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Business Law Today

April 2023

Cannabis Law: An Update on Recent Developments Related to the Cannabis Industry, 2023

Stanley Samuel Jutkowitz

Cannabis Law: An Update on Recent Developments Related to the Cannabis Industry, 2023

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§ 1.1 Introduction

As in past years, laws and regulations relating to cannabis and the cannabis industry are evolving at a dizzying pace. In order to put current developments in context, it is important to understand the current state of the law regarding marijuana.

The starting point is the Controlled Substances Act, 21 U.S.C. § 801 et. seq. (“CSA”), passed in 1970 to regulate the manufacture, use, and distribution of certain controlled substances for medical, scientific and industrial purposes and to prevent these substances from being used for illegal purposes. The CSA classified various drugs and chemicals into five categories, or schedules. Marijuana, along with heroin, cocaine, LSD and other substances, was placed on the most restrictive schedule, Schedule 1. The CSA prohibits the manufacture, distribution, sale possession or use of marijuana. Also, the CSA operates to prohibit the transportation of marijuana across state lines, even between states that have passed laws legalizing marijuana, as well as international borders.

Despite the existence of the CSA, as of today, thirty-nine states plus the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands have laws legalizing marijuana for medical use, and twenty-one of those states, plus D.C. and Guam a have legalized marijuana for recreational use, as well. Legislation to legalize marijuana is currently expected to work its way through other state legislatures. Since the CSA is the law of the land, the question remains as to how states can “legalize” marijuana consistent with the preemption doctrine.

The laws relating to marijuana and hemp became very complicated at the end of 2018, with the passage of the Agricultural Improvement Act of 2018, the Farm Bill. It is important to understand that both hemp and marijuana come from the same species of plant, Cannabis sativa L., and both were included in the definition of marijuana in the CSA. Both marijuana and hemp contain a number of chemical compounds, the two most known of which are THC (the psychoactive compound) and CBD. The legal difference is that hemp contains less than 3 percent THC. Part of the confusion revolves around the other chemical compound, CBD, which is extremely popular and ubiquitous in the market place. CBD comes from both hemp and marijuana. Further complicating the situation is that there is no standard for measuring THC content in a cannabis plant, so what might be classified as hemp by one state might be classified as marijuana by a different state.

While hemp is technically legal under federal law, the Food and Drug Administration maintains jurisdiction over hemp (and therefore CBD) to the extent it is marketed as a food or dietary supplement or as a drug. Also, the state statutory and regulatory framework for hemp and CBD derived from hemp remains very confusing and is rapidly evolving.

This section will focus on recent case law developments in cannabis.

§ 1.2 Contracts

Praetorian Global Inc. v. Eel River Organics LLC, A164245 (Court of Appeal of the State of California, First Appellate District)

Date: October 10, 2022

Facts: In January 2019, the parties entered a contract under which Plaintiff licensed portions of its intellectual property to Defendant. In exchange, Defendant was to pay a monthly royalty, with a minimum total of $1 million due for the first year and $2 million due for the second year. The contract contained an arbitration clause under which the parties agreed to submit disputes to binding arbitration in Colorado. After Defendant failed to pay over $2 million owed under the contract, Plaintiff filed a demand for arbitration seeking damages for breach of contract. In August 2021, the arbitrator found for Plaintiff and rejected Defendant’s claim that the contract was illegal under former California Code of Regulations title 16, division 42, section 5032 (former section 5032), which prohibited entities licensed to conduct commercial cannabis activity from conducting such activity “on behalf of, at the request of, or pursuant to a contract with” an unlicensed entity. After the arbitrator entered the final award, Plaintiff filed a petition to confirm the award in the trial court. Defendant opposed on the ground that the arbitrator exceeded her powers by issuing an award enforcing an illegal contract. The court granted the petition in a summary order. A judgment confirming the award was entered on October 13, 2021.

Held: Affirmed.

Reasoning: The Court of Appeals of California, First District, Division One upheld the decision confirming the arbitration award even if the contract violated former section 5032. The Court concluded that the contract was enforceable because: (i) even if the contract was illegal, it was not void, because the statutory scheme does not contemplate unenforceability as a penalty; (ii) Defendant, as a cannabis business, not a consumer or member of the public, is not part of the group primarily in need of protection; and (iii) Defendant is the party more at fault and would be unjustly enriched if the contract was not enforced.

