Foreign Investment in U.S. Cannabis: A Continuing Love/Hate Relationship

The U.S. cannabis industry attracts all kinds of entrepreneurs and investors. That has been true since Colorado and Washington legalized cannabis for adults 21 and up back in 2012, and since other states began creating comprehensive licensing regimes. The ever-emerging nature of the industry and its state-by-state quilt of regulations creates all kinds of business development and investment opportunities that most cannabis businesses hope culminate in either a very nice exit once our federal government (hopefully) legalizes/deschedules cannabis altogether, or that results in the ability to really compete long-term as interstate commerce opens up and serious, large-scale competition moves into the space when federal prohibition falls.

Foreign investors are not immune to the charms and allure of cannabis. And where only 11 states have legalized cannabis for adult use–some with extremely competitive licensing regimes– the appeal of cannabis increases exponentially for investors still looking to be early movers in the space. Additionally, there’s been a pivot in the investor scene of late where a lot of the fast, reckless money has left the space after significant bouts of mismanagement at larger cannabis companies and with some multi-state operators (generating certain vulture investment opportunities), so investors are really getting wise to the accordant pitfalls of cannabis (which are still many).

Foreign investors though have a special set of issues to deal with when it comes to cannabis, and they don’t necessarily stem from state law licensing issues. Mainly, the gorilla in the room is federal law, which is significantly more severe on foreign investors where, in addition to violations of the federal Controlled Substances Act (“CSA”), immigration consequences are undoubtedly worse in some ways.

Even though the Department of Jusice (“DOJ”) issued the now-rescinded Cole Memo in 2013, outlining various enforcement priorities for the DOJ in states with cannabis legal reform while basically articulating a “stand down” position, that memo didn’t discuss anything around foreign investment in cannabis. In fact, no federal guidance from the DOJ has ever done that. At the same time, the Department of Homeland Security (“DHS”) has taken a hardline stance of enforcement against foreign participation in cannabis (including even ancillary business investment), and it shows no sign of relenting anytime soon.

Any direct or peripheral involvement in the U.S. cannabis industry, whether ancillary or direct, is ultimately at odds with our immigration laws. Specifically, where a consular officer or an officer of the DHS has reason to believe that the foreign national is or has been an illicit trafficker of any controlled substance as defined in the CSA, or attempted to do so, that individual may be determined to be inadmissible into the U.S., which equates to a lifetime ban.

Similarly, pursuant to the Immigration and Nationality Act (“INA”), a foreign national is inadmissible for knowingly aiding, abetting, assisting, conspiring, or colluding with others in the illicit trafficking of a controlled substance. Even the spouse or child of the foreign national found inadmissible under the INA is also inadmissible into the U.S. if they have, within the previous 5 years, obtained any financial or other benefit from that illicit activity, and knew or reasonably should have known that the financial or other benefit was the product of such illicit activity. Where the state-by-state cannabis trade remains federally illegal, any foreign investment or ownership in a cannabis business is illicit activity that violates the INA.

The legalization of cannabis in Canada also seemed to put U.S. Customs and Border Protection (“CBP”) in a frenzy back in 2018. CBP, which is part of the DHS, and whose officers determine who can and cannot enter the U.S., announced in 2018 that Canadian citizens cannot come to the U.S. to participate in the licensed cannabis industry. CBP subsequently reiterated in a 2018 teleconference that foreign national investors who have knowingly financed and promoted the growth of the cannabis industry will be denied entry and could even get a lifetime ban. Additionally, the U.S. Customs and Immigration Service announced in 2019 that participation in the licensed cannabis industry can lead to a finding of lack of good moral character when applying for naturalization.

In the end, until citizenship is secured, non-immigrants may be denied entry and given a lifetime ban, and permanent residents may also be denied entry and ordered removed from the United States, for owning or financing a state-licensed cannabis business. And if you enter the United States for purposes of conducting commercial cannabis activity and you mislead CBP officials (which is probably a common practice at this point), you can also face these extreme consequences.

If you’re a foreign investor or owner in a cannabis business or planning to be and you’ve gotten comfortable with the above risks, it’s also important to note that if you do skirt the Feds, you may be dealing with a ticking time bomb anyway where the states and the Feds routinely share information (willingly or otherwise) about cannabis businesses and their owners and investors.

Most states allow foreign investment in cannabis, and only a few have residency requirements or other barriers to entry that would prevent a foreigner from owning or investing in a cannabis licensee. The main issue is that with most states any owner or financier is going to have to go on record with regulators regarding their involvement with the business, and in most of those states any kind of meaningful ownership or control is going to lead to background checks with the Federal Bureau of Investigation (at minimum). This is just the tip of the iceberg regarding information sharing between the Feds and the states when it comes to cannabis licensees (access to financial institutions via the FinCEN guidelines is another popular pathway for the Feds to know who exactly is involved with these businesses at all times).

