Cannabis Brands and China: An Emerging IP Challenge

Cannabis Brands and China Challenges

Cannabis brands account for a sizeable component of my law firm’s intellectual property work (and, indeed, our work generally). Historically, there has been little overlap between our cannabis and China practice areas, beyond our representing a number of cannabis ancillary product companies on their China manufacturing matters. This is starting to change, as we increasingly see bad-faith actors in China targeting cannabis brands’ trademarks. This intersection carries important implications that cannabis business owners need to understand.

This post highlights the emerging IP challenges cannabis brands face from China and provides proactive strategies for cannabis brands to fight back.

China Trademark Squatting

We can only speculate about what is driving this emerging phenomenon. Most likely, it is partly a new manifestation of an old China problem: trademark squatters. Trademark squatters in China now recognize that, much like other brands, cannabis brands also source various products from the country. Obviously we are not talking about cannabis or cannabis derivatives, but rather goods such as vapes, trimmers, merch, packaging, cosmetics, etc. Squatters generally register trademarks being used by brands like yours in the hope that eventually you will pay them to acquire control over “your” trademarks. And guess what, squatting often works, with payout of tens of thousands of dollars common, and larger payouts not unheard of.

For cannabis (and other) brands that source products from China, a squatter to their trademarks can be a huge problem. Chinese trademark squatters often use their trademark rights to get Chinese law enforcement to seize your products, halt your production, or block your exports, all with the ultimate goal of forcing you to buy the China trademark of your brand from them.

To avoid such problems, cannabis brands with any China exposure should vigilantly monitor trademark applications and oppose any suspicious registrations. Even better, they should register their brand names as China trademarks ahead of squatters, to ensure they remain one step ahead in this strategic game. If a squatter does manage to register your brand’s trademarks, your options will become more limited, especially during the first three years following this registration; after three years, there’s a good chance the squatted trademarks will be vulnerable to a cancellation petition on the basis of non-use.

Moreover, there’s an added dimension to consider: the real-world counterparts of these bad-faith actors. They could very well be manufacturers you’ve previously engaged with or have shared sensitive information. The threats could also emanate from rogue employees within your manufacturer’s fold or even affiliated manufacturers. In these complex, high-stakes scenarios, the optimal strategy often entails going on the offensive. Early discovery of such deceit during the trademark application phase allows brands to oppose the registration. But as highlighted, post-registration, the available strategic moves are far fewer.

Brands not sourcing from China aren’t entirely in the clear. Though they face a diminished threat from China trademark squatters, other bad-faith actors are waiting in the wings. In certain instances, these actors may register your brand’s trademarks in China with genuine intent to use them. Even if you don’t manufacture your products in China, there’s probably a manufacturer  there that can produce your product and nothing stops such manufacturers from collaborating with entities that have unfairly registered your trademarks.

To mitigate the risk of China-made counterfeits of your products entering the U.S. (or Canada or other markets), cannabis brands need to register their trademarks in their primary sales markets. They should also take the additional step of recording their trademark with U.S. Customs and Border Protection (CBP) or the customs authorities in the country in question, to help prevent the entry of counterfeits.

Of course, the risks posed by someone who is actually using trademarks obtained in bad faith is far greater for cannabis brands that are getting products from China. In addition to shipping counterfeits, bad-faith trademark registrants often engage in the same kind of hijinks as squatters, such as petitioning China law enforcement to shut down your production. Also, keep in mind that the counterfeiter actor might be the manufacturer with whom you have been working, sharing confidential information, or a rogue employee of your manufacturer, or a manufacturer related to yours.

For cannabis brands that find themselves (or could find themselves) in such a high-stakes situations, it is likely that the only sensible option is going on the offensive and mounting a challenge to the bad-faith actor. Ideally, you will find out about the shenanigans during the trademark application process, when you can oppose registration of the trademark. As discussed, options will be more limited after registration.


The merging of cannabis brands with China’s IP landscape introduces new challenges. Simultaneously, the need for cannabis brands to protect their intellectual property has become increasingly important. Being proactive is crucial; understanding potential threats, and arming yourself with the right tools and knowledge can make all the difference.

Ensure you have adequate protections in place not just in your home market, but possibly in China as well. If a squatter or counterfeiter has already secured rights over your brand’s trademarks, be prepared to go on the offensive.

Editor’s Note: This piece first ran on our firm’s China Law Blog on August 28, 2023.

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Marijuana as Schedule III: Woe is Me?

Unless you’ve been living under a rock, you know that a pretty historic announcement was made last week by the U.S. Department of Health and Human Services (HHS). HHS officially recommended that marijuana be rescheduled from Schedule I to Schedule III of the federal Controlled Substances Act (CSA).

The HHS news means that the country’s top health agency has finally conceded that cannabis has medical value, and isn’t a drug of abuse on par with fentanyl or heroin. Many people in the cannabis industry are convinced that this HHS recommendation to the Drug Enforcement Administration (DEA) means that the DEA will undertake this rescheduling (and fairly quickly, too–which would be a huge departure from its refusal to reschedule back in 2016).

If  cannabis goes from a Schedule I to a Schedule III, the cannabis industry as we know it will forever change. We recently wrote about three facts and myths from this massive development, but in this post I want to cover what I think legal cannabis looks like in the U.S. if the plant is moved to Schedule III. While all existing cannabis companies will benefit from axing I.R.C. 280E from their business plans and medical research will finally open up, I think the longer game ultimately spells trouble for our current state-legal cannabis industry. Just my two cents; feel free to disagree.

Schedule III is not a free-for-all

Schedule III controlled substances are classified by the DEA as drugs with low to moderate potential for physical and psychological dependence. According to the DEA, when misused, these drugs can still lead to abuse or addiction, even if less dangerous than Schedule I or II controlled substances. Schedule III’s are not available over-the-counter; you can only secure them via a prescription from your treating healthcare provider. This is the reason, for example, that you can’t go to your local gas station and pick up suboxone next to the beer aisle.

Furthermore, states have their own mini-CSAs that are pretty much lock-step with the federal CSA. This means that under both state and federal laws, only certain healthcare providers or licensed pharmacists can dispense (or even refill) Schedule III controlled substances. And, of course, a Schedule III controlled substance can only be prescribed for a “a legitimate medical reason”, which entails maintaining a valid record of care through a treating healthcare provider.

