How Cannabis Businesses Succeed

We work with many large cannabis businesses and many small ones too. It’s fun to talk up the bigger fish, but I have a soft spot for the little guys. I really enjoy small business at the end of the day. I like seeing financial statements of disciplined, privately held companies doing maybe $5m to $20m in annual sales; where the owners are getting good margins in a low-ego, no-drama environment; where the workforce is relatively stable; and where they only call me when it’s time for something sensible. Those are great little businesses.

These well run, profitable companies are also somewhat rare in the cannabis industry. Due to intense competition, heavy taxation and other business challenges, I don’t see as many of them as I’d like. Instead, the headlines are gobbled up by larger outfits that may or may not be run very well.

So, how are some of these cannabis businesses thriving? Here are five hallmarks of a successful, privately held cannabis company.

They control expenses

Controlling costs is important in any line of business, but it’s especially important for cannabis businesses where nothing beyond direct costs of goods sold (COGS) can be deducted from taxable income. We all know IRC § 280E is a bear.

If a cannabis business is spending money on advertising, for example, those ads or sponsorships must have ROI. If you show me a P&L with high advertising costs, high employee travel costs, significant meal expenses, outsized dues and subscriptions, etc., I won’t expect to see much margin there.

Expenses in cannabis are hard because everyone wants to charge these companies a premium. Also, when a small business owner is handling so much cash, it seems to make spending easier. The best companies have an owner in a “controller” chair of sorts, and the first c-suite hire may be someone in financial operations.

They don’t raise money

I’ve seen too many cannabis businesses undone by bad money raises. In an ideal scenario, founders would bootstrap everything and not raise money at all.

The pitfalls of raising money range from securities laws issues to onerous business terms. Over the past five or six years, we’ve probably handled more cannabis litigation around investment than any other topic.

Hard money loans are common in cannabis. These loans typically feature high interest rates and aggressive repayment schedules. Lenders often disregard even basic underwriting concepts. Exacerbating this dynamic, some states don’t have usury interest prohibitions for most written loans. You’d be astonished at some of the terms we have seen in Oregon and elsewhere.

Another common misstep is for a small cannabis businesses to onboard a large number of private investors in a single raise. Maybe the business raises $1 million from a few dozen individuals. When loan repayment becomes difficult, or when minority owners do not receive distributions or dividends, the business owners spend half of every day fending off emails.

If a cannabis business absolutely has to raise money, in my view it should: 1) take as little as possible, 2) based on sound forecasting, 3) from investors who understand and believe in the company, and 4) paper the transaction carefully. And maybe still don’t raise money.

They expand carefully

It’s easy and tempting to expand in cannabis. Failed businesses abound; much is for sale. Customer preferences constantly evolve within and across categories. Money is still relatively cheap and plentiful. Etc. etc. There are many reasons to expand.

The big cannabis pubcos are notorious for reckless expansion, but we see it frequently with smaller shops too. Conversely, the best operators find where they excel and leverage it relentlessly. They think really, really hard before taking on a new facility, or even pushing out another SKU. When they do expand, they often stick the landing. And that’s because they thought it through.

They treat people well

Good cannabis businesses have higher employee retention than their competitors. They pay vendors timely. They are respectful of competitors. Their customers love them. They are an open book with regulators. Etc.

We have a couple of clients that are great at this stuff, and it’s impressive. All of that goodwill accrues to the business and the brand, and ultimately, to the bottom line. It can also come in handy if the business gets into a tight spot.

They have good advisers

I’ve seen too many promising or profitable ventures undone by bad advice– and not just on the front end. We’re dealing a botched sale now: the lawyers had limited experience in cannabis and seemingly in business overall. The end result is a lot of waste and a smaller payday for the business owners.

As to CPAs, we’ve seen accountants take positions that clearly cut against the revenue code and companion cannabis tax cases, resulting in painful audits. We’ve also seen plenty of regrettable tax advice on entity set-up. In extreme scenarios, a partnership owner will be saddled with taxable income exceeding profits.

We’ve written plenty about suspect business structuring and what to watch out for with lawyers and other advisers in the cannabis space. Find a good one, listen to them, adhere to the guidelines above and other commonsense practices. With any luck you’ll be one of the small cannabis businesses that turns a handsome profit without a lot of fanfare.

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Cannabis Litigation: Perpetuating Testimony

Civil litigation in cannabis, like any other industry, usually proceeds in a predicable order. First, a complaint is filed and served. This kicks off the lawsuit and compels a defendant to file an Answer to avoid a default judgment. Second, the parties conduct written discovery: i.e. gathering relevant documents, identifying potential witnesses, and serving interrogatories and perhaps requests for admission. Third, the parties take depositions of their opponents and non-parties who have relevant information. And fourth, motions for summary judgment and trial ensue.

