Sean Hocking, Author at Green Market Report

Sean HockingSean HockingMay 27, 2019
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15min150

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AUTHOR: Glenn Johnson
PUBLISHER: CANNABIS LAW REPORT

 

As is so often the case in the Cannabis and Hemp industry, to succeed you do what you have to, when you have to, you learn you adapt and you overcome challenges in the market all in real time—which also sounds a lot like parenting in the 21st Century.

EDUCATION IS KEY

Osiris Stephen and his wife Nina certainly weren’t expecting to become immersed in Cannabis, Hemp and CBD to the degree where they were teaching their doctors about dosing, but it happened. Osiris didn’t expect to one day start to teach his child sign language so they could communicate when the young boy was being bombarded by 100 seizures a day. But he did it. 

They didn’t know they’d confront epilepsy head on, since none of their family before them had been exposed to it. But they did after a particularly bad grand mal seizure that brought them to the emergency room. While it is one of the oldest neurologist conditions, its even in the Bible, treating it today they’ve learned is a shot in the dark.

Together they’ve been on a journey of on-going self education and discovery that’s brought them together and almost tore them apart, but today they stand poised to take their battle to the state house in Albany to pass their bill, which codify’s a child’s right to take their plant based medicine at school just as they would any other.

 

 

IT HAS BEEN A CHALLENGE TO GET THE RIGHT CBD

Both he and his wife are pioneers in the adoption of plant based medicine. They’re a family who’ve had to address challenges and find solutions when science failed them. They’ve had to find solutions and ask questions, seeking information in real time to educate themselves, then their doctors and now their community about the benefits plant based medicine has had in their own lives, and how its helped their child.

As parents they’ve had to learn to adapt, as parents they’ve learned you have to be able to take a risk, sometimes just making it up as they go—and to take the good days with the bad ones.

They’ve learned the importance of packaging and sourcing and dived deep into understanding test results. When they ran into issues they found solutions, when they realized that brands that used lecithin as an emulsifier in their CBD wouldn’t work for their son, they created their own formulations. 

PACKAGING MATTERS A GREAT DEAL TO THE CONSUMER

Our son needs a specific strain,” Osiris states, “When shopping for CBD you may find a brand you favour, but we discovered it may be a different strain each time we bought a product and we saw different results—not every batch was the same strain, such that one wouldn’t work as well as another.”

“Every ingredient matters to us, our son is growing and his condition changes all the time. We have to layer his medications carefully for them to all work together, and have to always adjust it as he grows. In the future, medical will be truly customized to you, now science is working on DNA testing to match patients with a strain, for example.”

Happily they’ve seen remarkable results in their sons condition as they’ve researched the best strains for his condition and are working everyday to keep up with his evolving needs.

“Our neurologist is now asking us about it and referring clients to our Cannabis doctor. The plant has empowered us to do what we want to do.”

As a Business Development Specialist  for the Cannabis World Congress, a national and globally focused trade event that attracts attendee’s from all corners of the world set to open here in NYC on May 29th, I wanted to talk with Osiris to see his point of view on Branding to get his top-line thoughts on the industry today, and trends he sees in the near future.

TRENDS IN BRANDS & BRANDING

PERSONALIZATION IS IMPORTANT. People remember a brand by it’s look and feel…whether its an image or a feeling that people can connect to from a brand, people remember the design that they connect with, brands should work to ensure that consumers can relate to their brand, to their story.

PEOPLE WILL ASK: HOW DOES THIS BRAND RELATE TO ME and what condition I’m seeking to address, be it trouble eating / sleeping or if I just want to be happy.

READ LAB REPORTS: Make sure your brand has them, and if you’re looking for brands make sure you read them and learn the nuances of each. Customers will demand more from the market. Questions that need to be addressed include, shelf-life, how long has it been on the shelf, when was the last test done—be transparent: what’s your formulation process, how consistent are your strains and reveal your methodology including the use of specific strains.

People will look toward those brands that represents ME, whether that be a more discrete profile or simply over the top. Stay in peoples mind—do something different—you’ve got to get your name out there.

THE SEEDS ARE EVERYTHING. You’ll see more and more science behind this evolve.

You’ll also start seeing more MICRODOSING.

PERSONALIZATION is the future; Your DNA will be diagnosed with a specific STRAIN, that will be the future. The chemical compounds from plant based medicine will be most important. My own strain, my seeds—so I know what I’m getting.

RECREATIONAL will be wide open—it will drive the prices down—there will be no taboo anymore it will become more ubiquitous—loyalty will become more important. 

BLACK vs LEGIT MARKET — the cost and the inventories will continue to fluctuate.

RETENTION is important—address how are you going to KEEP your customer; customers won’t be loyal, there are a lot of choices.

BUDTENDERS are educators, they will evolve into a doctor role, the best will be more recognized.

For more on the Cannabis World Congress visit their website at https://www.cwcbexpo.com/

 

About Glenn Johnson

I am a Marketing, Branding and Communications Consultant w/ experience in high-touch luxury consumer marketing in the travel/hospitality, wine/spirits, fashion/beauty/grooming and Cannabis categories. My talents include Branding & Brand development, Business Building, Strategy and Brand Storytelling. I excel in working with Founders, funders, start-ups, and small brands.

CONTACT ME via email at: glenn.johnson@gmail.com

Connect with me on  LINKEDIN: https://www.linkedin.com/in/glenn-johnson-8018944/

Previously I was co-founder & moderator for the Creative Mind Salon series hosted at Soho House NY w/ industry innovators, creatives & decision makers from fashion, film, photography, music and digital industries which provided IRL intelligent discourse amongst highly-curated leading edge creatives.


Sean HockingSean HockingMay 26, 2019
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14min200

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AUTHOR:  “Jordan Zoot.  “aBIZinaBOX Inc., CPA’s
PUBLISHER:  CANNABIS LAW REPORT

Licensing Cannabis Cooperative Associations [“CCA’s”] – we have been working on getting CCA’s recognized and licensed by the California cannabis regulators for half a year. We share our success in getting the California Dept. of Tax and Fee Administration [“CDTFA”] to recognize CCA’s and successfully received Sales and Cannabis Permits for a number of CCA’s. The process with CalCannabis has been quite a bit more protracted. However, we are confident that we will be successful, we will share more when we know more.

 

Meanwhile, we think it may be useful to others if we share the analysis that makes the case for the requirement for the regulators to issue a license to a CCA, without regard to it becoming a “Processor” or directly engaging in cultivation activities distinct from those of its constituent members. [the analysis is a bit complicated so hang on for the ride].

 

The mere filing of Articles of Incorporation by a CCA, which as a matter of law creates a legal entity, is not alone sufficient to require licensing.  A corporation can be abandoned almost easily as it can be formed.  A number of actions are required to flesh out the organization of a CCA.  Once those actions are completed, however, CalCannabis is required by law to license the CCA for the reasons discussed below.  Please note that the actions taken to flesh out of the organization of CCA must constitute engaging in commercial cannabis activities under California law.  The sole purpose for the organization of a CCA is to engage in commercial cannabis activities.  The fleshing out of the organization of such a corporation are in furtherance of those activities.

 

Licensing Cannabis Cooperative

California Business and Professions Code (“B&P”) Section 26223 (a) provides:

“Three or more natural persons, who are engaged in the cultivation of any cannabis product, may form an association pursuant to this chapter for the purpose of engaging in any activity in connection with any of the following:

“(1) The cultivation, marketing, or selling of the cannabis products of its members.

“(2) The growing, harvesting, curing, drying, trimming, packing, grading, storing, or handling of any product of its members.

“(3) The manufacturing, selling, or supplying to its members of machinery, equipment, or supplies.

“(4) The financing of the activities that are specified by this section.”

To refresh your recollection, B&P Section 26001(k) provides: “(k) ‘Commercial cannabis activity’ includes the cultivation, possession, manufacture, distribution, processing, storing, laboratory testing, packaging, labeling, transportation, delivery or sale of cannabis and cannabis products as provided for in this division.”  Please also recall that in addition to the activities described in Section 26223(a), a CCA can engage in any activity permitted under the authorities granted a general corporation unless such activities are prohibited under Chapter 22.

As you can see from a comparison of these two provisions of California law, all of the activities described in B&P Section 26001(k) fall within B&P Section 26223(a).  Further, B&P Section 26223(a) authorizes a CCA to engage in many activities that would not necessarily fall within the specific activities described in B&P Section 26001(k).  Please also notice that the definition in B&P Section 26001(k) states that the phrase “commercial cannabis activity” includes all of the specified activities.  For the purpose of statutory construction, the use of the word includes means that the list is not comprehensive and that the list does not exclude other activities that are not listed.  Further, merely assisting cultivators in accomplishing one of the specified activities constitutes engaging in a “commercial cannabis activity” as the phrase is defined in B&P Section 26001(k).

