September 13, 2019

Navigating the Conflicting Federal and State Laws for Doing Business With Cannabis Companies

Cannabis is an illegal drug under federal law.  Notwithstanding the federal government’s position, thirty three states and the District of Columbia have approved cannabis for medical purposes and ten of those states also have legalized cannabis for recreational use.  This dichotomy of federal law and state law creates a unique legal situation in which many activities and services involving cannabis are legal under the majority of states’ laws, but remain illegal under federal law.  Thus, anyone involved in the cannabis industry is violating federal law.

The legal uncertainty caused by the conflicting legal landscape is not limited to those businesses operating directly in the cannabis industry.  Rather, anyone engaged in business with cannabis companies also can be impacted by the fact that such businesses remain illegal pursuant to federal law.  As such, doing business with a cannabis company, including providing services to and receiving funds from such companies, could expose such third parties to liability under federal aiding and abetting, money laundering, or civil forfeiture statutes.

Additionally, growers and dispensaries operate their businesses on land either owned or leased.  If the cannabis business owns the property, then it needs to make sure the property is not restricted in usage.  Some deeds restrict use to legal or lawful uses.  A party in interest may be able to restrict usage of a property that is looking to use it for cannabis.  A landlord that is renting the property could be faced with a similar issue.  Likewise, it may be difficult to properly insure a property that is being used for cannabis as may insurance policies exclude illegal activities.

However, the most significant limitation relating to the cannabis industry is the lack of access to banking and financial services.  The vast majority of banks will not do business with cannabis companies due to its illegality under federal law.  As a result, many cannabis companies are cash businesses.  This creates a number of issues for them, including excess security costs.  In doing business with a cannabis company, third parties may also have to accept payment in cash and their own banking relationships could suffer as a result of the connection to a cannabis business. 

Congress has been working on resolutions to this issue.  The two bills with the highest probability of passing are the STATES ACT and the SAFE ACT.  If either of these were to be enacted, it would solve most of the issues affecting banking and cannabis.

Separately, and related to cannabis is hemp, including its derivatives such as cannabidoil or CBD.  In the 2018 Farm Bill, hemp and hemp-based CBD was removed from the DEA’s list of Schedule I drugs which eased certain restrictions on hemp based CBD products as far as its status as a controlled substance.  However, because the FDA approved CBD for a drug, the FDA’s position is that it must approve any ingestible form of CBD before it can be sold in food or beverages (including pet food) as well as a dietary supplement or drug.  The FDA has raised concerns with and issued Warning Letters to companies selling CBD products and making claims about its effects.

The above are but a few of the issues that should be considered before doing business with a cannabis company.

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