Needless to say, cannabis being re-classified as a Schedule III tees it up for an endless amount of healthcare regulation, from how it will be produced, stored, and dispensed to applicable standards of care. I personally work with ketamine clinics, and ketamine is a Schedule III controlled substance. All of those clients have to deal with a myriad of healthcare law and regulatory issues under both federal and state law, and the cost of compliance is not cheap. We should also see other professional conduct rules for the physicians, healthcare providers, and pharmacists who prescribe and supply approved forms of cannabis, including mandatory drug monitoring programs.

All of this will be a wild departure from the medical cannabis dispensaries that mainly exist today (with the exception of maybe a handful of states that basically have a de facto pharmacy model in place now). As a footnote, since the early 2000s, physicians have had a constitutional right to discuss with their patients the medical benefits and use of cannabis, but they’ve only ever been able to “recommend” its use under state law, which spared everyone the immense headache of dealing with existing healthcare laws and regulations.

Existing healthcare laws and regulations

If you’re still thinking that pursuit of a cannabis enterprise is for you after its reschedule to a III, you need to consider the bevvy of healthcare regulation you’ll now face. The first hurdle is probably the corporate practice of medicine doctrine (CPOM). Cannabis businesses are used to cottage-style rules where there are residency restrictions or other barriers to entry to keep things local and/or small, but the CPOM doctrine is a different and much harsher animal altogether.

In the CPOM sandbox, licensed healthcare providers can only form certain kinds of business entities through which to practice medicine, and they can only go into business with a short list of other healthcare providers with extremely limited exceptions. Generally, healthcare providers also cannot pay for referrals, engage in kickbacks, or fee split across the board, again with very limited exceptions. And if you plan on taking Medicaid, Medicare, or any other government-based or private insurance money, depending on the state you’re in and what reimbursement you seek, you’re also facing the Anti-Kickback Statute, Stark Law, other fraud and abuse laws, and their state law equivalents.

I think I can safely say that no state-legal cannabis company in existence today is dealing with these issues right now, and I haven’t even scratched the surface on things like the application of HIPAA, dealing with electronic health information, or compliance with the Food, Drug & Cosmetic Act when it comes to production. That is a much longer post. And, again, it’s not like no cannabis company could get in line with this kind of compliance, but the question is how much do they want to spend to do so and can they legally enlist the proper healthcare providers to accomplish the end game without violating the endless spiderweb of existing healthcare laws in the U.S.

Cannabis drug development

With potentially moving to Schedule III, cannabis research will become easier almost overnight. Right now, as a Schedule I, research is still nearly impossible. Moving to a III undoubtedly means more drug development exploration. This will introduce the Food and Drug Administration (FDA) and its Center for Drug Evaluation and Research (CDER) into the game, too. Depending on who you are in the regulatory pipeline, this makes you either very excited or very upset. Per the FDA’s own website:

Drug companies seeking to sell a drug in the United States must first test it. The company then sends CDER the evidence from these tests to prove the drug is safe and effective for its intended use. A team of CDER physicians, statisticians, chemists, pharmacologists, and other scientists reviews the company’s data and proposed labeling. If this independent and unbiased review establishes that a drug’s health benefits outweigh its known risks, the drug is approved for sale. The center doesn’t actually test drugs itself, although it does conduct limited research in the areas of drug quality, safety, and effectiveness standards. Before a drug can be tested in people, the drug company or sponsor performs laboratory and animal tests to discover how the drug works and whether it’s likely to be safe and work well in humans. Next, a series of tests in people is begun to determine whether the drug is safe when used to treat a disease and whether it provides a real health benefit.

There are multiple different tracks and timelines for drug approval in the U.S. Unbelievably, per Wikipedia, “in an analysis of the drug development costs for 98 companies over a decade, the average cost per drug developed and approved by a single-drug company was $350 million. But for companies that approved between eight and 13 drugs over 10 years, the cost per drug went as high as $5.5 billion.” It is absurdly expensive and incredibly time-intensive to get a drug to market in the U.S., barring emergency circumstances (essentially). I believe that there will be strong interest in cannabis drug development from existing pharmaceutical companies even with the length of time and costs involved. And the truth is, right now, they’re probably the only ones that can truly afford to develop any kind of cannabis drug after it’s rescheduled.

Adult use and schedule III

I’ve seen a few opinions on this topic. Most say that the current state-legal programs won’t be impacted by a reschedule. And in the short term, this is probably true–there still won’t be lawful interstate commerce, state laws and rules for adult use cannabis licensing will still apply, and cannabis companies (including the medical ones) will still be violating federal law minus the application of I.R.C. 280E where cannabis will no longer be a Schedule I or II controlled substance.

However, I don’t think this “holiday” will last very long. I say that because I think most states will have to make the determination that cannabis is a Schedule III in line with federal law pursuant to their own mini-CSAs. Further, because you cannot acquire Schedule IIIs over the counter, I don’t see pharmaceutical companies largely tolerating these state-by-state experiments as they generally fight and lobby to keep existing drug prices high. And it’s no secret that “Big Pharma” has incredible influence with the FDA already. So, you do the political math there. I don’t think it would surprise anyone that our large pharmaceutical companies would like to develop and fully occupy the field of cannabis-based drugs to the exclusion of any other competition. And unless we get some federal law carve out or enforcement memo supporting and protecting an entirely separate adult use industry outside of this new scheduling, I’m not sure how adult use cannabis escapes Schedule III reprecussions.

What happens now?

Well, we wait. It’s not a done deal that DEA will in fact re-schedule to a III. And, even if the DEA make rules to do so, that will take an incredible amount of time to accomplish. There will be a lot of public comment, and maybe even lawsuits, which will keep state-legal cannabis in tact “as is” for that much longer. I sincerely hope I’m wrong about the impact of a Schedule III decision, but I do not see how state-legal markets can square in the long run with existing healthcare laws and rules, as well as the pharmaceutical industry and lobby in the race for new (and lucrative) drugs. It would take some federal exception to those existing laws to keep adult use free and clear. And for those who believe or hope that this initial reschedule could lead to descheduling altogether, I think that is a pipedream once cannabis hits Schedule III.

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Read This Before Selling Your Cannabis Business. Or Filing Your Next Tax Return

I’d like to send a shoutout to tax lawyer Nick Richards for an intriguing opinion piece published on Friday, September 1 in Marijuana Business Daily. Nick outlines two approaches to potentially help cannabis businesses recoup buckets of cash from Uncle Sam. One approach, which is known to us, may be utilized by cannabis businesses throughout their terms of existence. The second approach, which seems novel, relates to treatment of taxable gains upon sale.