In limited circumstances, however, a party may take a deposition when no lawsuit is pending. These depositions are known as “perpetuation depositions.” This blog posts covers the basics of that unusual procedure.

Under Federal Rule of Civil Procedure 27, depositions to perpetuate testimony may be used to take a deposition when no lawsuit is pending. (Most states also have a rule allowing perpetuation depositions, this post discusses the federal rule.) The rule is meant to apply to situations where, for some reason, testimony might be “lost” to a potential litigant unless the testimony is taken immediately without waiting for a lawsuit to commence.

The application of the rule, however, does not permit a litigant to conduct early discovery to “fish” for some ground to bring a lawsuit. Courts uniformly agree that such a purpose is improper and an abuse of the rule.

The federal rule requires a person seeking to take a deposition when no lawsuit is pending to file a “verified” petition. Such a petition is more like a sworn affidavit, made under penalty of perjury, than an ordinary complaint, which need not be “verified.”

The petitioner must establish several criteria that convince the court that a deposition is justified absent a pending lawsuit. These criteria include establishing that a lawsuit is expected to be filed but cannot presently be filed, the subject matter of the expected action, the facts the petitioner desires to establish, the names of adverse parties, and the substance of the testimony the petitioner expects to elicit.

A critical issue for the petitioner is demonstrating a danger of losing evidence by delay. It is not enough that some time may pass before a lawsuit is filed and the potential witnesses memory may not be as clear. Although a witnesses illness may be a factor, that alone is not enough, according to the Wright & Miller treatise on federal practice. The petitioner must also show why a lawsuit could not be filed now, and thereby proceed along the ordinary course described above.

If the court is satisfied with the petition, it will grant an order that requires the witness to testify at the perpetuation deposition – even though no lawsuit has yet been filed.

Depositions to perpetuate testimony ought to be considered at the outset of every cannabis business dispute. In most circumstances they are unnecessary, but in a few instances, a deposition before a lawsuit is pending may be required to collect critical evidence for trial.

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Classifying California Cannabis Workers

California is one of the trickiest states in the U.S. for employers, and especially for cannabis employers. The numerous, byzantine requirements here simply don’t exist in many other states. Classifying California cannabis workers is one of the biggest challenges for local industry.

Cannabis companies often think they can get around employment law requirements by calling workers “contractors” who are not entitled to the same rights and benefits. This has always been a tough sell here, and has gotten materially harder since California’s licensed cannabis regime came into full force.

In this series, we’ll explore many of the pitfalls cannabis businesses face when classifying California cannabis workers. In this first post, I want to look at the difference between employees and contractors and identify the basics for telling them apart.

Are California cannabis workers employees or independent contractors?

Over the years, our California cannabis lawyers have seen a ton of cannabis businesses assume that if they call a California cannabis worker an independent contractor, the worker magically is one. Whether this is a good idea (it’s not) is beside the point – classifying someone as an employee is very expensive! For example, according to the Department of Industrial Relations:

California’s wage and hour laws (e.g., minimum wage, overtime, meal periods and rest breaks, etc.), workplace safety laws, and retaliation laws protect employees, but not independent contractors. Additionally, employees can go to state agencies such as the Labor Commissioner’s Office to seek enforcement of these laws, whereas independent contractors must resolve their disputes or enforce their rights under their contracts through other means.

Obviously then, the difference between being an employee and contractor is significant for California cannabis businesses, many of which are startups. But unfortunately, California has long presumed that persons providing services for another are employees unless designated as an independent contractor. This designation involves more than simply calling an agreement an “independent contractor agreement” instead of an “employment agreement.”

Simply classifying someone as a contractor to get around California’s long-standing presumption just won’t work. That’s because the two legal terms have distinct legal meanings.

  • An independent contractor is “any person who renders service for a specified recompense for a specified result, under the control of his principal as to the result of his work only and not as to the means by which such result is accomplished.”
  • An employee is a “person in the service of an employer under any appointment or contract of hire or apprenticeship, express or implied, oral or written, whether lawfully or unlawfully employed . . . .”

The big difference is whether the business has control not only over what the person does, but how they do it. Sometimes this can be a very close call and ultimately will be up to a judge, jury, or arbitrator to decide if things go south. But businesses that roll the dice can be risking some pretty substantial penalties.

Misclassification claims by California cannabis workers can be extreme

Some of the most common types of employment claims in California are based on and arise from employee misclassification. In these cases, workers with independent contractor agreements claim they were misclassified and are really employees. They seek compensation for all of the things they would have gotten (see above, for example) if they were properly classified. There can be penalties for each violation of between $5,000 and $25,000.

These kinds of claims are notoriously difficult for employers to shake and are very costly to defend, especially for uninsured businesses (and many cannabis businesses are still uninsured or underinsured, as our cannabis insurance lawyers will tell you). Moreover, misclassification cases can lead to high damages, penalties and reputational problems within the industry. What cannabis company wants to be on the cover page of every publication as the outfit that misclassified its cannabis workers?