Brewfab LLC v. George Russo, 22-11003 (U.S. Court of Appeals for the Eleventh Circuit)

Date: October 13, 2022

Facts: Defendant appealed from the district court’s order granting summary judgment in favor of Plaintiff. In 2018, 3 Delta, Inc. (Delta) hired Plaintiff to build a machine for extracting cannabidiol oil. Delta and Plaintiff did not have a written contract. Instead, Delta and Plaintiff proceeded under an oral agreement whereby Plaintiff sent Delta invoices for the work it performed, and Delta paid those invoices. In December 2019, Delta stopped paying Plaintiff’s invoices. In turn, Plaintiff stopped shipping equipment to Delta and stopped working on the extraction machine. On January 30, 2020, Defendant, the president of Delta, had a conference call with Plaintiff’s owners to discuss the outstanding invoices and the work stoppage. After the conference call, Defendant sent the following text message to Rick Cureton, one of Plaintiff’s owners: “As per our conversation on Jan 30th 2020 I George Russo from 3 Delta do promise to pay brew fab in full all outstanding bills as of this date and all agreed upon work done for 3 delta future forward. I thank you for your patience.” Thereafter, Plaintiff resumed work and shipped additional equipment to Delta. But neither Delta nor Defendant paid the past due invoices and, on February 12, 2020, Delta instructed Plaintiff to stop all work. In August 2020, Plaintiff filed suit to recover the unpaid invoices and, among other claims, asserted claims against Defendant for breach of his personal guaranty—i.e., the text message. Defendant asserted that his text message was not a personal guaranty and that he sent the text message in his capacity as an officer of Delta. Defendant also asserted that the text message did not satisfy Florida’s statute of frauds and that it was not supported by consideration. The district court held that Defendant’s text message was a personal guaranty because its plain language acknowledged that “Defendant would personally finance Delta’s past and future invoices.” The district court further held that Defendant’s text message was an unambiguous and enforceable personal guaranty that satisfied Florida’s statute of frauds because: (1) the language “I george Defendant from 3 Delta” was an electronic signature under Florida law; (2) that language indicated that Defendant signed the text message in his personal capacity; and (3) the text message was supported by consideration, i.e., “Plaintiff’s voluntary return to work and delivery of equipment.”

Held: Affirmed.

Reasoning: The Court determined that: (i) the language of the text message was unambiguous; (ii) the language “I george Russo from 3 Delta” did not contain any descriptio personae for Defendant, and merely identified Defendant as an individual generally affiliated with Delta and not as an officer; (iii) the language “I george Russo from 3 Delta” constitutes an electronic signature under Florida law; and (iv) Defendant’s promise was a unilateral contract that covered future indebtedness for future work because Defendant’s promise became a binding guaranty agreement when Plaintiff accepted Defendant’s promise by resuming work and sending Delta additional equipment, after Defendant sent the text message.

§ 1.3 Insurance

Kinsale Ins. Co. v. JDBC Holdings, 3:20-cv-00008 (U.S. District Court for the Northern District of West Virginia)

Date: November 29, 2022

Facts: On October 31, 2019, a fire occurred at Defendant’s facility. On January 13, 2020, Plaintiff filed a civil action against defendant for rescission and declaratory relief. On October 28, 2022, a jury awarded Defendant $6,450,000.00, plus prejudgment interest for its insurance contract claim under the policy. Defendant then moved for the Court to declare that it substantially prevailed against Plaintiff, thereby entitling it to recover reasonable attorneys’ fees and costs.

Held: Defendant’s Motion for Judgment as a Matter of Law that it substantially prevailed was granted.

Reasoning: Defendant substantially prevailed because: (i) the Court previously ruled on summary judgment that Plaintiff had a duty to accept and pay the underlying insurance claim; and (ii) Plaintiff offered Defendant nothing on its claim prior to filing suit, and Defendant ultimately recovered the approximate amount demanded by Defendant prior to Plaintiff’s initiation of suit. The Court cited Thomas v. State Farm Auto. Ins. Co., 181 W.Va. 604, 383 S.E.2d 786 (1989), stating “[a]n insured ‘substantially prevails’ . . . against his or her insurer when the action is settled for an amount equal to or approximating the amount claimed by the insured immediately prior to commencement of the action, as well as when the action is concluded by a jury verdict for such an amount.”

Admiral Insurance Company v. Just Brands LLC, 0:22-cv-60550-AHS (U.S. District Court for the Southern District of Florida)

Date: October 27, 2022

Facts: Erin Gilbert alleged she sustained serious and life-threatening injuries by using an e-cigarette manufactured, marketed, or distributed by Defendant. Defendant demanded a defense to the claim by its insurer (Plaintiff). Plaintiff filed suit arguing that the claim was barred by Defendant’s insurance policy.