As with most tax strategies specific to cannabis, these approaches center on IRC § 280E, the federal law that disallows deductions and credits for traffickers of Schedule I and II controlled substances. Let’s look at the novel approach first, for cannabis business sellers.

The 280E Asset strategy on sale

Nick’s theory, dubbed the “280E Asset”, posits that deductions disallowed by 280E during the lifecycle of a cannabis business can still be factored into a business’ basis, or the basis of its assets, at sale. This would be highly desirable in many cases, because increased basis means lower taxable gains at sale.

What’s basis? Simply put, it’s the amount of capital investment made by a taxpayer into a business or asset. Nick gives the example of a taxpayer buying an airplane for $1 million and then immediately selling that airplane for $1.5 million. The taxpayer’s basis is $1 million; the taxable gain would be $500,000. If the airplane were a disallowed expense, however – like many cannabis business expenses under 280E – then the entire sale price of $1.5 million would be taxable. Pretty tough.

Enter the 280E Asset theory. This position holds that although 280E prohibits deduction of expenses when incurred by a cannabis businesses, these expenses may be recognized on sale. In support, Nick cites CBS Corp. & Subsidiaries v. U.S (“CBS Corp”), a 2012 tax court decision which held that certain disallowed expenses were recognizable as basis, and could thereby reduce taxable gain on sale. Such a principle would be great for cannabis businesses. Unlike businesses in most other industries, cannabis firms have plenty of disallowed expenses under 280E– especially retailers and other non-grower parties.

Rather than rely on my summary of Nick’s summary of CBS Corp, I suggest you read his short treatment. Then, I suggest you read the case itself; or better still, have a tax lawyer analyze and Shepardize it. Finally, you will need the CPA who prepares your return to sign off.

The 280E Asset strategy appears to be untested– at least in the context of cannabis business windups. I will emphasize again that use of the 280E Asset at sale seems novel, and litigating against the IRS has seldom gone well for cannabis businesses. In fact, I’ve explained that other than Champ v. Commissioner, no cannabis taxpayer has won a §280E case (and there have been a bunch of them).

Dealing with 280E prior to sale

The second approach is for going concerns, and arises out of statutory changes enacted after CBS Corp was decided. Let’s call this one the 471(c) Approach, because it comes into play under § 471(c) of the Tax Cuts and Jobs Act of 2017 (TCJA). In the IRS’s own words, the TCJA “changed deductions, depreciation, expensing, tax credits and other tax items that affect businesses.” On that point, everyone agrees.

Here’s the untested part. As with the 280E Asset strategy, the 471(c) Approach posits that disallowed expenses aren’t irretrievably lost under 471(c) accounting. For that reason, the 471(c) taxpayer may also report its costs of goods sold (COGS), which are not disallowed, according to its own books and records. In this manner, a cannabis business can report otherwise nondeductible expenses as COGS.

Another Marijuana Business Daily article from last month examines the 471(c) Approach in greater depth. For now, I will note that we work with several businesses and CPAs implementing this strategy (perhaps more than I know). I should also caution that I’m unaware of any IRS audits rejecting or allowing the strategy, or of any litigation on point. I’d love to hear from people on this.

Wrapping up on cannabis tax strategy

The good news is that these arcane exercises and tax uncertainties may soon go away. As I explained last week, “marijuana” appears headed for Schedule III. This means that the scourge of 280E would no longer apply, and the cannabis industry would be taxed like other industries at the federal level.

Let’s hope rescheduling goes according to plan, and quickly. Until then, it may be a good idea for cannabis businesses to take a hard look at the strategies set forth above– whether at sale or all along the way.

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Another California Cannabis Enforcement Program That Won’t Work

Earlier this week, California’s Attorney General Rob Bonta announced yet another cannabis enforcement program: the Cannabis Administrative Prosecutor Program (CAPP). CAPP is the newest of California’s ever-growing list of acronym enforcement programs, alongside EPIC (previously CAMP), UCETF, alongside countless other county and local agencies. Will the new enforcement program make a dent in the illegal market? If history tells us anything, the answer is no. And it’ll probably cost a whole lot to boot.

If you’re not familiar with how bad things are for California’s legal cannabis industry, I highly suggest you read my July 10, 2023 post “California Gives Up on the Illegal Cannabis Market.” Essentially, the illegal market may be 2-3x larger (or larger still) than the legal one. You would think that this would make enforcement easy, but you’d be wrong. In spite of all these fancily named enforcement programs, the state served a whopping 92 search warrants in Q2 2023, up from just 21 the quarter prior. That’s not a joke.

So now back to CAPP and why it probably won’t work. CAPP allows cities (Fresno will be the first) to use California’s Department of Justice (DOJ) essentially as backup in enforcement efforts. According to Bonta’s press release:

DOJ, through its Cannabis Control Section, will provide the following support to the city of Fresno, and other local jurisdictions who sign onto the CAPP program to address illegal cultivation by:

  • Provide attorneys to act as administrative prosecutors before local administrative hearing bodies or officers and, where necessary, assist with the development of procedures for expedited administrative enforcement.
  • Assist with investigative services through the EPIC program and its partnerships with other agencies.
  • If necessary, perform the administrative work necessary to provide notices, including assisting in facilitating administrative procedures, and assisting with logistical issues through the use of private process servers, contract code compliance officers, and abatement contractors.

I have to say, this is a relatively creative solution to help cities. Most cities are not Los Angeles or San Francisco or San Diego. Most cities don’t have the resources to go after cannabis criminals, with everything else going on. So allowing cities to tap into the state’s much bigger resources seems – at least on paper – to solve that problem.

However, for the enforcement program to do much, you’d need participation from virtually all of the cities. Let’s say that Fresno (the test case) uses CAPP to shut down all illegal businesses within city limits (which realistically just isn’t going to happen). The illegal businesses will just move to the neighboring city and deliver into Fresno. Problem not solved.

Imagine, on the other hand, that every city in the state signed onto CAPP in a unified effort to eradicate the illegal market. DOJ would be completely overwhelmed and wouldn’t be able to allocate enough resources. With thousands and thousands of illegal businesses, you’d need an army of lawyers to prosecute them all. And the state doesn’t have them.