Moreover, many cannabis startups rely on contractor labor that tends to be cheaper that hiring an employee workforce. These companies will be in for a rude awakening when lawsuits for wrongful misclassification emerge. And to make matters worse, the state attorney general can get involved. That’s why California cannabis businesses should seriously consider whether engaging a “contractor” is really worth the potential headache.

California goes back to the drawing board for classifying California workers

Prior to a few years ago, when courts were asked to evaluate whether a relationship was an employment or contractor relationship, they used the so-called Borello Test (I’ll write about that one later). That test involved analyzing a dozen or so factors to determine whether the contractor truly had the freedom to control how they performed their work. The Borello analysis was difficult and depended on hyper-specific facts that clever plaintiff lawyers would try to spin into liability.

In 2018, the California Supreme Court decided a case called Dynamex Operations West, Inc. v. Superior Court. In that case, the court created what’s now known as the so-called ABC Test to determine whether someone is an employee. That test was codified into state law via Assembly Bill 5 (AB-5) in 2019. The ABC Test allows a court to determine that a person is a contractor if that:

(A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

(B) The person performs work that is outside the usual course of the hiring entity’s business.

(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

AB-5 puts the onus on the hiring entity to prove that all three of those elements are met. If all three elements are not met, then the hiring entity can face liability for misclassification, among other things. While the ABC Test is much shorter on paper than the Borello Test, it is very clear that many, if not most, of the contractor relationships in California should be classified as employment relationships.

Dynamex and AB-5 faced understandable backlash both from businesses and individuals. Individuals were concerned that they would be unable to enter into normal contracting relationships with businesses who would fear misclassification cases and simply decide not to engage outside contractors. These fears led to subsequent legislation and numerous exceptions to AB-5.

I will look at some of these exceptions in later posts and how they can affect California cannabis contractor agreements. In the meantime, stay tuned to the Canna Law Blog for more cannabis employment law updates.

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Why the DEA Hemp Rule Challenge Really Matters

The  Drug Enforcement Administration (DEA) issued an interim final rule on hemp (“DEA hemp rule” or “rule”) on August 20, 2020. As per its executive summary, the rule “merely conforms DEA’s regulations to the statutory amendments to the [Controlled Substances Act (CSA)] that have already taken effect, and it does not add additional requirements to the regulations.” Yet, as we warned in 2020, the rule creates perils for the hemp derivative industry.

The dangers presented by the DEA hemp rule stem from the 2018 Farm Bill’s failure to explicitly cover hemp processing, which we discussed in Federal Policy on Hemp CBD Is Taking Shape: What Needs to Be Addressed? As many of our readers will know, the 2018 Farm Bill defines hemp as cannabis with a THC concentration of not more than 0.3 percent on a dry weight basis. The 2018 Farm Bill also defines hemp to include all derivatives, extracts, and cannabinoids of hemp.

It is undeniable that the hemp plant and hemp derivatives, extracts, and cannabinoids are no longer controlled substances. It would then logically follow that it is legal to process the hemp plant into legal derivatives, extracts, and cannabinoids. What’s the issue then?

In order to separate cannabinoids from hemp, hemp plant material must go through an extraction process. This extraction process almost certainly results in a temporary increase in delta-9 THC. As cannabinoids are isolated it is nearly impossible to control the levels of delta-9 THC from increasing through that process. This means that under the DEA’s interim final rule, the processor would be in possession of a Schedule I substance, even if the processor dilutes the end product down to the requisite level of 0.3% THC or destroys any byproduct with levels above the legal threshold.

The 2018 Farm Bill specifically mentions hemp derivatives, extracts, and cannabinoids. It follows that the legislative intent was not to make processing hemp into extracts, derivatives, and cannabinoids a violation of the CSA. The DEA either unintentionally or deliberately failed to account for this nuance in the hemp rule, perhaps, as we suggested back in 2020, as part of an effort by the DEA to maintain its authority over cannabis. Regardless of the intent behind the rule, it creates real criminal risks for anyone who processes hemp.

Challenging the DEA hemp rule

A lawsuit brought by the Hemp Industries Association (HIA) challenged the legality of the DEA hemp rule on several grounds. The matter is currently on appeal in the D.C. Circuit. According to HIA, the interim final rule is “arbitrary and capricious or otherwise contrary to law for two reasons.”

The first allegation made by the plaintiffs in that lawsuit concerns the treaty obligations of the United States. One of the things the interim final rule does is remove “approved cannabidiol drugs” from the CSA’s Schedule V. Yet a couple of years earlier the DEA noted that such action “would make it impossible for the United States to comply with its obligations under the Single Convention [on Narcotic Drugs].” As the interim final rule did not square the circle with regard to compliance with the Single Convention, the plaintiffs argued that it is “arbitrary or capricious or otherwise contrary to law.”