The bottom line is that no federal agency has issued guidance that would somehow outright permit or look the other way regarding foreign direct investment or ownership in cannabis businesses in the U.S. What we do have is a hard nosed reality between DHS and CBP that puts foreigners in the crosshairs of significant consequences for supporting the cannabis industry financially or otherwise (and of course there’s the issue of bringing cannabis-derived funds back into the investor’s country of residence). This dynamic probably won’t change anytime soon unless and until we have meaningful legal reform at the federal level, which is also probably a long way’s off at this point. So, foreign investors looking at cannabis should definitely proceed with extreme caution (if at all) and take the time to really understand the myriad and unique risks posed by participating in the industry.

The post Foreign Investment in U.S. Cannabis: A Continuing Love/Hate Relationship appeared first on Harris Bricken.

Cannabis Investment Basics: Debt v. Equity

Towards the end of 2019, it seemed that cannabis investments had all but dried up. Today, our cannabis lawyers are seeing a huge uptick in investment transactions of all kinds in cannabis and hemp businesses. With investments on the rise again, we plan to do more posts on various legal aspects of cannabis investments. At the outset, it’s best to understand some fundamentals, and the best place to start is looking at the question of debt vs. equity.

It is extremely common for cannabis businesses (and especially startups) to raise capital through issuing equity (i.e., stocks in a corporation or membership interest in a limited liability company, or “LLC”). Typically, startups seek to offer a significant chunk of equity in exchange for a large monetary investment that can be used to cover initial operating or startup costs (think of things like costly tenant improvements that virtually all cannabis licensees are required to make in order to get a permit and start operating). Generally, these equity offerings are of a not insignificant amount, and we’ve seen a lot of businesses offer close to half of the equity in the business to an investor. This makes sense from a common-sense point of view as investors in startups probably don’t want to drop half a million to get a 3% stake.

Another alternative is debt. Cannabis businesses can take out loans without issuing any equity to third parties, leaving the founders in the driver’s seat of the business. Lenders may be less willing to provide large loans to startups as they don’t get anything in return except a promise to be repaid (and there’s always a risk that repayment may never happen for a business that doesn’t even have permits yet). It’s therefore very common for lenders to ask for something additional besides just a promise to repay: a security interest in some asset of the company (like real property, tangible assets, or in some cases even things like IP). It’s also very common for lenders to require corporate or personal guarantees where third parties promise to pay the debt of the borrower in the event of a default. Debt can often be a less-attractive method of raising capital for startups. Founders may be rightfully worried about offering security interests and personally guaranteeing large debt. Moreover, loans that require immediate repayment with large amounts of interest may not be viable for businesses that aren’t yet operational.

There are some hybrid methods of fundraising that cannabis businesses commonly employ. One of the most common methods is convertible debt, which basically is a loan that converts into equity upon the occurrence of a future event. The business getting the loan will issue a promissory note that can be converted into equity. Convertible notes often include complex formulas for how debt converts into equity, and parties can freely negotiate how and when the debt can convert, and there are a lot of complex legal and non-legal terms that both investors and startups should consider when entering into a convertible note arrangement.

For cannabis businesses seeking money from third parties, serious consideration should be made as to the type of investment transaction they will use and what is best–giving up a stake in the company or taking on guaranteed and/or secured debt. Additionally, companies should carefully consider cannabis regulations that affect investments and require disclosure of investors or lenders, so as to avoid disputes by investors who gave money before knowing they had to be disclosed.

The post Cannabis Investment Basics: Debt v. Equity appeared first on Harris Bricken.

Tuesday, September 22, 2020 Headlines | Marijuana Today Daily News

Marijuana Today Daily Headlines
Tuesday, September 22, 2020 | Curated by host Shea Gunther

// Hemp Advocates Secure Major Win In New House Government Funding Measure (Marijuana Moment)

// Texas Ban On Smokable Hemp Lifted Until 2021 Judge Rules (Marijuana Moment)

// Scott says lawmakers have ‘come a long ways’ on retail pot bill (Valley News)

These headlines are brought to you by MJToday Media, publishers of this podcast as well as our weekly show Marijuana Today and the most-excellent Green Rush Podcast. And check out our new show Weed Wonks!