Held: Joint stipulation filed in the Southern District of Florida dismissing the suit with prejudice.

Reasoning: No details about the settlement were provided, but Plaintiff was defending Defendant “subject to a reservation of rights.” Plaintiff stated in the Complaint that it was “uncertain of its rights and obligations under the policy,” and had asked the Court to issue a Declaration of Rights under the policy. Before the Court could issue such a Declaration, the parties settled.

§ 1.4 Real Estate

§ 1.4.1 Access to Leased Cannabis Property

Yan Hong Zeng v. Casimir-Shelton, LLC, No. 56396-7-II (Wash. Ct. App. Oct. 18, 2022)

Facts: Appellant, Casimir-Shelton, LLC (“Casimir”), appealed the trial court’s grant of summary judgment and order of specific performance of a purchase and sale agreement (“PSA”) in favor of Respondent, Yan Hong Zeng (“Zeng”).

Casimir owns a property in Shelton, Washington, which was leased to CM1, LLC (“CM1”) for use as a cannabis production facility. The lease included a provision stating that Casimir may not enter the premises without notice and escort by CM1 or their employee or agent at any time. In November 2020, Casimir entered into a PSA to sell the property to Zeng. The PSA included a feasibility contingency which allowed Zeng to conduct inspections of the property and required Casimir to permit access to the property “at reasonable times subject to the rights of and after legal notice to tenants.” On December 7, a few days before the feasibility period expired, Zeng’s broker requested access to the property for an inspection on December 9, but was told that the tenant, CM1, was not available until December 19. Zeng’s broker asked about extending the feasibility period, but Casimir refused unless some of the earnest money would become non-refundable or if additional earnest money was provided. Zeng refused and the feasibility period expired without waiver of the contingency by Zeng. Accordingly, the PSA terminated by its terms. Zeng filed a lawsuit against Casimir for specific performance of the PSA. The trial court granted Zeng’s motion for summary judgment and ordered specific performance of the PSA.

Held: Court of Appeals of Washington, Division 2, affirmed the trial court’s order granting summary judgment and specific performance in favor of Zeng and the award of Zeng’s attorney fees.

Reasoning: According to the PSA, Casimir was required to allow Zeng to inspect the property, as long as the rights of the tenant were respected. However, CM1 did not have the right under the lease to specify that only Cheung could serve as the escort for inspections or to require more than four days’ notice before allowing access. Therefore, Casimir should have ensured that CM1 allowed entry for the inspection during the feasibility period, even if Cheung was not available. Casimir’s failure to do so constituted a breach of the PSA.

§ 1.4.2 Breach of Contract and Fraud

1240 S. Bannock, LLC., v. Dennis Siem, et al., Case No. 2:21-cv-00183 (W.D. Mich. May 27, 2022)

Facts: The United States District Court, W.D. Michigan, Northern Division, addressed two motions to dismiss that were filed by defendants in a lawsuit brought by 1240 S. Bannock LLC (“Bannock”) against defendants Coldwell Banker Real Estate Group, Coldwell real estate agent Dennis Siem, and property owners Donald J. Nerat and Steven A. Nerat. Bannock’s amended complaint alleges claims of breach of contract (Count 1), fraud and silent fraud (Count 2) against the Nerats, and a claim of fraud and silent fraud (Count 3) against Siem and Coldwell.

The dispute arises from Bannock’s offer to purchase a strip mall located in Menominee, Michigan, which was owned by the Nerats. Bannock January 2021 written offer included an expiration date for acceptance, and the Nerats only accepted the offer several days after the expiration date, after which Bannock make an earnest money deposit and began inspecting the property However, in March 2021, the Nerats agreed to sell the property to another buyer without disclosing the latter agreement to Bannock. Subsequently, Bannock and the Nerats executed an amendment to the original purchase contract in April 2021, which made the sale and purchase of the property contingent on a third-party business first obtaining a retail marijuana license to operate a marijuana establishment at the property and to extend the closing date to July 1, 2021. Then, when preparing for closing, Bannock was informed that the Nerats had already sold the property to the third-party purchaser.

Held: The Court granted the defendants’ motions to dismiss because the plaintiff’s factual allegations fail to state a claim upon which relief may be granted as a matter of law.