Second, HIA alleges that, through the interim final rule, the DEA sought to assert regulatory powers over natural tetrahydrocannabinols and hemp extracts, which the agency had previously recognized it lacks. It did this, according to HIA, “without pointing to any language in the 2018 Farm Bill supporting either claim and without offering any basis for believing that Congress intended the 2018 Farm Bill to overrule” two Ninth Circuit decisions that held that DEA could not place natural tetrahydrocannabinols in Schedule I without following certain procedures established by federal law.

The lawsuit also challenged the DEA hemp rule on account of certain procedural deficiencies in its promulgation. According to the Administrative Procedures Act (APA), government agencies must give notice of proposed rule making not less than 30 days before its effective date. This was not the case with the DEA hemp rule, which was effective immediately. While the APA allows agencies to dispense with the 30-day requirement upon showing of good cause, HIA argues that DEA did not make such a showing.

In addition, the APA requires that interested persons be given an opportunity to participate in the rulemaking. Again, HIA alleges that the DEA did not show good cause for denying the public an opportunity to comment prior to the effective date of the rule. The DEA itself conceded that it neglected to “afford interested parties a reasonable opportunity to participate in the rulemaking process.” Perhaps, if that opportunity had been afforded, hemp industry participants could have pointed to the potential risks faced by extractors, and, perhaps, the DEA could have clarified the rule accordingly.

Finally, HIA argued that the DEA hemp rule was issued in violation of the Federal Vacancies Reform Act (FVRA). Specifically, HIA alleged that Timothy J. Shea, who as Acting DEA Administrator promulgated the rule, was not eligible to serve in that capacity under the FVRA. HIA also alleged that, even if Shea had at one point been eligible to serve as Acting Administrator, his tenure exceeded the legal limit established for a federal office to be held in an acting capacity. The saga at hand is a perfect example of why we have rules pertaining to officials in an acting capacity. A confirmation hearing allows citizens, through their elected representatives, to question would-be office holders regarding their views on particular subjects, and ultimately vote against their confirmation if they find those views problematic.

The case it still making its way through the appellate process. If the D.C. Circuit sides with HIA and strikes down the DEA hemp rule, this will be good news from industry participants, who face the perils we discussed back in 2020. Yet there is a lot more at stake in this case, with implications not just for the hemp industry, but for the entire citizenry.

Not just a hemp thing, but a matter of good governance

It should go without saying that arbitrary and capricious government action is undesirable, and contrary to good governance. However, far too many Americans assume that arbitrariness and capriciousness are rare within their government. Unfortunately, this is not the case. Take it from a former federal bureaucrat: This goes far beyond the DEA hemp rule.

When a government agency says “A” one day and “B” another, without explaining its change in reasoning, citizens must hold that agency to account. This in part is a practical exercise– a functioning society requires clear guidelines. It is also civic duty, as oversight by citizens is a necessary component of the democratic system. But there is an even more compelling reason for citizens to keep their government agencies honest. When agencies behave arbitrarily and capriciously, people lose faith in them. That leads us down a slippery path.

Similarly, when government agencies do not follow the laws, citizens must demand that they comply. It may be the case that certain laws make no sense: Perhaps the country would be better off if the FVRA and APA (or for that matter the CSA) were amended or even entirely derogated. But that is not for the DEA or any government agency to decide. Again, such disregard for the law by government actors can have pernicious consequences. If those tasked with enforcing laws do not follow laws themselves, then why should average Joes?

At a more fundamental level, the FVRA, APA, CSA and 2018 Farm Bill are the product of legislative processes carried out by the elected representatives of the people. When unelected officials disregard those laws, they are acting without the consent of the governed. Okay, you might say, I read the Declaration of Independence as well, but who really cares if an acting DEA administrator is there for 210 or 211 days? Well, one day it is the arcane provisions of the FVRA, but the next it could be something far more serious. The DEA hemp rule, and the challenge to it, are important to everyone– not just the hemp industry.

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Legal Mistakes for Cannabis Businesses

I recently spoke with a lawyer who was newer to representing cannabis clients. The lawyer asked me to describe the biggest legal mistakes I see for cannabis businesses. Over the years, our cannabis lawyers have seen cannabis businesses make just about every mistake in the book. Today though, I want to talk about what I think are some of the most common legal mistakes for cannabis businesses from a corporate governance and operational standpoint.

Legal mistake #1 – hiring a cannabis lawyer and ignoring their advice!

A lot of folks in the cannabis industry don’t quite understand the role of a cannabis lawyer. I wrote about the nature of that role in dealmaking here for what it’s worth. But these types of folks seem to think a lawyer’s job is to rubber stamp whatever they want to do. Maybe the goal is to have someone to blame if things go wrong, but who knows. Businesses looking for a legal rubber stamp will eventually get upset when it’s not forthcoming. And in many cases, those businesses may ignore what their lawyers said and move forward anyways. Not good!