// New York Launches Process For Destroying Marijuana Conviction Records (Marijuana Moment)

// Cannabis Subscription Boxes Grow By 550% (Green Market Report)

// Canadian Cannabis Sales Accelerate in July to $232 Million (New Cannabis Ventures)

// Study: Recreational Marijuana Could Bring Connecticut $100 Million Over 4 Years (WSHU Public Radio)

// Legal Marijuana Now Party turns in signatures for official recognition in Nebraska (Cherokee Tribune & Ledger News)

// Marijuana seller’s story of ‘badass’ Mexican sisters was a cultural misstep Latinas say (Herald Mail (AP))

// Millennials Prefer Smoking Their Cannabis (Green Market Report)

Check out our other projects:Marijuana Today— Our flagship title, a weekly podcast examining the world of marijuana business and activism with some of the smartest people in the industry and movement. • Marijuana Media Connect— A service that connects industry insiders in the legal marijuana industry with journalists, bloggers, and writers in need of expert sources for their stories.

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Photo: Mark Fuya/Flickr

Federal Courts are Going Backward on Cannabis

A few weeks back, the Cannabis Law Institute invited me to discuss contract drafting for cannabis deals. A focal point for the panel was whether courts are willing to enforce cannabis contracts. The last time I had really looked at that issue was early 2019, when I wrote: Cannabis Dispute? Courts are Open. As the title indicates, my research (and our law firm’s experience) showed that both state and federal courts were generally open to resolving cannabis contract disputes at the time. And I assumed the trend had held. Unfortunately, it has not!

In the 2019 piece, I summarized:

[Contract enforceability] was always the biggest consideration in choosing a forum for cannabis disputes. A few months ago, we ran a survey of federal courts and cannabis litigation, observing that none of the districts at issue were invalidating state-sanctioned businesses’ cannabis contracts on the dreaded “illegal purpose” basis. This trend is holding strong in recent federal court disputes on issues from RICO to patent infringement, despite the prohibited status of “marijuana” under federal law. As to state courts, the decisions declining to hear cannabis beefs are pretty far in the rearview. (Ironically, it has been safer overall to enforce cannabis contracts in federal courts that state courts to date.) When drafting agreements for cannabis clients, we still advise as to the diminishing possibility of non-enforcement, but most cannabis companies seem comfortable choosing court over arbitration if other goals are satisfied.

In 2020, state courts still seem to be a good bet for cannabis businesses in cannabis-legal states. Although I have not run a formal survey, I also have not come across local courts tossing disputes solely because the contract related to cannabis activities (and our cannabis business litigators have worked on many of these cases). But federal courts are sliding backward. A trio of cases in Washington, Oregon and Nevada show why.

Before running that dismal gauntlet, it’s important to understand the rationale used by federal courts to enforce cannabis contracts previously. The touchstone ruling here is found in Mann v. Gullickson, 2016 WL 6473215 (N.D. Cal. Nov. 2, 2016). In that case, the court observed that “[n]o principle of law is better settled than that a party to an illegal contract cannot come into a court of law and ask to have his illegal objects carried out…” (quoting Wong v. Tenneco, Inc., 39 Cal. 3d 126, 135 (1985)). That makes sense, right? For example, if Party A pays Party B to start a forest fire, but Party B pockets the cash and skips town, no court would require Party B to return and start the fires. The contract would be void for public policy reasons.

But there’s some wiggle room here. The Mann court also observed that “[e]ven where contracts concern illegal objects, where it is possible for a court to enforce a contract in a way that does not require illegal conduct, the court is not barred from according such relief.” As such, the court determined it could require a cannabis company borrower to repay a loan it had received (provided the case did not settle between summary judgment and trial). Requiring someone to repay a loan, after all, doesn’t require the debtor to violate any laws– even if the debtor is a scofflaw.

In legal terms, what the Mann court did is “sever” the narrow, kosher contract requirements from the broader, “illegal contract” at issue. This is in keeping with our early 2019 survey of the federal courts, mentioned above. Specifically, we concluded in that blog post that courts were “find[ing] ways around invalidating contracts simply because they happen to involve cannabis–and sometimes even when they include terms that require parties to violate federal law–so long as those provisions are severable.”

Unfortunately, courts seem to be rethinking this approach, not just in jurisdictions that comprise states without legal cannabis programs, but in states that have taken the lead on ending prohibition. Below are the 2020 decisions in Washington, Oregon and Nevada, which show courts backing up a bit.