The express language of B&P Section 26001(k) belies the position of CalCannabis.  An activity that is not specified in B&P Section 26001(k) may constitute a “commercial cannabis activity.”  An activity that assists in, or is in furtherance of, any specified activity will constitute a “commercial cannabis activity” within the meaning of the definition of B&P Section 26001(k).  It is for these reasons we stated above that the fleshing out of the creation of a CCA, which is being organized to assist its members in marketing and selling their cannabis, constitute engaging in a “commercial cannabis activity” within the definition of B&P Section 26001(k).

 

Licensing Cannabis Cooperative

The preceding is the reason we advised CalCannabis a CCA should be issued a license because it exists.  A CCA is a collective of cannabis cultivators.  A CCA is a special purpose corporation enabled by the California legislature to engage in a specified group of business activities on behalf of a specifically defined group for the benefit of the specified group.  The sole purpose for the organization of a CCA is to engage in commercial cannabis activities.  These are the specific activities for which the legislature enabled the establishment of CCAs.  As we have noted above, a CCA has the authority under the law to engage in these activities as soon as it is organized.  As CalCannabis states, a person, and there can be no doubt a CCA is a person, must be licensed when engaging in a “commercial cannabis activity.”  California Department of Tax and Fee Administration (“CDTFA”) recognizes, as we have earlier pointed out to CalCannabis, that securing identification numbers for tax reporting purposes is engaging in a “commercial cannabis activity.”

If CalCannabis is going to base administrative decisions on an analysis of the law, CalCannabis must secure competent legal counsel.

 

Licensing Cannabis Cooperative

“The Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) does not require that “[a]ny individual or entity engaged in business in California’s commercial cannabis industry must be licensed.”  The MAUCRSA only requires an individual or entity when they are engaging in “commercial cannabis activity” as defined in Bus. & Profs. Code § 26001(k) to be licensed.  Additionally, Chapter 22 of the MAUCRSA does not create a license requirement or authorize the Department to issue licenses to cannabis cooperative associations.”

The statement quoted above is nonsensical pilpul.  It is nonsense to contend the statement MAUCRSA does not state a person engaged in California’s commercial cannabis industry is required to be licensed is somehow different from the statement MAUCRSA says such a person must be licensed when the person is so engaged.  It is obvious based on a minimal understanding of logic that the reasoning CalCannabis utilizes to support its position with regard to the licensing of a CCA is circular.

 

Licensing Cannabis Cooperative

Why is CalCannabis thwarting the stated purpose of the California legislature to create the equivalent of a farmers purchasing, processing, and marketing cooperative as a vehicle to facilitate the ability of small cannabis cultivators to effectively compete in California’s commercial cannabis industry with a nonsensical analysis?  CalCannabis’ argument consists of stating that it will not issue a license to a CCA until the CCA identifies an activity in which it is engaged that is a specified “commercial cannabis activity” even though a CCA is prohibited from engaging in the activities for which it was organized, and in which it is authorized by law to engage, unless and until it secures a license that CalCannabis is declining to issue.  Nonsense.

CalCannabis has stated, “Additionally, Chapter 22 of the MAUCRSA does not create a license requirement or authorize the Department to issue licenses to cannabis cooperative associations.”  As you are aware, B&P Division 10, Chapter 22, is enabling legislation.  Chapter 22 enabled a new form of California corporation for the benefit of small cannabis cultivators.  Why would the enabling legislation include a licensing requirement for a new form of California corporation?  The requirement that all commercial cannabis activities be conducted between licensees is already set forth in B&P Section 26053(a).  A CCA is authorized to engage in commercial cannabis activities as soon as its organization is completed.  All such activities must be conducted between licensees.  A CCA must be licensed.

CalCannabis has stated not authorized to issue licenses. Why does CalCannabis ask in its application form whether the applicant is a Cannabis Cooperative Association?  CalCannabis is the licensing agency for cultivators.  A CCA is a collective of cultivators.  Why would a California agency other than CalCannabis license a CCA?  How can CalCannabis reasonably conclude it cannot, or should not, license a CCA?  It is our impression it is likely almost every action CalCannabis has taken with respect to CCAs will be deemed arbitrary and capricious if CalCannabis does not promptly rectify the most significant errors it has made with regard to CCAs. Hezekiah Allen…we hope this article fills in the parts of the analysis that you never understood.

Licensing Cannabis Cooperative Associations

 


Sean HockingSean HockingMay 26, 2019
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13min350

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AUTHOR: Steven Monahan
PUBLISHER:  CANNABIS LAW REPORT

 

The Marijuana Financing Double Standard

 

It is common knowledge that the federal government’s Schedule I classification of marijuana makes it illegal.[1] Many people also understand that any money earned by selling marijuana is classified as “criminally derived proceeds,” which leads to money laundering when a person tries to spend those marijuana revenues.[2] However, what many people do not know nor understand, is the double standard that takes place in the American economy.

How is it that one company may fund a marijuana business’s expansion while another may not? How is it that the Department of Justice will prosecute a bank that commits money laundering but not a real estate investment trust that launders money?

How is it that the Securities and Exchange Commission, which states on its website that its mission is to protect investors and promote fairness[3], allow investors to buy and sell stocks listed on the NYSE whose business model only operates on the assumption that the federal government will not prosecute them?[4]

To begin with, there are various ways to launder money. One type of money laundering occurs when someone knowingly spends or attempts to spend more than $10,000 in criminally derived proceeds (marijuana revenues).[5] “This statute applies to ‘even the most open, aboveboard transactions’ that would otherwise be innocent and lawful.”[6]

Therefore, can a marijuana business go to a bank for a loan for an infusion of capital to expand their operations? No! If a person pays down a bank loan with marijuana revenues then they would be laundering money.

Another type of money laundering is called promotional money laundering. “Promotion money laundering is a crime in which illicit funds are used in a financial transaction to further the aims, goals or success of a specified unlawful activity.”[7]

For a successful conviction, the government must prove that (1) “the defendant conducted or attempted to conduct a financial transaction (2) which the defendant then knew involved the proceeds of unlawful activity (3) with the intent to promote or further unlawful activity.”[8]

For this form of money laundering the banks would be the ones in the prosecutor’s crosshairs. A bank that gives a loan to a marijuana company would undoubtedly know that they would be receiving marijuana revenues in the form of loan payments. Also, the banks would have the intent to promote or further the unlawful growing and selling of marijuana, because if the bank did not have that intention, then they would not have the expectation of receiving another loan payment.

If a bank cannot expand a marijuana company’s operations through an infusion of capital then no other company can do the same as well, right? Wrong. Real estate investment trusts, or REITs, have popped up in recent years to fill the need. REITs will purchase a marijuana company’s facility and pay them millions of dollars for the building so that the marijuana company may expand their operations, all in the effort to receive lucrative rental payments.

Innovative Industrial Properties is the prime example of how breaking the law can pay. Innovative is listed on the NYSE and has seen tremendous growth in its share price.[9] Innovative has purchased many buildings from marijuana growers and in turn leased them back to the growers.[10] Since banks are mostly unwilling to fund a marijuana company’s expansion, Innovative has stepped in and filled the void. Innovative is walking in the shoes of banks in the marijuana industry, but unlike banks, Innovative has decided that receiving marijuana proceeds is worth the risk of punishment.

Some people may think that Innovative is conducting their operations under the table or away from the eyes of regulators, but they would be mistaken. Representative Lundgren who once said, “it is time for us to tell the local trafficker and everyone else, (i)f you know that person is a trafficker and has this income derived from the offense, you better beware of dealing with that person,”[11] would be shocked at the federal government’s lack of action.

Innovative makes it unambiguously clear that they know and understand that they are breaking the law as expressed through their 2018 annual statement which they submit for all of the public to read:

“Cannabis is a Schedule I controlled substance under the CSA. Even in those jurisdictions in which the manufacture and use of medical cannabis has been legalized at the state level, the possession, use and cultivation all remain of federal law that are punishable by imprisonment and substantial fines. Moreover, individuals and entities may violate federal law if they intentionally aid and abet another in violating these federal controlled substance laws, or conspire with another to violate them. The U.S. Supreme Court has ruled in United States v. Oakland Cannabis Buyers’ Coop. and Gonzales v. Raich that it is the federal government that has the right to regulate and criminalize cannabis, even for medical purposes. We would likely be unable to execute our business plan if the federal government were to strictly enforce federal law regarding cannabis.”[12]

It is blatantly clear that Innovative only has life because it will do what banks will not do, which is break the law. It appears that the SEC will not take any action and protect American investors from aiding Innovative in their operations, nor will the Department of Justice prosecute Innovative for money laundering.

