Adelberto Jordon dissented in part and concurred in part with the Opinion of the other two judges. He was appointed in 2015 by President Obama, after being appointed in 1999 by President Clinton to the U.S. District Court in Miami. He argued that since some amount of DMAA (even a trace amount) had been found in a geranium plant, DMAA should be deemed a constituent or component of that botanical, the majority violated the basic judicial principle of accepting the plain language of the statute. He favored a remand and evidentiary trial on the meaning of “constituent.” This judge has a sterling reputation and, therefore, his five-page dissent will not be disregarded by other courts.

TAKEAWAY POINTS

TAKE NOTE that this Decision is only that of one appellate panel in one federal court of appeals. Nonetheless it is useful and instructive.

[1] This Decision clearly states that a dietary supplement may include a compound

(ingredient) as a dietary ingredient that is artificially produced (manufactured) entirely from chemicals provided that such component is present in a botanical or herb in more than a trace amount. A manufacturer, therefore, should request information from an ingredient supplier if it has any concern that there is no publicly available evidence that shows that the artificial (synthetic) compound has a counterpart in nature, whether that is a vitamin, mineral or botanical.

[2] This federal appellate decision was issued by the Court of Appeals for the

Eleventh Circuit, which includes all federal courts in the states of Alabama, Georgia and Florida. This decision is not binding on the FDA (except in the Eleventh Circuit) or on any of the other federal courts of appeal in the United States, although it is likely that federal trial courts, other federal appellate courts and the FDA will carefully evaluate its holdings and rationale. [3] This Decision is a reminder that it is extremely difficult to prevail on a GRAS status claim if the FDA opposes that position. [4] This Decision is a reminder that courts are very prone to defer to the FDA on matter of interpretation of text in the FDCA, although deference was not mentioned in the Opinion.

September 13, 2019 Page 3

ACTIVE 45640979v4

FEATURES OF THE OPINION OF THE APPELLATE COURT

THE INGREDIENT Hi-Tech used DMAA in dietary supplement fitness products. Its DMAA was manufactured from chemicals, not from any natural source. The Court noted that there was evidence that trace amounts of DMAA had been discovered by several non-parties in some geranium plants, although there was a difference of opinion about whether DMAA occurred naturally in geraniums or whether fertilizer could be a source of the DMAA that was detected. The Court, more than once, referred to the discovery of these trace amounts as “coincidental” to Hi-Tech’s use of artificially produced DMAA.

INTERPRETATION OF THE STATUTE The Decision turned, to a large extent, on the parameters of the word “botanical” as used in the statutory definition of “dietary supplement”.” 21 U.S.C. 321(ff)(1) includes within the definition of “dietary supplement” a list of legally permissible dietary ingredients; (ff)(1)(C) lists “an herb or other botanical” and in (1)(F) “a concentrate, metabolite, constituent or extract” of an herb or botanical as acceptable dietary ingredients. The Court noted, on page 8 of the Opinion that no dictionary definition suggests that the noun “botanical” “includes an artificially produced substance that, entirely coincidentally, may be found in trace amounts in a plant.” Furthermore, at page 10, the Court expanded its position by stating that “it is unlikely that Congress used the term “herb” or “other botanical” to mean a substance invented in a laboratory and artificially produced, that can be found in a plant only in trace amounts, only coincidentally, and that has never been derived from a plant for use in any medicinal, cosmetic or dietary product.” Hi-Tech argued that because DMAA had been found in some geranium plants, it is a dietary ingredient because it was then a “constituent” of the geranium plant. The Court disagreed and noted, among other things, that Hi-Tech’s position would render meaningless the other words (such as “metabolites” and “extracts”) in the statutory list of 21 U.S.C. §321(ff)(1)(F).

CLOSING NOTE Hi-Tech has requested that the entire panel of judges who comprise the Court of Appeals for the Eleventh Circuit review this case. The chances of the Court granting that request are remote. Time will tell if other courts agree with this Decision or if courts will expressly expand the essential holding to 21 U.S.C. §201(ff)(1)(E). Nonetheless, this Decision offers more opportunity for the use of artificial dietary ingredients.

-END-

INTELLECTUALPROPERTY&CANNABIS–AJOINTEFFORT

September19,2019

AmericanBarAssociation•TortTrial&InsurancePracticeSectionABACannabisConference

LeelaMadanManagingPartner&PatentAttorney

MADANLAWPLLC2016BissonnetSt.Houston,TX77005713.364.3796

SarahVanDeBogartFoundingPartner

VDBLegal,DenverCO303.502.9234

BrynaDahlinPartner

BeneschLLP71SouthWackerDrive,Suite1600

Chicago,IL60606312.624.6340

TomZuber

ManagingPartner&PatentAttorneyZuberLawler

350S.GrandAvenue,32ndFloorLosAngeles,CA90071

213.596.5620

Copyright2019AmericanBarAssociation

Introduction

Asthe legalization-ordecriminalization,dependingonwhoyouask-ofcannabis

spreadsacrosstheUnitedStates,theresultantemergingcannabisindustryhashadtodeal

withnotonlytheindividuallawsofthestatesbutalsotosomehowadheretothefederallaws

underwhich cannabishasnot yet been legalized. Intellectual property law is incredibly

nuancedwithallsortsofstateandfederaldistinctionsandrulesand,addtoitanindustry

thatislegalatthestatelevelbutillegalatthefederallevelonlycomplicatesthingsfurther.

Thispaperisdesignedtodiscuss(butnotsolve!)theoverarchingintellectualpropertyissues

thatfacethecannabisindustryin2019.

TrademarkProtection

Atrademarkisaword,phrase,design,symbol,sound,shape,color,orothersignal

thatisgiventoaconsumerthattellsthemwhereagoodorservicecomesfrom.Mostpeople

recognizetheTMand®symbolsandknowthattheymeanamarkiseitherfunctioningasa

trademarkand/orregisteredwith theUnitedStatesPatent&TrademarkOffice (USPTO).

Butwhatmostpeopledon’trealizeisthateveryindividualstatewithintheUnitedStatesalso

hasitsowntrademarklawsanditsowntrademarkregistrationsystem.

StateTrademarkLaws

Statelaw–or“commonlaw”–rightsrelatingtotrademarksareactuallyquitestrong

andhavecomeinquiteusefulinlightofthelegalizationofcannabis.Thesestatelawrights

haveallowedforcannabiscompaniestoobtainstateregistrationoftheirtrademarksthat

theyotherwisecouldnotregisterwiththeUSPTObecausefederaltrademarklawsrequire

proofoflegaluseincommerceinorderforamarktoberegistered(seebelow).Thestates,

however, who have legalized cannabis for either medical and/or recreational use, have

therebymadeapathavailableforregistrationoftrademarksdirectlytouchingorrelatingto

cannabis. In fact, most states that have legalized either medicinal and/or recreational

cannabishaveseenadramaticuptickintrademarkfilingsbycannabisrelatedcompaniesin

theirstates.

Todate,more than30statesandWashingtonDChave legalizedcannabis insome

form. State trademark registrations can be used to obtain protection formarks used in

connection with CBD, hemp, as well as THC containing goods, e.g., cannabis flower and

related products, cannabis-infused products, pre-rolledmarijuana cigarettes etc., and/or

relatedservicessuchasdispensaries,grows,transportation,investments,andthelike.

Benefits to state registration include a low threshold for registration, very quick

processing,andrelativelylowcostsassociatedwithregistration.Downfallsincludelimited

protection to only the states in which registration is obtained and the applicant must

understandandcomplywiththevaryingstateguidelinesandrules.

FederalTrademarkLaws

While state trademark registration is a great option, many cannabis-related

companiesreallywantprotectionandregistrationoftheirtrademarksatthefederallevel.

Prior to December 2018, the USPTO would not allow any federal registration of any

trademarkorservicemark foragoodorservice thatdirectlyrelated toor “touched” the

cannabisplant.ThisisbecausecannabisisfederallyclassifiedasaScheduleIdrugaccording

to theControlled SubstancesAct (CSA), therebymaking it impossible for an applicant to

showlegaluseincommercebecausetheCSAprohibitsthemanufacturinganddistribution

ofmarijuanaandmarijuana-basedpreparations.Toclarify,itisnotthetrademarkorservice

markthatistheissue,rather,itistheunderlyinggoodorservicethatisunlawful,thereby

renderingthetrademarkineligibleforregistrationatthefederallevel.

TheFarmBill–CBDvs.THC

Asifallofthisisn’tcomplicatedenough,inDecember2018,thefederalgovernment

passed the Agriculture Improvement Act of 2018 (aka the Farm Bill) and stated that

cannabidiol(CBD)derivedfromhemp is federally legaleventhoughtetrahydrocannabinol

(THC)andCBDderivedfromTHCisnot.

AsdefinedintheFarmBill,legalCBDderivedfrom“hemp”isdefinedas“theplant

CannabissativaL.andanypartofthatplant,includingtheseedsthereofandallderivatives,

extracts,cannabinoids,isomers,acids,salts,andsaltsofisomers,whethergrowingornot,

withadelta-9tetrahydrocannabinol(“THC”)concentrationofnotmorethan0.3percenton

adryweightbasis,”whichmeanstheFarmBilleffectivelycarvedoutanexceptionforCBD

andhempfromtheCSAandnowtreatsCBDandhempasagriculturalcommoditiesunder

purview of the United States Drug Administration (USDA) in conjunctionwith state and

tribalgovernments.Theresultofthisisthatnowatrademarkorservicemarkforagoodor

service related to or touching CBD derived from hemp or hemp itself can actually be

registeredwiththeUSPTOsolongascertainguidelinesarefollowedbecausetheapplicant

cannowshowlegaluseincommerce.

Following the passage of the Farm Bill, in May of 2019 the USPTO released a

statementexplainingtheirguidelinesonCBDandhempandclearlystatedthatwhilehemp

andCBDderivedfromhemphavebeenlegalized,onlyapplicationsfiledafterthepassingof

theFarmBillwouldbeconsidered forregistrationandonlymarks forcertaingoodsand

serviceswouldbeeligiblefortrademarkprotectionwhereasotherswouldnot.Applications

forhempgoods/servicesandhemp-derivedCBDgoods/servicesfiledbeforethepassingof

the2018FarmBillwouldneedtoeitherbere-filedortheirapplicationfilingdateswould

needtobeamendedbecauseapplications filedpriortothepassingof theFarmBillwere

eitherbasedonfederallyunlawfuluseorlackofbonafideintenttouseinfederallylawful

commerceundertheCSA.

Regardingthecertaingoodsandserviceseligibleforfederaltrademarkprotection,

despitethepassageoftheFarmBillandthereleaseoftheUSPTOguidelines,the2018Farm

BillpreservedtheFood&DrugAdministration’s(FDA)authoritytoregulatefoodanddrug

productscontainingcannabis. BecausetheFDAiscurrentlyallowingaprescriptiondrug

containingCBD(Epidiolex)toundergoclinicaltrials,viatheFDAtheUSPTOisrefusingto

registeranyCBDorhempproductsthatareingestible.ThismeansthattrademarksforCBD

andhempproductssuchastinctures,dietarysupplements,petfoods,humanfoods/edibles,

andthelike,cannotberegisteredwiththeUSPTOuntiltheFDAconcludesitstesting.The

FDA has also declared that CBD and hempwill be examined like any other new dietary

ingredientbeforeitisallowedinthefoodsupply.Whilestrictinnature,thegoodnewsis

thattheseFDAregulationsdonotapplytowhattheFDAconsiderstobecosmetics(products

thatareappliedtopically)sotrademarkprotectionforthesegoodsshouldbeavailable.

Finally, it isworthnotingthatdespitethepassageoftheFarmBillanddespitethe

USPTO’s statement on the matter, in practice, USPTO Trademark Examining Attorneys

applied these positions very inconsistently and many applications for goods containing

hemp-derived CBD or hemp moved through to registration with little opposition while

otherswereoutrightrefused.

ZoneofExpansion

As has always been the case, if an applicant is able to obtain federal trademark

registrationforamarkinaspecificclassofgoods/services,theywillalsobeaffordedrights

intotheir“naturalzoneofexpansion.”Thismeansthatasavvyapplicantmightgoaheadand

obtainfederaltrademarkregistrationfortheirmarksinconnectionwithcurrentlyavailable

goods/services(e.g.,smokersarticlessuchaspipesandnon-cannabisherbalsupplements)

andtherebysetthemselvesuptobefirstinlinefortheCBDandhemp(andhopefullyinthe

futureTHCproductscontainingmorethan0.3%THC)productsinthefuture.

THCGoods/ServicesNotDirectlyEligibleforFederalTrademarkProtection

Notwithstandingtheforegoing,trademarksforproductsorservicesdirectlyrelated

toortouchingTHC(i.e.,whichcontainmorethan0.3%THCarethereforearenotsolelyCBD

orhemp)remainineligibleforfederaltrademarkprotectionandcanonlyberegisteredat

thestatelevel.ThisremainsthecasebecausetheCSAprohibitsmanufacturing,distributing,

dispensing or possessing THC and THC-based preparations and clearly states that it is

unlawfultosell,offerforsale,oruseanyfacilityofinterstatecommercetotransportdrugs

and/or drug paraphernalia. This includes recreational andmedicinal THC products and

servicesdespitemanystateslegalizingsuch.

WhileTHCproductsandservicesthemselvesarenoteligibleforfederaltrademark

protection,theUSPTOwillallowforregistrationofmarksforgoodsand/orservicesthatare

ancillarytothecannabisindustry,eventhosethataredealingwithTHC.Forexample,the

USPTOwillallowanapplicanttoregisteramarkforgoodssuchasclothing,merchandise

(e.g., coffee cups, water bottles, etc.), or smokers articles (e.g., pipes, rolling papers,

vaporizers)andservicessuchasinformationalwebsites,consulting,blogs,andeducational

workshops/seminars.Thisbackdoorapproachallowsforapplicantstoobtainsomeformof

federalprotectionfortheirtrademarksandtherebysignaltocompetitorsorputthemon

noticethattheyintendtousethosemarksandclaimtheirrightstothesetrademarksinthe

cannabis industry. This notice can be useful in the event of enforcement and/or

infringement,whetheronthestateorfederallevel,becausefederalandmoststatelawsstate

thatany infringerwhohadnoticeprior to the infringementwas thereforean intentional

infringerandthereforeliableforincreaseddamages.Takenote,however,thattheapplied-

for and registered goods and services should be closely related to cannabis in order to

achievethenoticefunctiontootherbrandsbutnotsodirectlyrelatedsoastopreventfederal

registration.

PatentProtectionforCannabisandCannabis-RelatedInventions

In general, regardless of industry, there are three types of patents – plant, utility,

design.Whilecannabisisnotnew,thelegalizationofthecannabisindustryisrelativelynew,

andthisrelativelynewstateofthingshasinspiredincreasinginterestinpatentprotection

forcannabisandcannabis-relatedinventions.

Now,let’sclarifyamisconception.Manyassumethatbecausecannabisisillegalat

thefederallevel,itcannotbepatented. Thisisfalse. Thereisnobartoobtainingpatent

protectionforillegalsubjectmatterperse.Tobeclear,ifyouhaveinventedamachineor

processforproducingbetterherointhatotherwisemeetstherequirementsofpatentability,

theUSPTOwillgrantyouapatentonit.Thatsaid,whenitcomestopatentlaw,cannabisis,

well,funky.We’llgettothat.

First, let’sgooversomepatent-lawbasicsthatapplytocannabissubjectmatteras

muchasothersubjectmatter.Toobtainapatent,theapplicantmustdemonstratethatthe

subjectmatteroftheclaimedinventionis:(1)patenteligible;(2)useful,(3)new;(4)non-

obvious; and (5) describedwith the particularity required so that people of skill in the

relevant technology field or science can understand what the invention is, make the

invention and use the invention without engaging in what the law calls undue

experimentation.We’llbrieflyrunthroughthesefactorsoneatatime.

