While AK Futures LLC v. Boyd St. Distro, LLC (9th Cir. May 19, 2022) may seem like a golden opportunity for companies in the intoxicating hemp market, it is unlikely to be much of a windfall beyond the near future. Those relying on this decision to provide legitimacy to their business should proceed with extreme caution based on previous responses to loopholes and governmental eagerness to regulate intoxicants such as delta-8. To believe that these products will be held to a lesser standard than state-regulated (and soon enough, federally-regulated) marijuana products would be short-sighted and naïve.
As mentioned in the first post of this series, it is unlikely that AK Futures LLC v. Boyd St. Distro, LLC (9th Cir. May 19, 2022) will be viewed as the conclusive victory that some in the delta-8 THC arena are hoping for. In this post, we will explore what might be accomplished by (or more accurately, what backlash might come from) this and other similar decisions.
The debate surrounding delta-8 THC and the proper regulation of intoxicating hemp products has accelerated greatly over the last several months, fueled by multiple court decisions, federal policy actions, and new state laws. Not least of which is last May’s decision in AK Futures LLC v. Boyd St. Distro, LLC, No. 21-56133, 2022 WL 1574222 (9th Cir. May 19, 2022). This case provides a great deal of clarity for many seeking to enforce trademark protections for hemp products. It is a major win for intoxicating hemp maximalists, and in hindsight, it feels like the start of many that came this summer. However, it would be unwise to see these developments as a final green light to produce and sell delta-8, delta-10, hemp-derived delta-9, and other intoxicating hemp products across the country.
A split First Circuit panel affirmed yesterday that the US Constitution’s dormant commerce clause applies to the federally illegal medical marijuana industry and that a Maine law mandating local ownership of cannabis businesses was struck down.
What does this mean?
Since Colorado became the first state to regulate medical cannabis, there has always been a desire from local advocates and state regulators to limit individuals permitted to own a marijuana license to those that are residents of such state. These atypical rules have caused numerous litigations contesting the validity of such rules, created a quagmire of work arounds by non-residents in an attempt to own businesses in such states (resulting in regulatory actions and litigation), and have hampered industry participants from participating in normal capital markets.
While most states have either gotten rid of or have stopped enforcing such rules (Missouri is an example), this ruling is still a solid legal win for the marijuana industry in affirming that such laws are unconstitutional.
On May 18, 2022, in a 153-2 vote, the Massachusetts House of Representatives voted to amend the state’s tax code to provide income tax relief for Massachusetts cannabis businesses. The Massachusetts House and Senate will go through a conference committee process before both chambers vote on a final bill, which would then be sent to the Governor’s desk for signature. If passed in its current form, Massachusetts would decouple its tax code from Section 280E of the Internal Revenue Code, which denies most deductions to cannabis businesses.
Internal Revenue Code Section 280E provides that no deduction or credit shall be allowed for any trade or business consisting of trafficking in controlled substances prohibited by Federal law or the law of any State in which such trade or business is conducted. Because cannabis remains listed as a Schedule I controlled substance under the federal Controlled Substances Act, cannabis businesses are generally not permitted to deduct business expenses on their federal income tax returns. Currently, business deductions and credits are not permitted at the state level either, because Massachusetts uses federal taxable income as the starting point for calculating Massachusetts tax liability. The result of Internal Revenue Code Section 280E is that cannabis businesses incur a significantly higher effective tax rate than businesses in most other sectors.
The pending bill would allow Massachusetts cannabis businesses to deduct business expenses for purposes of determining Massachusetts taxable income, potentially resulting in significant tax savings. If passed, Massachusetts would become one of a growing number of states to decouple from Internal Revenue Code Section 280E, including California, Colorado, Hawaii, Michigan, New York and Oregon.
Husch Blackwell’s tax and cannabis attorneys will continue to monitor the Massachusetts bill, as well as developments in other states. If you have questions about the effect of 280E or decoupling on your business, please reach out to Steve Levine, Bob Romashko and Kevin Erb.