Moreover, it looks like the enforcement program has some overly aspirational funding goals. According to Bonta:

The program is designed to be self-funded as DOJ staff, in coordination with the local government, will seek to recover costs through fines, enforcement actions, stipulated administrative orders, settlements, and abatement liens. Any funding received that exceeds the cost of services provided as part of this MOU will be held by the city of Fresno.

In other words, DOJ believes that fines raised through enforcement actions will pay for the actions. Any time the government says a program will be self-funded, I become 20 times more skeptical. It almost never works out that way. In fact, Willamette Week just reported that Oregon’s purportedly self-funded psilocybin program will now need taxpayer support.

The same thing will happen here. Even assuming lots of cities sign on, a huge proportion of defendants will simply skip town, default, or not pay their fines. It will be an impossible task to recover funds sufficient to fund the program. Maybe that’s why Bonta’s press release said that the program “is designed” to be self-funded rather than that “it will” be. And when that self-funding doesn’t work out, taxpayers will be left with the bill.

Will CAPP help smaller participating cities go after some of the more brazen illegal operators within their borders? Probably. Will it solve the illegal market? Absolutely not.

Enforcement will never end the illegal market. In fact, it won’t even put a meaningful dent in the market. This should be extremely obvious, yet it seems like the folks in charge cannot see what’s right in front of their eyes.

As I have said before, police actions did not work for decades under the Controlled Substances Act, so why would they work when the laws are even more permissive? If the state really wants a healthy legal industry, it needs to deregulate things that make no sense. And there is a lot that makes no sense. Unless illegal market operators are incentivized to come into the legal market — and you can bet a couple of search warrants here and there isn’t going to do that — nothing will change.

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Three Myths and Three Facts on the HUGE Marijuana Rescheduling Recommendation

Huge news yesterday. Huge! The U.S. Department of Health and Human Services (HHS) has officially recommended that marijuana be rescheduled, from Schedule I to Schedule III of the federal Controlled Substances Act (CSA). This means that the country’s top health agency has finally conceded that cannabis has medical value, and isn’t a drug of abuse on par with fentanyl or heroin. We haven’t yet seen the HHS letter so we’re not sure what changed from the last “medical and scientific” evaluation undertaken by the Food and Drug Administration (FDA) and HHS in 2015, but hey, we’ll take it.

Griffen Thorne in our office recently predicted that administrative action, and not Congressional action, would be the course of reform at hand. Kudos to him and others who shared that view. Rescheduling is not the best possible outcome, however. It’s really not. We’d like to see marijuana descheduled entirely, like alcohol or tobacco– which are demonstrably harmful substances. Still, moving marijuana down to Schedule III would be monumental progress.

The internet is full of hot takes on yesterday’s news, of course. They range from 0% accurate to 100% accurate. This blog post aims to dispel a few myths around rescheduling, and trot out some interesting facts.

Myth 1: It’s a done deal

It’s not a done deal! This all looks pretty good right now, but the Drug Enforcement Administration (DEA) has final say on whether to schedule or reschedule marijuana following the HHS recommendation. As an HHS spokesperson explained:

“While HHS’s scientific and medical evaluation is binding on DEA, the scheduling recommendation is not. DEA has the final authority to schedule a drug under the CSA (or transfer a controlled substance between schedules or remove such a drug from scheduling altogether) after considering the relevant statutory and regulatory criteria and HHS’ scientific and medical evaluation. DEA goes through a rulemaking process to schedule, reschedule or deschedule the drug, which includes a period for public comment before DEA finalizes the scheduling action with a final rulemaking.”

Here, the spokesperson is paraphrasing the CSA at 21 USC § 811(b). That CSA section references the Attorney General (AG) rather than DEA (and refers to the AG only as a “he”, embarrassingly). In any case, the DEA Administrator reports to the AG (through the Deputy AG). The HHS spokesperson is ultimately correct that DEA will have to instate rulemaking. The AG could then reschedule.

So, will DEA actually commence the rulemaking process? It seems inconceivable that DEA wouldn’t, but DEA has taken many bad positions on controlled substances over the years. This includes ignoring orders from its own administrative law judges to reschedule marijuana back in the day. Without having seen the HHS letter, I strongly believe that DEA will commence rulemaking to reschedule marijuana to III. Biden himself requested this HHS review, after all, for better or worse.

A couple of other, very important questions include: Will DEA drag its feet? How long will the rulemaking process take? What will the proposed rule actually say? How much testimony will be entertained, and from whom? Will the rulemaking be litigated? I could go on. Overall this is not a done deal, and although it feels imminent, this may take some time.

Myth 2: State marijuana businesses would be clear of federal enforcement

Nothing is going to change here, legally speaking. Practically speaking, same story: not much will change on federal enforcement exposure. This is because moving marijuana to Schedule III would have no effect on the federally verboten status of state-licensed marijuana businesses. These businesses would still be in violation of federal law if the AG reschedules, similar to any other business selling Schedule III drugs like methamphetamines or anabolic steroids. For a fuller analysis, check out this old chestnut from 2016.

But would moving marijuana to Schedule III make the risk of federal enforcement even more unlikely? I suppose. Truth be told, we haven’t worried much about federal law enforcement against state-licensed cannabis businesses since the days of notorious cannabis dingus Jeff Sessions. Moving the plant to Schedule III can’t hurt, though.

The only way state-licensed cannabis businesses will become insulated from all risk of federal enforcement is for marijuana to be removed from the CSA entirely, as half of Congress has voted to do and as Senators have recently petitioned the Attorney General to do (citing yours truly). Let’s hope we get there eventually.

Myth 3: Marijuana businesses would be taxed like other businesses

This is almost correct. If marijuana goes to Schedule III, the margins-crushing statute known as IRC § 280E would not apply, and the cannabis industry would change forever. That said, state-level taxation of cannabis will not change. Or, it may change for the worse, as states feel emboldened to raise cannabis-related taxes in the absence of § 280E.

Do states tax cannabis heavily? Yes they do. Although several states have passed laws designed to mute the effects of § 280E at the state return level, most states (and many cities and counties) levy significant taxes on cannabis in some form or other. These taxes usually accrue at the point of sale and are borne by the consumer. They are designed to raise prices, however, and place downward pressure on sales. For that reason, cannabis businesses tend to oppose them.

