On July 18, 2024, the Englewood and Denver area offices of the Occupational Safety and Health Administration (OSHA) published a Local Emphasis Program (LEP) targeted at identifying and reducing workplace hazards associated with cannabis processing, growing, cultivation, and product manufacturing.
In April, I wrote about the Docklight case in Washington State. That case involved a qui tam action pursuant to the False Claims Act in which Docklight, a cannabis ancillary company, settled with the Department of Justice for having wrongfully received and been forgiven a Payment Protection Program (PPP) loan. While there was little reporting on or analysis of the case by the cannabis industry, it was clear that the federal government was looking at cannabis and cannabis ancillary businesses and, essentially, PPP fraud.
Now, there is growing concern among cannabis PPP loan recipients of potential audits related to the Small Business Administration (SBA) Office of Inspector General’s estimate that up to one-third of PPP loans were fraudulently secured (and forgiven). Notably, as part of the PPP, the SBA issued specific guidance in 2019 that both cannabis and cannabis-related companies were not eligible for PPP loans (though it’s likely that hundreds if not thousands of these companies applied for and received these funds anyway). And while “plant touching” businesses likely have no leg to stand on if they’re audited by the SBA, cannabis ancillary businesses potentially have a shot at surviving these audits.
As the 2024 Minnesota Legislative Session came to a chaotic close on May 20, numerous changes to Minnesota Statutes Chapter 342 were sent to the Governor’s desk to build on the already existing cannabis regulatory structure. On May 24, Governor Tim Walz signed the amendments to Chapter 342, which address social equity provisions, preapproval process for social equity applicants, the larger application and licensing process, and consumer safety.
While the cannabis industry is closely following the recently published notice of proposed rulemaking from the Department of Justice (“DOJ”) and the Drug Enforcement Administration (“DEA”), which will move cannabis from a Schedule 1 controlled substance to a Schedule 3 controlled substance under the Controlled Substance Act (“CSA”), a very important federal cannabis litigation matter is making its way through federal court. That case is Canna Provisions, Inc., Gyasi Sellers, Wisacre Farm, Inc., and Verano Holdings Corp.v. Merrick Garland, case no. 23-cv-30113. Filed in October of last year, the Canna Provisions case is more important than ever in the context of rescheduling (in my opinion) and this post serves as an update on what’s happening in court.
On May 16, the Drug Enforcement Administration (“DEA“) published its 92-page notice of proposed rulemaking (“NPRM“) to move marijuana from schedule 1 on the Controlled Substances Act (“CSA”) to schedule 3 (ironically, the proposed rule itself only takes up a couple of paragraphs on the last two pages of the NPRM). On the same day, the DEA released an opinion from the Office of Legal Counsel (within the Department of Justice (“DOJ”), which prepares legal opinions of the U.S. Attorney General “and provides its own written opinions and other advice in response to requests from the Counsel to the President, the various agencies of the Executive Branch, and other components of the Department of Justice”) in response to questions from the U.S. Attorney General’s office about schedule 3 marijuana (the “Opinion”). While the NPRM represents the proposed DEA rule that moves marijuana from schedule 1 to schedule 3, the Opinion is essentially the OLC’s roadmap for fending off legal and administrative challenges to this historic move.
The biggest legal shift in the cannabis industry in decades just occurred on the heels of the Drug Enforcement Administration’s (DEA) proposal today for cannabis rescheduling. Specifically, as many anticipated, the DEA will exercise its authority to reschedule cannabis from a schedule I controlled substance to a schedule III controlled substance on the Controlled Substances Act (CSA). This cannabis rescheduling comes in part from the recommendation of the Department of Health and Human Services to reschedule cannabis from a I to a III on the CSA. The DEA’s proposal must now go before the White House Office of Management and Budget (OMB) for review and approval. The OMB’s primary functions relate to budget formulation and execution, legislative coordination and clearance, executive orders and proclamations, information and regulatory affairs, and mission-support areas and management initiatives. OMB will very likely review this DEA proposal for budget impact, regulatory impact, and legislative coordination.
Due to federal illegality, the cannabis industry has long been plagued by federal agencies taking a variety of different enforcement approaches to cannabis businesses. From the U.S. Patent and Trademark Office to the National Labor Relations Board to the Bureau of Reclamation, the cannabis industry has not really received consistent treatment across the board. All that to say that a new threat has entered the chat–cannabis qui tam actions. Not many people know what a “qui tam” action is. And with good reason as it’s fairly antiquated and an obscure means through which the federal government (potentially) seeks financial recovery from individuals and businesses that defraud it. In addition to the “gotchas” of IRC 280E and banking, cannabis qui tam actions are now on the table.
Hemp Production and Prices Increase
Earlier this year, hemp was included in the USDA’s Census of Agriculture. When hemp was first legalized in 2018, there was a boom in production under the fervor of new opportunities, spearheaded by the demand for CBD products. This resulted in over production and over supply. The CBD market was over-saturated within a growing season and hemp biomass prices plummeted, along with hemp production. More recently, however, hemp production has leveled out and is even increasing as reported by the USDA on April 17, 2024. As an example, prices for hemp outdoor-grown flower are up 35% and hemp clone and transplant prices are up 61%.
Dealing with creditors is never a fun experience. However, some creditors are more severe than others, especially in the cannabis industry. One of those is the California Department of Tax and Fee Administration (CDTFA), which administers California’s sales and use, fuel, tobacco, alcohol, and cannabis taxes, as well as a variety of other taxes and fees that fund specific state programs. It’s no secret that CDTFA cannabis taxes are crippling the California cannabis industry. For example, I recently recorded a Cannabis Law Now podcast episode with Anthony Almaz, general counsel for Catalyst. Catalyst is challenging various emergency rules promulgated and adopted by CDTFA that would further expand taxable items in California’s cannabis industry. This post though is about the CDTFA cannabis creditor relationship and the myths and truths around it.
If you’re in house counsel at any company, you’re likely looking to cut down on the day to day, high volume minutia posed by a variety of commercial agreements and transactions that come your way time and again. Doubly so in the cannabis industry given the fact that you have bigger fish to fry with labor and employment issues, day to day operational issues, fundraising and finding more capital, and dealing with the precarious legal environment created by the current federal law conflict (even with possible rescheduling on the horizon). To alleviate some of that in house stress, general counsels should be considering instituting cannabis corporate playbooks (or alternative language libraries) to make the company’s contracting process more turnkey, predictable, and efficient while cutting down on risk.