Bart St. III v. ACC Enterprises, LLC, No. 217CV00083GMNVCF, 2020 WL 1638329 (D. Nev. Apr. 1, 2020)

Like Mann, Bart St. is a loan default case. Plaintiff lent defendant, a cannabis grower, $4.7 million under a contract governed by Nevada law. When the defendant defaulted, plaintiff sued for breach of contract and unjust enrichment. Defendant argued that it couldn’t be liable for breach of contract: under federal law, the contract was illegal. The judge agreed as to various portions of the contract, but could not decide on summary judgment whether the illegal provisions could be severed from the rest of the agreement. For that reason, the defendant’s summary judgment motion was denied on the breach of contract claim. As to the unjust enrichment claim, the judge wrote:

Plaintiff cannot prevail for unjust enrichment because the parties’ contract involves moral turpitude. If the Contract is unenforceable, it is because Plaintiff invested in Defendants’ marijuana cultivation business primarily to obtain a pathway to an equity investment therein . . . . Providing funds in exchange for equity violates the CSA because it would allow the investor to profit from the cultivation, possession, and sale of marijuana . . . . Conspiracy to cultivate marijuana is a crime of moral turpitude.

Ouch. After that ruling, the defendant was left with one arrow in its quiver (breach of contract). It seems the court will stick to the Mann severability analysis there, but the denial of plaintiff’s equitable claims on an “illegal contract” and/or “moral turpitude” finding, is a discouraging setback.

Polk v. Gontmakher, No. 2:18-CV-01434-RAJ, 2020 WL 2572536 (W.D. Wash. May 21, 2020)

This one looks like a classic cannabis partnership dispute, complete with regulatory scheming. Polk and Gontmakher owned a company that owned a retail store and a processing facility. When Polk prepared to leave the business, Gontmakher refused to acknowledge his ownership interest: Polk had a prior criminal record, which would have made him ineligible under Washington administrative rules. So Polk sued Gontmakher for breaching their (oral) agreement and to recover past and future profits from the enterprise. Here’s what the Court said, in granting Gontmakher’s motion to dismiss:

Mr. Polk’s claim that his requested relief would not require a violation of the CSA defies logic. He is demanding the future profits of a business that produces and processes marijuana in violation of federal law. How does Mr. Polk anticipate [the business] will generate these future profits? The Court cannot fathom how ordering [Gontmakher] to turn over the future profits of a marijuana business would not require them to violate the CSA. And as this Court has previously explained to Mr. Polk, it cannot award him an equitable interest in [the business] because to do so would directly contravene federal law.

Does that seem unfair to you? It is! It’s also a straightforward reading of the law.

Lilly, LLC v. Clearspan Fabric Structures Int’l, Inc., No. 3:18-CV-01104-HZ, 2020 WL 1855190 (D. Or. Apr. 13, 2020)

To me, this is the scariest one of the three. Unlike the other two cases, the defendant here didn’t even raise the “illegal purpose” defense. The judge just brought it up on his own, sua sponte, and now the parties are stuck with it.

In this matter, J. Lilly, an Oregon licensed cannabis producer, contracted with Clearspan to build its facility and lease some greenhouse equipment. After construction began, J. Lilly gave notice that defects in the facility were impeding cultivation efforts, and ultimately sued for breach of the agreements. J. Lilly claimed lost profits due to the inability to cultivate cannabis. Clearspan moved to dismiss the claims on the basis that the cultivator waived any contractual right to consequential damages– not because the contract had an “illegal purpose.” However, Judge Hernandez raised the issue on his own at oral argument, asked the parties for supplemental briefing, and ultimately held that:

awarding Plaintiff damages for lost profits [for the sale of cannabis] would require the Court to compel Defendants to violate the [CSA…and] provides an independent basis to dismiss Plaintiff’s lost profits claim in addition to [the issue of waiver, and other merits issues.]

Obviously, that’s another tough one for the industry. And it’s especially discouraging that the judge took it upon himself to raise this thorny issue to dispose of the case.

So what are the takeaways here?

  1. Federal courts in 2020 look less inviting than before for cannabis business disputes. That is even (especially?) true in certain cannabis friendly jurisdictions. It seems true in less friendly jurisdictions, too.
  2. The Mann analysis is still viable; courts will continue to grapple with it; and courts may be willing to carve out cannabis contract remedies. But that is true only for certain causes of action, and only if the remedy does not contemplate federally unlawful conduct.
  3. Skillful contract drafting is terribly important. “Severability” clauses, for example, are generally considered boilerplate, but in the cannabis contract context they can be paramount.
  4. As always, federal law has to change. Cannabis is legal for adult use in 11 states and for medical use in 33 states, yet no one has any contract certainty. None of this makes any sense.

We will keep you posted on further developments in this nettlesome area. Until then, for more insight on cannabis contracts in federal court, check out the following blog posts:

The post Federal Courts are Going Backward on Cannabis appeared first on Harris Bricken.