Is this the double standard that we desire in our economy? Should a company be rewarded for their blatant disregard of the law while other companies (banks) be punished if they take the same actions?

In the current situation, marijuana companies are forced to sell their buildings to a REIT if they need an infusion of capital, even though a bank would be more than willing to give a loan. In my opinion, America’s economy works best when everyone plays by the same rules creating a competitive marketplace. However, that will only happen when either marijuana becomes federally legal or prosecutors start enforcing the laws of the land.

If we as Americans do not want to criminalize marijuana anymore, then we should elect officials that will change the Scheduling of marijuana. However, as long as marijuana is a Schedule I drug, our government agencies with the responsibility to enforce the laws of this great country should enforce those laws. The current situation only benefits the people who are willing to break the law while the honest American businessman is on the outside looking in.

 

[1] 21 U.S.C. § 812 (2018).

[2] 18 U.S.C. § 1957(a) (2018).

[3] U.S. Securities and Exchange Commission, https://www.sec.gov/

[4] Innovative Indus. Properties Inc., Annual Report (Form 10-K) p.25, (March 29, 2018).

[5] 18 U.S.C. § 1957(a) (2018).

[6] Blair, 661 F.3d at 777 (dissenting) (quoting Rutgard, 116 F.3d 1270, 1291 (9th Cir. 1997)).

[7] 1 U.S. Money Laundering § 3.01 (2018).

[8] U.S. v. Stanford, 823 F.3d 814, 849 (5th Cir. 2016) (citing U.S. v. Brown, 553 F.3d 768, 782 (5th Cir. 2008)).

[9] Matt McCall, Why Marijuana REITs Are One of the Best Investments Today, Investorplace.com (March 19, 2019), https://investorplace.com/2019/03/why-marijuana-reits-are-one-of-the-best-investments-today/.

[10] Innovative Indus. Properties Inc., Our Business-Medical Cannabis Industry, http://Innovativeindustrialproperties.com/our-business/. (last visited May 25, 2019).

[11] Blair, 661 F.3d at 777 n.2 (Traxler dissenting) (citing H.R. Rep. No. 99-855 pt. 1, at 14 (1985)).

[12] Innovative Indus. Properties Inc., Annual Report (Form 10-K) p.25, (March 29, 2018).

 

Please Contact Author:

Steven Monahan
(714) 266-4811
Smonahan16@yahoo.com


Sean HockingSean HockingMay 26, 2019
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4min230

When the President signed the 2018 Farm Bill in December, which legalized industrial hemp for all intents and purposes, the federal government permanently removed industrial hemp from the Controlled Substances Act (CSA), resolving any lingering doubts.

However, this sweeping law has caused a great deal of confusion among government agencies who, as a general rule, struggle with change. Federal agencies, such as FDA and USDA, are undergoing reviews and rulemaking with respect to hemp and hemp-derived products. A flurry of state legislatures are enacting new or amended state laws concerning hemp and more are expected to do so in early 2020. Yet, there remain instances of isolated state and/or local enforcement activity towards lawful hemp. “We are in the midst of a very important, but steep, learning curve for both industry and regulators alike. We expect even greater clarity in the remainder of 2019 and in 2020, upon agencies and legislatures implementing more detailed regulations, providing even greater certainty for all,” noted Garrett Graff, Managing Attorney of Hoban Law Group.

In the meantime, there is a lot of confusion in the marketplace about whether hemp is legal, whether it is a controlled substance, whether it is the same as marijuana, and/or whether it could be sold and produced across the United States. This confusion has reached local and state law enforcement as well as the commercial marketplace. “This campaign is intended to set the record straight about hemp in the United States,” said Director of Business Development Halston Puchek.

It is necessary for people to understand that hemp is not a controlled substance and that it is no longer considered an illegal plant. In part, this education works to ensure hemp operators are availed of customary ancillary business services – banking, financing, payment processing, insurance, and web marketing. Consumer demand for hemp products has reached an all-time high and continues to grow. As such, it is critical that people understand that hemp is not marijuana. And that manufacturers, retailers, law enforcement, and consumer product outlets understand that hemp is a legal and viable commercial product – simply another agricultural commodity.

As a result, it is our intention, our burden, our duty to inform the American public that it is now legally part of the new globalized hemp economy.

Please visit HempIsLegal.org to learn more.

About Hoban Law Group

Hoban Law Group is the first U.S. based law firm to expand its cannabis industry services across the globe, with attorneys in the European Union, Latin America, and beyond. Since 2009 HLG has been providing professional services to the cannabis industry, which is comprised of the international hemp and regulated marijuana marketplace.


Sean HockingSean HockingMay 24, 2019
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4min470

Chris Nani writes. I recently completed the following case study of Los Angeles’ social equity program and Social equity programs are designed to help individuals and communities harmed by the War on Drugs by creating opportunities that otherwise would not be available.

Using ten objective metrics, my colleague and I scored Los Angeles’ social equity program  at 85/140 (60.71%).

ABSTRACT

Overall, Los Angeles has a below average social equity program, with the potential of improving as the program continues to roll out. Los Angeles’ social equity program inception and framework scored well by providing those impacted by the War on Drugs by providing broad opportunities in the cannabis industry. However, the implementation of the program has not met expectations.

Los Angeles’ program received high marks in some Accessibility Factors. The program’s expansive eligibility criteria permit the majority of individuals harmed by the War on Drugs access to the program. Los Angeles does little to support the expungement process, but the score benefits from California’s automatic expungement review system. The program does a good job reserving licenses for social equity applicants and providing assistance during the application process bolstering their overall score. However, there is anecdotal evidence of applicants being exploited for their equity from shareholders.

Under the Environment Factors, Los Angeles earned less than half the possible points. As the program currently exists, it does not promote the long-term success of applicants and does little to address existing market concerns affecting applicants in the short-term. Educational services offered by the program are minimal. Incubators provide little support and some have allegedly abused their position as Tier 3 applicants. Some government officials and city council members appear to be more interested in promoting their own agendas rather than the future of the social equity program. Los Angeles currently does not have a community reinvestment fund which severely limits the outreach and potential of the social equity program.

Here’s the report in its entirety

Los Angeles Social Equity Report

 

To Contact Chris please get in touch below

Christopher Nani
President, First Generation Law Student Association
J.D. Candidate Class of 2019
Moritz College of Law The Ohio State University
55 W 12th Ave, Columbus, OH 43210
nani.4@buckeyemail.osu.edu


Sean HockingSean HockingMay 24, 2019
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21min310

AUTHOR:  “Jordan Zoot.  “aBIZinaBOX Inc., CPA’s
PUBLISHER:  CANNABIS LAW REPORT

 

CA Lobby Activity Background – we enjoy turning over rocks…we find poisonous snakes, scorpions, all kinds of vermin and lobbyists.

Our current fascination is with lobbyists, lobbying firms, trade associations, and consultants that are contracted by businesses to seeking to exert influence over elections, activity by California Legislature, activities bystate-level agencies in California the regulate and tax the legal cannabis industry [BCC, CDPH-MCSB, CFDA-CalCannabis, and CDTFA.]. [We will address the municipal and city level in a separate article.]

The California Fair Political Practices Commission [“FPPC”] has voiced concerns over the unregistered and unreported lobby activity on numerous occasions. We intend to dig into the publicly available information for the activity that impacts the California cannabis industry and shares what we find. In addition, we have put together a repository of tools for anyone that would like to investigate for themselves which can be found here. We believe that we need to provide some background information before we dive into the documents

The Political Reform Act[1] requires individuals, businesses and other organizations that make or receive payments to influence state governmental decisions – such as advocating for or against legislative bills and state agency regulations – to register as lobbyists and submit periodic reports of their lobbying activity. The Act does not regulate individuals or other entities that lobby the federal government, or city, county or other local government agencies. Let’s begin with some basic definitions that will dive deeper into as we proceed.

“A lobbyist is an individual who is compensated to communicate directly with any state, legislative or agency official to influence legislative or administrative action on behalf of his or her employer or client. An individual who receives reimbursement only for reasonable travel expenses is not a lobbyist.

A lobbying firm is a business that is compensated to communicate directly with any state, legislative or agency official to influence legislative or administrative action on behalf of a client.

lobbyist employer is an individual, business or other organization that employs a lobbyist or hires a lobbying firm.

lobbying coalition is a group of 10 or more individuals, businesses or other organizations that pool their funds for the purpose of hiring a lobbyist or lobbying firm.