Reasoning: The Court concluded that Bannock’s claims against the defendants failed to state a claim upon which relief could be granted under Federal Law because (i) the initial proposed agreement had expired prior to acceptance, and (ii) the subsequent amendment to the agreement was premised on a contingency that is illegal under federal law and, therefore, unenforceable.

§ 1.4.3 Leasing

Prime Care, Inc. v. Nguyen Phat Real Estate Inv., No. B304910 (Cal. Ct. App. Jan. 19, 2022)

Facts: In January 2019, the plaintiff, as tenant, entered into a commercial lease with the defendant, Nguyen Phat, as landlord, for an industrial building in Montebello, California, which stated that the premises would be used for “commercial cannabis distribution, manufacturing, cultivation, and retail delivery in accordance with all state and local licenses and laws.” The lease provided that the tenant was responsible for determining the suitability of the premises for their intended use and had been advised to satisfy themselves with respect to the size, condition, and compliance with applicable requirements of the premises. The lease also stated that the plaintiff had made the necessary investigations and assumed responsibility for their use of the premises. The tenant paid $150,000 to landlord after signing the lease, which included a deposit, advance rent, and other charges. However, before the tenant began operations, the City of Montebello determined that the property was not suitable for cannabis distribution due to its proximity to a residential area.

In this case, the tenant filed a complaint alleging five causes of action against the defendants, Nguyen Phat and Sam Ho (who was landlord’s manager): (i) negligence, (ii) fraud, (iii) negligent misrepresentation, (iv) rescission based on fraud, and (v) rescission based on unilateral mistake. The defendants demurred to the complaint, arguing that the plaintiff had assumed responsibility for determining the suitability of the premises for their intended use under the express terms of the lease and therefore could not prove negligence or any of the other claims. The trial court sustained the demurrer to the first cause of action for negligence and the remaining four causes of action with leave to amend. The plaintiff then filed an amended complaint, including its original negligence claim, as well as amended claims for fraud and negligent misrepresentation. The defendants again demurred, arguing that the amended complaint still did not sufficiently allege the necessary elements for these claims. The trial court sustained the demurrer without leave to amend and entered judgment of dismissal in favor of the defendants. The plaintiff appealed.

Held: The Court of Appeal, Second District, Division 5, affirmed the decisions of the trial court, with costs for the defendants.

Reasoning: In connection with the plaintiff’s claim for negligence (the first cause of action arguing that plaintiff’s argument that the defendants owed them a general duty of care, which was breached through their listing, advertising, leasing, and representations about the property), the Court found that the allocation of duties in the written agreement between the parties clearly stated that the plaintiff was responsible for determining the suitability of the property for their intended use and that the defendants had no such duty. Further, the Court found, with respect to the second and third causes of action, that the plaintiff did not adequately allege that they relied on the defendants’ false statements in order to establish their claims for fraud and negligent misrepresentation. Finally, in connection with the trial court’s denial of the plaintiff’s request for leave to amend actions one through four, the plaintiff failed to provide an explanation of how they would amend their allegations to adequately allege each element of their causes of action, and therefore did not demonstrate that an amendment would cure the defective pleadings. As a result, the Court upheld the trial court’s decision to sustain the demurrers to the plaintiff’s negligence claim.

§ 1.5 State Law

Northeast Patients Group et al. v. United Cannabis Patients and Caregivers of Maine, and Northeast Patients Group dba Wellness Connection of Maine et al. v. Kirsten Figueroa et al., case numbers 21-1719 and 21-1759 (1st Cir.)

Date: August 17, 2022

Facts: Northeast Patients Group is a corporation wholly owned by three Maine residents and that owns and operates three of Maine’s seven licensed dispensaries as a for-profit corporation. High Street Capital is a Delaware corporation that is owned exclusively by non-Maine residents and that wanted to acquire Northeast Patients Group. If the deal between the two companies proceeded, then the resulting company would violate the Maine Medical Marijuana Act’s residency requirement, because the “officers or directors” of that new company would not be only Maine residents. The Court struck down Maryland’s residency requirement for cannabis business owners, saying it was a clear violation of the constitutional doctrine that limits states’ power over interstate commerce.

Held: Affirmed.