If a lawyer says “don’t do X” or “if you do X then here’s a laundry list of bad things that will happen,” they are doing it for a good reason. If the business goes ahead and does the thing and faces consequences, then they not only will have nobody to blame, but their contrary opinion of counsel could make their lives even harder down the road. This is a big legal mistake for cannabis businesses.

Legal mistake #2 – handshake cannabis deals

We’ve said it before and don’t really need to explain it again – handshake deals are a big, huge legal mistake for cannabis businesses. They just should not be happening in 2022. Here are some of our old posts:

Legal mistake #3 – 50/50 ownership of a cannabis business

Another very common legal mistake that cannabis businesses — especially startups — make is 50/50 ownership. I wrote a post about this called “50/50 Cannabis Business Ownership: A Terrible Idea.” That post sums the issue up completely. The gist is that in a business that has 50/50 ownership, any disunity in decision-making can grind the business to a halt.

There are easy ways to fix this like deadlock provisions or giving one partner more of a vote on certain decisions. But a lot of businesses don’t do this. I’ve had people get mad at me for suggesting that they needed a deadlock provision – “hey, we’re best friends, we’d never fight, we don’t like that you’re even suggesting this!” That kind of stuff. It doesn’t matter how friendly partners are: if the business is deep in the financial hole or is having problems, they will inevitably stop seeing eye to eye. If two people want a business to fail, this is the way to do it.

Legal mistake #4 – bad business “marriages”

Sort of along the same lines as 50/50 ownerships are what I call bad business marriages. These are situations when people with wildly different backgrounds and expectations get involved in the same business or project. This happens all the time in the cannabis world. The most common one of these is when someone from an old-school industry with lots of money gets paired with someone with decades of experience in the cannabis industry but no business experience in an established industry where written contracts, record-keeping, paying taxes, etc. are the norm.

A lot of the old-school business types are initially smitten by the experienced cannabis operators – “hey, this person knows what they’re doing, we’re going to quadruple our investment!” When that doesn’t happen, things will go south. And if the old-school investor pops their head under the hood of the business, that’s when things can actually blow up.

There are some things that people in these positions can do to protect themselves if they have good lawyers, but they often don’t concern themselves until it’s too late – another huge legal mistake for cannabis businesses.

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Sometimes, the Parody Defense to Copyright Infringement Works!

As a cannabis intellectual property litigator, part of my job is to help clients make cost-benefit and risk analyses. My colleagues and I have written several posts about the defense of “parody” in cannabis intellectual property litigation, and why it’s a very specific defense that people tend to overstretch in most cases. While that remains true, it’s only fair to also write about cases where it does work – like in this week’s decision by a New York court to deem a sketch comedy group’s theater production titled “Vape” a fair use of the famous “Grease” musical.

The parties’ arguments

Plaintiff Sketchworks Industrial Strength Comedy, Inc. filed a Complaint in the Southern District of New York to seek a declaratory judgment that Vape does not infringe Defendants James Jacobs and Warren Casey’s copyright in Grease. (FYI, James Jacobs and Warren Casey are the co-authors of Grease.) Sketchworks owns its own copyright in Vape. Vape depicts the same characters and features portions of Grease’s well-known songs. But, Sketchworks claims Vape is a parody of Grease:

[It] “pokes fun at various absurdities in Grease”, and “uses millennial slang, popular culture, a modern lens, and exaggeration to comment upon the plot, structure, issues and themes of Grease and to criticize its misogynistic and sexist elements.” In so doing, Vape, which was written and directed by women, “reexamines Grease from a female perspective in the #MeToo era,” and “exposes how the ‘humor’ and rape-cultured elements of Grease have not aged well” by, for example, “directly criticiz[ing] Grease’s ‘happy ending,’ where a woman completely changes who she is in order to please a man.” Vape also “recognizes that modern youth still navigate complex issues relating to sex, drugs, and peer pressure – just in different forms from their 1950s counterparts.”(Citations omitted).

Defendants argued Vape does not constitute a parody because it utilizes the same music, plot, characters, settings, and other elements of Grease, and that Sketchworks also misappropriated Defendants’ trademark in Grease. When they learned Vape was scheduled to be performed in New York City in August 2019, Defendants sent Sketchworks a cease and desist letter and Sketchworks cancelled the scheduled performances.

The court’s analysis

On one hand, it is well settled under case law that the Copyright Act not only protects “original creative work[s],” but also “derivative works,” defined as works “based upon one or more preexisting works, such as a[n] . . . art reproduction, abridgement, condensation, or any other form in which a work may be recast, transformed, or adapted.” However, a copyright holder cannot prevent another person from making a fair use of its copyrighted material. There are four factors to consider when evaluating whether a use is fair:

  1. the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes;
  2. the nature of the copyrighted work;
  3. the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and
  4. the effect of the use upon the potential market for or value of the copyrighted work.