$5,000 filer is an individual or entity that does not make payments to a lobbyist or a lobbying firm, but still spends $5,000 or more in a calendar quarter to influence legislative or administrative action, such as placing an advertisement or sending a mailing urging others to contact their legislators concerning pending legislation.

placement agent is any person hired, engaged, or retained by, or serving for the benefit of or on behalf of, an external manager, or on behalf of another placement agent, who acts or has acted for compensation as a finder, solicitor, marketer, consultant, broker, or other intermediary in connection with the offer or sale of the securities, assets, or services of an external manager to a board or an investment vehicle, either directly or indirectly.  Individuals who serve as placement agents before an entity such as CalPERS or CalSTRS must register as lobbyists and file disclosure reports.”

Our recent experiences have caused us to focus on the provisions which govern lobbyists[2] and lobbying activities in California. California requires an individual to register as lobbyist if he or she receives (or is entitled to receive) $2,000 or more in a calendar month (other than reimbursement for reasonable travel expenses) to communicate directly with any covered official for the purpose of influencing legislative or administrative action, and to prepare for those direct communications.

In practice, a contract lobbyist might engage in a range of activities, only some of which involve direct communication with officials. Prior to the new rule, the Fair Political Practices Committee [“FPPC “] had little recourse when individuals claimed that less than $2,000 of a monthly retainer was devoted to direct communications with officials to influence legislation, The practice has been referred to as “shadow lobbying” has been talked about for a number of years and we’ve got to start figuring out a way to address it, with the rest attributable to non-lobbying activities, such as strategic planning, grassroots campaigns, or public relations.

When an individual receives or is entitled to receive more than $2,000 a month for services that include direct communications with a public official to influence government action, the FPPC will presume that the entire payment was for direct communications with covered officials and therefore requires registration – unless the individual can produce evidence to support a different allocation. Such evidence may include testimony, records, bills, and receipts establishing that less than $2,000 of any monthly payment is allocable to lobbying activity.

As a result of the new lobbying rule, it is important that consultants and others who engage in direct communications with California officials, but who do not meet the $2,000 per month threshold for lobbying registration, maintain records that substantiate their decision not to register. The FPPC has effectively proposed a reverse-record keeping requirement – mandating that individuals who do not fall under the provisions of the Act maintain records to prove they do not meet the registration/reporting thresholds under the Act,” the California Political Attorneys Association wrote in a letter to the agency.

Anyone communicating with public officials should be keeping records anyway to determine whether they trigger lobbying registration requirements. The presumption is eliminated if they provide evidence showing the payment in question was not made for lobbying activities. The provisions are among a series of actions the commission has taken recently to increase lobbying transparency.

Once a contract lobbyist registers, his/her firm is also required to register, and the lobbyist, firm, and employer are required to file quarterly disclosure reports. Lobbyists, lobbying firms, and employers are also subject to strict gift rules and campaign contribution restrictions.

The FPPC has produced a number of materials and created several channels for individuals and business entities that might have need to seek advice on the application of these laws and regulations. They have created:

  • Publications – Numerous pamphlets, publications and guides that provide explanations and best practices.
  • Informal Advice – Informal advice can provide guidance if you have questions such as where to file campaign statements, filing schedules, or your basic responsibilities under the Act. Unlike formal advice, informal advice does not provide immunity from prosecutions by the FPPC and does notqualify as legal advice[3].
  • Formal Advice – If the request for advice contains sufficient information and the question is within the FPPC’s jurisdiction, the FPPC must provide formal written advice within 21 working days. The response will be provided in the form of an “advice letter.”

A formal advice letter can provide the requestor immunity from enforcement actions by the FPPC. It also provides evidence of good faith conduct in any relevant civil or criminal proceeding brought by another party, so long as the facts presented in the request for advice are accurate and the requestor follows the guidance provided in the FPPC’s advice letter. Formal advice does not provide immunity to any person other than the requestor.

The FPPC saves and posts all advice letters which you can click here to search. The letters may be searched and used for guidance only – they will not provide immunity to any person other than the original requestor[4].

  • Commission Opinions – Another form of formal advice is a Commission Opinion. Any individual or entity (or their authorized representative) may request a formal opinion from the Commission concerning their duties under the Act. The Commission’s Executive Director must accept or reject a request for a formal opinion within 14 days.

A request will normally be rejected if the question can be answered under existing statutes or regulations, or does not otherwise present a significant policy issue. In addition, since the process requires formal action by the full Commission, it normally takes several months after the question is submitted and accepted before a formal opinion may be issued. Due to the topic restrictions and the processing time, Commission Opinions are infrequent.

A Commission Opinion provides the requestor with immunity from civil or criminal prosecution under the Act so long as the facts presented by the requestor are accurate and the requestor acts within the confines of the opinion. More details about the formal opinion process can be found in sections 18320 through 18326 of Title 2 of the California Code of Regulations.

Application to the California Cannabis Industry [Next Installment]

  • Grower’s Associations
  • Government Relations Consultants
  • Attorneys, Certified Public Accountants [“CPA’s] and Other Licensed Professionals

[1] The Fair Political Practices Commission website provides links to a number of resources that are very helpful in understanding the process.

 

[2] § 18239. Definition of Lobbyist.

(1) If an individual engages in direct communication, other than administrative testimony, with a qualifying official for the purpose of influencing legislative or administrative action on behalf of any person other than his or her employer, apply Section 82039 and subdivision (b) of this regulation to determine if the individual is a lobbyist.

 

(2) If an individual engages in direct communication, other than administrative testimony, with a qualifying official for the purpose of influencing legislative or administrative action on behalf of his or her employer only, apply Section 82039 and subdivision (c) of this regulation to determine if the individual is a lobbyist.

 

(3) Except as provided in Section 86300, if an individual is a “placement agent” as defined in Section 82047.3, the individual is a lobbyist for purposes of the Act, regardless of the definitions in subdivisions (b) through (d), below.

 

An individual does not become a placement agent under Section 82047.3 solely as a result of communicating with a state public retirement system representative provided that the individual accompanies a registered placement agent who represents that individual or that individual’s organization, is present only to provide additional substantive information, and would not otherwise qualify as a placement agent under Section 82047.3

(b) A lobbyist is an individual who receives or becomes entitled to receive $2,000 or more in compensation in a calendar month for engaging in direct communication, other than administrative testimony, with one or more qualifying officials for the purpose of influencing legislative or administrative action.

(c) A lobbyist is an individual who spends one-third or more of the time, in a calendar month, for which the individual receives compensation from his or her employer, engaging in direct communication, other than administrative testimony, with one or more qualifying officials for the purpose of influencing legislative or administrative action.

(d) Definitions.

  • “Administrative testimony” means either of the following:
  • Influencing or attempting to influence administrative action by acting as counsel in, appearing as a witness in, or providing written submissions, including answers to inquiries, that become part of the record of any regulatory or administrative agency proceeding:

 

(i)That is conducted as an open public hearing for which public notice is given

(ii) Of which a record is created in a manner that makes possible the creation of a transcript; and

(iii) Where full public access is provided to the record or transcript and to all written material that is submitted as part of the record.

 

(B) Any communication made at a public hearing, public workshop, public forum, or included in the official record of any proceeding, as defined in Section 82002(b) or (c), before the California Public Utilities Commission.

 

(2) “Compensation” means any economic consideration, other than reimbursement for reasonable travel expenses (i.e., expenses for transportation plus a reasonable sum for food and lodging). Under subdivision (b), if it is established in an administrative or civil action that an individual received or is entitled to receive compensation of $2,000 or more in a calendar month 3 from a person for services that include direct communication, other than administrative testimony, with a qualifying official for the purpose of influencing legislative or administrative action, there is a rebuttable presumption affecting the burden of producing evidence that all compensation from that person to the individual during that calendar month is for direct communication. This presumption can be rebutted by evidence that may include testimony, records, bills, and receipts establishing the allocation of the individual’s compensation for all other goods and services provided.

 

(3) “Direct communication” means appearing as a witness before, talking to (either by telephone or in person), corresponding with, or answering inquiries from, any qualifying official, either personally or through an agent who acts under the individual’s direct supervision, control, or direction.

 

(A) Direct communication does not include any request for or provision of purely technical data or analysis to an administrative agency by a person who does not otherwise engage in direct communication for the purpose of influencing legislative or administrative action.

 

(B) For the purpose of determining whether an individual qualifies as a lobbyist pursuant to subdivision (c), an individual does not engage in “direct communication” when the individual is an employee of a lobbyist employer, meets or speaks with a qualifying official in the company of a registered lobbyist retained by the individual’s lobbyist employer, and participates as a subject matter expert regarding a legislative or administrative action at issue. For purposes of this exception, an employee includes a member of a bona fide trade association or membership organization.