Still, I cannot emphasize enough that removal of § 280E would change the industry forever. Having worked with cannabis businesses for 13 years, I view taxation as the largest affront to marijuana businesses— more than banking access, intellectual property protection problems, lack of bankruptcy, you name it. This would be HUGE.

Fact 1: Marijuana rescheduling would give industry more leverage with investors

The cannabis industry is depressed and starved for capital. The last big investment spike came in on the COVID wave; since that point equity has been cheap and investors hold all the cards. With § 280E gone, many struggling cannabis outfits should begin producing better financial statements. The most efficient cannabis businesses would look sexy as all get-out.

Cannabis businesses also would have an easier time explaining their models, and we’d see fewer people scheming to do things like move to Puerto Rico or build these types of rats’ nests. It is also worth noting that U.S. small business lending has held up recently despite higher costs of credit. More of those available dollars could flow to cannabis businesses. They would have more value overnight (the pubcos already got a jolt), and should be able to generate financial statements on par with other industries.

Fact 2: Marijuana rescheduling wouldn’t fix the banking thing

The banking thing will not be fixed. At Schedule III, marijuana would still be a controlled substance and state-licensed businesses would still be “trafficking” in a controlled substance, contrary to federal law.

As someone who has advised many banks and credit unions on cannabis, including the federal government, I’m here to tell you that the analysis for financial institutions won’t fundamentally change. We need the perpetually stalled SAFE Banking Act or some other act of Congress to fix this, so long as cannabis remains on any CSA schedule. Even if marijuana is moved to Schedule III, cannabis businesses would be stuck with current options (which aren’t as bad as advertised.)

Fact 3: Marijuana would become easier to research, and subject to the morass of health care regulation (kind of)

These are probably two different facts. Oh well. Due to its Schedule I status, marijuana has always been incredibly difficult to research (see: How to Study Schedule I Controlled Substances). That paradigm changed a bit with passage of the Medical Marijuana and Cannabidiol Research Expansion Act last July, but a move to Schedule III would open the floodgates. Substances on lower schedules are simply more accessible from a DEA licensing perspective.

Related to this, the plant would “officially” have medical value if placed on Schedule III. That would be great and not so great. As a law firm with a substantial ketamine practice, for example, we’ve seen how the morass of health care regulation is brought to bear on controlled substances fit for medical use (ketamine is also a Schedule III drug). Granted, ketamine is an FDA approved drug, but the classification of a substance as something with medical value opens the door to any number of opportunities for medical application and attendant regulation.

The cannabis industry has always been worried about Big Pharma moving in. That fear has been somewhat irrational in my view, especially given the size and staying power of the non-pharmaceutical market. With a Schedule III placement, however, we would see more FDA drug development opportunities, which means more FDA drugs, which means off-label uses, etc. Expect to see a dual-track market for cannabis going forward, including an intensive regulatory structure.

Wrapping up on marijuana rescheduling

Again, really great news. In the absence of descheduling we’ll gladly take it. Keep your fingers crossed for a smooth and speedy process. In the meantime, we’ll continue to share thoughts and track this crucial development, as I’m certain we’ll have much more to say in coming weeks and months. For now, it’s time to celebrate!

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California Cannabis Repeal? A Humboldt County Study

It’s no secret that the cannabis industry is on a steep decline in a variety of states, including California. We have time and again written about the specific woes plaguing the California cannabis industry. High taxes, a staggering credit crunch and collections problems, receiverships, rampant local prohibition, overregulation by the state, and the raging illegal market are just a few. Now, queue the California cannabis voters who may have initially supported this democratic experiment but are now thinking twice about local laws and rules permitting commercial cannabis activity in their borders. Cannabis repeal may be on the horizon.

Cannabis NIMBYs

The term “Not In My Backyard” neighbor (“NIMBY“) has obvious negative connotations. Of course, cannabis NIMBYs are not unique to California. They’re everywhere in cannabis.

Years ago, we wrote a post about how to deal with them and their tactics. See here. Essentially, NIMBYs thrive on confrontation and manufacturing lots of arguments to eliminate or stop progress when it comes to cannabis business development. They’ll even go so far as to form plaintiff groups to sue local government and cannabis businesses on any possible grounds, including (and usually) alleged environmental issues or violations of due process rights in the creation of cannabis laws.

In turn, cannabis businesses are wise to be as transparent as possible with all of their neighbors as well as their local government, and to keep constant contact with regulators in order to avoid inadvertent regulatory violations. But what happens when you make it past the initial NIMBYs only to find yourself at their mercy again years after you’ve set up shop?

California cannabis repeal

When I was practicing in Washington State, there were several instances where a city or county initially embraced cannabis legalization, welcoming all kinds of businesses to set up shop. Then, a couple of years down the line, you’d see some of these local governments re-think those decisions and enact subsequent moratoria. In some cases, these jurisdictions even pulled or denied conditional permitting in order to completely stamp out cannabis businesses (yes, that can be done depending on local laws).

Now, I’m seeing some rumblings in California of certain cities and counties going back on their initially warm and fuzzy cannabis feelings. And a lot of that is driven by fed up and annoyed local constituents.

Humboldt County

I recently read this article by Lester Black from SF Gate. The Emerald Triangle in California is universally known for its cannabis quality and generational cannabis farmers, and that especially includes Humboldt County. It was one of the first local governments to regulate cannabis farmers in the state post-legalization back in 2018. Now though, its entire local industry is going to face a potential death knell posed by a March 2024 vote on a new initiative that heavily restricts the existing industry, while essentially eliminating any more farms from setting up.

Here’s a copy of the initiative. According to the initiative website, the proposed amendments would “Reduce the cannabis cultivation footprint, promote healthy environments and rural communities, ensure public involvement, and protect truly small-scale, environmentally-minded cannabis farmers”. Backers of the initiatve state on their website that, due to the County’s initial planning and current laws,

“There are now over 1000 legally permitted operations, most of which are in stark contrast to the small-scale, organic ‘hippy’ farming, of previous decades. The newly emerging cannabis culture represents a more industrialized ‘mega-grow approach’, with heated and ventilated grow houses, 24/7 lights, extensive use of water, and loud generators.”