Patent-EligibleSubjectMatter

35 U.S.C. §101 provides that patent-eligible subject matter includes a machine,

process,articleofmanufacture,oracompositionofmatter(i.e., compound). Thesedays,

patentable-subject-matterchallengescomeupmostofteninthecontextofproposedprocess

inventions that include software and/or online elements. Examples relating to cannabis

mightincludeprocessesrelatingtoregulatorycompliancesoftware,oronlineplatformsfor

thedistributionofcannabis.Inshort,theUSPTOappliesamachine-or-transformationtestto

determinepatentability forprocesses. See InreBilski,545F.3d943,88U.S.P.Q.2d1385

(Fed. Cir. 2008). In the Bilski case, the Supreme Court determined that patent claims

involvingamethodofhedgingrisksincommoditiestradingweretooabstractandbroad.Id.

However,Bilskileftopenthatnotionthatprocessestiedtoamachineoratransformative

processispatentable.

Utility

35U.S.C.§101alsoprovidesthattheproposedinventionmustbe“useful.”Thebar

hereisquitelow.Aproposedinventionwillbeusefulforthepurposesofpatentabilityunless

itis“totallyincapableofachievingausefulresult.”Nevertheless,patentapplicationscanand

have failed this test. This failure results from either a failure to identify, explicitly or

implicitly,anyutilityatall,orbecausetheutilityisnotcredible(e.g.:teleportationofahuman

byatravelmachine).

Novelty

35 U.S.C. §102 provides that an invention be “novel,”meaning, essentially, that a

claimedinventionmustnotbeexactlyidenticaltoanythinginthepriorart.Moreprecisely,

aparticularclaimisnotnovel,oris“anticipated,”ifeachandeveryelementoftheclaimis

disclosedinthepriorart.Anticipationisinthissensetheinverseofinfringement,meaning

thatwhichwillanticipate,ifearlierthanthefilingdateofawould-bepatent,willinfringeif

laterthanthefilingdateofthepatent.Thoughnoveltychallengestopreventpatentability

with some regularity, the novelty requirement is not as tough to meet as the non-

obviousnessrequirement.

Non-Obviousness

35U.S.C. §102 provides that an invention be “non-obvious.” In short, even if the

applicantcandemonstratethattheproposedinventionispatentablesubjectmatter,useful

andnovel,apatentwillnotissueiftheinventionwouldhavebeenobvioustooneskilledin

the art at the timeof filing their application forpatentwith theUSPTO. An invention is

obviousif:1)itcontainsonlyobviousdifferencesfromsomethinginthepriorart,or2)if

thereissomesufficientexpectationthatacombinationofdifferentthingsinthepriorart

wouldachievethedesiredresult.

TheOne-YearRule

In addition to satisfying the requirements above, in order to obtain a patent, an

applicant must file timely. The so-called one-year rule, also known as the on-sale bar,

providesthataninventorcannotacquirepatentprotectioniftheapplicationisfiledmore

than one year after any of the following: 1) any public use, sale, or offer of sale, of the

invention anywhere in the world, or 2) publication of a description of the invention

anywhere in theworld. After thisone-yeargraceperiod, the invention isnoteligible for

patentprotection,andtheinventionorsubjectmatterbecomespartofthepublicdomain.If

onemust disclose prior to filing, disclosure under awritten confidentiality agreement is

generallyokandnotconsideredapublicdisclosureforthesepurposes.

TheFirsttoFileWins!

TheUnitedStateswaspreviouslyafirst-to-inventcountry,meaningthatotherthings

beingsufficient,thefirstpersonorentitytoinventsomethingwouldbeentitledtogetand

ownthepatentonit.Allofthatchanged,however,whenonMarch16,2013,theAmerica

InventsAct(AIA)waspassedandturnedthefirst-to-inventconceptonitshead.TheAIA

convertedtheUStoa first-to-filecountry,meaningthat,otherthingsbeingsufficient, the

firstpersonorentitytofileanapplication(vsfirst-to-invent)forapatentonsomethingis

entitledtopursuethepatentwiththeUSPTO.Thismakesrelyingontradesecretprotection

riskierinsomecontexts.

SomeFunkyThingsAboutPatents+Cannabis

ALackofUnderstanding

Insomeways,thecannabisindustryisInternet2.0.Accordingtosome,theUSPTO

issuedanumberofoverlybroadpatentsbackintheearlydaysoftheInternetasafunction

ofnotunderstandingthisnewinformationmediumbeforeit.TheAmazon1-clickpatentis

anexampleofapatent that someconsideroverlybroaddue toa lackof familiaritywith

Internet subject matter on the part of the U.S. Patent & Trademark Office. Likewise,

accordingtosome,theU.S.Patent&TrademarkOfficeisissuingsomeoverlybroadpatents

on cannabis subject matter due to a lack of familiarity on the part of the U.S. Patent &

TrademarkOffice.We’lldiscusssomerecentlyissuedpatentsbelow.

WhatPriorArt?

Cannabiswasonlyrecentlylegalizedinsomestates,andremainsillegalatthefederal

level.Assuch,thoughpeoplehavebeenworkingwithcannabisforcenturies,relativelyfew

patentapplicationshavebeenfiledinrelationtocannabis,andrelativelyfewpublications

exist in relation to cannabis. As such, the USPTOmay be inclined to grant patents for

proposed inventions that have been known in the art for some time. Likewise, patent

litigationdefendantsmayhaveahardertimeinvalidatingcannabispatentsthantheywould

patentsrelatingtoothersubjectmatter.

WhereIsAllthePatentLitigation?

Unliketrademarklaw,thereisnosuchthingasstateorcommonlawpatentrights.

Patentsareissuedunderthefederalpatentstatute,ornotatall.Assuch,patentsmustbe

enforcedinfederalcourt. Giventhefactthatcannabisremainsillegalatthefederallevel,

patentlitigationrelatingtocannabisremainsanextremerarity.Thisistrueevenforhemp-

derivedCBD,due likelyat least inpart toperceptionsofprejudiceon thepartof federal

courtsagainstcannabispatentlitigationclaimants.Thiswilllikelychangeif/whenfederal

prohibitionagainstcannabisends.Infact,thefirstpatentlitigationrelatingtocannabishas

alreadybeenfiledbyUnitedCannabisCorporationagainstPureHempCollectiveintheState

ofColoradoinrelationtoclaimsdirectedatLiquidCBDformulations.UnitedCannabisCorp.

v.PureHempCollectiveInc.,CivilActionNo.18-cv-1922-WJM-NYW(D.Colo.Apr.17,2019).

Thelitigationremainspending.

CannabisPlantPatents

35U.S.C.§161providesthataplantpatentmayissueforinventinganddiscovering,

andasexuallyreproducing,adistinctandnewvarietyofplant,otherthanatuberpropagated

plantoraplantfoundinanuncultivatedstate.Aplantpatentgrantsthepatentownerthe

righttoexcludeothersfromasexuallyreproducingtheplant,andfromusing,offeringfor

sale, or selling the plant so reproduced, or any of its parts, throughout theU.S., or from

importingtheplantsoreproduced,oranypartthereof,intotheU.S.

OneexampleofaplantpatentisU.S.PatentNo.PP27,475entitled“Cannabisplant

named‘EcuadorianSativa.’”ItwasgrantedonDecember20,2016,andisownedbyKubby

PatentandLicenses,LLC. Itsingleclaimreads:“Anewanddistinctcultivarof ‘cannabis’

plantasshownanddescribed.”

CannabisUtilityPatents

Autilitypatent isapatent thatcovers thecreationofanewor improvedproduct,

process,ormachine.Theownerofautilitypatentcanpreventothersfrommaking,using,or

selling the inventionwithout authorization. Examples of utility patents in the cannabis

industrymightincluderecipes,devices(e.g.,batteries,smokersarticles,growingequipment,

etc.),machines andmethods for extracting cannabis,machines andmethods for packing

cannabisjoints/cigarettes,machinesandmethodsfordelivering/dosingcannabisintothe

human body, and cannabis plant fingerprints applied to particular human physiological

conditions.

OneexampleofacannabisutilitypatentisU.S.PatentNo.9,095,554(Granted:August

4, 2015 to Assignee: Biotech Institute LLC, Westlake, California) directed to particular

cannabis strains and specifically to: ahybrid cannabisplant, or anasexual cloneof said

hybrid cannabis plant, or a plant part, tissue, or cell thereof, which produces a female

inflorescence,saidinflorescencecomprising:aBT/BDgenotype;aterpeneprofileinwhich

myrcene is not the dominant terpene; a terpene oil content greater than about 1.0%by

weight;andaCBDcontentgreaterthan3%;whereintheterpeneprofileisdefinedas…(click

hereforfulltext).

CannabisDesignPatents

Adesignpatentappliestotheornamentaldesignforanobjecthavingpracticalutility.

Adesignpatentallowsitsownertopreventothersfrommaking,using,copyingorimporting

intotheU.S.anythingwithadesignthatissubstantiallysimilartothedesignclaimedinthe

patent. The thingdoesnothave tobeanexactcopy inorder for thedesignpatent tobe

infringed.Thethingneedonlybesubstantiallysimilar.Examplesofcannabisdesignpatents

might include ornamental smokers articles (e.g., a pipe with unique ornamental

designs/features), cannabis product packaging, machines for delivering/dosing cannabis

intothehumanbody,andthelike.

AGoodOffenseisaGoodPatentPortfolio

Cannabiscompanieswithlargerpatentportfoliosmaybeabletocrediblycountersue

claimants,andperhapsachieveearlierfavorablesettlements,ifnotoutrightawards.Onthe

otherhand,cannabiscompanieswithoutpatentportfoliosareexposed,andwillhavetorely

solelyonpaying lawyerstoproveinvalidityand/ornon-infringement. Sogettoworkon

thosepatentportfolios!

Conclusion

As you can see from the foregoing, the intellectual property laws are incredibly

nuancedwithallsortsofstateandfederaldistinctionsandrulesand,addtoitanindustry

thatislegalatthestatelevelbutillegalatthefederallevelandtheresultisacomplexmap

fortheintellectualpropertypractitionertonavigate.

Summer 2018A PROFESSIONAL JOURNAL BY THE INSTITUTES CPCU SOCIETY

CANNABISCLAIMS

How Can

Be Covered and Adjusted?

by Chantal Roberts

THE INNOVATION ISSUE SEE INSIDE FOR ARTICLES ON BIOMETRICS, DARK DATA, AND MORE!!!

How Can Cannabis Claims Be Covered and Adjusted?by Chantal Roberts

FEATURE

INSIGHTS | Summer 2018 | 1

4 |

Volume 5, Issue 2

9 |

11 |

34 |

15 |

23 |

27 |

Read My Lips (if I Signed a Release): A Primer on Biometric Privacy for Insurersby Jon D. McLaughlin

Moving From Dark Data to Clear Insights: A Frameworkby Rajesh Narayan

Employee Resource Groups: Helping Companies and Employees Thriveby Amy C. Waninger

Insurers’ Reliance on Big Data: What Does It Mean for Insurance Regulation?by Paul Tetrault

Workplace Violence, Insurance Technology Examined at 2018 Reinsurance Symposiumby Susan Crowe

CPCU View: Making Meaningful Memories Through Mentoringby Katrina Bannikova

Climbing on Board: The Inevitability of Change in the Auto Industryby Eric C. Nordman

What do you think?Send us your feedback on this issue, along with thoughts on what you’d like to see in the future: CPCUSociety.org/Insights

Greetings, Fellow CPCU Society Members,

What is the best investment you can make? With summer upon us, our current time investment might include vacations, family reunions, and yard work. But what about the big picture?

A mentor of mine once told me the best investment we can make is in ourselves. Obviously, I am preaching to the choir about this because you have earned your CPCU® designation. But does the investment continue to bring returns if we stop growing? I think the answer is no.

In this time of rapidly changing technology and fast-paced work environments, we must continue to invest in ourselves. I don’t know about you, but I like to learn. Fresh ideas or a new perspective can make all the difference sometimes between success and failure. Just as our industry continues to innovate with big data and new technologies, we must find innovative ways to invest in ourselves.

The CPCU Society has done this for me. Not only am I constantly exposed to new information about emerging technologies, but more importantly, I get to meet and learn from people who work with them.

Along these lines, while we should invest in ourselves, we also need to invest in our relationships. It is one thing to know or have awareness of something, but it is entirely different to know someone who has expert knowledge about it. For me, the CPCU Society has allowed for both. I have found ways to invest in myself but have also formed relationships with people who are tops in their field. I don’t think you can find many other places in our industry with such diverse opportunity.

Recently, 300 CPCU Society leaders gathered in Baltimore for the CPCU Society Leadership Summit. I was inspired by the education shared and collaboration that occurred. As we continue to focus on recruitment and retention as a group, let’s not forget to focus on the one thing that will make all other things unnecessary or easier for us as individuals. This is the WTOT (or What’s the One Thing?) I talked about at Leadership Summit, and it varies for each of us.

In this issue, we focus on innovation, examining topics related to new technologies, creative risk management, and leadership trends. Specifically, you will find articles on:

• Unpacking insurance considerations around marijuana claims

• The implications and necessary uniformity of biometrics practices

• Leveraging dark data to generate insights

• The rise of employee resource groups as connecting agents at companies

• The effects of big data on insurance regulation

• Out-of-the-box thinking from the 2018 Reinsurance Symposium

• CPCU View columns on mentoring and innovation

I hope your summer days bring a harvest of opportunity. I hope you find innovative ways to invest in yourself and your relationships.

Here’s to cool drinks on hot days,

Troy H. Baldwin, MBA, CPCU, AU President and Chair, CPCU Society Leadership Council


4 | INSIGHTS | Summer 20184 | INSIGHTS | Summer 20184 | INSIGHTS | Summer 2018

Continued on page 6


Continued on page 6


by Chantal Roberts


hesitant to provide specific figures because of the legal environment and that street value is not likely an appropriate basis for determining legal marijuana’s worth.

One of the most important factors to consider when determining the value of marijuana is quality. In a routine contents claim, the adjuster could call the vendor and verify the insureds’ purchases and purchase price, but dispensary records are deliberately kept vague because of the very real possibility of a federal raid, which could put the dispensary’s suppliers at risk. Further, even in states where marijuana is legal, the majority of dispensaries operate on a cash basis because federal law prohibits banks from taking so-called drug money. In a cash-based transaction with no receipts or proof, insurers may have to pay for whatever the insureds claim they had, which is where things could get sticky.

Wikileaf is another source of pricing information. It is being likened to Priceline or Yelp because it compares prices of different dispensaries and provides reviews of strains, employees, and services. It lists a price of $22.00 per gram of marijuana.

Going back to Alaskans and their three budding plants: Under ideal conditions, an average plant can yield four harvests with up to one pound (453.6 grams) each harvest.1 Using the Wikileaf figures, those three plants could produce nearly $120,000 in contents after a year.

Because Alaska allows residents to have up to six plants per person, a resident’s spouse may also have three flowering plants, so one dwelling could contain several pounds at the time of loss. And while the exact methodology of determining yield is beyond the scope of this article (and likely beyond the scope of the claim), the easiest method is to divide the number of grams of dried product by the total hourly wattage of the lighting used to grow it.

Personal property limits are expressed as a percentage of the Coverage A (building)

Plants Additional Coverage applies to cannabis plants. It lists seven named perils, but the most common claims involve theft.

Care must be taken that the plant not be used for business purposes as defined in the policy. And insureds must remember that this coverage offers a sublimit of only $500 per plant, which may be adequate because a single plant—often a clone from another—typically costs about $10 to $20. Insureds, however, may become confused about the value of the plant because the equipment, nutrients, and yield (all of which would be classified as personal property) may be worth $100 to $500 per plant. This is akin to policyholder confusion about a home’s insured value versus its real estate value—the Marshall & Swift value versus the listed value. Adjusters need to take the time to explain to insureds what the value is and how it was determined, which may be difficult.