Trademark Squatting: Not a Lucrative Business Proposition in the Cannabis Industry

During one of my recent sessions perusing current news related to cannabis legal issues, I came across a press release that I think warrants a bit of discussion. I’m always wary of self-promoting press releases, but they can provide some good entertainment and, in this case, blog fodder. The particular press release that will provide us with the lessons to be learned from this post is titled “Any such use of the CBD Nation name in the marketplace is unauthorized and is considered Trademark Infringement.” You can read the full release here if you have some time to kill.

The gist of this press release is that the releaser, a San Diego-based company called GoGoPay LLC, owns a registered trademark for CBD NATION (more on that later), claims that any use of the mark “in the marketplace” constitutes trademark infringement (more on that later, too), is putting others on blast for using the mark in a way they allege infringes their rights, and is announcing that both the domain name AND the registered trademark are up for sale. There are a lot of trademark lessons to be learned here, and I’ll try to break them down.

First, what does this company actually own? They own a federal trademark registration for the mark CBD NATION (Reg. No. 5312245) that covers the following services:

Providing on-line computer databases and on-line searchable databases in the fields of medical information including medical testimony and preventative care information.

Note that the scope of a trademark is only as broad as the goods and services specified in the application. This registration does not specify any goods or services related to CBD, meaning that if a company started a line of CBD edible products called “CBD Nation” (not a particularly strong trademark), it would not infringe on the registered CBD NATION mark at issue.

So, how did GoGoPay get this registration and what services does the company actually provide? Well, they submitted (pursuant to an office action claiming they had not submitted a specimen sufficient to show use in commerce of the mark) a specimen showing the CBD NATION mark in use via a screen capture of a website. That website screen capture showed a site where people could “Search Hundreds of Medical Information Services Simultaneously.” However, when I tried to access the URL shown in the specimen, I got a 404 – PAGE NOT FOUND alert indicating that the page did not exist. The home page just shows a logo and a recitation of the services covered by the trademark registration. In addition to the limited scope of services specified in the trademark application, I would say that this registration is wide open to a challenge in the form of a petition to cancel for non-use. As we all know, lawful use in commerce is one of the fundamental requirements for obtaining a U.S. federal trademark registration.

Okay, so they got a trademark registration for CBD NATION that covers some limited computer database services, despite what appears to be a lack of use in commerce. Setting aside the use in commerce issue, what about their claim that the domain name and the CBD NATION trademark registration are up for sale? While the sale of domain names is possible (subject to the Anticybersquatting Consumer Protection Act, or the ACPA, which prohibits the registering, trafficking in, or using of an Internet domain name in bad faith with the intent to profit from the goodwill of a trademark belonging to another party), the sale of a trademark without its associated goodwill is deemed an “assignment in gross” and is invalid.

Backing up a bit, it’s helpful to think of trademarks as a bundle of property rights, which includes the goodwill associated with the brand. A trademark is not a property right that can be separated from this goodwill. How does one acquire goodwill in a brand? Through use. Without use in commerce, there can be no trademark registration, no trademark rights, and therefore no goodwill.

It follows that a “sale” of a trademark that does not include any goodwill would be invalid – the purchaser would acquire no trademark rights. The prohibition on assignments in gross of trademark rights stems from broader concepts of unfair competition. It goes against public policy for individuals to become “trademark squatters,” obtaining registrations for desirable brand names and then trading in the brand names for profit, which is exactly what this GoGoPay company appears to be attempting.

The moral of this blog post? First, always be skeptical of self-promoting press releases. Second, and most importantly, be very wary of companies that are selling domain names together with “trademark rights” without actually having a viable business to back up the brand, and don’t attempt to do this yourself. We’ve seen countless attempts at trademark squatting both in and out of the cannabis industry (look into the folks trying to lock down alternative names for the Washington Redskins), and we would never advise our clients to engage with these opportunists, or to view this type of “business” as a viable or ethical opportunity.

The post Trademark Squatting: Not a Lucrative Business Proposition in the Cannabis Industry appeared first on Harris Bricken.

Cannabis Securities Litigation: Alleged Failure to Disclose Material Information Leads to Federal Lawsuit

Keeping up with the multitude of (shifting) state and municipal cannabis regulations is a daunting task for any multi-state cannabis operator. One well-known tool for doing so has been CannaRegs, which offers a web-based subscription service to aggregate and organize cannabis rules, regulations, and legislation.  In January 2020, CannaRegs was acquired by Fyllo, “a digital marketing company focused on the cannabis industry,” for approximately $10 million in cash and stock. Recently, a stock transaction that preceded the Fyllo deal has become the subject of a lawsuit filed in the Southern District of New York (Firstenberger et al. v. Regs Technology, Inc. et al., S.D.N.Y. No. 1:20-cv-07169-JGK).