 

(4) “Influencing legislative or administrative action” means communicating directly or taking any other action for the principal purpose of supporting, promoting, influencing, modifying, opposing, delaying, or advancing any legislative or administrative action.

 

(5) “Qualifying official” means:

  • Any elected state official;
  • Any legislative official;
  • Any appointed, elected, or statutory member or director of any state agency;

 

(D) Any staff member of any state agency who makes direct recommendations to the persons listed in subdivision (5)(C) of this subdivision, or who has decision-making authority concerning such recommendations.

[3] The information that must be provided when seeking “Informal Advice” includes:

  • State your name, telephone number, and position.
  • List the public official, agency, candidate or committee that is related to your question.
  • If asking a question on behalf of another, state the capacity in which you are authorized to represent the official, agency, committee or other organization (e.g., city attorney, candidate’s attorney, committee officer, campaign consultant).
  • Articulate your question with as much specificity as possible.
  • If you have a question about Form 700 disclosure, include your disclosure category.

 

[4] The request must:

  • Be in writing,
  • Provide specific information about the requestor, and
  • Contain sufficient information for the FPPC’s staff attorneys to conduct a complete legal analysis.
  • If a request does not meet these criteria, the FPPC may provide an informal written reply with general guidance. This type of advice does not provide the requestor with immunity from enforcement actions.

 


Sean HockingSean HockingMay 22, 2019
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31min540
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PUBLISHER:  CANNABIS LAW REPORT
May 17, 2019|INTERNAL REVENUE CODE, 401(K), CANNABIS, LEGAL CANNABIS PRODUCTION, INDUSTRIAL HEMP, IRS, DEPARTMENT OF LABOR, HEMP, DOL, ERISA, CONTROLLED GROUP, TAX, JEWELL LIM ESPOSITO, 280E, CBD, MARIJUANA
The 2018 Farm Bill gives Hemp/CBD companies access to 401(k) plans and related tax deductions
The 2018 Farm Bill gives Hemp/CBD companies access to 401(k) plans and related tax deductions

 

May 19, 2019

Cannabis company participation in 401(k) plans is a complicated and confusing matter.

The matter is attracting increasing (and maybe both equally panicked and excited) attention as a result of cannabis-related statutory changes with the December 2018 Farm Bill that President Trump signed into law.  These changes have to do with definitions that now treat low-THC cannabis products such as hemp and CBD as industrial hemp, rather than as controlled substances under the Controlled Substance Act.

There are approximately 300,000 employees in the legal cannabis industry.  The Internal Revenue Code expressly permits cannabis employees to participate in a retirement plan just like other, non-cannabis employees. (For some background, see last month’s blog post on the IRS’s acknowledgment of permissible cost of goods sold adjustments tied to pension and profit sharing plan contributions in “Cannabis and 401(k) Participation”).

The participation of cannabis employees in 401(k) plans, however, has not been without its issues, particularly when they engage in activities that constitute criminal trafficking federally, despite being legal at a state level.

Fear and Loathing on Wall Street: The Trafficking Issue

The real obstacle to implementing 401(k) plans for otherwise legal marijuana producers are the industry retirement plan providers who are nervous and jittery about dealing with “traffickers.”

In fact, they’re more than nervous.  They have dug in their heels, refusing to do business with cannabis companies technically engaged in trafficking under federal law.  Here below are some unequivocal truths:

  1.   Cannabis companies are legally able to adopt 401(k) plans.  Again, see the ERISA/Tax support in a related post.
  2.   The United States Attorney General is on record with the stated intent to refrain from pursuing trafficking prosecutions against otherwise legally-operating cannabis companies.

It stands to reason that — for protection and insulation from fallout liability —  a retirement plan provider might demand representations and warranties to confirm that the cannabis companies with which it wants to do business are legally operating.

The major retirement industry players are not persuaded, these above truths notwithstanding.  At present, many retirement plan service providers — think:  brokerages, wire houses, third party administrators (TPAs), recordkeepers, custodians, corporate trustees, CPAs, and even attorneys — will not deal with these cannabis companies when, in fact, the Internal Revenue Code provides authority for their 401(k) participation.

The reluctance here, however understandable, is unfortunate for the Cannabis and Hemp/CBD Industry.

Clearing the Smoke: ERISA, Tax, and Controlled Group Rules

With the Farm Bill now as law, the 401(k) game has changed, and retirement plan service providers should pivot and be ready (and willing) to respond to the Cannabis and Hemp/CBD Industry.

The Farm Bill provides a critical component of the solution to the 401(k) plan access problem for cannabis companies who are deemed traffickers.  Essentially, the bill alters the definition of marijuana to exclude the cannabis plant’s buds, leaves, and germinating seeds (and products extracted from them, such as CBD) as long as their THC content falls below a threshold of 0.3 percent. These products are now termed “hemp” or “industrial hemp” (and I will later refer to a company cultivating and selling industrial hemp as a “HempCo” company; in contrast, I will refer to a marijuana producer (a trafficker) as a “CannaCo”).

Hemp is Off the List 

Hemp, as newly defined, has come off Schedule I of the Controlled Substance Act, making it an ordinary agricultural commodity. Section 280E of the Internal Revenue Code no longer impacts hemp production. While producers will be regulated pursuant to the Farm Bill, HempCos are no longer committing the federal crime of trafficking, and there is no bar to claiming normal business deductions or obtaining 401(k) plan services from industry providers.

With HempCos and their employees allowed to be in the 401(k) space, there is a legal mechanism through which CannaCos and their employees may participate in 401(k) plans by way of HempCos. That mechanism is the long-established Internal Revenue Code concept of the controlled group, an entity comprised of two or more companies or businesses under common control and connected by ownership (either a parent-subsidiary relationship or a brother-sister relationship).

Even in the Cannabis and Hemp/CBD industry, the key characteristic of the controlled group is that the employers in the group are deemed to be a single employer for purposes of ERISA, tax, and benefit plan qualification, including many non-discrimination tests.  Such tests seek to determine whether, among other things, highly compensated employees are favored or benefited at the expense of other employees.  In a controlled group, the tests extend to all employees of the deemed single employer.

A hemp company and a cannabis company together can be deemed a "single employer" under ERISA and the Tax Code
A hemp company and a cannabis company together can be deemed a “single employer” under ERISA and the Tax Code

“Single Employer” Concept Allows Cannabis and Hemp to be in Same 401(k) Plan

The coverage test (under Section 410(b) of the Internal Revenue Code) is critical to the “single employer” concept.

A hypothetical  (though these similar company structures exist in the Cannabis/Hemp/CBD Industry):

1. There is a Canada parent company “CanadaParent” who has two wholly-owned subsidiaries in the United States.

2. Those two companies are HempCo and CannaCo.

3. Under tax rules, CanadaParent, HempCo, and CannaCo are part of the same controlled group.

4. Under tax rules, HempCo and CannaCo are brother-sister.

Note:  Similar organizational structures will be of concern too with the likely eventuality (?) of a non-cannabis company (who has a 401(k) plan) owning a significant percentage of or having enough common ownership in the corporate stock of a cannabis company (who is not yet participating in a 401(k) plan, likely in violation of discrimination rules).  That is a blog post for another day.


Advisers to Cannabis Companies Cannot Afford to be Wrong in Their Advice

Let’s assume — as the law permits — that HempCo sponsors its own HempCo 401(k) Plan for employees in the United States.  Let’s further assume that the HempCo 401(k) Plan fails the required annual coverage test.

Beware: this is a typical failure, and one over which cannabis consultants (financial advisers, CPAs, TPAs, health insurance sellers,ERISA professionals, attorneys, etc.) should not be remiss.  With the very automatic operation of applicable tax rules, a head-in-the-sand, this-is-too-taboo approach will underserve or mis-guide the very Cannabis and Hemp/CBD companies that yearn for guidance that only experts in the retirement industry can provide.

The Tax Code Provides the Authority for Cannabis and Hemp/CBD to Share in a 401(k) Plan

The Internal Revenue Code itself provides the solution on how to cure the HempCo 401(k) Plan’s (and the management/fiduciary obligation to correct the) failure of this particular test.

Existing tax law effectively forces CannaCo to have its United States employees participate in the HempCo 401(k) Plan.  That is because both CannaCo and HempCo are a deemed “single employer.” If CannaCo’s employees are not permitted to participate (and/or do not coordinate their own non-discriminatory 401(k) plan), then HempCo violates ERISA and various Internal Revenue Code provisions.

Tax Rules Require the IRS to Allow Cannabis Employees to Participate in a 401(k) Plan

It seems incongruous that the IRS can use the Tax Code to impose income tax on illegally earned (trafficking) income, but not use the 401(k) rules within that same Tax Code to permit retirement plan savings for Cannabis/Hemp/CBD companies.