The price of marijuana is not in the contents list of Xactimate’s claims-estimating software. Forbes uses data from PriceOfWeed.com, a crowdsourcing method of determining marijuana’s street value. When determining the value of a high-end object, such as art or a new vehicle, adjusters often contact the sales person or experts in the field, and marijuana should not be any different. Adjusters should realize, though, that insureds may be

6 | INSIGHTS | Summer 2018

Abstract Marijuana is illegal at the federal level, and insurance policies do not cover illegal activities. This article will discuss how some states have amended personal and commercial policies to overcome these issues. It cannot enumerate all the perils faced by insureds in the cannabis industry, but it will help underwriters and agents understand their insureds’ risks to provide better coverage. The article will also help claims adjusters communicate with underwriters to properly protect insureds from uncovered losses—and to protect insurers from legal issues.

As more states legalize medicinal and recreational marijuana use, perceptions of the drug must change, regardless of political beliefs. Although marijuana is still illegal at the federal level, and insurance policies do not cover illegal activities, some states have amended personal and commercial policies to overcome these issues.

So how is marijuana insured, and what happens when a covered loss occurs? Generally speaking, assuming that insureds are in a state where cannabis is legal and that they have the required license or prescription, marijuana is covered property. Things get more complicated, however, when adjusters must answer questions about which coverage applies, the value of the property, and liability, among other factors.

ValuationIn several states, not only is selling cannabis legal, but growing a certain number of plants is as well. Alaska, for example, allows residents to grow up to six plants per person, but no more than three may be flowering at one time. An adjuster may be tempted to consider these plants a crop and deny the claim—as crops that can be grown and harvested are not covered under the Insurance Services Office, Inc. (ISO) Homeowners 3—Special Form (HO-3).

And while the HO-3 contains other restrictions, its Trees, Shrubs and Other

“ Adjusters need to take the time to explain to insureds what the value is and how it was determined, which may be difficult”

Coverage F is not available for occurrences on the property involving people who are there without the insureds’ permission. The underage children are insureds under the policy; therefore, they may be able to grant permission to the partygoers without their parents’ authorization. If the parents did not secure their marijuana, they could be considered negligent. And aside from the fact that teenagers are notoriously shortsighted, in part because of a lack of life experiences, the Expected or Intended Injury exclusion might not apply because neither group of insureds (adults or teenagers) foresaw the reaction of marijuana and an unknown prescription drug. In light of situations such as this, insurers should consider including a rider that requires insureds to keep drugs in a locked safe away from children and pets.

Controlled Substance ExclusionTo address some of these changes in the insurance landscape, ISO has added the Controlled Substances exclusion to its HO-3. Controlled substances include but are not limited to cocaine, LSD, marijuana, and all narcotic drugs. The exclusion “does not apply to the legitimate use of prescription drugs.” Unfortunately, the Washington, D.C., insureds were not prescribed cannabis, so this fictitious claim might be denied. And if that is the case, Coverage F would not be available because the policy cannot respond to an excluded loss.

A chilling trigger for liability involves children and medication, regardless of its scheduled classification. Arkansas legalized medical marijuana in 2016 when its voters passed Issue 6, the Arkansas Medical Marijuana Amendment, which allows patients to use medical marijuana for seventeen conditions. The introduction of marijuana edibles, such as gummy bears, alarmed opponents of Issue 6, who believed that children would mistake the edibles for regular candy. In a March 2017 report, two doctors describe the death of an

claims, whether or not the insured is liable, cases are not always that simple. Take this example:

The parents of teenage siblings in Washington, D.C., where recreational marijuana is legal for adults age twenty-one and older, are out of town for the weekend. The standard no-parties-while-we-are-gone rule has been laid down. Nonetheless, the teenagers decide that this is in fact an ideal time to host a party, complete with their parents’ marijuana. Things go awry when the cannabis reacts poorly with a prescribed drug an underage guest takes, causing that guest to lapse into a coma for weeks. Consider the following policy language:

Section II—Liability Coverages

We will pay the necessary medical expenses that are incurred or medically ascertained within three years from the date of an accident causing “bodily injury.” … As to others, this coverage applies only:

1. To a person on the “insured location” with the permission of an “insured”

limit. If the median home value in Fairbanks, Alaska, is $225,000, and the Coverage C limit is 50 percent of that of Coverage A, then the typical personal property limit would be $112,500. An insured’s marijuana plants could account for the entire contents limit, leaving the insured with no coverage for other contents such as clothes, furniture, and appliances. And if marijuana does not entirely exhaust the limits, the insured may face a coinsurance issue.

Causes of LossThe peril of fire is always imminent. The National Fire Protection Association found that smoking materials (cigarettes, pipes, cigars, etc.) caused $621 million in direct property damage in 2011. Of deaths that resulted from these fires, 40 percent were caused by fires that started in the bedroom, with sleep a factor in 31 percent of cases.2

With this in mind, underwriters in states where marijuana is legal should consider fire-protection safeguard warranties. For example, an insurer could require the insured to install smoke alarms that alert the fire department.

Finally, because many insureds grow plants indoors in warm, damp conditions, underwriters and agents must be aware of the possibility of mold growth. Mold claims may be denied because the HO-3 excludes certain mold losses.

Liability ClaimsUnderwriters, agents, and adjusters must also consider possible cannabis-related liability claims that may be covered under Section II of the HO-3. In some respects, these liability claims may be easier to adjust than cannabis-related Section I claims because either the insured breached a duty and caused harm, or it did not. And if the insured did not breach an owed duty, Coverage F—Medical Payments to Others would pay for bodily injury without having to determine fault.

Although paying claims under Coverage F is almost a knee-jerk reaction to bodily injury

“ An insured’s marijuana plants could account for the entire contents limit, leaving the insured with no coverage for other contents such as clothes, furniture, and appliances”

Continued on page 8


Continued on page 32


Continued from page 7

equipment breakdown coverage. The benefit for insureds is that they may be able to avoid some of the coverage gaps found in cafeteria-type coverages, which consist of separate stand-alone coverage forms. Examples include commercial property policies (with applicable causes of loss forms), business interruption policies, crime policies, and equipment breakdown coverage.

The ISO BOP considers cannabis to be personal property, just like the homeowners policy. However, its Property Not Covered section excludes “contraband, or property in the course of illegal transportation or trade,” raising the specter of claims for property that may be legal at the state but not the federal level.

Under the McCarran-Ferguson Act of 1945, states have the right to regulate insurance. So, despite the fact that the U.S. government considers marijuana plants contraband, it is the states that determine insurance regulations and—in a roundabout way—whether cannabis is indeed contraband.

Insurers should therefore take care, because a good plaintiff’s attorney could argue that the insured’s cannabis is not illegal and that, under the HO-3, the coverage extension for shrubs and plants applies. The ISO Building and Personal Property Coverage Form, or BPP, is nearly identical to Section I of the BOP, but its sublimit is lower.

The BOP, BPP, and even commercial crime coverage forms bar recovery for seizure or destruction of property by order of governmental authority. Grow operations and dispensaries face the very real threat of government raids. Some commercial brokers offer so-called pot-raid insurance, which can cover dispensaries in accordance with relevant state laws. Generally, this endorsement is limited to insureds operating legally under state statutes. It provides coverage for court and defense costs if the owners are proven not guilty of all raid-related charges.5

Professional Services, Your Product, and Your Work ExclusionsThe BOP specifically excludes professional services, but the ISO Commercial General Liability policy (CGL) must be specifically endorsed to exclude insureds who caused bodily injury or property damage by either providing or failing to provide medical advice or treatment, health or therapeutic services, or services in the practice of pharmacy.

CGL underwriters and adjusters may rely too heavily on the Products-Completed Operations, Your Product, and Your Work exclusions, but these exclusions only apply to the cannabis product itself. Coverage still applies for the sellers’ representations and any implied warranties—and if not, a scintilla of coverage may be available under negligent hiring, so if a suit is filed, defense could be provided while coverage is determined.

eleven-month-old boy who was exposed to cannabis.3 Skeptics dispute the relationship, but underwriters in states where marijuana is legal should reflect on the potential liability triggers: Could having edibles be considered an attractive nuisance? Or even a matter of strict liability?

Because marijuana is still a Schedule I drug, even when listed for medicinal use, and doctors are not technically allowed to prescribe it, insurers should confirm the circumstances under which cannabis is covered. In addition, adjusters must know their state laws regarding impaired driving. Indiana, for example, considers drivers guilty of driving under the influence if they have a controlled substance with them, even if they show no impairment.4

Parts A and D of the ISO Personal Auto Policy have no exclusions concerning marijuana. Losses caused by a driver in an altered state, whether or not induced by cannabis or alcohol, should be adjusted in the same manner as loss caused by a driver whose mental state was altered by an opioid.

Commercial Insureds: Contraband and SeizureCommercial insureds face similar perils as their personal lines counterparts. In most cases, dispensaries and grow operations are no different from any other business. But in addition to issues related to cannabis’s uncertain legal status, there are a few other surprising differences.

One of the first differences a business owner will face is increased scrutiny from the government. It is easier to go after the larger target that allegedly sells illicit items than the multitude of individual insureds who purchase them.

Similar to homeowners policies, businessowners policies (BOPs) provide combined property and liability coverage in one form for small to midsize businesses. A BOP typically includes building and contents coverage, business income loss coverage, limited crime coverage, and

“ Because marijuana is still a Schedule I drug, even when listed for medicinal use, and doctors are not technically allowed to prescribe it, insurers should confirm the circumstances under which cannabis is covered”


How Can Cannabis Claims Be Covered and Adjusted?Continued from page 8

The TABC does not take administrative action against the license or permit provided that certain steps are taken—such as holding a current training certificate. In states that have legalized marijuana, insurance professionals should consider such training as part of their continuing education; educated employees are an asset to the insured and insurer through their knowledge of industry trends and regulations, dosing, and the effects of cannabis.

TheftWhen discussing cannabis claims, adjusters often cite theft as a consistent peril for marijuana dispensaries. Laypeople may chuckle, imagining a Hollywood-inspired farce in which a pair of lovable rogues hatch an overly elaborate plan to rob a dispensary in order to throw an epic party. The reality is typically more mundane. As with the HO-3, insureds with a BOP or BPP face issues concerning contents coverage. Will they face a coinsurance problem? Will they exceed their policy limits? However, one significant peril is often given less attention: the theft of money, a serious concern for the largely cash-based $7 billion cannabis business.6

The BOP and BPP do not cover money, cash, or securities. Unlike insurance, banking

is federally insured and backed, and the government can levy hefty fines if a bank participates in illegal activities such as money laundering. But despite cannabis’s federal classification, some small, state-run banks and credit unions see the practicality of offering accounts for dispensaries and grow operations.

However, Attorney General Jeff Sessions caught these banking agencies by surprise with his January 4, 2018, memo, which stated:

These activities [cultivation, distribution, and possession of marijuana] also may serve as the basis for the prosecution of other crimes, such as those prohibited by the money laundering statutes, the unlicensed money transmitter statute, and the Bank Secrecy Act.7

While the impact on insurers may not be immediately evident, vandalism and breaking-and-entering claims are indeed covered. Before Lloyds syndicates left the American marijuana market, they placed warranties and safeguards on their policies requiring practices meant to discourage theft and vandalism, such as placing cash and product in a 300-pound safe that was bolted to the floor. Because an alarm system linked to an off-site monitoring facility is standard, the thought was that police could be alerted while a crime is occurring. But these warranties and safeguards only help after hours.

Most dispensaries are not as well-guarded as financial institutions, but banks are an excellent source of inspiration for protecting cash and stock. Of course, a commercial crime coverage form can indemnify insureds for loss of money inside the premises. Accordingly, insurers may wish to insist on deterrents.

For example, a dispensary could install a panic button that employees could use to trigger a silent alarm if a burglary occurs during business hours. A locking

Because marijuana dispensaries often characterize themselves as healthy and therapeutic alternatives to traditional medicine, insurers need to scrutinize the coverage they wish to bind because the CGL excludes coverage for professional services. Even in states where recreational cannabis is legal, the dispensaries’ logos often use medical imagery, such as a green cross, references to medication, or the rod of Asclepius. But professional services may now be in the purview of dispensaries through their staff, often known as budtenders, who can act as marijuana pharmacists.

Budtenders are also known as dispensary agents, pharmacy technicians, or patient liaisons. Customers may assume that a budtender has superior knowledge about, for example, how other drugs can interact with cannabis; underwriters and agents should therefore be aware of the insureds’ business model so that they can recommend appropriate coverage.

It seems logical that liability for injury or property damage caused by a person who bought marijuana can be attributed to the dispensary, similar to dram shop liability. The Liquor Liability exclusions in the BOP and CGL policies specifically refer only to alcohol—not to intoxication by drugs. Failure-to-warn claims may be a new cottage industry for the plaintiff bar.

Because of the murky legal status of cannabis, there is no standardized certification or license for budtenders. Most dispensary employees are self-taught. Because one budtender’s knowledge may be less robust than another’s, carriers should consider including a warranty in their BOP and CGL policies that requires completion of a training program, similar to the Texas Alcoholic Beverage Commission’s (TABC’s) Safe Harbor Act, which covers laws concerning alcohol sales to underage people and intoxicated adults.


“ Some commercial brokers offer so-called pot-raid insurance, which can cover dispensaries in accordance with relevant state laws”

mechanism on a double set of doors that could lock would-be burglars in or out could also be helpful. Finally, cameras are always useful in deterring and identifying criminals.

Transportation is another rising concern related to cannabis legalization (not least of all because crossing state lines may violate federal law). The highly lucrative nature of the marijuana business makes it a valuable target for thieves, and if dispensaries become harder to rob, criminals may turn to stealing cannabis in transit. Insurers should consider endorsing policies with specialized clauses that require strict security procedures, such as having two drivers in a vehicle, running criminal background checks on all drivers, and transporting the product in armored vehicles.

Business Income LossesThe most difficult aspect of a marijuana claim is verifying the loss. Dispensaries deliberately keep vague records, often not listing the names of suppliers because of the potential of a federal raid. Further, because the federal government discourages banks from conducting transactions with businesses it considers illegal, adjusters often have difficulty verifying how much cash was present at the time of loss.

Dispensaries, grow operations, and transporters must file federal tax returns, which may prove helpful in reverse-engineering loss-of-income claims, but agents and underwriters may wish to determine an agreed value for business income losses rather than attempt to determine the amount of loss after the claim is filed.

This article cannot touch on all the perils faced by the numerous insureds who work in and around the cannabis industry. Underwriters and agents should know and understand their insureds, and claims adjusters should communicate with underwriters to properly protect insureds

from uncovered losses—and to protect insurers from legal issues. �

Many thanks to the Coverage, Litigators, Educators & Witnesses Interest Group for its contributions to this article.

Endnotes

1. Oregon Board of Pharmacy, “Oregon Medical Marijuana,” www.oregon.gov/pharmacy/imports/marijuana/public/orstatepolice_ommalegpp.pdf?ga=t (accessed April 23, 2018).

2. John R. Hall Jr., “The Smoking-Material Fire Problem” National Fire Protection Association, July 2013, www.nfpa.org/-/media/Files/News-and-Research/Fire-statistics/Major-Causes/ossmoking.ashx?la=en (accessed April 23, 2018).

3. Carroll, Linda Carroll, “Doctors Debate Whether Baby Died From Marijuana Overdose,” NBC News, November 17, 2017, www.nbcnews.com/health/kids-health/doctors-debate-whether-baby-died-marijuana-overdose-n821801 (accessed April 23, 2018).

4. Paul Ruiz, “The Marijuana Legalization Trend in the U.S.—Thoughts About the Potential Impact on Claims,” Gen Re, June 2015, www.genre.com/knowledge/publications/iinapcmarij1506-en.html (accessed April 23, 2018).

5. Chad Hemenway, “’Pot Raid Coverage’ Available to Medical Marijuana Industry,” Property Casualty 360, 14 February 2011. Property Casualty 360, www.propertycasualty360.com/2011/02/14/pot-raid-coverage-available-to-medical-marijuana-i (accessed April 23, 2018).

6. Sarah N. Lynch, “Justice Department Blindsided Banking Agency on Marijuana Reversal: Report,” Huffington Post, January 11, 2018, www.huffingtonpost.com/entry/justice-department-blindsided-banking-agency-on-marijuana-reversal-report_us_5a57bdcbe4b0d7e82dd5cf73 (accessed April 23, 2018).