Under the first factor, the Court found that Vape sufficiently changed certain elements of Grease, including the script and lyrics to songs, in order to emphasize misogynistic features of the original work:

[T]his is not a case in which the authors of Vape have taken elements from Grease “for the sake of convenience, and then changed the lyrics [and script] to satirize a subject having nothing to do with the original [work]. Nor is it merely a derivative update of Grease. To the contrary, Vape relies on allusion to Grease to convey its central message about Grease’s misogynistic story line. (Citations omitted).

Under the second factor, the Court recognized Grease falls within the core of the Copyright Act’s protection, but declined to afford much weight to it because “parodies almost invariably copy publicly known, expressive works’ and thus, in parody cases, this factor is ‘not much help’ in determining whether the new work constitutes fair use.”

Under the third factor, the Court found that Vape’s “taking” of elements from Grease was not excessive because they were necessary for Vape to achieve its parodic purpose. For example, Vape would not have been able to communicate its critique of Grease’s “happy ending,” (Sandy changing who she is to please Danny) without incorporating their overall plot arc. The Court also noted that Vape does add new features that did not exist in Grease.

Under the fourth factor, the Court considered whether Vape would potentially take away demand from Grease by serving as “a market substitute.” Under that analysis, it found the potential harm to Grease’s market value to be minimal because Vape could not reasonably be viewed as a derivative work – like a sequel or updated remake – because it mocks and critiques Grease.

Ultimately, the Court deemed Vape a parody and fair use of Grease, and Sketchworks was additionally awarded its attorneys’ fees in prosecution of the case.

Conclusion

To be clear, the Court’s ruling in this case is not a call for cannabis companies or anyone else to pursue parodies of well-known works. It’s just a reminder that in very specific circumstances, the parody defense can be considered alive and well.

For recent articles specific to cannabis intellectual property litigation where the parody defense does not work check out the following:

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Signs of Life for the SAFE Banking Act?

The SAFE Banking Act has languished in Congress since early 2017, a victim of political gridlock and division, as well as political wrangling over broad approaches to cannabis legalization.  We last covered the SAFE Banking Act in February, when it looked as though 2022 would be the sixth year in which this bill would die.

Since then, the bill has been showing new signs of life, though for the most unfortunate reasons. As we’ve covered, cannabis dispensaries are facing an epidemic of robbery from coast-to-coast. The lack of access to the traditional financial sector, and the need to do business in cash, makes dispensaries a prime target. The continued and mounting safety concerns have put pressure on industry officials and policymakers at all level to come up with a solution.

A bipartisan group of Senators in Washington, DC now supports passage of the Safe Banking Act, including in particular Senators from the Pacific Northwest, including Patty Murray (D-Wash.), Jeff Merkley (D-Ore.), and both of Montana’s Senators, Steve Daines (R-Mont.) and Jon Tester (D-Mont.). Nine Republican Senators now co-sponsor the Act, approaching the ten Republican votes needed to overcome a potential filibuster in a 50-50 Senate. The sudden shift in Republican support has followed the wave of recreational and medical legalization or decriminalization in over a dozen states since 2020, including a number of Republican strongholds, as well as the support of the American Bankers Association and state banking associations, representing the financial industry.

Ironically, the sudden increase in support for the SAFE Banking Act has reversed the longstanding political lines on federal cannabis legalization. Long-time advocates for legalization and restorative efforts to address the impact of the War on Drugs— such as expungement of past criminal convictions for cannabis offenses–are now concerned that the Act may represent a giveaway to the financial industry that not only fails to address equity issues, but undermines future efforts at broader reform. For example, Sen. Cory Booker (D-NJ), previously a co-sponsor of the Act in 2018, pledged last year to “lay myself down” in the Senate chamber to prevent passage of the Act without equity or criminal justice provisions.

The Safe Banking Act also faces headwinds from a cramped legislative calendar in an election year, in which legislation that fails to pass by the August recess is generally considered dead as DC’s focus shifts to the upcoming November midterm elections. Proposals to include the Act in broader legislation, such as the bipartisan-supported COMPETES Act focused on trade, would also face traditional Republican aversion to unrelated add-ons in large legislative packages.

Nevertheless, the shift in fortunes for the SAFE Banking Act, which after five years may have enough support to have a realistic chance of passage either in this or a future Congress, demonstrates the slow but steady progress of cannabis reform nationwide. Hopefully, access to mainstream financial institutions will come for the industry soon, both for the sake of business development as well as public safety.

For our previous coverage of this bill, check out the following:

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Where are the New Jersey edibles? Why you can’t buy edibles in NJ

At long last, recreational sales have finally started in the state of New Jersey. Two years after citizens of the Garden State took to the polls and called for cannabis legalization, the first recreational cannabis dispensaries opened their doors to the public just a few weeks ago on April 21, 2022. Since then, it’s been clear that recreational cannabis sales are a hit.