Husch Blackwell’s Matt Kamps and Andrea Shoffstall were recently published by Marijuana Ventures in an article where they review U.S. cannabis-centric patents and patent applications trends during the pandemic, which were granted and published at record numbers in 2021. However, early returns in 2022 suggest the numbers may take a dip for the first time in years.
In addition, Kamps and Shoffstall examine cannabis-centric litigation at the federal level. Read more.
A group of Illinois cannabis companies face an antitrust lawsuit alleging that they maintained illegal interlocking directorates. An interlocking directorate is where a person from one company serves as an officer or director at a competing company in violation of Section 8 of the Clayton Act. On April 18, 2022, a plaintiff named True Social Equity in Cannabis, an association of consumers, workers, and others in Illinois, filed a complaint in the Northern District of Illinois alleging that Akerna Corp., Green Thumb Industries Inc., ILDISP LLC, Verano Holdings Corp., and Surterra Holdings Inc. maintained illegal interlocking directorates (the “Illinois Complaint”).
In addition to the Illinois Complaint, the U.S. Department of Justice Antitrust Division (DOJ) announced in an April 2022 speech by Assistant Attorney General Jonathan Kanter that DOJ is “ramping up” efforts to enforce alleged violations of Section 8. Private litigation and government challenges to resolve alleged interlocks are rare, but DOJ and the Federal Trade Commission occasionally announce settlements based on investigations. In June 2021, DOJ announced that Endeavor Group executives were resigning from the Live Nation Board of Directors as part of a settlement of an alleged illegal interlocking directorate.
Section 8 of the Clayton Act prohibits a person from simultaneously “serv[ing] as a director or officer in any two corporations (other than banks, banking associations, and trust companies) that are [competitors].” 15 U.S.C. § 19. The prohibition only applies to corporations whose competitive sales are above a certain dollar threshold, and there are other exemptions that may apply.
Although the Illinois Complaint also contains vague and unsupported allegations of collusion, price-fixing (via information sharing), and monopolization of the legal Illinois marijuana market, no other antitrust violations besides the Section 8 claim are alleged. In addition, rather than requesting equitable relief to remedy the alleged interlock, the Illinois Complaint inexplicably seeks to prohibit the defendants from marketing, selling, licensing, distributing, and growing marijuana and a divestiture of all assets.
The Illinois Complaint and DOJ’s recent announcement should factor into a company’s selection of its board of directors and officers. Because the analysis of whether two companies compete and meet the requirements of Section 8 (or qualify for Section 8’s exemptions) is a complex and fact-specific inquiry, we recommend that you consult with antitrust counsel if you have any questions in this regard.
The 2019 Cannabis Regulation and Tax Act provided the authority for the Illinois Department of Agriculture (the “IDOA”) and the Illinois Department of Financing and Professional Regulation (the “IDFPR”) to issue additional adult-use craft grower, infuser, transporter, and dispensary licenses. Each Department developed an application process for each license type to be graded by a third-party contractor. KPMG was awarded the contract to score the license applications. The award of several categories of licenses has been inhibited by a number of lawsuits. We have provided a brief summary of the status of each license category and the corresponding litigation below.
Husch Blackwell has launched its Psychedelics and Emerging Therapies team, an interdisciplinary, cross-office group of lawyers capable of addressing the challenges faced by innovators that seek to research, develop and commercialize novel therapies based on psychedelic drugs. Many of these drugs are regulated by a patchwork of state and federal laws regulating Schedule I controlled substances. Continue Reading Husch Blackwell Launches Psychedelics and Emerging Therapies Practice Group
The Husch Blackwell Cannabis team has released episode two of their podcast, The Grass is Greener: Cannabis Law News. In this episode, cannabis attorneys Marshall Custer and Alyssa Samuel dive into ESG (Environmental, Social, Governance) and what it means for the cannabis industry, specifically the regulated marijuana industry. They explore what it means to take a holistic approach to ESG and how today’s cultural climate is setting the stage for increased demand for responsible companies by consumers. Cannabis companies have always been required to be good corporate citizens, but what does the future of ESG hold for the industry?