Chantal Roberts’ career reflects over 20 years of accomplishments in the insurance industry, with specialization in commercial general liability, special investigations and fraud investigations, commercial auto insurance,

homeowners insurance, and cargo insurance. Roberts has held leadership roles with distinguished insurance companies, including Liberty Mutual Insurance Company and MetLife. She currently serves as director of claims for Affirmative Risk Management, a third-party administrator for certain syndicates of Lloyd’s of London.

7. Jeff Sessions, “Memorandum for all United States Attorneys,” Office of the Attorney General, January 4, 2018, www.documentcloud.org/documents/4343716-Sessions-Marijuana-Enforcement-Memo-1-4-18.html (accessed April 23, 2018).


Federal Preemption

• U.S. v. Oakland Cannabis Buyers’ Co-op, 532 U.S. 483 (2001)• Supremacy Clause – because under Federal law there is no medical

use for cannabis, there is no medical necessity defense to CSA prosecution

• New York v. U.S., 505 U.S. 144 (1992) • Reserved Powers Clause, 10th Amendment – even though Federal

law trumps, Congress does not have the authority to dictate state law

1

CSA Preemption Provisions

• CSA Section 903 “No provision of this subchapter shall be construed as indicating an intent on the part of the Congress to occupy the field in which that provision operates, including criminal penalties, to the exclusion of any State law on the same subject matter which would otherwise be within the authority of the State, unless there is a positive conflict between that provision of this subchapter and that State law so that the two cannot consistently stand together.”

• Safe Streets v. Hickenlooper, 859 F.3d 865 (10th Cir., June 27, 2017)• CSA Section 903 does not permit injunctive relief to stop Colorado from issuing licenses

permitting citizens the right to grow and sell marijuana under Colorado Amendment 64• Private plaintiffs have no substantive rights under § 903, and thus cannot enforce it

2

CSA Enforcement

• Gonzales v. Raich, 545 U.S. 1 (2005)• Intrastate conduct in compliance with state law is still illegal under Federal

law• State law does not create a shield

• However, Cole Memorandum (2013, revoked January 2018)• Federal enforcement against state legal businesses will be limited if 8

priorities are met: no distribution to minors, no revenue to criminals, no diversion to illegal states, not used as a pretext for distribution of other illegal drugs, no violence and firearms, no adverse public health consequences, no growing on federal lands, no possession or use on federal property

3

Defunding of CSA Enforcement

• Rohrabacher Blumenauer Amendment• 2014 – Rohrabacher Farr amendment to short-term spending bill• Renewed several times; expires with appropriations act• Federal funds cannot be used to prevent states from implementing laws that authorize use,

possession, or cultivation of medical marijuana• Currently effective through September 30, 2019. • Current appropriations bill, in Senate now, added section that would prevent DOJ from using

funds to prevent laws that authorize use, possession, or cultivation of marijuana.

• U.S. v. McIntosh, 833 F. 3d 1163 (9th Cir. 2016) – under Rohrabacher Blumenauer, state compliant medical marijuana actors may not be prosecuted by DOJ

• Defendants get evidentiary hearings to determine whether they are complying with state law• Caveat: if bill expires, court notes that government has 5 years to prosecute

4

RICO Recovery Elements

• Safe Streets v. Hickenlooper, 859 F.3d 865 (10th Cir., June 27, 2017)• Defendant violated 18 U.S.C. §1962• Injury to plaintiff’s business or property• Injury caused by defendant’s violation

• RJR Nabisco, Inc. v. European Cmty., 2016 U.S. Lexis 3925, 136 S. Ct. 2090, 2096-97 (2016)

5

Element 1: 18 U.S.C. §1962(c) Violation

• Safe Streets v. Hickenlooper, 859 F.3d 865 (10th Cir., June 27, 2017)• § 1962(c) violation claims require that defendant

• “(1) conducted the affairs• (2) of an enterprise• (3) through a pattern• (4) of racketeering activity”• George v. Urban Settlement Servs., 833 F.3d 1242, 1248 (10th Cir. 2016) (citating

18 U.S.C. § 1962(c); Robbins v. Wilkie, 300 F.3d 1208, 1210 (10th Cir. 2002))• Racketerring activity includes federally punishable drug activities• Manufacture, distribution, and sale of marijuana are racketeering

activity by definition

6

Element 1 “Association” Limitation

• Safe Streets v. Hickenlooper, 859 F.3d 865 (10th Cir., June 27, 2017)• RICO defendants do not include everyone whose activities benefit

the enterprise (i.e., delivering water to a marijuana grower)• “a defendant must do more than simply provide, through its

regular course of business, goods and services that ultimately benefit the enterprise.”

• George v. Urban Settlement Servs., 833 F.3d 1242, 1251 (10th Cir. 2016) (citation omitted)

7

Element 2: Injury to Business or Property

• Safe Streets v. Hickenlooper, 859 F.3d 865 (10th Cir., June 27, 2017)• RICO incorporates common-law principles

• Beck v. Prupis, 529 U.S. 494, 504 (2000)• “Concrete financial loss” need not be plead• Emotional, personal, or speculative future injuries are not

recoverable• RJR Nabisco, Inc. v. European Cmty., 136 S. Ct. 2090 (June 20, 2016)

8

Element 3: Violation Caused Injury

• Safe Streets v. Hickenlooper, 859 F.3d 865 (10th Cir., June 27, 2017)• Proximate cause requires alleged violation directly lead to

plaintiff’s injuries• Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 461 (2006)

• Plaintiff does not need to be a victim of underlying crime• Bridge v. Phoenix Bond & Indem. Co., 553 U.S. 639, 650 (2008)

9

RICO: Additional Cases

• McCart v. Beddow et al. (settled)• Included every licensed dispensary that received product from neighboring

cultivators• Oregon Right to Farm Act (cannabis treated as a farm crop) provides immunity

from trespass and nuisance claims• State law prevents diminution of property value if nuisance can be stopped

• Ainsworth v. Owenby, 326 F.Supp.3d 1111 (August 17, 2018)• Incorporates theory using zoning to avoid Right to Farm Act immunity• RICO claims dismissed without prejudice for failure to state a claim. Refiled

the suit and dismissed with prejudice for failure to state a claim in March 2019: Ainsworth v. Owenby, 2019 U.S. Dist. LEXIS 51707(March 27, 2019)

10

RICO: Additional Cases

• Phillis and Michael Reilly v. 6480 Pickney, LLC, Parker Walton, and Camp Feel Good, 2018 WL 5984294 (D.Colo.) - Final Verdict

• Jury rendered a unanimous verdict to dismiss civil suit against marijuana grower that alleged a RICO claim for loss of property value because of the smell of marijuana.

• Bokaie v. Green Earth Coffee LLC, 2018 U.S. Dist. LEXIS 216960, N.D. California (December 27, 2018)

• Motion to dismiss granted for failure to adequately allege an injury to business or property required by RICO.

11

Uniting Plaintiff, Defense, Insurance, and Corporate Counsel to

Advance the Civil Justice System

THE GRASS IS ACTUALLY GREENER – INSIGHT FROM A CANNABIS IN-HOUSE LAWYERBy: Jessica Feingold, General Corporate Counsel for Medically

Correct, LLC d/b/a incredibles) and

Lisa Pittman, Corporate Counsel Committee Vice-Chair and Special Counsel at Feldmann Nagel, LLC, specializing in cannabis business law

Lisa Pittman, who runs an Austin, Texas outpost for a Colorado law firm focusing on cannabis law, interviews Jessica Feingold, General Corporate Counsel for a large up and coming cannabis edibles manufacturer based out of Denver, Colorado, about what it’s like to serve as in-house counsel for a burgeoning company in an exponentially expanding new industry, still pending repeal of federal cannabis prohibition.

Is your role as in-house counsel the same or different

from your role in private practice for a law firm?

Even though the underlying general principle is always the same – protecting your client’s best interest – my practice of law as General Corporate Counsel for one of the largest cannabis infused product manufacturers and brands in the country is definitely very different from those engaged in typical law firm life. I still work long hours and bill my time but I no longer dread looking at the clock.

How does your daily involvement at the Company

change the typical role of an attorney?

Due to my intimate knowledge of incredibles, I can anticipate problems and mitigate the issues instead of

Corporate Counsel Committee

Summer 2017


Continued on page 11IN THIS ISSUE:

The Grass is Actually Greener – Insight From A Cannabis In-House Lawyer . . . . . . . 1Message From The Chair . . . . . . . . . . . . . . . . 4The International Trade Commission: Game Changing Results in an Underutilized Arena. 5The Ever-Changing Playing Field: Evolving Legislative and Judicial Scrutiny of Non-Compete Agreements . . . . . . . . . . . . . 6The Cat’s Cradle Just Got More Complicated – Second Circuit Expands Cat’s Paw Doctrine . . . . . . . . . . . . . . . . . . . . . 72017-2018 TIPS Calendar . . . . . . . . . . . . . . . 16

2 2

Corporate Counsel Committee Newsletter Summer 2017

ChairDavid Becker

Freeborn & Peters LLP311 S Wacker Dr, Ste 3000

Chicago, IL 60606-6679(312) 360-6391

Fax: (312) [email protected]

Chair-ElectBeth Kramer

Lockheed Martin Corporation6801 Rockledge Drive, MP236

Bethesda, MD 20817(301) 897-6402

[email protected]

Council RepresentativeMarcy Greer

Alexander Dubose et al515 Congress Ave, Ste 2350

Austin, TX 78701(512) 716-8310


Diversity Vice-ChairKirsten Castaneda

Alexander Dubose Jefferson & Townsend LLP4925 Greenville Ave, Ste 510

Dallas, TX 75206-4087(214) 369-2358


Immediate Past ChairWilliam Kruse

Gallup Inc901 F St NW, Fl 4

Washington, DC 20004-1417(202) 715-3185

[email protected]

Law Student Vice-ChairChuqing Huang5142 Shady Oak DrHilliard, OH [email protected]

Membership Vice-ChairKermit KendrickBurr & Forman LLP

420 20th St N, Ste 3400Birmingham, AL 35203-3284

(205) 458-5393Fax: (205) [email protected]

Scope LiaisonChristine Davis

Manatt Phelps & Phillips LLP1050 Connecticut Avenue NW, Ste 600

Washington, DC 20036(202) 585-6609

[email protected]

Vice-ChairsZascha Abbott

Sioli Alexander PinoPO Box 347924Miami, FL 33234(305) 610-2843

[email protected]

Gabriel AragonCohen Dowd Quigley P.C.

2425 E Camelback Rd, Ste 1100Phoenix, AZ 85016-9207

(602) 252-8400Fax: (602) 252-5339

[email protected]

Jeffrey BrauerHahn Loeser & Parks LLP200 Public Sq, Ste 2800

Cleveland, OH 44114-2303(216) 274-2371


Daina Bray7935 Buffalo Rd

Nashville, TN 37221(508) 744-2147


Rebecca BushBorden Ladner Gervais LLP22 Adelaide St W, Ste 3400

Toronto, ON M5H 4E3(416) [email protected]

Mary Dohner Smith1983 N Summit Ave, Unit 21Milwaukee, WI 532021387

(615) 320-5200Fax: (615) 321-5891

[email protected]

Lacy DurhamDeloitte Tax LLP

2200 Ross Ave, Ste 1600Dallas, TX 75201-6703

(214) 840-1926Fax: (214) 756-9714

[email protected]

Alyssa Ehrlich2026 Mendocino Blvd

San Diego, CA 92107-2306(619) 616-6155

[email protected]

Natalie FurnissBricker & Eckler LLP

100 S 3rd StColumbus, OH 43215-4291

(614) 227-8918Fax: (614) 227-2390

[email protected]

Gary GassmanCozen O’Connor

123 N Wacker Dr, Ste 1800Chicago, IL 60606-1770

(312) 474-7994Fax: (312) 474-7898

[email protected]

Monica Gibbs6305 Lawnton Ave

Philadelphia, PA 19141(856) 968-2430

[email protected]

Sherra GilbertFarmers Insurance Exchange

11200 Richmond Ave, Ste 250Houston, TX 77082

[email protected]

M Gerard GregoireAllstate Insurance

2775 Sanders Rd, Ste A2ENorthbrook, IL 60062

(847) [email protected]

Tracey HaleyZurich North America

1502 Shannon PlCarrollton, TX 75006-1517

(972) 774-2233Fax: (800) 329-6105

[email protected]

Grace HansonHomesite Insurance Company

1 Federal St, Lobby 4Boston, MA 02110-2012


Kim Hogrefe746 Pascack Rd

Washington Township, NJ 07676(201) 218-8041


Floyd HollowayState Farm Insurance6 Hillman Dr, Ste 200

Chadds Ford, PA 19317(610) 361-4150


Keith HopkinsonWinstead PC

401 Congress Ave, Ste 2100Austin, TX 78701-3798

(512) 370-2896Fax: (512) 370-2850

[email protected]

3 3


Susan JenningsLife Insurance Co of the Southwest

15455 Dallas Pkwy, Ste 800Addison, TX 75001-6496

(214) 638-9301Fax: (214) 638-9120

[email protected]

Kara JermainGallup Inc

1001 Gallup DrOmaha, NE 68102(402) 938-6008


Michelle LaffertyArthur J. Gallagher

2850 Golf RdRolling Meadows, IL 60008


Juanita Luis175 County Road B2 E, Apt 201Little Canada, MN 55117-1513

(651) 483-2583Fax: (952) [email protected]

Matthew MoellerThe Moeller Firm LLC

650 Poydras St, Ste 1207New Orleans, LA 70130-6101


Pamela PalmerMorris Polich & Purdy LLP1055 W 7th St, Ste 2400

Los Angeles, CA 90017-2550(213) 891-9100


Stefan PalysStinson Leonard Street

1850 N Central Ave, Ste 2100Phoenix, AZ 85004-4584

(602) 212-8523Fax: (602) 240-6925

[email protected]

Gary PappasCarlton Fields, P.A.

100 SE 2nd St, Ste 4200Miami, FL 33131-2113

(305) 539-7230Fax: (305) 530-0055

[email protected]

Julia PhillipsAldridge Pite LLP

9311 SE 36th St, Ste 100Mercer Island, WA 98040-3700

(206) 232-2752Fax: (206) 232-2655

[email protected]

Lisa Pittman1200 Miami Dr

Austin, TX 78733(713) 632-1772

[email protected]

Eric ProbstPorzio Bromberg & Newman PC

100 Southgate Pkwy, Ste 1Morristown, NJ 07960-6465

(973) 889-4320Fax: (973) 538-5146

[email protected]

James ProctorMcWane Inc

2900 Highway 280 S, Ste 250Birmingham, AL 35223-2469

(205) 578-3800Fax: (205) 414-3170

[email protected]

Lesley ReynoldsFullbright

799 9th St NW, Ste 1000Washington, DC 20001-4501

(202) 662-0247Fax: (202) 662-4643

[email protected]

April SavoyAcceptance Insurance

3813 Green Hills Village DrNashville, TN 37215

(615) 844-1331 [email protected]

Sarah Sederstrom8700 Jeffrey Ave N

Stillwater, MN 55082-9251(651) 272-6235

[email protected]

Alexander ValdesWinstead PC

401 Congress Ave, Ste 2100Austin, TX 78701(512) 370-2842

[email protected]

Vanessa WilliamsIHS Markit, Ltd

26533 Evergreen Rd, Ste 900Southfield, MI 48076-4249

(248) 728-7250Fax: (248) 728-7502

[email protected]

Hypertext citation linking was created with Drafting Assistant from Thomson Reuters, a product that provides all the tools needed to draft and review – right within your word processor. Thomson Reuters Legal is a Premier Section Sponsor of the ABA Tort Trial & Insurance Practice Section, and this software usage is implemented in connection with the Section’s sponsorship and marketing agreements with Thom-son Reuters. Neither the ABA nor ABA Sections endorse non-ABA products or services. Check if you have access to Drafting Assistant by contacting your Thomson Reuters representative.