Further, per the initiative’s website,

“. . . incursions of mega-grows into rural residential, agricultural, and woodland areas have been received with considerable anger and bitterness by the rural public. One reason for this is that the county’s ordinance 2.0 precludes most affected rural residents from being notified that a mega-grow would be setting up next door to them.  Such disregard has been taken to be demeaning and disrespectful, leaving residents little if any recourse to complain, or to go through the pain of expensive and difficult litigation.  Residents cite issues of health, safety, welfare, dangerous traffic, harassment by growers, and harm to the environment and natural beauty.  Of particular concern has been diversion of stream and well water that takes critical water away from residents and ranchers, as well as from watersheds and ecosystems, where water deprivation impacts animal and plant habitats.  Strong objections have been made about the constant night lights and generator noise that disrupt residents’ lives and that impact wildlife, including the Northern Spotted Owl.”

Humboldt industry reaction

The proposed, 38-page initiative (called the Humboldt Cannabis Reform Initiative) represents a massive overhaul to existing Humboldt County cannabis laws. Perhaps most importantly, this initiative would limit cannabis farms to no more than 10,000 square feet, which would make about 400 currently permitted farms non-conforming uses under the initiative; and the number of permits issued would be capped at no more than 1,200, valid only for one year before renewal. Further, a business could not have multiple cultivation permits on a single parcel. No generators would be allowed except for one for emergency use only, and all neighbors of a cultivation site would have to be notified beforehand that a grow was coming in. Lastly, for existing growers to come into compliance with the proposed initiative, they’d have to enact a laundry list of expensive changes or be rendered non-conforming and eventually shut down.

The County’s reaction to de facto cannabis repeal

The County Planning Department’s  analysis of the initiative is incredibly interesting. Early in its analysis, the Planning Department writes “The [initiative] purports to ‘…protect the County’s residents and natural resources from harm caused by large-scale cannabis cultivation…’ It does this by developing a regulatory system that renders most existing permitted farms non-conforming.” The analysis goes on to state:

“The largest farms in Humboldt County range between 7 and 8 acres. There are four farms this size. For comparison, in Lake County there are farms in excess of 60 acres and in Santa Barbara and San Bernadino Counties there are farms in excess of 100 acres. In a statewide market context, Humboldt County does not have large scale farms.”

Essentially, the County is claiming that there are no real “mega farms” in Humboldt County at this point in time, and that:

“the public does not understand what this initiative would do and signed the petition thinking that ‘large scale’ cannabis farms should not be in Humboldt County without recognizing that most of the so-called ‘large-scale farms’ that would be outlawed if the [initiative] passed are the very farms that have existed in Humboldt County for decades”.

It seems then that the County Planning Department does not support the passage of the initiative, and that’s what it relayed to the County Board of Supervisors.

What’s next in Humboldt

Undoubtedly, between now and March, both proponents and opponents of this initiative will undertake education campaigns for and to the public. The big legal takeaway though is that Humboldt will not be the last stand or instance where local voters initially embraced cannabis legalization, only to change their minds down the road. We could see major overhauls or total eliminations of local cannabis industries in California as a result.

Perhaps most importantly, if the Humboldt Cannabis Reform Initiative passes in March, other motivated, well-capitalized, angry, and annoyed local voters could use this process as a blueprint for their own cannabis repeal campaigns. I will definitely be watching in March when this vote goes down, as it could have huge implications for other local cannabis programs in California.

The post California Cannabis Repeal? A Humboldt County Study appeared first on Harris Bricken Sliwoski LLP.

Taste the Injunction: Unsweet Ending for Skittles Infringer

This post written by Harris Bricken attorney Fred Rocafort was originally published on July 20, 2023 on The Trademark Lawyer website and is republished here with their permission.

Candymaker Wrigley and Terphogz, LLC have reached a settlement in a high-profile lawsuit over Terphogz’s use of the mark ZKITTLEZ on cannabis products and other merchandise such as clothing (WM. Wrigley Jr. Co. v. Terphogz, LLC, No. 21-CV-02357 (N.D. Ill. July 3, 2023)). Wrigley argued that Terphogz infringed on its SKITTLES trademarks, including its tagline TASTE THE RAINBOW and its S logo. As part of the settlement agreement, Terphogz has agreed to immediately cease all use of the ZKITTLEZ marks, including TAZTETEHZTRAINBRO, ZKITTLEZ HEMP, and ZKITTLEZ HEMP & Cloud Design.

Wrigley’s suit, filed in 2021, alleged trademark infringement, false designation of origin, unfair competition, trademark dilution under both federal and Illinois law, and violation of the Federal Anti-Cybersquatting Consumer Protection Act as well as the Illinois Uniform Deceptive Trade Practices Act. Also named in the lawsuit were five businesses allegedly reselling products bearing the ZKITTLEZ marks. Pursuant to the parties’ agreement, the court enjoined Terphogz from using the ZKITTLEZ marks.

This case is just one of many involving the use of famous candy or snack brands on cannabis products. The Federal Trade Commission (FTC) and the US Food and Drug Administration (FDA) recently issued joint cease-and-desist letters to six companies “marketing edible products containing Delta-8 tetrahydrocannabinol (THC) in packaging that is almost identical to many snacks and candy children eat, including Doritos tortilla chips, Cheetos cheese-flavored snacks, and Nerds Candy” (Press Release, FTC, FTC Sends Cease and Desist Letters with FDA to Companies Selling Edible Products Containing Delta-8 THC in Packaging Nearly Identical to Food Children Eat, July 5, 2023). In 2022, Nerds-maker Ferrara sued Akimov LLC over its use of the NERDS and TROLLI trademarks on cannabis-related goods (Ferrara Candy Co. v. Akimov LLC, No. 22-CV-80768-RAR (S.D. Fla. Oct. 27, 2022)). As in the Wrigley case, the court enjoined the defendant from using Ferrara’s trademarks.

Despite similar outcomes, there are significant differences between the Wrigley and Ferrara facts. In Ferrara, some of the defendant’s products featured marks identical to those registered by Ferrara. Akimov’s products included “THC-0 Apple Rings” that prominently displayed the TROLLI mark and a “Medicated Nerds Rope”. In contrast, Terphogz did not utilize any SKITTLES marks on their products. Furthermore, the infringing products in Ferrara were “THC-infused candy products”; Terphogz did not sell any cannabis-infused candy (or indeed any candy) bearing the ZKITTLEZ marks.