Around 12,000 people purchased legal cannabis products from the state’s 12 open dispensaries on the first day alone, spending about $2 million in the process, according to the New Jersey’s Cannabis Regulatory Commission. That’s a whole lot of cannabis flower, resin, wax, shatter, capsules, and tinctures. What recreational buyers in the Garden State still can’t get their hands on, however, are cannabis-infused edibles. The law doesn’t allow brownies, gummies, cookies, or any other cannabis products “resembling food.”

But why are cannabis-infused food items still off-limits in Jersey? And what exactly counts as an edible and what doesn’t?

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Are edibles legal in New Jersey?

No, not at this time. Because unlike some cannabis laws around the nation, New Jersey’s statute is very clear about what forms of cannabis are allowed. Legal cannabis is broken down into two simple categories: ingestible cannabis products and inhalable cannabis products. Edibles are not currently included in the ingestible cannabis category.

Let’s dig a little deeper into each of these categories to understand why.

Inhalable cannabis products

Under the letter of New Jersey law, forms of cannabis specifically intended to be inhaled via smoke or vapor — like dried cannabis flower, concentrates, and vape cartridges — are all considered smokable products. No real curveballs or surprises here.

Ingestible cannabis products

Things get a little bit more specific when it comes to edibles. As the New Jersey state law is written currently, the only forms of non-smokable cannabis products legally available for recreational consumers are products like tablets, pills, syrups, and tinctures. That means that the THC-infused candies, beverages, and pastry-style treats that can be found in dispensaries in states like Colorado, California, and Oregon are not legal.

Gina Coleman/Weedmaps

Why are edibles illegal in New Jersey?

The part of the legislation that outlaws products like pot brownies, cookies, and cakes from being sold in dispensaries is about as clear as it gets. It says cannabis products sold in NJ dispensaries can’t resemble “commercially manufactured or trademarked” food products or any animals, characters, fruit, and other artistic imagery. So, for now, the law does not allow for the manufacturing and selling of cannabis edibles.

Lawmakers have said they wrote this language into the legalization bill for two reasons.

First, state-level lawmakers cited concerns about minors getting their hands on THC-laced products. If kids stumble upon edibles like pot brownies and THC-rich cookies, the reasoning goes, they would be far more likely to eat those than to consume a capsule or tincture.

The second factor is the lack of testing facilities. The New Jersey Cannabis Regulatory Commission doesn’t have the capacity to test the potency and purity of commercially produced cannabis edibles while setting statewide health and safety standards.

What’s the state missing out on?

While it’s clear that the state has reasons for not allowing the sale of recreational edibles, the stats show that New Jersey is missing out on a lot of profit. In key adult-use states, sales of edibles, especially gummies and other chewy candy, have outpaced overall cannabis sales. In addition, the US market for non-alcoholic, THC-infused beverages is expected to be worth as much as $1 billion by 2025 as young people shift from binge drinking to enjoying cannabis products instead. That’s a lot of tax revenue that could be going into the state’s coffers.

Thankfully, crafty New Jersey cannabis aficionados can still whip up a batch of pot brownies in their own kitchens with flower purchased at a dispensary. That’s a good thing since they won’t be able to buy them from a dispensary for the foreseeable future.

The post Where are the New Jersey edibles? Why you can’t buy edibles in NJ appeared first on Weedmaps News.

FREE Webinar June 14: Protecting, Monetizing and Enforcing Cannabis Intellectual Property

Register HERE!

Protecting and monetizing intellectual property (IP) assets in the cannabis industry is a critical step for many businesses. Enforcement of valuable IP rights against infringers may also be vital to a cannabis business’s success.

The cannabis industry is highly dynamic and competitive. In addition to state and local rules, the Schedule I status of “marihuana” under federal law creates an unusual environment for all things cannabis and IP.

Several cannabis businesses have established significant market share through the creation and leveraging of IP. Others have been served demand letters or lawsuits because their branding or products allegedly infringe upon existing protected IP– whether owned by cannabis businesses or otherwise. As a corporate cannabis law firm serving the cannabis industry since 2010, we have seen just about every possible scenario.

This webinar is designed to help you gain a high-level understanding of cannabis IP in both the hemp and marijuana context, including how to protect, monetize and enforce it.

Vince Sliwoski (Oregon) will moderate a discussion by cannabis intellectual property attorneys Fred Rocafort (Washington/Florida), Jihee Ahn (California/Oregon) and Paul Coble (Arizona/Illinois). These attorneys have a broad mix of transactional and litigation experience in the cannabis IP space, and will provide a detailed overview of what you need to know to protect your cannabis brand. The attorneys will cover topics such as the following:

  • Categories of goods and services eligible for IP protection
  • Federal IP protections available to cannabis businesses
  • The importance of copyrights, trade secrets, patents, and trademarks to your cannabis business
  • IP hurdles cannabis business owners frequently encounter
  • IP licensing, both within state borders and across state lines
  • How to avoid cannabis IP disputes, and what to do in the case of a dispute

Questions will be taken throughout the presentation. To register for this free webinar, as well as submit questions in advance, please go HERE.