©2017 American Bar Association, Tort Trial & Insurance Practice Section, 321 North Clark Street, Chicago, Illinois 60654; (312) 988-5607. All rights reserved.

The opinions herein are the authors’ and do not necessarily represent the views or policies of the ABA, TIPS or the Corporate Counsel Committee. Articles should not be reproduced without written permission from the Copyrights & Contracts office ([email protected]).

Editorial Policy: This Newsletter publishes information of interest to members of the Corporate Counsel Committee of the Tort Trial & Insurance Practice Section of the American Bar Association — including reports, personal opinions, practice news, developing law and practice tips by the membership, as well as contributions of interest by nonmembers. Neither the ABA, the Section, the Committee, nor the Editors endorse the content or accuracy of any specific legal, personal, or other opinion, proposal or authority.

Copies may be requested by contacting the ABA at the address and telephone number listed above.

4 4


Corporate Counsel Committee Members,

Welcome to the Spring/Summer 2017 committee newsletter. I hope everyone is getting ready for a fun and exciting summer and carving out a little bit of time for your friends at TIPS and to join us at the annual meeting in New York City from August 10th to August 13th. In this newsletter you will find several practical and relevant articles from a wide variety of practice areas aimed at providing useful content for the varied practice settings of our members.

We have had a great year on our committee, offering CLE’s (both live and in webinars), throughout the year. In that same spirit, we will be closing out the year by presenting a

great CLE program at the annual meeting and co-sponsoring another. The first will take place at the Grand Hyatt on Thursday, August 10th at 1:30 pm. The program will focus on career development and ethical issues for in-house counsel and those working with in-house counsel. We’ve put together a great panel and the program should be worth the time. The second will take place at the same hotel on Friday, August 11, 2017 at 10:30 am and is titled “The Trajectory of Marijuana Law and How it Will Affect Your Practice.” Will legalization of marijuana becoming more common in the various states, this program should provide useful insights on how that legalization impacts in-house counsel responsibilities to their employees, customers, and others. Please join us for both of these programs, which will be offered to TIPS-meeting attendees at no additional cost.

If you’re in New York for the meeting or just located in New York, please also take the time to join us for our committee meeting on August 10th at 9:30 am. The exact location will be available in advance and at registration, but it will take place in the Grand Hyatt as well.

We look forward to seeing you in New York and to a great close to the bar year.

Best regards,

David BeckerChairman, Corporate Counsel Committee

MESSAGE FROM THE CHAIR

VISIT US ON THE WEB AT:

http://www.ambar.org/tips

5 5


THE INTERNATIONAL TRADE COMMISSION: GAME CHANGING RESULTS IN AN UNDERUTILIZED ARENABy: Jennifer L. Fitzgerald, Freeborn & Peters LLP

The International Trade Commission (“ITC”) is a little used, and not very well known, forum for resolving many intellectual property disputes in

an expeditious and efficient manner. Much of the ITC’s value is provided by its unique discovery procedures and, critically, its ability to provide remedies that can include an immediate stop to importation into the United States of infringing goods. Thus, it may be the ideal forum for dealing with foreign-producing, importing, infringers.

The ITC is empowered under Section 337 of the Tariff Act of 1930 (19 U.S.C. §1337). It is authorized to issue remedies to prevent unfair practices in the importation of goods into the United States. While monetary damages are not available, exclusion orders can be issued, including orders that potentially cover products made by non-parties. Furthermore, the ITC has broad discovery powers, and the docket moves very quickly – with trial almost always within a year of filing.

The International Trade Commission institutes approximately 40 patent cases per year. With the highest number of cases filed in 2011 (69 -- primarily driven by smartphone technology suits). It provides a forum for intellectual property disputes and cases are administered and decided by Administrative Law Judges (ALJ) who are knowledgeable and do not take kindly to requests for extension or gamesmanship in the discovery proves.

While historically, most Section 337 cases have related to patent or trademark infringement allegations, other forms of unfair competition can, and have, also been brought before the ITC, including: copyright infringement, misappropriation of trade secrets, passing off, and false advertising.

In order to evaluate the ITC as a potential forum for your next IP dispute, there are several areas where the differences between the district courts are significant. Reviewing some of these differences will aid in deciding whether the ITC is right for any particular matter.

1. Is the defendant importing and do I meet the domestic industry requirement?In order to bring an action in the ITC any complainant (the equivalent of a plaintiff) must establish both that the Respondent’s (the equivalent of a defendant) products at issue are imported into the United States and that the complainant maintains a domestic industry related to that same product. The ITC is authorized solely to issue remedies related to unfair practices in the importation of goods. Without importation, the ITC has no jurisdiction. Thus, complainants must first carry the burden of establishing the importation. The complainant also bears the burden of satisfying the domestic industry requirement, which has two prongs – a. the technical prong which requires the complainant to show that it (or its licensee) practices at least one valid claim of each patent and b. the economic prong, which requires the complainant to show that it has made significant domestic investment in the United States. This can be met by showing patent licensing, labor, factories, and/or research and development in the United States. Since there is no bright line rule about what satisfies the economic prong, many complainants opt to hire an expert to demonstrate the economic impact within the United States, but this also creates an opportunity for respondents to drive up costs and proceed with onerous discovery effort to investigate thoroughly the complainants operations, research and development, and manufacturing.

2. Timing – How fast do I want this case to move?To be sure, one of the key differentiators between federal district courts and the ITC is timing. The average time to trial is about 10 months, with 6-8 months of fact and expert discovery. Most cases before the ITC are concluded within 16-18 months, including both the initial and final determination by the ITC which will be issued many months after trial. Of course, most court


6 6


THE EVER-CHANGING PLAYING FIELD: EVOLVING LEGISLATIVE AND JUDICIAL SCRUTINY OF NON-COMPETE AGREEMENTSBy: Matthew A. Moeller

In business, change is both constant and inevitable. One change that often causes concern is when an employee or group of

employees leaves a company and later goes to work for a competitor. This occurrence often triggers the application of a non-compete agreement that was executed at or likely near outset of the employment relationship. This can send both corporate and outside counsel scurrying to review the agreement to determine what is in it and how it will affect the departing employee’s ability to compete with the company. Non-competes are used to protect a company’s confidential information, client relationships, trade secrets and workforce. As a general concept, non-competes are disfavored but allowed, with North Dakota being the only state in the country that has a blanket prohibition against non-competes.

Recent developments in state judiciaries and legislatures demonstrate that just as in business, change is also constant and inevitable in the law of non-competes. Legislatures and courts have been proactive in limiting non-competes and scrutinizing certain aspects of the agreements. Legislative activity has been especially brisk in the healthcare and technology sectors. In July 2016, both Connecticut and Rhode Island passed laws restricting the application of non-competes to physicians. The Rhode Island law eliminates any restriction on the right to practice medicine in an employment contract, partnership, or other professional relationship involving a state-licensed physician. However, the law does not apply to the sale and/or purchase of a medical practice if the non-compete is less than five years in duration.

Similarly, while not as comprehensive, the Connecticut legislature established specific limits for the enforceability of a non-compete in any new, amended, or renewed physician agreement. The new law allows a duration of only a year and limited the geographical scope to a mere fifteen miles from the primary site where the physician practices. The law also renders a physician non-compete unenforceable if the physician’s employment is terminated without

cause. However, the law is silent as to the circumstances which would constitute termination without cause. Furthermore, in July 2015, the Hawaii legislature passed a law that prohibited non-competes relating to an employee of a technology business. The law defines a technology business as one that drives most of its gross income from the sale or license of products or services resulting from its software development or information technology development or both. The actions by state law makers illustrate the importance they place on not restraining trade in high demand industries that heavily influence society.

Recent court decisions emphasize the importance of the interplay between the concept of consideration and the nature of the employment relationship. In Durrell vs. Tech Electronics, Inc., an at will employee, who was terminated after returning from a Family Medical Leave Act absence, filed suit seeking damages and a declaration that the non-compete portions of his employment agreement were unenforceable. Durrell vs.

Tech Electronics, Inc., No. 4:16 CV 1367 CDP, 2016 WL 6696070 (E.D. Mo. Nov. 15, 2016). The non-compete portion of his agreement prohibited the association with any company carrying on a similar trade or business within a one hundred fifty-mile radius of St. Louis or Columbia, Missouri for a post-termination period of one year. The plaintiff claimed that the agreement was unenforceable because an at will relationship cannot form the basis of consideration for a non-compete. The United States District Court for the Eastern District of Missouri agreed, reasoning that in such a relationship the employer makes no promise to do or refrain from doing anything that it is not already entitled to do, and the employer can still terminate the employee for any reason. Consequently, there must be another source of consideration.

Similarly, in Jumbosack Corp. v. Buyck, an employer sought review of the trial court’s summary judgment ruling that its non-compete was not supported by valid consideration. JumboSack Corp. v. Buyck, 407 S.W.3d 51 (Mo. Ct. App. 2013). After working for six months, the defendant employee executed a non-compete that


7 7


THE CAT’S CRADLE JUST GOT MORE COMPLICATED – SECOND CIRCUIT EXPANDS CAT’S PAW DOCTRINEBy: Kimberly F. Seten, Esq., Constangy, Brooks, Smith & Prophete, LLP,

[email protected]

French author Jean de La Fontaine’s tale Le Singe et le

Chat retells the Aesop fable of a monkey who persuaded a cat to pull chestnuts out of a fire

for them to eat. The monkey ate all of the chestnuts, leaving the cat with burned paws. Today, we use the term “cat’s paw” to signify someone who is duped into accomplishing the purpose of someone else.

In a 1991 age discrimination case, Judge Richard Posner of the U.S. Court of Appeals for the Seventh Circuit coined the phrase in the employment law context. The U.S. Supreme Court officially recognized the doctrine in 2011, in Staub v. Proctor Hospital, a case arising under the Uniformed Services Employment and Reemployment Rights Act of 1994. In Staub, the Supreme Court held that an employer could be liable for the discriminatory animus of a supervisor – even though that supervisor was not the decisionmaker – if the employee could show that the adverse employment decision was influenced by the biased supervisor. The Supreme Court, however, did not address whether the cat’s paw theory applied when the “influencer” was a co-worker.

In Vasquez v. Empress Ambulance Service, the U.S. Court of Appeals for the Second Circuit has expanded the doctrine to co-workers, putting employers in greater danger of being burned.

The allegationsAndrea Vasquez worked as an emergency medical

technician for Empress Ambulance Service. According to her lawsuit, Tyrell Gray, a dispatcher, began making romantic overtures to her, flirting and repeatedly asking her out on dates. Ms. Vasquez claimed that she rebuffed his advances for a few months. Then, Mr. Gray allegedly texted Ms. Vasquez a picture of his erect penis, captioned “Wat u think.” Ms. Vasquez alleged that she immediately informed her field supervisor about the text upon her return to the office at the end of her shift.

The supervisor took immediate action, walking Ms. Vasquez to a computer so that she could type a formal complaint. However, Ms. Vasquez alleged that Mr. Gray saw her at the computer, typing and crying, and he tried

to talk to her. When she refused to speak with him, she alleged, Mr. Gray asked Ms. Vasquez whether she was reporting him. Then, according to the lawsuit, Mr. Gray asked a co-worker to lie and say that Mr. Gray and Ms. Vasquez were in a romantic relationship (the co-worker refused), and Mr. Gray doctored text messages on his phone to make it appear that another woman – with whom he actually was in a romantic relationship – was Ms. Vasquez.

After receiving Ms. Vasquez’s formal complaint, Empress supervisors met with Mr. Gray to investigate. According to the lawsuit, Mr. Gray presented printouts of the doctored text messages, which included a racy photo of a woman whose face was only partially visible, and claimed that he and Ms. Vasquez were in a consensual sexual relationship. Shortly thereafter, Ms. Vasquez met with her union representative, the owner of the ambulance service, and a representative from Human Resources. The HR representative allegedly told Ms. Vasquez that Empress “knew the truth,” and had spoken with Mr. Gray who showed them “proof” of Ms. Vasquez’s improper conduct. According to the lawsuit, the HR representative also said that Empress believed Ms. Vasquez had been sexually harassing Mr.

Gray. Empress terminated Ms. Vasquez’s employment. Her denials and her offers to provide her own proof that she was not in a relationship with Mr. Gray fell on deaf ears, she alleged.

Ms. Vasquez filed suit under Title VII and the New York State Human Rights Law, claiming Empress had terminated her in retaliation for complaining of sexual harassment. Empress filed a Motion to Dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, asserting that Ms. Vasquez could not state a claim because Mr. Gray’s retaliatory intent could not be attributed to Empress. A federal judge in New York agreed, and dismissed Ms. Vasquez’s complaint, and she appealed to the Second Circuit.

CAUTION: It is important to note that a Motion to

Dismiss is filed at the very beginning of the litigation, before any discovery has taken place. Because it is filed so early, courts are required to assume that the allegations in the lawsuit are true, and they have to

decide whether – with that assumption – the plaintiff

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has stated a valid claim under the law. If the Motion to Dismiss is denied, the parties proceed with discovery

and can later file motions based on the actual evidence in the case, or the case may go to trial. Because Ms.

Vasquez’s case was at the “Motion to Dismiss” stage,

we don’t know yet whether Empress or Mr. Gray will

plausibly deny Ms. Vasquez’s allegations or what

evidence they might offer to support their side.

The Second Circuit decisionAs noted above, the Second Circuit reversed the

dismissal of the lawsuit and found that Empress could be liable for retaliation based on the alleged “cat’s paw” actions of Mr. Gray. In reaching this decision, the Second Circuit relied on “general principles of agency law” to extend the cat’s paw doctrine to co-worker conduct. Citing to the Supreme Court’s decision in Burlington Industries, Inc. v. Ellerth, the Second Circuit set out the four circumstances in which agency principles impose liability on employers, and found that the critical question in this context would be whether the Empress’s negligence allowed Mr. Gray’s bias to play a “meaningful” role in the decision.

In reviewing Empress’ actions as alleged in the lawsuit, the Second Circuit found that Ms. Vasquez had sufficiently alleged that Empress was negligent in allowing Mr. Gray’s false accusations, and the retaliatory intent behind them, to influence its decision to terminate Ms. Vasquez.

The moral of the storyMoving forward, employers, particularly those

in the Second Circuit, should proceed with caution in making adverse employment decisions based on allegations or evidence from co-workers. The Second Circuit acknowledged that employers will not automatically be liable in all situations involving co-worker bias. Thus, an employer still can “just get it wrong,” as long as the employer can demonstrate it was not negligent in relying on the information provided by the biased co-worker. Post-Staub, employers knew they had to do at least some investigation into the circumstances surrounding an employee’s discipline or termination. However, in the wake of this decision, employers should be even more mindful of investigating closely any evidence offered by co-workers. Unfortunately, the Second Circuit provided virtually no guidance on the depth of investigation required to avoid a claim of negligence. The allegations in the lawsuit, however, do provide

some explanation for why the Second Circuit found that Ms. Vasquez could proceed with her claims based on Empress’s negligence:

• In meeting with Ms. Vasquez to discuss her complaint, her supervisor chose not to look at the obscene photo and text from Mr. Gray.

• Mr. Gray – a bit too conveniently, perhaps – was able to produce printouts of text messages that he claimed supported a consensual relationship only hours after Ms. Vasquez complained.

• Empress refused to look at Ms. Vasquez’s phone when she offered to show them that she had never sent any text messages to Mr. Gray as he had claimed.

• The “racy” picture that Mr. Gray provided did not show the woman’s face and could not clearly be identified as Ms. Vasquez.

• The content of the text messages showed “Ms. Vasquez” claimed to be sleeping at a time when the real Ms. Vasquez was working.

At a minimum, employers should carefully review evidence given to them by co-workers and give the individual in question an opportunity to rebut any evidence provided.

Don’t get burnedEmployers who don’t want to “burn” their “paws”

can best protect themselves by thoroughly investigating allegations of employee wrongdoing. Here are some suggestions:

• Do not rush to judgment, no matter what your personal opinion may be.

• Allow employees a reasonable opportunity to present evidence, and never refuse an offer of evidence from an employee.