Moreover, the IRS itself would be in a position to require that HempCo force the participation of CannaCo under tax rules to ensure non-discrimination.  That not-so-absurd result then finds the Hempco/CannaCo single employer having to contribute money on behalf of CannaCo employees as a required correction for those who had been impermissibly excluded.

Further, with a failed coverage test that remains uncorrected, the IRS could deny otherwise legitimate tax benefits to HempCo.  That is, the IRS could (1) disallow deductions on the corporate return of HempCo; (2) require income tax on the amounts employees contribute; (3) disallow the tax-deferred growth on earnings inside the accounts of HempCo 401(k) employee participants; (4) prohibit the ability of HempCo 401(k) participants to roll over their money in a tax-free distribution; etc.

It’s very important to note that the penalties result not due to trafficking, but rather due to the operation of the Internal Revenue Code.

Department of Labor Rules Require the Government to Ensure Cannabis Employees are Protected and can Participate in a Proper 401(k) Plan

The Department of Labor, as well, would have ample authority to contend that the failure to extend the HempCo 401(k) plan to the CannaCo employees was a fiduciary breach and improper administration of the 401(k) plan document provisions (and governing law).  As the DOL notes on its website:  “[A fiduciary] must follow the terms of plan documents to the extent that the plan terms are consistent with ERISA.”  Such a fiduciary breach could lead to personal liability.

Even if these HempCos and CannaCos want to provide competitive benefits for their 300,000 employees, they both will find it hard to comply with ERISA, Tax, and Controlled Group Rules if the retirement plan industry service providers remain reluctant to serve an industry that is in desperate need of assistance and clarity.

The Future of Hemp and Cannabis 401(k) Participation

In removing hemp from the ambit of the Controlled Substance Act, the Farm Bill makes it possible for hemp producers in the industry to take advantage of 401(k) plans and various federal tax credits and accelerated tax deductions without having to worry about the impact of section 280E of the Internal Revenue Code. The industry will continue to grow with such incentivization and so will the employee population at HempCos across the United States.  Meanwhile, their CannaCo counterpart companies will also grow.

It’s fair and just (and not to mention, the law under the Internal Revenue Code and ERISA) that all employees within controlled groups in the Cannabis and Hemp/CBD Industry access 401(k) plans, the tensions between federal and state laws notwithstanding.

* * *

Learn more about what the lawyers in our Cannabis, Hemp, & CBD Practice Group are doing with companies in the industry by reviewing some of our most recent transactions.

 

Author Bio

Jewell Lim Esposito offers decades of in-the-trench practical experience in the Employee Benefits/Tax legal world. She further sub-specializes in Title I (Department of Labor fiduciary issues) and Title II (IRS tax qualification issues) under the Employee Retirement Income Security Act (ERISA). Ms. Esposito’s strength is understanding the business and demographics of her clients, who are headquartered across the nation. That is, with her practice being federal law, the location of the US client needing ERISA/Tax guidance on tax compliance and fiduciary duties is immaterial.

She advises in “plain English,” even when the issues are complex and is able to size up exposure for C-suite executives to help them select an optimal Tax and ERISA strategy. The range of Ms. Esposito’s practice extends to work in the areas of government pension plans, Executive Compensation, the Affordable Care Act, COBRA, health and welfare fringe/prevailing wage under the Service Contract Act and Davis-Bacon, and ERISA prohibited transaction exemptions.

In the area of cannabis/hemp/CBD, Ms. Esposito counsels associations, member companies, and growers/distributors/dispensaries/license holders on how Section 280E of the Internal Revenue Code affects their payroll, 401(k), health benefits, and insurance deductions. She currently chairs and coordinates her firm’s efforts in showcasing all the legal services already provided to the Cannabis, Hemp, and & CBD industry and in education related to marijuana use to the general workplace.

Ms. Esposito is the editor of and contributing author to the AllThingsERISA blog.


Sean HockingSean HockingMay 21, 2019
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PUBLISHER:  CANNABIS LAW REPORT
SEVERAL TENNESSEE LAW ENFORCEMENT OFFICIALS FACE CIVIL RIGHTS CLAIMS IN FEDERAL COURT OVER THEIR MISGUIDED “OPERATION CANDY CRUSH” CBD STING.

I was visiting Nashville, Tennessee last February with my family when I received news of the now infamous “Operation Candy Crush” CBD raid just south of Nashville in Rutherford County, TN. In a chaotic press report staged by local law enforcement immediately after padlocking 23 stores and arresting over 30 individuals, one of my client’s products were prominently displayed as part of the “evidence” of illegal substances that were being sold.

Since I was nearby I called the prosecutor’s office and offered to meet and discuss the matter. In a contentious phone call with Assistant District Attorney John Zimmerman, whom I later discovered was one of the architects of the raid, I attempted to explain the legal distinction between lawful CBD (derived from industrial hemp) and unlawful CBD (derived from marijuana). I explained that, at least with respect to my client’s products, I could vouch that they were definitely derived from industrial hemp and thus lawful. Zimmerman was unmoved.

In fact, we had a circular conversation. I asked him how he knew that the substance at issue (cannabidiol) was illegal. He said that it was based on the lab reports he received from the Tennessee Bureau of Investigation (TBI). I responded by stating that the lab report can only show what the substance is, not the source from which it is derived. Since the source of CBD determines its legal status, the lab report cannot state whether it is lawful or not. He responded by stating, “That’s what the lab told me and I follow the lab report.” I reiterated that the lab cannot determine whether the CBD is lawful or not. As the attorney, it is his job to determine the substance’s legal status. He responded as before. Zimmerman also bemoaned the fact that the stores selling CBD were run by “foreigners”.

As it turns out, these two claims by Zimmerman- that the TBI’s analytical lab report was what he relied on to determine the CBD’s legal status and the fact that CBD was being sold locally by “foreigners”- have become key issues in a civil rights lawsuit filed against him and other law enforcement officials by the store owners who were arrested and had their businesses shuttered.

As I wrote here and here, Operation Candy Crush was eventually crushed. All charged were dropped, the store owners’ criminal records were expunged, their stores were ordered reopened, and their seized merchandise was returned. Angry and frustrated, many of them filed a federal lawsuit in the US District Court for the Middle District of Tennessee alleging violations of their civil rights.

The defendants, including Zimmerman, filed a motion to dismiss the case. In a robust Memorandum of Law denying the law enforcement motions to dismiss (see below), Judge Aleta Trauger made it clear that the store owners could proceed with their claims against Zimmerman and the other law enforcement officials that they sued. Zimmerman and the other defendants have appealed Judge Trauger’s order.

In the Memorandum, Judge Trauger referenced the “foreigner” comment that Zimmerman made to me. The store owners allege that other stores in the area selling CBD products that were operated by non-immigrants were not raided and their owners not arrested. And, in a press release cited by Judge Trauger, the TBI sharply disputed Zimmerman’s argument to me that its lab report told him that the CBD being sold was illegal marijuana:

“In this matter, it is inaccurate for the local stakeholders in these cases to assert they made decisions in this case unaware of the limits of our forensic work. . . .

Our laboratory analysis can only determine relevant compounds, not the particular origin of those substances. So, in this matter, we are not able to determine whether the CBD in these cases originated from industrial hemp, illicit marijuana, or synthetic production. In fact, such a determination is beyond the capability of contemporary drug identification. Still, the identified CBD, as a derivative of marijuana, may be considered a Schedule VI substance under the Tennessee Code, which is why our agency reported it that way to the local law enforcement agency and District Attorney General….

Again, to be clear: TBI lab reports objectively determine the compound present, but in no way are statements of compound origin, circumstances of possession, or guilt or innocence.”(emphasis added)

Although things are much clearer now under the 2018 Farm Bill than they were under the 2014 Farm Bill, there are still too many instances of law enforcement arresting people and/or seizing their hemp products based on a misunderstanding (or knowing pretense) that they are illegal “marijuana” substances. (See, for instance, this and this.) Hopefully, Judge Trauger’s memorandum will provide sufficient notice that these types of arrests and seizures must stop.

Here is the memorandum. See At Source Post https://cannabusiness.law/civil-rights-case-to-proceed-against-tennessee-officials-in-cbd-raid/

Kudos and many thanks to Nashville attorney Christopher Smith for his excellent work on this case for the store owners and for updating me on its progress. You can read local news coverage of the story here.

May 20, 2019

Rod Kight is an attorney who represents lawful cannabis businesses. He speaks at cannabis conferences across the country, drafts and presents cannabis legislation to foreign governments, is regularly quoted on cannabis matters in the media, and maintains the Kight on Cannabis legal blog, where he discusses legal issues affecting the cannabis industry. You can contact him here.