The post FREE Webinar June 14: Protecting, Monetizing and Enforcing Cannabis Intellectual Property appeared first on Harris Bricken Sliwoski LLP.

Cannabis in Mexico: Focus on Hemp

Have you heard of cannabis legalization in Mexico lately? Neither have we.

Apart from limited Oaxacan efforts to decriminalize individual recreational consumption and grant a few medical growing licenses, and earlier Supreme Court decisions declaring prohibition unconstitutional, we have not heard about any legislative efforts to regulate a market that is poised to grow globally. That’s a shame.

The Cannabis Law Bill has languished in the Senate since last year, ready for discussion and approval. That bill would regulate recreational cannabis, its commercialization and research. It was also meant to regulate hemp, but earlier this year talks surfaced about removing from the bill. You can find our take on that here.

What is going on with cannabis legalization in Mexico?

At around this time last year, Mexico seemed poised to pass the Cannabis Law Bill. It had already been approved by the Lower Chamber; the President’s party had a visible majority in Congress; and there was a somewhat functional relationship among all political factions.

Fast forward to May 2022, after the mid-terms. The ruling party lost its visible majority. It does not get along well with the other political factions, given the dismissal of major presidential bills on issues like energy reform. The President is attempting to advance major reformist bills like the electoral bill, so there is no room for more controversial legislation like the Cannabis Law Bill.

The way we see it, the political climate will not allow for the Cannabis Law Bill to be approved in this legislative term and perhaps not in this administration, set to end in 2024. It does not matter that the market is poised to grow, that foreign companies (mainly American and Canadian) have set their sights on Mexico, or that public and private studies forecast a dramatic increase in government revenues should the Cannabis Law Bill pass. It’s time to ask: is the situation really going to change? If not, how do we create or take advantage of the business opportunities brought by cannabis in Mexico? The answer for now is industrial hemp.

How to capitalize on industrial hemp in Mexico

The first step is to form a company. This is a no-brainer. As of now, the only agency entertaining cannabis applications, including hemp, is Cofepris. Licenses are granted to whoever applies, be it an individual or an entity. However, as discussed here, there are requirements that can only be fulfilled by companies.

The second step is to find where to grow and process hemp. Like with any industry, it is necessary to set up functional supply chains. And functional supply chains are usually either close to the production means or their markets, so as to ensure a steady flow of raw materials, customers, etc.

From a biologic standpoint, it will be feasible to grow hemp almost anywhere in Mexico. Logistically and security-wise, try to site close to good intermodal infrastructure and in areas not ridden by violence. Once you find the right place, you will want to ensure you have proper title to the land or, in the case of growers, a proper contract in place. This will be essential to secure an eventual license.

Finally, you will have to decide if you want to process hemp in situ or in a separate piece of land (preferably close to where you/your grower is). Medical cannabis licenses are attached to the land and we do not expect hemp to be any different. Mind your costs.

Industrial hemp in Mexico is legal but not regulated: be prepared to litigate

Keep in mind that though industrial hemp is legal, it is not regulated. Accordingly, neither Cofepris, nor the Ministry of Agriculture (the agency rumored to eventually entertain hemp applications) have any incentive to give you any license to grow or process industrial hemp. Lack of regulation is a great excuse to not answer or deny any application. Expect to go to federal court and even to the Supreme Court if needed, to force the authorities to act and issue licenses.

Promote hemp’s industrial applications

In Mexico industrial hemp is often considered only in the context of fibers, textiles, and the like. But hemp is so much more than that. Its applications cover everything from the automobile industry, to food and beverage, to construction. Hemp can also serve as a substitute for lithium batteries, at a time where lithium is sought to be re-nationalized in Mexico. All these are existing social and economic needs in Mexico, which in turn speak of existing productive chains. Hemp operators can make an impact, without having to go through the uncertainties of creating a new market.

Statewide lobbying to regulate industrial hemp

Remember, the Cannabis Law Bill is national. Politicization of cannabis is taking place at the national level. There already have been attempts by state legislatures to draft bills regulating hemp production. If stakeholders can continue promoting industrial hemp among local regulators, chances to obtain licenses to legally implement your industrial hemp business model will exponentially increase, bypassing Cofepris.

Time to focus on hemp in Mexico

Under the current Mexican landscape, we have only medical cannabis (with difficult compliance requirements) and industrial hemp. Hemp is a clearer path to profitability. It has lower activation and compliance costs, plus customers lined up in existing industries.

In Mexico, it’s time to move forward with industrial hemp. We all just need to go for it.

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