• Consider the source of any evidence on which you are basing a decision. Who provided it? Do they have a motive to fabricate it? Does the evidence itself seem suspicious?

• Ask whether any “reporting” employee – whether a supervisor or a co-worker – might have an ulterior motive, such as a longstanding personality conflict, or a desire for revenge, or envy.

• Consider whether there is any reason to believe that the “reporting” employee has an unlawful motive, such as discrimination or retaliation.

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• As always, with any investigation, employers should document the steps they take.

Remember, it is okay for employers to “just get it wrong,” but only if they have acted with due diligence. Judges, as well as juries, expect employers to be thorough and fair in their investigations. Proceed with caution lest you get burned.

Kimberly Seten, a partner with Constangy, Brooks, Smith

& Prophete, LLP devotes her practice to helping employers

proactively address workplace matters. Kim believes that the best

way to minimize litigation in the workplace is to address issues

before they become problems. A frequenter presenter throughout the United States, Kim also has authored numerous articles and

other publications on labor and employment topics, including

serving as a chapter editor for How To Take A Case Before The NLRB.

Open to both ABA and Non-ABA members.

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For more information or questions regarding the directory email: [email protected]

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scrambling to put out the fires. And, another difference from my role at a law firm is that I get to participate in all business activities and decisions that the Company makes, and I absolutely love it.

How did you end up as in-house counsel for Medically

Correct, LLC d/b/a incredibles?

It was all about perfect timing and making promises

that I could keep. I was working for a leading cannabis law

firm that helped draft the adult-use rules and regulations in Colorado. While I was working as a cannabis lawyer,

trying to make a name for myself in this new industry, I

serendipitously got the chance to spend some time with

the two owners of incredibles at a marijuana business

conference. I already knew the Company because their

recognizable name and brand was everywhere. At that

time, incredibles was already a client of the law firm, but was only engaging the lawyers on a limited as-needed basis. I immediately recognized the opportunity to

expand the caseload and made the offer to do so. The

owners accepted on the condition that I would have to

make them my #1 top priority. My workload quickly

grew. The client grew even faster and it became difficult to keep up. I needed a solution to keep my biggest, most

important and demanding client happy. I came up with

the idea of working exclusively for incredibles at their

office two days a week. It became immediately apparent what a big difference being in-house made. Within a few months, two days a week turned into a full-time position as incredibles’ General Corporate Counsel.

How did you develop the relationship with incredibles?

I developed my relationship with incredibles over time

by proving myself through good work, providing sound legal

advice and my commitment to serving the best interests

of the Company and the overall success of the Company.

My efforts were quickly recognized and appreciated by

the owners and as our relationship developed so did our

communications and trust for each other’s opinions.

What is the very biggest difference about being in-house?

The biggest difference is that I get the owners’

undivided attention whenever I need it. Answering the

hundreds of emails and countless phone calls and text

messages from me became absolutely impossible for

the owners to manage, on top of running a multi-million dollar start-up company that has grown to over 80 full-time employees, three facilities of over 40,000 square

feet, and a national expansion of the brand in over seven

legalized states. Being in-house with my clients on a daily basis has made all of us incredibly efficient and effective.

What has been the biggest challenge?

Many companies, especially in the cannabis industry,

are incorporated incorrectly and do not have the proper

legal fundamental building blocks in place. Due to

bad prior legal advice compounded by complexities of

the federal law, we have done a tremendous amount of

corporate restructuring and planning which was extremely

time consuming. But this process was critical in order to

avoid future disputes and excessive tax liabilities.

Describe the challenges of being a cannabis company.

We experience many roadblocks that other

companies do not face. We have been unable to access

ingredients, equipment, materials and packaging

from distributors and manufacturers because we are

a cannabis company, albeit legal and licensed. Being

discriminated against has been frustrating and has

caused delay in implementation and rollout of certain

products. However, we have managed to overcome many

of these issues through perseverance and persistence

and by being fully transparent.

What is the most interesting part about being in-

house counsel for a cannabis company?

I know that every day at work is going to be different.

I love the fact that I am never bored. I am constantly

confronted with unique and complicated legal challenges.

First, the rules and regulations are continuously changing

and vary from state to state. And because the penalties

for violations are severe and without recourse, staying up

to date and being strictly compliant is our primary focus.

The Company motto is “[w]e are a compliance company

first and a cannabis company second.”

How do you contribute to the growth of the Company?

I get to personally witness and play a part in the

research, development and execution process of all

new products as incredibles is extremely focused on

developing innovative means to manufacture high-quality, safe and consistent products while meeting

the demands of the market and our patients and

consumers. I contribute comments and give advice on

how to avoid costly mistakes. As a lawyer, there is no

greater achievement than knowing that my legal advice

is making a difference in the success of my client’s

Company.

THE GRASS IS ACTUALLY...Continued from page 1

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cases extend for periods of years. In some jurisdictions, trial in 3 years is considered expeditious, and that does not take into account how long it takes to reach a final resolution.

While most plaintiffs want their cases heard quickly, there are some potential negative consequences to the speedy resolution. First, a higher percentage of cases at the ITC go to trial. Second, the cost of an ITC trial can be high, although, as compared to a district court patent infringement case that goes to trial, the costs are likely lower in the long run. However, once an ITC case is filed, there is no delaying the process. So, whereas a $2.5 million legal expenditure may spill over three years in the district court, that same amount may be spent in a single year while litigating in the ITC.

Furthermore, where there is a chance that a prospective defendant is anticipated to seek post-issuance review of the validity of a patent through the inter partes review process (IPR), it is important to know that the ITC rarely stays a case for an IPR. That is not the case with district court and is somewhat based on the fact that the ITC matter is likely to progress faster than the IPR. In comparison, an IPR is not likely to be reviewed and instituted for approximately 6 months, by then the ITC case will be nearly ready for trial and the ITC will not be inclined to stay the matter pending a determination that may still be months away.

3. Who are the Defendants?One true advantage to the ITC, especially in wake of the America Invents Act, is the ability to sue multiple unrelated respondents in a single action. The AIA all but prohibited multiple-defendant matters. But the ITC has no such restrictions. In fact, as an investigation based on a class of products, the ITC is generally encouraged to include multiple importers of those products into a single investigation.

A further significant advantage in the ITC is the fact that the ITC has in rem (not in personam) jurisdiction over products imported into the United States by the respondents. This means

that the ITC can have jurisdiction in a matter, even when the respondents themselves are not subject to a district court’s jurisdiction.

Additionally, the ITC has power to issue exclusion orders against respondents named in an investigation and who do not appear. Because of the draconian effect of such a failure to respond, any respondent that wishes to continue to do business in the US must fully participate in the investigation or risk no longer being able to import into the US.

4. What kind of discovery will I need?The discovery powers of the ITC are comprehensive. The ITC has subpoena power and can compel non-parties to appear before it with very little notice and with little to no ability for a recipient to attempt to quash the subpoena.

Further, complainants can obtain discovery from any and all named respondents. The ability to directly get discovery, on a very short time table, especially from a foreign respondent, is a true advantage in using the ITC. Respondents’ ability to hide information or delay responses in discovery is greatly reduced.

5. How complex is my case?As previously noted, the ITC handles, on average, more patent trials each year than any other tribunal. The ITC is uniquely positioned to handle complex cases. Many, but not all cases are assigned an attorney from the ITC’s Office of Unfair Import Investigations (“OUII”). The OUII attorney participates in the investigation as an independent trial attorney. They file briefs and provide insight into all aspects of the case including importation, domestic industry, claim construction, infringement, validity, and discovery disputes. They provide a potentially independent voice to the ALJ that is intended to represent the interests of the United States as opposed to the interests of the parties. Further, they are very knowledgeable about the rules and procedures of the office, which helps both parties keep up with the rigors of an ITC case.

6. What remedies are available?Within the district court, available remedies include monetary damages and, potentially,

THE INTERNATIONAL TRADE...Continued from page 5

13 13


injunctive relief. Enforcement of a district court injunction, however, may require subsequent court contempt proceeding. Likewise, an unpaid monetary damage may be incredibly difficult to collect from a foreign entity.

However, at the ITC, there are no monetary damages available. Instead, the primary remedy is the issuance of an exclusion order to prohibit the importation of infringing goods. Exclusion orders can either be in the form of a limited or a general exclusion.

(i) Limited exclusion orders only apply to the parties that appeared before the Commission. However the scope of the exclusion against those parties is broad. Exclusion orders rarely list specific products by name/product number. Instead, they more broadly apply to all varieties of the infringing product, including future redesigns. The burden shifts to the respondent to prove noninfringement of its products, and of its redesigns. In order to receive such clearance to import, the respondent may need to seek an advisory opinion or a modification proceeding to alter the exclusion order. That process may also implicate extensive dealing with U.S. Customs officials. Exclusion orders are not limited to products themselves, and can extend to downstream products that incorporate the product at issue, even when the downstream product manufacturer is not before the Commission.

(ii) A general exclusion order is not limited to the parties to the ITC proceeding. Instead, it excludes all infringing articles of the type at issue, regardless of the source. In order to secure a general exclusion order, the claimant must also demonstrate that the issuance of a general exclusion order is necessary to avoid circumvention of a limited exclusion order or that there is a pattern of violation of the statute and difficulty in identifying the source of the infringing products.

Exclusion orders are issued to the U.S. Custom and Border Protection (“Customs”), and charge Customs with barring the excluded goods from entering the US. The scope of the exclusion order can be very broad. It may include products that were not at issue before the ITC, product redesigns (requiring the respondent to prove the redesign does not infringe).

The ITC can also issue a cease and desist order either in addition to or instead of an exclusion order. Cease and desist orders are usually implemented when significant inventory of infringing product has already been imported into the US. The ITC has broad powers to issue cease and desist orders including, among other things: required destruction of infringing good, prohibitions on repairs, and/or a stop on additional importation among others. Failure to comply with a cease and desist orders can result in an enforcement action before the Commission, which would then have the ability to assess civil penalties.

Finally, the ITC does not apply the Ebay factors in determining whether to issue an exclusion order. Therefore, there is no requirement that a patentee establish either irreparable harm or the inadequacy of damages (of course monetary damages are not evaluated or awarded by the ITC).

Also of potential significance is the fact that before the ITC can issue a remedy, it must consider whether an exclusion order would be consistent with the public interest. While most cases do not rise to this level, it may be more significant in areas of medical devices.

7. How can I recover my damages?Most ITC cases are concurrently filed with a district court action. The district court actions are generally stayed in light of the ITC matter (and must be stayed if a respondent timely requests). However, once the stay is lifted, the district court case can proceed. Significantly, the parties have the ability to rely on ITC discovery for the district court cases – including any discovery from a foreign manufacturer who is not a party to the district court case. When the stay is lifted, the record from the ITC transfers to the district court. Therefore, the parties can rely on the same evidence in the district court that was

14 14


relied upon in the ITC, regardless of whether the parties are identical or not. However, take note that in patent cases, a successful complainant in the ITC is not guaranteed victory in the district court. Respondents/defendants may still raise invalidity challenges in the district court litigation. On this point, the Federal Circuit has commented that the Commission’s determination has “persuasive value.”

8. Will my documents and settlement agreement be maintained as confidential?Each of the ALJ’s seems to have his or her own nuanced protective order (PO). The PO generally provides two tiers of confidentiality. The ALJ’s are very clear that not every document in the possession of the parties is entitled to the highest (attorney’s eyes only) designation. That said, the ITC takes confidentiality very seriously. Each attorney must individually sign onto the protective order; there is not a general sign-on for a named attorney’s firm. Further, before potential experts can be shown any confidential documents, the name and background information on that potential expert must be disclosed to the other party, with a chance for that party to object to

the use of the expert. During a hearing, when confidential documents are to be used, the ALJ will clear the courtroom, and close the blinds. The excused individuals are to sit in a room that has white noise pumped in. However, should the parties settle a matter before the ITC, it is expected that only a lightly redacted form of the settlement agreement will be publicly filed with the ITC.

9. What are your best tips?If you are planning to file suit in the ITC, make sure that your attorney has been there before. The ITC has very unique characteristics and the unsuspecting attorney is likely to learn the ropes the hard way. Additionally, before you file, get your discovery in order. Draft your discovery requests, and have your documents ready to be searched and produced – if not already prepared for production. The deadlines in the ITC are no joke. Missing deadlines can be catastrophic and extensions are rarely given. Complainants have a true opportunity getting their house in order before filing the complaint. It should not be wasted.

VISIT US ON THE WEB AT:

http://www.ambar.org/tips

15 15


prohibited contact with the company customers for three years after the termination of his employment. He later resigned, and accepted a position with a competitor. The company sought a temporary and permanent restraining order, injunctive relief, and damages based on an alleged breach of the agreement. After granting the company’s petition for a TRO, the trial court granted the employee’s motion for summary judgment explaining that the employer cannot enforce the non-compete agreement due to employer’s prior breach of the employment agreement and lack of consideration. However, the appellate court found that access to the employers new and existing customers as well as continued at will employment, salary, and commissions constituted adequate consideration for a non-compete agreement. The court further reasoned that the continued attendant access to protectable information and relationships was adequate consideration for a non-compete executed six months after the consummation of the employment relationship.

Courts are also focusing on the nature of an employee’s departure in determining the enforceability of a non-compete. For example, a New York court recently held that employer who terminated an employee without cause could not enforce a non-compete agreement. In Buchanan Capital Mkts,

LLC v. DeLucca, an employer sought to enforce non-solicitation portions of a non-compete against employees who sought business from the employer’s clients soon after being terminated. Buchanan Capital

Mkts, LLC v. DeLucca, et al 41 N.Y.S.3d 229 (N.Y. App. Div. 2016). The court reasoned that the plaintiff could not show the necessary likelihood of success on the merits because, as a matter of law, such restrictive covenants are not enforceable if the employer (plaintiff) does not demonstrate “continued willingness to employ the party covenanting not to compete.”

Even more recently, a Texas court affirmed summary judgment on behalf of an employee based on language that did not clearly specify whether a non-compete provision was triggered solely through the employer’s termination of the employment relationship. In East

Texas Copy Systems, Inc. v. Player, the defendant sold his business and entered into an asset purchase agreement that contained a non-compete provision and incorporated a separate non-compete agreement. E. Texas Copy Sys., Inc. v. Player, No. 06-16-00035-CV, 2016 WL 6638865 (Tex. App. Nov. 10, 2016). The agreements provided that if his employment was terminated without cause within two years, the non-compete provisions would no longer be binding. The defendant resigned within the two-year period and immediately resumed work at a competing business. The trial court granted summary judgment for the defendant, and the appellate court affirmed. The court reasoned that despite the presumed understanding that the provision was to protect defendant from a pre-mature, not-for-cause termination, the evidence was insufficient to demonstrate that was its sole purpose. The court further articulated that the bilateral right made sense from a risk allocation standpoint since this was a new, un-tested business venture.

The recent legislation and court decisions demonstrate that scrutiny of non-competes is as intense as ever. Both corporate and outside counsel must have a thorough understanding of the requirements for a bona fide non-compete as well as possible nuances in the applicable state jurisprudence on enforceability. It’s clear that in the healthcare and technology sectors, states are taking a very aggressive line on non-competes. It will be interesting to see if other states follow suit, eventually eliminating or severely limiting non-competes across both sectors and other sectors that are viewed as highly important. Moreover, the context of the employment relationship is also drawing a very discerning eye regarding valid consideration and the nature of the termination of the employment relationship. Courts are trending towards requiring more than a simple at will employment relationship in order to enforce a non-compete, and termination without cause may preclude an employer from enforcing a non-compete regardless of who terminates the relationship.

Matthew A. Moeller is the Principal of The Moeller Firm

LLC in New Orleans, LA and practices in the areas of maritime, commercial and construction litigation.