The lawsuit centers around whether CannaRegs and its CEO had a duty to disclose the Fyllo deal to minority shareholders in connection with the sale of their interests to two other entities, Phyto and Panther. According to the Complaint, Plaintiffs are former CannaRegs executives who left the company in 2018 but retained shares representing about 11% of the company. Sometime in 2019, the CEO of Cannaregs approached the Plaintiffs to propose the sale of their stock to Phyto and Panther and, also allegedly, approached Phyto and Panther and proposed they purchase of Plaintiffs’ shares. (So far nothing out of the ordinary.)

The Plaintiffs reached deals with Phyto and Panther and sold their shares pursuant to Stock Purchase Agreements for about $179,000 predicated on a $1.6 million valuation of CannaRegs. Four months later, Cannaregs sold to Fyllo for $10 million—making the assessed value of Plaintiffs’ shares worth more than six-and-a-half times the amount paid by Phyto and Panther. So far nothing in these facts may seem to give rise to a securities fraud claim—as it appears the Plaintiffs merely sold their interests with unfortunate timing.

Here’s the rub. Plaintiffs allege that when CannaReg’s CEO approached them about the sale of the stock, the CEO knew that CannaRegs was to be sold to Fyllo for $10 million. Plaintiffs further allege that the purchaser, Phyto and Panther, also knew about the pending sale to Fyllo. On the basis of these allegations, Plaintiffs contend that the CEO, Phyto, and Panther colluded to deny the Plaintiffs material information pertaining to the value of their securities. In layperson’s terms, Plaintiffs are saying that had the Fyllo deal been disclosed to them, they would not have sold their shares $179,000. Plaintiffs seek damages of approximately $1.1 million along with interest, fees and costs.

Generally speaking, an officer or majority shareholder who misleads a minority shareholder in connection with the purchase of shares, and who induces the minority shareholder to sell the shares, may be held liable. The legal theories—all of which are pleaded in this lawsuit—vary from fraud to breach of fiduciary duty to violations of federal and state securities laws. Whether Plaintiff can prove their claims remains to be seen. But this case serves as reminder that cannabis companies and their officers, directors, and majority shareholders that just as they must take care in raising capital, they must take care in the later purchase and sale of interests in the company.

If your cannabis company is raising capital, contemplating a merger, or the purchase and sale of shares, I strongly recommend you retain an experienced cannabis securities lawyer before doing so. For more reading on cannabis securities, see:

The post Cannabis Securities Litigation: Alleged Failure to Disclose Material Information Leads to Federal Lawsuit appeared first on Harris Bricken.

Prepare Your Cannabis Business for the TCPA

For some reason, many cannabis businesses believe that because they’re already violating the federal Controlled Substances Act, they’re free to violate other existing federal laws. This of course is not the case, and never has been. Even though cannabis businesses can’t get legitimate recognition or fair treatment from the Department of Justice or the Drug Enforcement Administration, it doesn’t mean that they’re otherwise exempt from compliance with existing federal laws, including consumer protection laws that apply to all businesses throughout the United States.

The latest legal debacle for unwitting cannabis businesses are violations of the Telephone Consumer Protection Act (“TCPA“). Plaintiffs’ lawyers are quickly recognizing how vulnerable/unaware cannabis businesses are when it comes to TCPA compliance.

Passed by Congress in 1991, the TCPA is a strict liability statute designed to fight incessant “robocalls” and aggressive/abusive telemarketers that plague unconsenting consumers. The TCPA provides, in relevant part:

It shall be unlawful for any person within the United States, or any person outside the United States if the recipient is within the United States … to make any call (other than a call made for emergency purposes or made with the prior express consent of the called party) using any automatic telephone dialing system or an artificial or prerecorded voice … to any telephone number assigned to a paging service, cellular telephone service, specialized mobile radio service, or other radio common carrier service, or any service for which the called party is charged for the call, unless such call is made solely to collect a debt owed to or guaranteed by the United States …

The Federal Communications Commission and courts agree that, even though the statute only refers to telephone calls, the TCPA also applies to text messages and faxes. The term “automatic telephone dialing system” means “equipment which has the capacity (A) to store or produce telephone numbers to be called, using a random or sequential number generator; and (B) to dial such numbers.” The truth is any automated phone communication of any kind may end up being a target under the TCPA as this area of the law and the regulations around it continue to evolve.

The TCPA is terrifying because of the statutory damages in play, which are uncapped: it prescribes a penalty ranging from $500 to $1,500 for each text, call, or fax made in violation of the statute (think about that the next time your marketing team sends out 1,000 text messages to your customer list). It’s not unusual for larger companies to be hit with verdicts in the millions of dollars in recent years. The TCPA is also scary because it has a fairly robust four-year statute of limitations. And as we noted in a previous blog post in regards to the TCPA plaintiffs’ bar:

[s]ome file complaints that have just enough basis to obtain a quick settlement – they know that smaller companies don’t have the bandwidth to really defend against these types of claims (especially because insurance policies usually have explicit TCPA exceptions!), so they figure they can make a ‘quick buck’ with a two-week shakedown.