Reasoning: The Court rejected Defendant’s argument that the residency requirement does not run afoul of the dormant Commerce Clause because “it is impossible for there to be an interstate market in any good that, under federal law, is contraband throughout the country.” The Court noted that Maine’s prohibition “reflects the reality that the market continues to operate,” and that, “the market is so robust that, absent the Medical Marijuana Act’s residency requirement, it would be likely to attract entrants far and wide.” The Court also pointed to Congress’s enactment of the Rohrabacher-Farr Amendment (which prohibits the U.S. Department of Justice from targeting companies that are acting in accordance with state cannabis regulations) stating that the amendment “hardly reflects a congressional understanding that the Controlled Substances Act succeeded in eradicating the interstate market in medical marijuana.” The Court goes on to add, “. . . whatever the circumstances may be with respect to other goods that Congress has deemed contraband, this is not a case in which Congress may be understood to have criminalized a national market with no expectation that an interstate market would continue to operate. Quite the opposite. Congress has taken affirmative steps to thwart efforts by federal law enforcement to shut down that very market, through the annual enactment of the Rohrabacher-Farr Amendment. And it has taken those steps, presumably, with an awareness of the beneficial consequences that those steps will have for consumers who seek to obtain medical marijuana.”

Variscite Inc. et al. v. City of Los Angeles et al., 2:22-cv-08685, (U.S. District Court for the Central District of California)

Date: December 8, 2022

Facts: Los Angeles created a licensing program for commercial cannabis related businesses that includes a social equity component, referred to as the “Social Equity Program.” Pursuant to the Social Equity Program, the storefront retail, delivery, and cultivation application processes are exclusively available until January 1, 2025, to individuals who have been verified by Los Angeles as a Social Equity Individual Applicant (“SEIA”). To be verified as a SEIA, an individual must submit evidence of two of the following three criteria: (a) a qualifying California cannabis arrest or conviction prior to November 8, 2016; and (b)(1) 10 years of residency in a disproportionately impacted area, or (b)(2) low income in the 2020 or 2021 calendar year. Plaintiff lived in Michigan and applied to be verified as a SEIA for the Lottery. Plaintiff’s application was ultimately rejected for failing to satisfy any of the verification criteria.

Held: Application for Temporary Restraining Order denied.

Reasoning: Plaintiff could not show how allowing the lottery to go ahead as planned would irreparably harm them. The Court noted that “Plaintiffs’ argument that they will suffer irreparable harm are based on their speculation that they would be able to successfully enter the commercial retail cannabis market, establish a loyal customer base, and make a profit . . . Plaintiffs’ monetary losses associated with the challenged provisions are purely speculative and insufficient to demonstrate irreparable harm.”

§ 1.6 Trademarks

§ 1.6.1 Trademark Protection for Delta-8 Marks

AK Futures LLC v. Boyd Street Distro, LLC, 35 F.4th 682 (9th Cir. 2022)

Facts: Appellant, Boyd Street Distro, LLC (“Boyd Street”), appealed the district court’s grant of a preliminary injunction in favor of Appellee, AK Futures, LLC (“AK Futures”).

AK manufactures the CAKE brand of e-cigarette and vaping products, including Delta-9 cannabis products. Boyd Street sold CAKE unauthorized products with virtually identical logos and branding at its downtown Los Angeles retail store. AK Futures hired a private investigator who purchased the counterfeit products and confirmed they were not authentic.

Boyd Street alleges it received a first batch of CAKE products from an unidentified “someone” selling the goods on consignment, and a second batch from an unidentified person holding himself out to be an authorized distributor of CAKE products.

Held: The Ninth Circuit Court of Appeals affirmed the district court’s order granting a preliminary injunction.

Reasoning: The Ninth Circuit reviewed the district court’s preliminary injunction analysis and agreed AK Futures was likely to succeed on the merits and had suffered irreparable harm. Boyd Street relied heavily on its argument that AK Futures could not own valid rights to its marks because AK Futures was not using the marks lawfully in commerce through its sale of Delta-8 products. AK Futures asserted its Delta-8 products were lawfully sold because the 2018 Agriculture Improvement Act (the “Farm Act”) legalized Delta-8. The Ninth Circuit ultimately sided with AK Futures and agreed the Farm Bill legalized Delta-8 products.

The Ninth Circuit focused extensively on the text of the Farm Bill including its definition of “Hemp.” This definition removed from schedule I and therefore legalized “the plant Cannabis Sativa L . . . with a delta-9 [THC] concentration of not more than 0.3 percent on a dry weight basis.” The Ninth Circuit noted AK Futures’ Delta-8 products included less than 0.3 percent THC and were therefore lawfully sold according to the Farm Act. Because the products were lawfully sold, AK Futures owned common law trademark rights in the marks used with the products and those rights were infringed by Boyd Street’s counterfeit sales of CAKE-branded products.

Contributors to this publication include: Katrina Bennett, Patrick T. Muffo, and Avrohom Colev Posen.