THE EVER-CHANGING...Continued from page 6

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2017-2018 TIPS CALENDAR

August 201710-13 ABA Annual Meeting Grand Hyatt Hotel Contact: Felisha A. Stewart – 312/988-5672 New York, NY Speaker Contact: Donald Quarles – 312/988-5708

October 201711-15 TIPS Fall Leadership Meeting Ritz-Carlton Key Biscayne Contact: Felisha A. Stewart – 312/988-5672 Key Biscayne, FL

19-20 Aviation Litigation Committee Meeting Ritz-Carlton Contact: Donald Quarles – 312/988-5708 Washington, DC

November 20178-10 FSLC & FLA Fall Meeting Sheraton Boston Hotel Contact: Donald Quarles – 312/988-5708 Boston, MA

January 201824-26 Fidelity & Surety Committee Midwinter Meeting JW Marriott Contact: Felisha A. Stewart – 312/988-5672 Washington, DC

31-2/6 ABA Midyear Meeting Vancouver Contact: Felisha A. Stewart – 312/988-5672 British Columbia

February 201822-24 Insurance Coverage Litigation Midyear Mtg Arizona Biltmore Contact: Donald Quarles – 312/988-5708 Phoenix, AZ

April 20184-5 Motor Vehicle Products Liability Program Arizona Biltmore Contact: Felisha A. Stewart – 312/988-5672 Phoenix, AZ

6-8 Toxic Torts & Environmental Law Meeting Arizona Biltmore Contact: Felisha A. Stewart – 312/988-5672 Phoenix, AZ

Page 1 of 16

American Bar Association

Tort Trial & Insurance Practice Section

Cannabis Law and Policy General Committee

From Regs to Riches: Navigating the Rapidly Emerging Fields of Cannabis and Hemp Law

September 19-20

Chicago, Illinois

CLE Written Material To Accompany the Program Entitled:

IN LEGAL LIMBO: FEDERAL CANNABIS LAWS AT THE CROSSROADS

September 19, 2019 at 8:10 AM

Page 2 of 16

Laurent Crenshaw Senior Director of Government Affairs Eaze

Question: Please describe some of the unique legal challenges companies operating in the cannabis business face that affect day-to-day operations.

Answer:

The current disharmonization of state and federal laws around cannabis has created a number of unique legal and business challenges for companies’ day-to-day operations in the cannabis space. The media has widely discussed the banking and capital access challenges that most cannabis companies have given that the plant is still a Schedule I drug. This means that most of the cannabis industry still operates in cash only, with limited access to financial institutions for storing money, paying taxes, using ACH/Bank transfers and obtaining business loans. To date, this has been one of the most robust legal challenges that has inhibited growth of the cannabis industry. There are, however, many other areas within the cannabis industry that are faced with legal challenges that go far beyond the scope of what virtually any other industry in the US faces today.

For example, multi-state cannabis operations must build supply chains in every state in which they operate because cannabis plants cannot be transported across state lines without violating federal drug trafficking laws.

Additionally, states that have legalized cannabis have not standardized regulatory regimes, meaning there are few or no standards or tests for pesticides and foreign substances such as heavy metals. While more developed markets, including Oregon and California, have begun developing rules in these areas, states that have legalized more recently have developed varying and less robust requirements.

Along with the challenges mentioned above, cannabis companies must generally integrate into a seed-to-sale tracking system to ensure that the cannabis plant is monitored from the moment the

Page 3 of 16

clone is created to once the commercial transaction has concluded. States that have legalized commercial markets have generally mandated that an electronic tracking system should be used by cannabis operators, with METRC, BioTrackTHC, and Trellis being just a few examples of the companies that are out there. Remaining in compliance with tracking requirements has been a slow and expensive process due to the different software solutions that states have mandated operators must use.

This is not meant to be an exhaustive list of the legal challenges that cannabis companies are facing in their day-to-day operations. It is merely meant to show how the current legal limbo around federal cannabis laws has created large and sometimes conflicting patchwork of state laws and regulations that cover all aspects of the cannabis industry. The lack of federal harmonization around the industry continues to make the costs of operations and compliance extremely high, especially for multi-state operators.

Page 4 of 16

Shane Pennington Associate & Founder of Admin.law YetterColeman LLP Houston, Texas [email protected] Question: What are some of the biggest Federal administrative law burdens facing the industry and is there any current litigation to test or resolve any of these?

Answer:

Cannabis’s Schedule-I Status

It goes without saying that cannabis’s status as a Schedule I controlled substance is far and away the biggest obstacle facing the industry. Because of that classification, the possession, use, and distribution of cannabis will likely remain illegal unless and until one of the following occurs:

1. DEA (or perhaps FDA) suddenly concludes that cannabis has an accepted medical use after denying that proposition and, on that basis, agrees to reschedule cannabis;

2. A federal court departs from uniform precedent upholding DEA’s interpretation of “accepted medical use,” creating an opportunity to reassess the propriety of cannabis’s Schedule I classification under a new and more flexible legal standard; or

3. Congress passes legislation removing or eliminating cannabis’s Schedule I classification.

It seems unlikely that DEA or FDA will changes its view of cannabis’s lack of an “accepted medical use” any time soon. That is because both agencies have repeatedly reaffirmed that their settled view on the matter rests primarily on the lack of FDA-approved clinical trials demonstrating the safety and effectiveness of cannabis for therapeutic use. Yet DEA’s administration of the Controlled Substances Act, and in particular, its implementation of the Act’s provisions regarding the registration of manufacturers of Schedule I controlled substances, have thus far made it impossible for researchers to conduct effective clinical trials with the medicinal cannabis actually being used today.

Page 5 of 16

Cannabis’s Schedule I status frustrates industry development at virtually every level. And, because demonstrating cannabis’s accepted medical utility through clinical trials remains the only path to rescheduling—under current law at least—clearing the path to clinical trials regarding cannabis’s medical utility should be a high priority for the entire industry. I am aware of one important pending case that seeks to take the DEA to task for its unreasonable refusal to facilitate clinical research into cannabis’s potential medical uses. Full disclosure: I’m representing the petitioner, Scottsdale Research Institute, LLC, in that litigation. Here’s a summary of the case:

In 2016, DEA announced that it would be adopting a new policy designed to increase the number of entities that could manufacture marijuana for use in federally approved research. Despite DEA’s subsequent receipt of more than two dozen applications to grow research marijuana since that announcement, to date the University of Mississippi still holds the only license to manufacture marijuana for research in the United States. That may finally be about to change.

In June, the Scottsdale Research Institute, LLC (“SRI”) filed a petition for a writ of mandamus in the U.S. Court of Appeals for the District of Columbia Circuit against the DEA and the Attorney General.1 SRI’s petition seeking to force the government to act on SRI’s application to manufacture marijuana for research purposes, which SRI filed in 2016. SRI claims that the DEA has failed to comply with certain statutory deadlines regarding clinical research-based manufacture applications, causing an unreasonable delay in the processing of SRI’s application. SRI argues that the “DEA’s delay in noticing or responding to SRI’s application is unlawful, unreasonable, and egregious. It contravenes the letter and spirit of the [Controlled Substances Act], seriously harms SRI, and hampers SRI’s efforts to help suffering veterans through clinical research.”

SRI received good news recently when the D.C. Circuit ordered the DEA to file a response to SRI’s petition within 30 days. More often than not, the D.C. Circuit denies mandamus petitions without even asking the government to respond. The Court only requests a response if a special panel of the Court reviews the petition and finds that it potentially meritorious. SRI’s petition, which is supported by an amicus brief from the Iraq and Afghanistan Veterans Association, outlines multiple unsuccessful attempts by SRI and lawmakers from both sides of the aisle to obtain status updates on the marijuana research applications from the Attorney General and DEA. The D.C. Circuit’s recent order means that there is now some hope that the DEA will finally have to articulate some rational response for its delay in processing the applications.

Another important case that challenges cannabis’s Schedule I classification is currently pending in the Second Circuit.2 The Court held that plaintiffs had failed to exhaust their administrative remedies before the DEA, but it didn’t dismiss the case.3 Instead, the Court took the unusual step of holding the case in abeyance and retaining jurisdiction to take “whatever action might become appropriate if the DEA does not act with adequate dispatch.”4

1 In re Scottsdale Research Institute, LLC, No. 19-1120 (D.C. Cir.). 2 Washington, et al. v. Barr, No. 18-cv-859 (2d Cir.). 3 Id. at Dkt. 106 at 2. 4 Id.

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Patent Issues

Patents serve to incentivize innovation by protecting the ideas and inventors and the capital of those who invest in them. Like any other industry, investors in the cannabis industry rely on the patent system to protect their investments. And because the industry is very competitive, innovators have predictably sought to protect their ideas and products from being copied by competitors.

The United States Patent & Trademark Office has issued thousands of cannabis-related patents, but it isn’t entirely clear whether those patents will be enforceable in federal court. An infringement claim involving a cannabis patent would essentially ask the federal court to protect the plaintiff’s monopoly in contraband. Whether the U.S. PTO can “grant a patent that gives the owner the exclusive right to commit a crime” remains an open question.5

Longstanding precedent barring the enforcement of patents that facilitate a criminal act may could thwart a patent-infringement action based on a cannabis patent. Patents in inventions that have only illegal uses are generally prohibited.6 Because the use, possession, and distribution of marijuana is illegal under federal law, this “illegality rule” could bar enforcement of many cannabis patents.

There is, however, a regulatory deference exception to that general prohibition in the context of drugs which cannot be legally marketed without prior FDA approval. The exception creates a safe harbor for inventions that purport to have therapeutic utility. Where the exception applies, the PTO will ignore the fact that the sale of the invention will be illegal under the Food Drug and Cosmetic Act without prior regulatory approval and defer to the FDA’s eventual determination of this question.7

Under current law, there is at least a possibility of legal uses of Cannabis as a drug. FDA approval of some cannabis drugs has resulted in DEA rescheduling of those specific drug formulations. “Under the regulatory deference exception, this window of potential legality is sufficient to allow the U.S. PTO to grant patents on Cannabis drug formulations and medical uses of Cannabis, leaving other legal issues to the FDA and the DEA. Id. at 39-40. The regulatory deference exception would likely not apply to patents on cannabis products lacking any claimed medical use, however.

Recreational marijuana use is categorically illegal under federal law. FDA would have no authority to approve a recreational substance, and DEA’s rescheduling authority is tied to accepted medical use. Because recreational cannabis does not have the potential path to legality that medical cannabis does, the illegality rule would likely pose greater challenges to the enforcement of a recreational-cannabis-related patent.

5 William J. McNichol, Jr., The New Highwayman: Enforcement of U.S. Patents on Cannabis Products,

101 J. Pat. & Trademark Off. Soc’y 24, 29 (2019). 6 Id. at 36. 7 Id. at 38 (discussing In re Brana, 51 F.3d 1560 (Fed. Cir. 1995)).

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The upshot of all of this is that investors and innovators in the cannabis industry who have placed their faith in the patent system might be in for a rude awakening when they seek to enforce their patents in federal court. If the patent system does not protect cannabis investors and innovators to the same degree that it protects their counterparts in other industries, innovation and investment in the cannabis industry will almost certainly lag by comparison. It is therefore important for industry players to keep a careful eye on federal litigation in this area.

I am aware of only one currently pending case raising a cannabis-related patent-infringement claim. The complaint in United Cannabis Corp. v. Pure Hemp Collective, Inc., No. 18-cv-01922-NYW (D. Colo. filed July 30, 2018), alleges that the defendant infringes U.S. Pat. No. 9,730,911, which claims cannabinoid formulations. The plaintiff requests injunctive, treble damages, attorney’s fees, and costs. So far, the parties do not appear to have raised the “illegality rule” concerns identified here, which is discussed in greater detail in William J. McNichol, Jr.’s article: The New Highwayman: Enforcement of U.S. Patents on Cannabis Products, 101 J. Pat. & Trademark Off. Soc’y 24, 29 (2019). Nevertheless, it is certainly a case to watch.

Health Care Regulations

While most states have legalized the use and distribution of medical cannabis, many doctors, hospitals, and drug makers still keep their distance from medical cannabis for fear of liability under federal law. Should federal reforms come to fruition, or should the DEA reschedule marijuana, the medical cannabis industry will face some immediate regulatory challenges under federal health care laws, including, for example, the Health Insurance Portability and Accountability Act of 1996 (“HIPPA”).

While medical cannabis dispensaries have thus far evaded HIPAA scrutiny, the statute theoretically should apply to them. As federal-law restrictions on medical cannabis loosen, however, “this question is likely to come to a head.”8 Industry players will face these and other regulatory compliance puzzles eventually. Those businesses that anticipate and prepare for these emerging challenges will have a distinct competitive edge over companies that are caught flat-footed when the regulatory environment continues to evolve.

8 Joanne Caceres & Michael Montgomery, In the Weeds: Are U.S. Health Care Companies Ready for A

Legal Cannabis Market? Three Potential Compliance Issues That Health Care Industry Participants Should Anticipate, 21 J. Health Care Compliance 17, 22 (2019).

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Jessica Wasserman Partner GreenspoonMarder LLP Washington, DC [email protected] Question: Cannabis is an increasingly large international business, with major operations in Europe, Canada, and Israel. Can you discuss the barriers to obtaining product from international sources and problems the industry faces with labeling?

Answer:

Introduction

When thinking about global growth in the cannabis industry, it is important to keep in mind the distinction between international trade versus international investment. Trade refers to the import and export of goods across international borders. International investment refers to a direct financial investment in another country, for example if a US company were to open a production facility in Germany this would be an international investment.

Trade In Marijuana Products

In terms of trade, the legal international movement of cannabis products remains limited. In order for there to be legal trade, the product would have to: 1) be legal in the exporting country; 2) be legal in the importing country; and 3) the two countries would have to allow the trade—there would have to be a process for clearing customs and an equivalence between the regulatory regimes of the two countries. At present, there is legal trade only in medical marijuana, but not recreational, and only among countries where medical marijuana has been legalized. Even for these, trade is at low levels and requires preapproval and licensing.

In addition, international treaties limit trade in marijuana products. The 1961 Single Convention on Narcotic Drugs, the 1971 Convention on Psychotropic Substances, and the UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, ratified in 1988, include

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that signatories have an obligation to restrict the movement of cannabis to “medical and scientific purposes between countries.” There has been discussion in the media recently suggesting that these treaty requirements might be liberalized, triggered by a World Health Organization (WHO) recommendation to the UN to change the scheduling from the most restrictive category, which contains Class A drugs such as cocaine and heroin, to a less restrictive category. This resulted UN consideration of removal of cannabis from Schedule IV of the 1961 convention, the most restrictive category. But the UN has yet to follow through, and the politics are not promising for a change in UN policy any time soon.

For medical marijuana, trade is being facilitated also by Mutual Recognition Agreements (MRAs) between countries in the pharma sector. These sectoral agreements are recognition between countries that their regulatory quality and safety controls are equivalent, allowing for trade. This is facilitating pharma grade marijuana trade. Despite the hurdles to trade, the trend is toward more trade in the mid-term future. Medical marijuana is now legal in 33 US states and a few dozen countries in North America, Europe and South America. Trade among these countries will likely grow.

Trade in Hemp/CBD Products

International trade in hemp and CBD products is growing more quickly than for marijuana but the legal and regulatory frameworks are only slowly coming into place. Through the 2018 Farm Bill, in January 2019, the US legalized hemp and CBD products with trace levels of THC. In theory, the US should now be allowing import of CBD products and should be allowing exports as well. However, this is not the case. The Drug Enforcement Agency (DEA) has yet to establish a protocol for determining the 0.3% THC content on a dry weight bases—the amount allowed through the Farm Bill—on the grounds that DEA is not able to reliably test for the THC level. Depending on the port of entry and the classification of the product, US Customs and Border Protection is likely to seize and destroy hemp CBD products even though legal. These sort of limitations and confusing policies are also prevalent in export markets. For example, the United Kingdom allows CBD to be sold domestically, but does not allow importation so that exports of CBD from the US are likely to be seized by UK customs upon entry in the UK. Cross Border Investment in the Marijuana Industry Because of the limitations on trade, companies looking to access consumers in third country markets are focusing on foreign direct investment. Countries that do not allow imports may allow direct investment in growing, processing, or distributing marijuana products for their domestic markets. A US investor would need to abide by the host country’s laws and regulations, but would otherwise, in most countries, be allowed to invest. One strategy available to companies looking to enter a foreign market is to buy existing operations and brands that are already present in a foreign market.