In August of this year, Curaleaf was the largest cannabis operator to be on the defending side of a TCPA class action lawsuit. We wrote about the case here. Dispensaries in Michigan, Colorado, Massachusetts, and Nevada have also been hit with these lawsuits (multistate operators of dispensaries seem particularly vulnerable because they operate in multiple jurisdictions and often send promotional texts to drum up business). And at least one CBD company out of Missouri is also facing the heat of a TCPA lawsuit.

What can you do to prepare/defend your business for and against TCPA claims?

  1. Get the express written consent of your customer base to contact them via phone, text, or fax. That (provable) consent is going to be your number one savior in the event you receive a TCPA demand letter or complaint.
  2. Sufficiently and continually educate and train your staff and marketing teams around customer communications recordkeeping and consumer interactions concerning the ability to contact consumers by phone or fax.
  3. Continually monitor customer contact consent in order to know when to cease contact accordingly.If a consumer revokes consent and you’re still contacting them by phone, text, or fax, you’re going to have big problems under the TCPA.
  4. If you receive a TCPA demand letter or are served with a TCPA complaint, immediately notify your insurance company or face the risk of potentially losing defense coverage.
  5. The TCPA does exempt certain entities from compliance. For instance, certain communications from non-profits are exempt, and if the communication, itself, is more educational or informational in nature rather than a commercial advertisement, the consent rules may not apply at all. This though is not an area where cannabis businesses should be cute over masking a real-time ad as a public service announcement (again, just go for documenting express written consent if you can).
  6. The big target of TCPA claims is the use of “autodialer” equipment. Obviously, we’re in an age of text fever, so that’s probably the easiest way for most cannabis companies to reach large consumer bases (plus, it’s probably one of the best ways to comply with state-by-state marketing and advertising regulations). However, the more actual human involvement occurs with the consumer contact, the harder it’s going to be for a potential plaintiff to claim that the “telephone equipment” at issue satisfies the language in the statute.

TCPA litigation is  picking up every year, and it seems that almost on a monthly basis, more cannabis companies are facing potentially large scale TCPA class actions. At this point, cannabis businesses should stop questioning whether the TCPA even applies to them and should immediately get hip to compliance before incurring expensive legal battles and settlements for playing the odds.

For more on this topic, check out the following posts:

The post Prepare Your Cannabis Business for the TCPA appeared first on Harris Bricken.

Friday, September 18, 2020 Headlines | Marijuana Today Daily News

Marijuana Today Daily Headlines
Friday, September 18, 2020 | Curated by host Shea Gunther

// Vermont Bill To Legalize Marijuana Sales One Step Away From Governor’s Desk After House Vote (Marijuana Moment)

// Marijuana vape firms say one year after vaping crisis customers turning to legal suppliers over illicit market (Marijuana Business Daily)

// ‘If someone with experience can’t get this license who can?’ Illinois Governor’s team to meet with critics of marijuana licensing process (Chicago Tribune)

These headlines are brought to you by MJToday Media, publishers of this podcast as well as our weekly show Marijuana Today and the most-excellent Green Rush Podcast. And check out our new show Weed Wonks!

// Trulieve forks out $66 million for two Pennsylvania medical cannabis firms (Marijuana Business Daily)

// Barbados Is Inches Away From Decriminalizing Cannabis Possession (Merry Jane)

// Election 2020: All you need to know about cannabis legalization on the ballot (Leafly)

// 6 cannabis elections that changed the game (Leafly)

// Slim Majority Of Arizona Voters Support Marijuana Legalization Ballot Measure, New Poll Finds (Marijuana Moment)

// German Health Insurance Has Covered Nearly $90 Million of Medical Marijuana in 2020 (Merry Jane)

// Federal Agency Tells USDA To Keep Hemp Rules Open For Comment Even Longer (Marijuana Moment)

Check out our other projects:Marijuana Today— Our flagship title, a weekly podcast examining the world of marijuana business and activism with some of the smartest people in the industry and movement. • Marijuana Media Connect— A service that connects industry insiders in the legal marijuana industry with journalists, bloggers, and writers in need of expert sources for their stories.