Source: https://cannabusiness.law/civil-rights-case-to-proceed-against-tennessee-officials-in-cbd-raid/


Sean HockingSean HockingMay 17, 2019
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16min4860

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AUTHOR: By Steve Schain, Senior Attorney at Hoban Law Group
PUBLISHER:  CANNABIS LAW REPORT

Powered by a $6.1 billion annual budget and prosecutorial alliance with the Federal Trade Commission (“FTC”), last month the U.S. Food and Drug Administration (“FDA”) simultaneously charged three cannabidiol (“CBD”) companies with violating the Federal Food, Drug, and Cosmetic Act, 21 U.S.C. 301, et seq. (“FDA Act”) and Federal Trade Commission Act, 15 U.S.C. §§ 41-58 (“FTC Act”) by: (1) placing “‘unapproved’ and ‘misbranded’ human drugs and adulterants” and “unapproved and unsafe animal drugs” into interstate commerce; and (2) making false or unsubstantiated health claims.

A wildly popular nutritional supplement and food additive, oil-based hemp derived products like CBD racked up $1.1 billion in 2018 domestic sales and, after the Agriculture Improvement Act of 2018 (“Farm Bill”) removed them from the Controlled Substance Act, 21 U.S.C. §§ 801, Et. Seq (1970) and Drug Enforcement Administration’s (“DEA”) clutches, 2019 hemp production and sales exploded.

With the FDA “locked and loaded”, and billions of annual sales and “deal flow capital” hanging in the balance, the cannabis and hemp industries are questioning whether their products can be manufactured, sold and marketed without vending “adulterated” or “misbranded” food, drugs and cosmetics, or making “false or unsubstantiated” health claims.

Industrial Hemp and CBD

A fast-growing, sustainable, and inexpensively produced plant, “Industrial Hemp” is a variety of Cannabis sativa L. containing less than 0.3% plant chemical delta-9 tetrahydrocannabinol (“THC”). Agricultural Act of 2014, 7 U.S. Code §5940. Unlike Marijuana, which is cultivated to yield psychoactive THC, Industrial Hemp yields more than 25,000 oil and fibrous products embraced by farmers as a hedge against lower-value soy, cotton, and alfalfa crops.

Seventy-eight percent (78%) of all hemp grown in 2018 was for CBD, an oil-based hemp-derived product offering broad health and wellness uses that achieved $641 million in domestic sales according to the Hemp Industry Journal. The U.S.’s largest CBD firms achieved record Q3 2018 revenues including $17.7 million by Charlotte’s Web (maker of products sold in 3,000 U.S. stores and up 57% from prior year); $16.8 million by “hemp and CBD-based products portfolio companies owner” Medical Marijuana Inc. (up 116% over Q3 2017); and $13.6 million by manufacturer CV Sciences (whose Plus CBD oil is sold in 2,000 natural health food stores).

“Animal Feed” is an example of a fibrous hemp-derived product, which, before being sold or distributed, must be deemed “Generally Recognized as Safe” (“GRAS”) by the FDA and/or listed as a “recognized feed ingredient” by the American Association of Feed Control Officials.

Hemp production also skyrocketed in 2018 with 112,000 acres licensed for cultivation, 3,546 cultivation licenses issued, 78,176 total acres cultivated, and 40 universities conducting research.

Farm Bill’s Impact and Rise of the FDA

Beyond removing plant cannabis sativa L. containing no more than 0.3% THC on a dry-weight basis from the Controlled Substances Act and DEA’s purview, the Farm Bill:

  • guarantees that hemp and hemp derived products can be imported, exported and                                     transported from state to state like any other crop;
  • tasks United States Department of Agriculture (“USDA”) with promulgating hemp regulations “as expeditiously as practicable”; and
  • tasks states with submitting hemp-growing regulations plans to the USDA which it may approve or reject within 60 days.

The Farm Bill also removes major hurdles impeding hemp cultivators’ ability to run successful, profitable businesses including accessing insurance and banking, finding adequate harvesting equipment and processors, and moving hemp biomass or finished products between states.

Budgeted at $6.1 billion (a $643.1 million increase from 2019 and over double the DEA’s $2.862 billion budget), the FDA is responsible for protecting and promoting public health through controlling and supervising food safety, tobacco products, dietary supplements, prescription and over-the-counter pharmaceutical drugs, cosmetics, animal foods and feed, and veterinary products.

Pursuant to the FDA Act, the FDA oversees a wide range of food, drugs and cosmetics and, following the hemp plants’ cultivation, has enormous sway over how hemp derived products can be prepared, manufactured and sold. Other than Epidiolex (an FDA-approved severe epilepsy treatment), the FDA deems most CBD products to be “adulterated” or “misbranded” and, following the Farm Bill’s passage, announced plans to review CBD use in food, drugs and cosmetics while maintaining that CBD cannot be used in a food or dietary supplement if listed as “an active ingredient in a drug product” and that the FDA regulates hemp products making medical treatment claim of therapeutic values for humans or animals (including dietary supplements) and is the regulatory body determining what new food type may enter the U.S..

Although it is anticipated that the FDA will create “conditions” for CBD products (including dosage limits and material information labeling requirements) following which, pursuant to the Dietary Supplement Health and Education Act of 1994, it will regulate them as dietary supplements (and opening the CBD market to mass-market retailers), no timeline exists nor does any pressure on the FDA to act.

At odds with the FDA’s position, Colorado passed a law declaring that “food and cosmetics are not adulterated or misbranded by virtue of containing industrial hemp,” including CBD, which the FDA has not challenged. Conversely, states including California and New York maintain that CBD cannot be added to food until the FDA updates its CBD posture (although CBD manufacturers and sellers in those states report only limited rules enforcement).

FDA’s “March Assault”

The game forever changed on March 28, 2019, when, teamed with the FTC, the FDA issued warning letters to three CBD product sellers alleging false, unfounded, unsubstantiated, and egregious health claims about their products’ ability to limit, treat or cure without sufficient evidence or FDA approval and threatening product seizures, injunctions and sales proceeds reimbursement.

The targets – – Advanced Spine and Pain, LLC d/b/a Relievus (a South Jersey and Pennsylvania pain clinic chain), Nutra Pure LLC (a Washington CBDPure brand soft caps and oils manufacturer and seller), and PotNetwork Holdings (a Florida Liquid Gold Gummies manufacturer and seller) – – advertised a range of CBD containing supplements boasting the ability to effectively treat diseases (including cancer, Alzheimer’s and fibromyalgia) and “neuropsychiatric disorders” in both humans and animals.

The warning letter apprises Relievus that its website’s claims establish that Relievus products are drugs under §201(g) of the FDA Act because they are “intended for use in the cure, mitigation, treatment, or prevention of disease” although the products are:

* not generally recognized as safe and effective for these uses and, therefore, rendered “new drugs” under §201(p) of the FDA Act that are barred from being introduced into interstate commerce without prior FDA approval (which is solely provided on the basis of scientific data and information demonstrating that drug is safe and effective);

* misbranded under §502(f)(1) of the FDA Act for failing to bear adequate “intended use(s) directions” defined as “directions under which a layperson can use a drug safely and for the {intended} purposes” or as “prescription drugs” which “can only be used safely at the direction, and under the supervision, of a licensed practitioner”; and

* intended for the treatment of one or more diseases that are not amenable to self-diagnosis or treatment without a licensed practitioner’s supervision” and for which it is “impossible to write adequate directions for a layperson to use your products safely for their intended purposes”.

Relievus’ warning letter also apprises that it is unlawful under the FTC Act “to advertise that a product can prevent, treat, or cure human disease” unless possessing competent and reliable scientific evidence (including well-controlled human clinical studies, substantiating that claims are true at the time of making) and of the FTC’s “concern” that Relievus’ “efficacy claims” are not substantiated by competent and reliable scientific evidence.

The warning letters instruct Relievus, Nutra Pure and PotNetwork to notify the FDA and FTC within 15 days of specific actions taken to address these concerns and threaten legal action including product seizures, injunctions and reimbursement of all sales proceeds.

Impact of FDA’s March Assault

The FDA’s tripartite assault, coupled with its landmark FTC prosecutorial alliance, sent shock waves through both the hemp and legalized Marijuana industries.

First, despite prohibiting food, drugs and cosmetics products deemed to be “adulterated” or “misbranded” or making “false or unsubstantiated” health claims, the FDA provides zero guidance on how to comply either with current FDA regulations or those to be promulgated in compliance with Farm Bill.

Since they are mostly sold over the internet and enter the “stream of interstate commerce”, virtually all CBD product making “health and wellness” claims or deemed a food or drug are subject to the FDA’s wrath.   However, “health and wellness applications” and “food and beverage infusion” are what makes CBD and other oil-based hemp derived products attractive to consumers. A multi-billion dollar industry must immediately decide to either cease operations or carefully proceed while assessing “legal versus bottom line” risks mindful that no pressures exist for the FDA to define precisely what is allowable.