Akimov’s use of NERDS and TROLLI marks presents grave risks both to Ferrara and consumers. For Ferrara, sales of the infringing products could result in lost revenues and reputational issues. Meanwhile, there is a clear potential for confusion on the part of consumers, particularly considering the genuine Nerds and Trolli products’ appeal to children. As Ferrara noted in its complaint that its candy products are marketed “as a fun and enjoyable treat for children of all ages,” hence it “would never condone or authorize the use of the Ferrara Trademarks and Ferrara Trade Dress in connection with products that could be harmful to children.”

Wrigley on the other hand presents a more nuanced situation. While the allusion to the Skittles brand is clear, using a punny mark like ZKITTLEZ is not the same as using an identical mark without authorization. It can be reasonably argued that there is not likelihood of confusion between SKITTLES and ZKITTLEZ. In fact, the US Patent and Trademark Office (USPTO) allowed Terphogz’s application to register the mark ZKITTLEZ HEMP & Cloud Design (Application Serial No. 88703451) in connection to clothing, despite Wrigley’s previous registration of the SKITTLES mark for clothing (Wrigley has since filed an opposition to the registration of Terphogz’s mark with the Trademark Trial and Appeal Board (TTAB)).

Differences between the two cases aside, a clear message emerges for cannabis businesses considering the use of marks inspired by established brands: Do not! While this is sound advice for any business, the cannabis industry must expect heightened scrutiny of their activities. Brands might not mind names that riff on their marks if used on run-of-the-mill products – but they might object if cannabis is involved.

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Oregon Cannabis: CIAO Wins Round One on Aspergillus Testing Rule!

Oregon marijuana growers dreading the new aspergillus testing rule can exhale (for now). That’s because on Friday, August 25, the Oregon Supreme Court stayed enforcement of the new aspergillus testing rule pending a final hearing on the merits. This is a big deal! Kudos the Cannabis Industry Alliance of Oregon (CIAO) and the co-petitioners who filed a petition against the Oregon Health Authority (OHA) and Oregon Liquor & Cannabis Commission (OLCC) seeking judicial review of the new aspergillus testing rule. Kevin Jacoby, who represents the petitioners, did an excellent job. We’ve covered the aspergillus testing rule before here, here, and discussed the lawsuit here. We were not optimistic about the odds of success, but are quite pleased for our numerous clients who grow marijuana in Oregon.

Let’s dive into the ruling and what it means.

How did we get here?

In March 2023, the Oregon Health Authority (“OHA”) promulgated a new rule that required testing marijuana for certain microbiological contaminants, including for aspergillus. On July 28, 2023, the CIAO and others filed a lawsuit challenging the OHA’s new aspergillus testing rule. The petitioners seek to stop the OHA from enforcing the rule and when they filed suit they also filed a motion for emergency relief from the new aspergillus testing rule.

A litigant who seeks emergency relief compelling or preventing another litigant from doing something is fighting an uphill battle. Here, the petitioners had to establish to the Supreme Court that “irreparable injury probably would result” if a stay is denied. The Supreme Court also considers the likelihood that petitioners will prevail on the merits and the likelihood of harm to the public if a stay is granted.

Petitioners offered evidence that the harm to them from enforcement of the aspergillus testing would be “devastating and irreparable.” This evidence included petitioner’s showing that at least one of them would be out of business and causing a “risk of total business failure as soon as this fall” to numerous other marijuana growers if the stay was denied. Respondents (OHA & OLCC) argued the impact of the aspergillus testing rule was “highly exaggerated” but did not argue petitioners failed to show irreparable harm. The Court found petitioners made the required showing of irreparable harm.

The Court turned to whether petitioners demonstrated a likelihood of success on the merits, and ruled they did. Petitioners argued that the OHA exceeded its statutory authority in promulgating the aspergillus testing rule by failing to consider “less restrictive alternatives” as required by Oregon Statute 475C.544(8)(b).  Petitioners directed the Court to evidence showing the OHA was aware of less restrictive alternatives adopted in other states and argued the aspergillus testing rule was more restrictive than necessary to protect public health. Respondents (the OHA), said the Court, did not raise a “clear response” to this argument. Because the legislature directed that the OHA standards “may not” be more restrictive than reasonably necessary, the Court ruled that petitioners have shown a likelihood of success on judicial review.

Finally, the Court examined whether staying enforcement of the aspergillus testing rule would negatively affect public health. Petitioners argued it would not. They pointed to Oregon’s eight-year track record of recreational marijuana and twenty-five year history of medical marijuana use. In all that time, explained petitioners, there has been no data linking cannabis consumption to higher rates of aspergillosis in Oregonians. The Court found this persuasive and made no mention of any evidence or argument presented by the OHA or OLCC.

What does the ruling mean?

Neither the OHA nor the can OLCC enforce the aspergillus testing rule at this time. Specifically, the court stayed enforcement, pending completion of judicial review, of the provisions of OAR 333-007-0390 relating to testing for “Aspergillus flavus, A fumigatus, A niger and A terreus.” The court did not stay the portions of the rule relating to “Shiga toxin producing Escherichia coli and Salmonella species,” which were not challenged in this case.

The Oregon aspergillus testing fight is not over

This is a big victory for cannabis growers in Oregon. But the case is not over. The case now proceeds to a full hearing where the parties may offer more evidence. Essentially, the Court decided to stay enforcement of the rule on an emergency basis, but the final decision comes later.

Aspergillus testing won’t be required this fall harvest

We highly doubt the case will progress in the next few months. That means, until further notice, the aspergillus testing rule cannot be enforced as described above.

Petitioners have the upper hand so far

This ruling is a boon for petitioners and Oregon marijuana growers. Reading between the lines of the opinion, the Court found petitioners presented very strong evidence and arguments that the OHA’s rule goes far beyond what may be needed to protect the public from aspergillus. Perhaps this will cause the OHA and OLCC to entertain discussions with the CIAO and others on how to rewrite the rule to protect both marijuana growers and satisfy the public health concerns that led them to adopt this rule.

Again, great work on behalf of the industry by the CIAO and others.

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New York Cannabis: CAURD Injunction Update

On August 9, 2023, we wrote about the temporary injunction ordered by Judge Kevin Bryant in New York Supreme Court, County of Albany which occurred on August 7, 2023. That injunction provided, in sum, that the New York Cannabis Control Board (“CCB”) and Office of Cannabis Management (“OCM”) are restrained from awarding or further processing any more Conditional Adult-Use Retail Dispensary (“CAURD”) licenses. They are also constrained from conferring operational approval upon any more provisional or existing CAURD licenses, pending further order of the Court.