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A Bipartisan Bill Would Regulate Hemp CBD as a Dietary Supplement

Last week, Oregon Representative Kurt Schrader (D) and Virginia Representative Morgan Griffith (R) introduced The Hemp and Hemp-Derived CBD Consumer Protection and Market Stabilization Act of 2020 (“H.R. 8179”). If enacted in its current form, H.R. 8179 would legalize the manufacture, sale and marketing of hemp, hemp-derived cannabidiol and other hemp extracts (collectively referred to as “Hemp Products”) as dietary supplements under the Federal Food, Drug and Cosmetic Act (“FDCA”).

This means that these products would be exempt from the FDCA’s “Drug Exclusion Rule,” which, as we previously discussed, currently prevents the sale and marketing of any substance that has been approved or investigated by the FDA as a new drug as a conventional food or dietary supplement – In July 2018, the FDA approved CBD as a drug ingredient in Epidiolex.

To be compliant with the FDCA, these Hemp Products would need to meet the existing regulatory framework imposed on dietary supplements. This comprehensive regulatory framework mandates, in part, that these products be safe as well as properly labeled and marketed.

Because Hemp Products were not sold and marketed in the U.S. as dietary supplements or conventional foods before October 15, 1994, they would be deemed “new dietary ingredients” or “NDIs”.

Pursuant to Section 413 of the FDCA, if a dietary supplement contains an NDI, its manufacturer and distributor must ensure that the NDI is adequately substantiated as being safe and must notify the FDA about that ingredient prior to marketing.

To meet this standard, manufacturers and distributor of Hemp Products would have to provide the FDA with information that is the basis on which they have concluded that their Hemp Products are reasonably expected to be safe under the conditions recommended or suggested in the labeling.

If the manufacturers or distributors were to receive a no-objection letter from the FDA, or no response at all, they could lawfully market their Hemp Products after the 75-day notification period is over, assuming there is in fact a history of use or other evidence of safety establishing that the Hemp Products, when used under the conditions recommended or suggested in the labeling, are reasonably expected to be safe.

When it comes to labeling requirements, manufacturers and distributors of Hemp Products would need to ensure their product packaging contains specific labeling elements, such as an identity statement and a nutrition facts panel and contain no medical claims about the therapeutic values of their products. Inclusion of medical claims would suggest that the Hemp Products’ intended use is that of a drug, and thus, would violate the FDCA and warrant FDA and Federal Trade Commission (“FTC”) enforcement actions.

In sum, the enactment of H.R. 8179 would help alleviate regulatory uncertainties surrounding the legality of Hemp Products, which have hindered market opportunities for hemp farmers and businesses. In addition, the passage of this bipartisan bill would help raise the quality and safety of Hemp Products, and thus, protect consumers.

If, like a consensus of hemp stakeholders, you support H.R. 8129, you should contact your representatives and urge them to co-sponsor this bill. For automatically generated messages, visit the U.S. Hemp Rountable’s online Action Center.

The post A Bipartisan Bill Would Regulate Hemp CBD as a Dietary Supplement appeared first on Harris Bricken.

Thursday, September 17, 2020 Headlines | Marijuana Today Daily News

Marijuana Today Daily Headlines
Thursday, September 17, 2020 | Curated by host Shea Gunther

// House Marijuana Vote In Question Following Leadership Remarks But ‘Schedule Hasn’t Changed’ (Marijuana Moment)

// Vermont Lawmakers Finally Reach Deal On Marijuana Sales Legalization Bill (Marijuana Moment)

// Illinois recreational marijuana sales hit nearly $64 million in August marking a new record (Chicago Tribue)

These headlines are brought to you by Curaleaf, one of the leading vertically-integrated cannabis operators in the U.S. With legal medical and adult use marijuana dispensaries, cultivation sites, and processing facilities all over the United States, Curaleaf has served more than 350,000 medical cannabis patients and looks forward to helping many more long into the future. Swing over to to learn more about this very cool company!

// Congressional Lawmakers Ask Supreme Court To Hear Marijuana Lawsuit Against DEA (Marijuana Moment)

// Is Arizona’s New Medical Marijuana Testing Program About to Cause Shortages? (Phoenix New Times)

// Canadian Retailer Fire & Flower Q2 Revenue Increases 24% Sequentially to $28.6 Million (New Cannabis Ventures)

// Trulieve Raises C$100.45 Million Selling Shares at C$24.50 (New Cannabis Ventures)

// Sheriff’s deputies are not serving warrants cutting down weed in wildfire evacuation zones (Growth Op)

Check out our other projects:Marijuana Today— Our flagship title, a weekly podcast examining the world of marijuana business and activism with some of the smartest people in the industry and movement. • Marijuana Media Connect— A service that connects industry insiders in the legal marijuana industry with journalists, bloggers, and writers in need of expert sources for their stories.

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Photo: Phil Roeder/Flickr