Second, although most suspected that bigger players would be targeted first, the FDA bagged more modest prey like Relievus, Nutra Pure and PotNetwork. Although the FDA may have viewed their purported violations as more egregious or subject to more consumer complaints, the FDA’s industry grasp and monitoring scope are wider than anticipated suggesting that no CBD company is capable of flying under the radar.

Third, what does this portend for cannabis? Because it can’t be sold between the states and is presently incapable of entering the stream of interstate commerce, the marijuana industry has been spared the FDA’s scrutiny. However, at some point cannabis will come off Schedule 1 of the Controlled Substance Act, be sold between states and, thus, be regulated by the FDA for medical marijuana’s health and wellness claims and any THC item deemed a food, drug or cosmetic. Stated another way, the Marijuana industry will soon undergo a new and even more pervasive line of regulation.

Fourth, how will FDA’s increasingly aggressive stance affect “deal flow capital”? Although the Farm Bill removed the DEA from regulating hemp, the FDA is larger and better-funded regulator capable of casting a much longer shadow, under no pressure to define its regulatory parameters, and already working in conjunction with the FTC to prosecute perceived wrongdoing. Even the most risk tolerant investor will need to re-assess whether the FDA will derail or delay the enterprise’s profitability.

Steve Schain

Steve Schain is a Senior Attorney to Hoban Law Group and admitted to practice in Pennsylvania and New Jersey. Steve represents entities, governments and individuals in choosing a structure, preparing and submitting license application, regulation, compliance and litigation, and drafting legislation. A nationally recognized consumer finance litigation, banking law and cannabis law expert, Steve is a The Legal Intelligencer and Cannabis Business Executive columnist, frequent Pennsylvania Bar Institute and National Bar Institute author and lecturer and serves as a court appointed judge pro tempore and arbitrator.

 

____________________________

 

This article has been prepared for informational and general guidance purposes only; it does not constitute legal or professional advice. You should not act upon the information contained herein without obtaining specific professional advice. No representation or warranty (express or implied) is made to the accuracy or completeness of the information contained in this publication. Hoban Law Group, its members, employees, and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based thereupon.

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Sean HockingSean HockingMay 17, 2019
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With the growing number of states legalizing marijuana for medical and recreational use, many brands have emerged for cannabis and related goods and services. The change in legal status is not just happening on a state level, but federally as well. A major change occurred in December with passage of a federal law legalizing hemp and a wide range of products made from hemp. With expanding federal legalization, what lies ahead is a war of brands. It has already started. Many companies are already filing federal and state trademark registrations. This article provides insight into the best practices for protecting trademark rights during this period of transition in the law.

In the US, there are three ways a trademark can be protected. There are rights established under the common law in every state to protect a trademark adopted and used to identify the source of a product. The foundation of the common law is that the use must be lawful use. Courts protect common law trademark rights. Building on the common law, each state has a trademark registration system providing state registration rights which can help protect marks within that state. Lastly, federal trademark registration rights are nationwide rights obtainable based on lawful commercial use in interstate commerce.

The filing date of a federally registered trademark is the nationwide priority date, which means that once the mark is registered, the entire country is on constructive notice of nationwide rights as of this date. Securing the earliest possible filing date for lawful goods is advantageous to avoid an application from being rejected based on likelihood of confusion with another mark, and is a legal obstacle to third parties seeking to register a cannabis-related mark after the filing date.

In view of the large demand for registration of trademarks for cannabis-related goods and services, on May 2, 2019, the United States Patent and Trademark Office (“USPTO”) issued an Examination Guide setting forth the standards by which it will be examining applications directed to such marks. It is clear now that federal trademark registration is obtainable for cannabis-related goods or services derived from hemp, i.e., if they contain no more than 0.3% THC. The USPTO is now applying this standard to pending and new applications, making it clear federal registration is obtainable for marks if the goods/services relate to cannabis having no more than 0.3% THC. For marks used for cannabis products above 0.3% THC, state trademark registration rights should be pursued in states where cannabis is legal. Another option is to file federal trademark applications for secondary products and services, e.g., clothing. The goal now in the cannabis field is to establish federal and state trademark registration rights.

 

Overview of the Guidelines

Initially, the guidelines make clear that use of a mark in commerce must be lawful under federal law to be the basis for federal Trademark registration. Unlike the laws of many states, cannabis, or marijuana, defined as “all parts of the plant Cannabis sativa L., whether growing or not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt, derivative, mixture, or preparation of such plant, its seeds or resin” remains illegal federally under the Controlled Substances Act (CSA). This was even true for cannabidiol (CBD), an increasingly available chemical constituent of cannabis encompassed within the CSA’s definition of marijuana. Therefore, the USPTO traditionally refused registration for applications identifying goods encompassing any part of cannabis, including CBDs.

However, the Farm Bill of December 20, 2018 removed “hemp”, defined as any part of the plant Cannabis sativa L. having not more than 0.3% THC (the hallucinogenic component of cannabis) from the CSA’s definition of marijuana. So, cannabis plants and derivatives such as CBDs containing no more than 0.3% THC are no longer controlled substances under the CSA.

Accordingly, the Farm Bill potentially removes the CSA as a ground for refusal of registration for trademark applications directed to CBDs. If an applicant’s goods are derived from “hemp”, the guidelines make clear that the USPTO may grant federal trademark registrations if the identification of goods expressly state that they contain less than 0.3% THC.

 

Pending Trademark Applications filed before December 20, 2018

Given the uncertainty related to the Farm Bill’s impact on federal trademark protection, there is currently a significant backlog of pending trademark applications for cannabis-related goods. The USPTO guidelines will help resolve this backlog.

Specifically, for pending applications filed before December 20, 2018, the USPTO will permit an applicant to either: (1) amend the filing date, filing basis, and scope of goods of the application; or (2) abandon the application and re-file. Accordingly, in order to proceed to registration, an applicant must amend the filing date of the application to December 20, 2018 to comply with the Farm Bill. Furthermore, if an application was filed with a “use in commerce” basis, it will be necessary to amend the filing basis to “intent-to-use.” The applicant will also be required to narrow the identification of goods to specify that the CBD or cannabis products contain less than 0.3% THC. The Examining Attorney will then conduct a new search of the USPTO records for conflicting marks based on the later application filing date.

Given the significant number of pending marks, and the potential flood of new trademark applications, it is our strong recommendation for applicants to amend the filing date, filing basis, and scope of goods (if applicable), rather than abandoning the pending mark and re-filing. The constructive first use date of December 20, 2018 could be very important in establishing priority over third parties.

 

Pending Trademark Applications filed on or after December 20, 2018

 For pending applications filed on or after December 20, 2018, or newly filed applications, the USPTO Examining Attorney will simply require applicants to narrow the scope of goods to expressly state the goods are derived from hemp and contain less than 0.3% THC.

 

Not all Goods for CBD or Hemp-Derived Products are Lawful following 2018 Farm Bill

The USPTO guidelines do not permit federal registration of all hemp-derived goods. Specifically, any CBD-containing or hemp-derived food or dietary supplement products may still be considered illegal if they undergo clinical investigation without FDA approval. Therefore, registration of federal trademarks for foods, beverages, dietary supplements, or pet treats containing CBD will still be refused by the USPTO as unlawful, even if derived from hemp.

 

Best Practices Moving Forward

Obtaining federal trademark registration rights provides a registrant with nationwide rights. This is a big deal, especially in such a burgeoning industry. Hemp-related pending applications should be handled as described. Applications for marks for related goods/services and for cannabis with more than 0.3% THC should be filed in states where lawful, and federally to the extent there is lawful commercial use of the mark for goods/ services. A search of federal, state and common law uses is recommended for marks not yet adopted and in use. This is one industry where an effective trademark registration strategy can make a major difference in the value of a brand.

 

Joshua B. Goldberg

Joshua B. Goldberg is the Partner-in-Charge of the Chemical, Pharmaceutical and Biotechnology Department of Nath, Goldberg & Meyer and works extensively with the firm’s Trademark department. Mr. Goldberg’s practice involves portfolio management and analysis, including the preparation, prosecution, and acquisition of U.S. and foreign patents across a wide range of technology areas. Mr. Goldberg has had a recent focus on patent and trademark issues related to cannabis products and has helped navigate clients through the options available for protecting the same.

NATH, GOLDBERG & MEYER

112 S. West  Street, Alexandria, VA 22314

Tel: 703-548-6284 Fax: 703-683-8396

jgoldberg@nathlaw.com



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