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This strategy allows global companies to have a foothold in a region and provides a potential regional platform as the restrictions on import and export loosen over time. For example, Denmark has attracted hundreds of millions of dollars in foreign direct investment from global leaders. In a related concern, difficulties in raising capital are prevalent for marijuana companies. In the US, marijuana companies cannot be listed on the stock exchange if the company has US operations. (Whereas, foreign companies, such as Canadian companies, can raise capital in the US as long as the company does not have US operations.) This also means that Canadian companies can raise money on the Canadian stock exchange and invest in the US, putting US companies at a disadvantage.

Cross Border Investment in the hemp/CBD Industry

Just as with medical marijuana, foreign investment to bypass restrictions on importation is an option that is being pursued by global CBD companies. However, there is uncertainty in this growth as concerns about the safety of adding CBD to foods and supplements is rising. The European Commission is now requiring lengthy preapprovals for CBD as a food additive, a development that has slowed foreign investment in the EU.

Conclusion

The global trend is for more and more countries to move toward legalization of both medical and recreational marijuana and CBD, but the pace in each country and region differs with a patchwork of countries that might allow trade. Even between two countries with legalized marijuana different regulatory regimes can create barriers to trade. Locating a facility in a third country or purchasing an existing foreign facility is increasingly a strategy for access to third country markets.

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Lisa Pitman Thomas Pittman, P.C. Austin, TX [email protected] Question: We have seen major retailers like CVS and Whole Foods selling CBD products. In light of the Farm Bill, how is the Food and Drug Administration responding to CBD products on the shelves and is the government making any distinction between hemp-sourced and cannabis-sourced CBD?

Answer:

First, it should be explained that hemp and marijuana are varietals of the same plant: cannabis. Cannabis is called “marihuana” under the U.S. Controlled Substances Act, and listed as a Schedule I substance, meaning it has no accepted medical use and a high potential for abuse. Marijuana/Cannabis is completely federally illegal for any purpose, with the exception of the 33 states and D.C. that have legalized medicinal use of cannabis, including 11 that have completely legalized it for adult use.

Hemp, on the other hand, is a low THC form of the cannabis plant that has been excepted from the definition of marijuana as of this year with the signing of the 2018 Farm Bill, as long as it contains no more than .3% THC, the only compound out of over 250, including many CBDs, that produces a feeling of euphoria, or a “high.” Prior to the 2018 Farm Bill, hemp CBD extracts were either imported from other countries or produced under the 2014 Farm Bill, which permitted limited exceptions from the Schedule I cannabis designation for the production of hemp in conjunction with a university research pilot program or a state’s industrial hemp program. The four main states that took advantage of the industrial side of the program were Oregon, Colorado, Kentucky, and Montana.

After hemp production began, a surge of hemp derived CBD extracts began being sold across state lines despite existing prohibitions in law. Neither the DEA nor the FDA had the resources to fight this wave of products in light of other higher priorities, such as opiate abuse. The growing popularity created a lucrative environment for hemp farming that led Mitch McConnell,

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Senate Majority Leader from Kentucky, to push for the passage of the 2018 Farm Bill that included his Hemp Farming Act to open this business up to commerce across the country.

The 2018 Farm Bill paved the way for hemp to be allowed in interstate commerce and to be produced in any state. “CBD” or cannabidiol, is a compound in the cannabis plant that can be derived from either the marijuana/cannabis plant or the hemp plant. If CBD is derived from marijuana/cannabis, in Colorado, for example, it must be sold in a regulated dispensary with other marijuana products. CBD derived from a plant with greater than 0.3% THC is still considered a Schedule I substance in the eyes of the federal and most state governments. However, CBD may also be derived from the hemp plant, and that is what has become so popular and propelled further with its new legality granted to it by the 2018 Farm Bill. Hemp CBD is currently free from the regulatory burdens of Cannabis derived CBDs, but that is about to change.

The 2018 Farm Bill specifically retained U.S. Food and Drug Authority (FDA) authority over consumable products made using CBDs. On the same day the President signed the 2018 Farm Bill, the FDA issued a statement reminding people that CBD is considered a drug and may not be marketed as a dietary supplement or infused into foods or beverages placed in interstate commerce. CBD is considered a drug because the marijuana/cannabis derived version was approved by the FDA for a drug called Epidiolex, used to treat seizures. Because it was a marijuana/cannabis derived, it was a Schedule I substance and thus no doctor could prescribe it. The Drug Enforcement Administration (DEA) thus had to reschedule Epidiolex to Schedule V so that it could be prescribed by physicians, which the DEA did on September 27, 2018.9 Now, even though hemp CBD is no longer a controlled substance, “CBD” is now regulated by the FDA and considered to be a drug, which is admittedly a bit confusing.

The rise in popularity and use of hemp CBD thus put the FDA in a bit of a conundrum. An unregulated substance, that could contain metals, pesticides, contaminates, or maybe not even any CBD, is being sold and utilized all over the country, creating a potential public safety hazard in the absence of any uniform regulations. Even in states that permit hemp CBD, regulations for it are currently lax to nonexistent. Responsible producers demonstrate their hemp is sourced from a licensed hemp producer and provide Certificate of Analyses which show the test results including the potency of the product and other information about the product. However, most consumers probably do not know to look for products that provide this information. Thus snake oil salesmen abound and hemp CBD can be bought at a gas station or on amazon where the average consumer has no assurance the product they are consuming comports with any GMP standards whatsoever. This is not what the FDA envisions.

The good news is, the FDA could have taken the position that all CBD products must go through the multi-million dollar process to become FDA approved drugs and then funneled through an expensive drug prescription process. But Dr. Scott Gottlieb, the recently departed commissioner FDA, acknowledged there is value in hemp CBD products and need to have such products

9 Drug Enforcement Administration, FDA-approved drug Epidiolex placed in schedule V of Controlled Substance Act, https://www.dea.gov/press-releases/2018/09/27/fda-approved-drug-epidiolex-placed-schedule-v-controlled-substance-act.

https://www.dea.gov/press-releases/2018/09/27/fda-approved-drug-epidiolex-placed-schedule-v-controlled-substance-act

https://www.dea.gov/press-releases/2018/09/27/fda-approved-drug-epidiolex-placed-schedule-v-controlled-substance-act

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widely available to consumers without a prescription, and has proposed that the FDA come up with rules to regulate hemp CBD products for public safety, in accordance with the mandate of the 2018 Farm Bill. In April, the FDA formed a workgroup to address the issues in testing, processing, inspection, labeling, and selling hemp CBD products. In May, the FDA held a day-long hearing to take public and stakeholder input into the regulations the FDA is considering. There is no imminent timeline for when these regulations are expected to be available, but our intelligence suggests that the FDA is not intending to drag its feet on it, especially considering the USDA is simultaneously devising rules to govern the production, testing, sampling, sale, transport, and processing of hemp.

With the cover of federal legalization, major retail chains including CVS and Whole Foods have begun carrying CBD products. I assume retailers of this realm of trust will select quality products, but what the FDA is aiming to do is create uniform rules, including a QR code on the bottle, that takes you straight to the source of the hemp and the composition of the product. The FDA is playing catchup with a product that is swiftly becoming mainstream. Products already on the market will have to adapt to comply with whatever rules the FDA comes up with. Manufacturers who are currently defying the rules the FDA has laid out regarding drug claims or marketing hemp CBD as a dietary supplement are now receiving warning letters from the FDA threatening immediate enforcement action. It is forbidden to claim any product can cure or treat any disease or condition that is not FDA approved for such, for example.

So, the FDA is making examples of the largest company bad actors, and in the meantime formulating rules for those involved in the hemp supply chain. No company has yet been shut down—they have been opportunity to cure the violations—but it is likely that new FDA rules will allow for random retail sampling and companies violating the new standards will be put out of business.

The latest letter sent by the FDA to Curaleaf, the country’s largest multi-state cannabis operator, which also has a hemp line, has been the most brass tacks warning letter to date, signifying the FDA will begin to funnel resources toward removing noncompliant products from the shelves. Additionally, state health departments are taking action, and in some cases, forbidding hemp CBD products or CBD infused foods/beverages—not that that is stopping most. In the meantime, we are still in a waiting game and companies willing to take the risk and gain market share while there are few rules are pursuing this 3-5 year of lucrative opportunity before consolidation and commoditization occurs for this latest wellness sensation.

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Adrian Snead Associate Whiteford, Taylor & Preston L.L.P. Washington, DC [email protected]

Question: What are some of the biggest issues facing lawmakers in Washington when it comes to the emerging Cannabis industry?

Answer:

In early fall 2014, I was thrust into the world of cannabis policy when Senator Jeff Merkley (D-OR) became the first U.S. Senator to “support” marijuana legalization. That fall, Senator Merkley was asked during a debate how he would vote in the state referendum about legalizing marijuana for recreational use. He said he would vote yes. Press outlet quickly transformed his specific statement about Oregon law into a statement of general support for marijuana legalization. As staff, we were tread on uncertain ground, and we often feared stepping in quicksand and being swallowed by the generally unknown world of cannabis policy.

Although Senator Merkley had been a moving force behind passage of the hemp provisions of the 2014 Farm Bill, this was a different beast altogether. As his counsel, it fell to me to advise the Senator on cannabis law and policy and, ultimately, to help develop the Senator’s positions on cannabis reform.

What I discovered was a plethora of information related to marijuana prohibition generally, but very little information related to its modern politics. Beyond those who had been fighting in the policy trenches for years—the Drug Policy Alliance and Marijuana Policy Project for instance—the industry was generally unrepresented and disorganized. The National Cannabis Industry Association (NCIA) was the only industry group actively engaging Congress. While NCIA’s chief lobbyist was well versed on cannabis issues and very well liked on the Hill, he was simply overwhelmed by the complexity and breadth of issues surrounding reform.

It is critical for those who know the industry to establish relationships with members and offices. Lobbyists may be derided in the media, but just about every Congressional staffer will admit that lobbyists and government relations professionals are a necessary part of the lawmaking process. Staffers are overworked, underpaid, and do not have the bandwidth to become experts in any field, let alone a new and emerging one such as cannabis. Staff relies on lobbyists and industry


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experts to help them understand what is happening on the ground and draft laws that actually make sense.

As an example, when I drafted the Marijuana Business Access to Banking Act of 2015 (and, later, the SAFE Banking Act of 2017), I had almost no assistance from industry experts who understood banking and finance law. Having spent time in prosecutor’s offices, I understood forfeiture and made sure those protections were included the draft law that I proposed to the Senator. I searched for industry experts to help me understand more aspects of banking law, but few existed and none were known to our office at that time. Thus, as far as specific banking law was concerned, I had to rely on my general legal skills and our Banking Committee staff to help draft those provisions of the law.

This was no accident. The more folks I spoke to, the more I realized that many in the industry, particularly those out West, were so confident in how quickly Congress would legalize marijuana that they felt little need to engage with Congress or even organize amongst themselves. While reform has moved faster than many imagined, it is simply not fast enough for the industry. The industry cannot rest on its laurels and simply expect the federal government to change. Instead, it must organize and engage.

Early in my foray into cannabis policy, I witnessed two patterns quickly emerge: first, there was greater political appetite for marijuana reform on the Hill than we expected and, second, the broader cannabis’ industry’s political naiveté and self-confidence often led to strategic blunders.

One particularly poignant early example occurred at one of the first industry meetings with Senator Merkley. Approximately 20 businessmen representing many touch the plant and ancillary businesses asked for and received a meeting in the Senator’s D.C. office. I came in first to begin the meetings. Greeting me were individuals who looked wholly uncomfortable talking to government officials, and who exuded an overpowering smell of weed. I did not want to bring the Senator in the room, fearing he would get a contact high. But, the Senator came in, pretended not to notice the smell, and began engaging his constituents and others in the room. Once the conversations started, they flowed like any other meeting, with those in the room relaxing and explaining issues facing them and their businesses.

The industry must also organize and learn to respect those who have spent decades battling for marijuana legalization. New initiatives that rely on big money donors and believe they can simply buy their way to marijuana reform fundamentally misunderstand policymaking. Success on Capitol Hill takes coordination, long-term effort, and broad-based stakeholder buy-in. Moving legislation forward is hard, requiring the support of many members; stopping legislation is very easy, often requiring the objection of a single senator. Thus, it is vital that business community work in close coordination with more established entities. As we have seen over the last two years, doing otherwise can cause slow progress.

One particular area where the industry has made a major strategic blunder is failing to engage the civil rights community. African and Latino Americans have faced the brunt of the War on Drugs, which has decimated many of their communities. Some estimate that 33% of the African

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American male population has a felony conviction.10 Yet, it seems as if white Americans are the ones overwhelmingly benefiting from the “Green Rush.” Indeed, many state and local cannabis regulations exclude individuals with criminal convictions from obtaining cultivation or dispensary licenses, or, in some cases, working in touch the plant industries.11 Particularly in my early meetings with marijuana companies, they saw no reason to engage, let alone spend money on, criminal justice reform initiatives. My sources on the Hill tell me that marijuana reform legislation is now being held up in the House by criminal justice groups unhappy with the industry.

But, help is on the way, from outside the industry at least. In July, ten leading civil rights and criminal justice reform groups created the Marijuana Justice Coalition (MJC) to “advocate that marijuana legalization legislation must be comprehensive and include wide-ranging social equity provisions.”12 The participating organizations include the ACLU, Center for American Progress, Center for Law and Social Policy, Drug Policy Alliance, Human Rights Watch, Immigrant Legal Resource Center, Lawyers’ Committee for Civil Rights Under Law, Leadership Conference on Civil & Human Rights, NORML and Students for Sensible Drug Policy. While this is a powerhouse list, these organizations represent the left of the political spectrum. The industry would be wise to organize its own criminal justice initiative and focus on bringing in Republicans who can help push legislation forward.

Overall, businesses in the cannabis industry would be wise to remember that the Industry still suffers from decades of government propaganda and misinformation. Moving legislation forward, nationally, will take a coordinated effort. Businesses must engage and provide their expertise in order to facilitate passage of national laws and regulations that will speed reform. Industry should not free-ride and simply expect good things to happen or good ideas to flourish. That risks having legislation or regulations crafted without key stakeholder input, and Industry could find itself facing new laws that pose significant and potentially unnecessary burdens. As President Franklin Roosevelt was known to tell constituents, “That’s a great idea! Now, go make me do it!” Industry should approach Congress the same way.

10 Allie Howell, Criminal Conviction Restrictions for Marijuana Licensing, at 4 (September 2018),

https://reason.org/wp-content/uploads/criminal-conviction-restrictions-for-marijuana-licensing.pdf. 11 See, e.g., 935 Code of Massachusetts Regulations. Cannabis Control Commission (prohibiting those with

drug distribution convictions from can be an owner of a cannabis business), https://www.mass.gov/files/documents/2018/03/27/935cmr500.pdf; Washington State Administrative Code, Title 314-55-040 (prohibiting those with felony drug convictions from obtaining a marijuana license for ten years), https://apps.leg.wa.gov/wac/default.aspx?cite=314-55-040. 12 Kyle Jaeger, ACLU And Other Groups Form Coalition To Push Justice-Focused Marijuana Legalization Model, Marijuana Moment, July 9, 2019, https://www.marijuanamoment.net/aclu-and-other-groups-form-coalition-to-push-justice-focused-marijuana-legalization-model/

https://reason.org/wp-content/uploads/criminal-conviction-restrictions-for-marijuana-licensing.pdf

https://www.mass.gov/files/documents/2018/03/27/935cmr500.pdf

https://apps.leg.wa.gov/wac/default.aspx?cite=314-55-040

https://www.marijuanamoment.net/aclu-and-other-groups-form-coalition-to-push-justice-focused-marijuana-legalization-model/

https://www.marijuanamoment.net/aclu-and-other-groups-form-coalition-to-push-justice-focused-marijuana-legalization-model/