On Friday, August 18, 2023, Judge Bryan granted the preliminary injunction (the “Order”) against the CAURD licensing program, finding, inter alia, that the CCB and OCM exceeded their legal authority by creating a new licensing class that excluded specific minorities – namely disabled veterans – who were specifically prioritized in the 2021 state law that legalized recreational marijuana – the Marijuana Regulation and Taxation Act (“MRTA”).

The Order prevents, the OCM and CCB from further processing or awarding more CAURD licenses. The Order provides an exception for many of the CAURD licensees who have already passed basic inspections and are ready to open.

The Order had the following implications:

  1. It prohibited the OCM and CCB from processing or awarding any additional CAURD licenses.
  2. However, it provided an exception for CAURD licensees who had met all requirements for licensing before August 7, 2023, including site plan approval from the CCB and, where applicable, local municipalities.

Judge Bryant’s decision was influenced by the fact that the OCM had made questionable decisions, such as creating the CAURD program and proceeding with licensing despite facing legal challenges– including the Variscite case and another lawsuit brought by the Coalition for Access to Regulated and Safe Cannabis. These challenges had the potential to invalidate the entire CAURD program.

“It was Defendant that decided to move forward and accelerate the CAURD program in the face of unresolved litigation and they were undeniably on notice of the alleged constitutional defects at issue,” Bryant wrote. “Despite this notice, Defendants encouraged potential licensees to incur significant expenses in reliance on a program that Defendants knew was at issue in pending litigation.

That language, Bryant wrote, was that the retail license period “be open to all applicants at the same time,” and that the OCM had no legal authority to create CAURD licenses, since those permits were not explicitly enumerated in state law.

In essence, the Order allows some existing CAURD licensees to continue their operations and open up dispensaries pending certain approval during the ongoing legal proceedings. However, it also suggests that the entire CAURD program may ultimately face significant challenges and potentially be invalidated.

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How To Wind Up a Cannabis Company

Most cannabis companies are not wound up properly, some cannabis companies (and their owners) suffer repercussions for this, and all cannabis companies (and their owners, and investors!) are well served by an orderly wind-up. This blog post will cover some basics on the cannabis business wind-up process.

First, though, I want to address a point of frequent confusion– “dissolving” and “winding up” a company are two different things. Dissolution occurs when a company representative files Articles of Dissolution, or similarly named paperwork, with the relevant Secretary of State. Dissolution may also ensue “administratively” by the State if a Company fails to pay taxes or fees. Dissolution is just one step in the wind-up process, and it often occurs early in that process. “Winding up”, conversely, is putting the whole thing to bed.

Step 1: Face the facts and get your affairs in order

There comes a point in the lifecycle of most cannabis businesses when it no longer makes sense to proceed. Most businesses eventually fail. According to BLS statistics aggregators, 20.8% of private sector U.S. businesses fail within a year, 48.8% fail within 5 years and 65.1% fail within 10 years. In the cannabis industry, I guarantee you those numbers are higher.

Sometimes it’s hard to admit defeat. In many cases, owners hang on longer than they should, exposing the company and its assets to greater and greater risk. Timing the wind-up is key, more so with bankruptcy out of the question for cannabis outfits. It’s easier to know when to bail if your recordkeeping is sound, data is current, and when company ownership is aligned in its thinking. (Most closely-held company agreements require unanimous owner approval to dissolve.)

Step 2: Vote and paper any decision

A cannabis company considering dissolution should properly notice a meeting, discuss the topic, vote, and paper any decision. The “paper” authorizing dissolution and windup would be a consent resolution or some variation of minutes. It’s important to follow company agreements to a T here; or, if the company lacks governance documents, to abide by statutory strictures in the relevant state. Where I sit in Oregon, for example, unless a corporation’s bylaws state otherwise, the corporation may be dissolved: a) on the written consent of all shareholders, or b) by the board, but only if the board proposes dissolution and a majority of shareholders agree.

Typically, the consent resolutions will cover some or all of the following:

  • Recitals laying out the unfortunate milieu (this needn’t be gory, or too detailed)
  • A resolution to dissolve the company
  • A resolution authorizing certain key activities: e.g., the filing of Articles of Dissolution, closing of certain accounts
  • A resolution appointing of a representative (usually within the company) who is authorized to oversee the final disposition of all company assets, obligations and other liabilities (known and unknown, matured and contingent), once operations cease
  • A resolution to set aside a certain amount of cash for activities outlined above

These critical resolutions will be propounded by directors, or shareholders, or both, in a corporation. In an LLC, it is members, or members and managers, who do the deed. Again, see company agreements and/or statutes.

Step 3: Final payments and actions

Once the dissolution is approved and wind-up commences, ideally the business has enough cash lying around to pay down creditors and wriggle out of any ongoing obligations (e.g. buying out a lease, paying taxes eventually owed). Typically, the order of payments required in a windup is something like this:

  • First, to the extent permitted by law, to creditors (including owner-creditors), in satisfaction of liabilities of the company
  • Second, to owners of the company for any income tax liabilities, if the governance agreements required that
  • Third, to owners of the company as distributions or dividends
  • Fourth, to the establishment of any reserves deemed appropriate for winding up the company’s affairs

Again, company agreements are crucial to follow here. If the company lacks governance agreements, consult the relevant statutes at play.

Step 4: Tax returns

This is really part of Step 3, but I’m giving taxes its own category because that’s typically the last thing a dissolved cannabis company does, just before closing any bank accounts and distributing final proceeds. There are different rules for when returns are due, depending on the type of company at issue:

  • a dissolved corporation must file a final return by the 15th day of the fourth month after the date of dissolution
  • a dissolved S corporation or partnership (most LLCs) must file a final return by the 15th day of the third month after the date of dissolution

Sometimes, a dissolved entity cannot file using official forms since the current year’s forms aren’t yet available. Still, early dissolvers must comply with filing instructions. Many of these companies choose to file an extension request at dissolution, taking into account the final return’s due date and when the current year’s tax forms will be available.


I hope you never have to wind up your cannabis company. Or if you do, I hope it’s because you sold all your assets to a well-heeled buyer, and it’s a simple dissolution where you file returns and ride off into the sunset. For everyone else, the best advice is: a) exit before things get to dire (if possible), b) follow the protocols set forth in relevant company agreements and/or relevant statutes (always) and c) seek help where needed. Best of luck.

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