With a quasi-legal status, the multi-billion dollar cannabis industry faces complex, novel, and constantly changing legal issues. This Article discusses new and noteworthy developments in the cannabis industry, including federal regulations, business issues, and state laws. This Article also includes references to federal and state cases, insurance coverage, advertising requirements, and the overlapping hemp industry. Although cannabis remains an illegal Schedule I drug under the federal Controlled Substances Act, this Article addresses recent developments toward rescheduling. From 2012 to 2024, twenty-four states, including the District of Columbia, have legalized cannabis recreationally, while forty states and the District of Columbia have legalized cannabis for medical purposes.
Although cannabis remains illegal under federal law, numerous states have passed legislation to decriminalize cannabis and permit its use for medicinal and/or recreational purposes. As of April 24, 2023, thirty-eight states, three territories, and the District of Columbia have enacted medicinal cannabis use laws. As of November 8, 2023, twenty-four states, two territories, and the District of Columbia have recreational cannabis use laws. The most recent cannabis legislation has cropped up in Delaware, Kentucky, Maryland, Minnesota, Missouri, and the U.S. Virgin Islands. The following paragraphs in this section will briefly explore these new laws in these states and territory.
Delaware first “legalized” cannabis for only medicinal use in 2011 through the Delaware Medical Marijuana Act. In April 2023, Delaware passed additional legislation to permit the recreational use of cannabis. Adults aged twenty-one and over may now possess, use, display, purchase, and share cannabis (without reciprocal remuneration) with other adults without a resulting penalty, such as a civil fine. The law places parameters on the quantity of cannabis that may be possessed, which cannot exceed one ounce of marijuana in the form of leaf marijuana, twelve grams or less of concentrated marijuana, or cannabis products containing 750 milligrams or less of delta-9-THC. The Delaware Marijuana Control Act, which also passed in 2023, creates regulations for the state’s cannabis industry, including licenses for cannabis-based businesses.
In March 2023, Kentucky passed cannabis legislation that creates a state medicinal cannabis program. Under Kentucky’s medicinal cannabis program, a registered qualified patient will generally be able to possess a thirty-day supply of medical cannabis to treat certain qualifying conditions, such as cancer, epilepsy, or PTSD. The law does not permit the recreational use of smoking or personal cultivation of cannabis. Moreover, the law will not take effect until January 1, 2025. Until then, cannabis use for any reason in the state of Kentucky remains illegal.
However, individuals who have lawfully purchased it in other jurisdictions and have been diagnosed with a qualifying medical condition may be eligible for a pardon for the criminal offense of possessing cannabis pursuant to Governor Andy Beshear’s Executive Order, which took effect on January 1, 2023. This Order notes that the Team Kentucky Medical Cannabis Advisory Committee received more than 3,500 public comments and 98.6% of them were in favor of legalizing medical cannabis, including military veterans with PTSD. The committee also reported that Kentuckians cross state lines to purchase this medical cannabis where it is legal to do so and then fear arrest when returning home to Kentucky. As a result, the governor granted a full, complete, and conditional pardon in circumstances where the medical cannabis is lawfully purchased and certain medical documentation is produced.
Maryland legalized medicinal cannabis in 2014; however, in 2022, Maryland voters successfully amended the state constitution to permit the use and possession of cannabis for adult recreational use. Effective July 1, 2023, state law permits those aged twenty-one and older to possess a “personal use amount” of cannabis, which by Maryland regulation is defined as “(a) [c]annabis that does not exceed 1.5 ounces; (b) [c]oncentrated cannabis that does not exceed 12 grams; (c) [c]annabis products containing no more than 750 milligrams of delta-9-tetrahydrocannabinol; or (d) [t]wo or fewer cannabis plants.”
Minnesota enacted its Therapeutic Research Act in 2014 to permit the medicinal use of cannabis, and, similar to Maryland, Minnesota, as of August 1, 2023, also permits adult recreational cannabis use. In addition to medicinal use of cannabis for patients with qualifying medical conditions, adults aged twenty-one and older may now possess or transport two ounces or less of adult-use cannabis flower in a public place; two pounds or less of adult-use cannabis flower in the individual’s private residence; eight grams or less of cannabis concentrate; or edible cannabis products or lower-potency hemp edibles infused with a combined total of 800 milligrams or less of THC. Home cultivation of up to eight cannabis plants (with up to four mature plants) is also permitted under the enabling legislation. The law also regulates lower-potency hemp edibles and hemp-derived consumer products and creates multiple licenses for the cultivation, manufacture, and retail of cannabis.
Following Missouri voters’ passage of the Medical Marijuana and Veterans Health Services Act in 2018 (Amendment 2)—which legalized medical cannabis as of November 2022—Missouri voters approved Amendment 3, a public ballot initiative to amend the Missouri Constitution and legalize adult-use cannabis. Cannabis consumers in Missouri are allowed to legally possess up to three ounces of cannabis as of December 8, 2022.
On January 18, 2023, the U.S. Virgin Islands enacted the Virgin Islands Cannabis Use Act, which authorizes the use of adult recreational cannabis. This enabling legislation permits those twenty-one years of age and older to possess up to two ounces of cannabis, fourteen grams of cannabis concentrate, and one ounce of cannabis products for recreational, sacramental, and other uses. Qualifying patients utilizing cannabis for medicinal purposes may possess four ounces of cannabis, one ounce of cannabis concentrate, and two ounces of cannabis products. Governor Albert Bryan Jr. also issued a proclamation that allows persons convicted of simple possession of cannabis to apply for a pardon through the Virgin Islands Department of Justice.
Although many states have authorized the manufacture and sale of cannabis, cannabis remains a federally classified Schedule I Controlled Substance, rendering the manufacture and sale of cannabis an “illicit” business under federal law. The federal legal status of cannabis creates tension between state and federal cannabis laws, including banking laws. Consequently, cannabis-based businesses operating lawfully under applicable state laws are often forced to operate as cash businesses. Operating with large quantities of cash on hand presents additional risk for cannabis businesses. For example, they are particularly susceptible to burglaries. Furthermore, cannabis businesses operating in cash frustrates states’ efforts to tax cannabis sales. Currently, financial institutions handling proceeds from an unlawful activity, such as the sale of cannabis, are subject to anti-money laundering laws and, if prosecuted, may face fines and imprisonment.
The Secure and Fair Enforcement Regulation Banking Act (SAFER Banking Act), introduced in September 2023, aims to reduce barriers to access financial services in the cannabis industry. The bill does not aim to change the legal status of cannabis, but it will alleviate some risk to financial institutions desiring to provide financial services to cannabis-based businesses. If passed, the SAFER Banking Act exempts transactions involving state-sanctioned cannabis businesses from anti-money laundering laws, and proceeds from cannabis-related transactions in jurisdictions where cannabis is legal under state law will not be considered proceeds from an unlawful activity. The bill also states that a financial institution, insurer, or federal agency may not be held liable (or subject to asset forfeiture) under federal law for providing a loan, mortgage, or other financial service to a state-sanctioned cannabis business.
The SAFER Banking Act would also prohibit a federal banking regulator from penalizing a depository institution for providing banking services to a cannabis-business lawfully operating in accordance with state law. Thus, federal banking regulators will not be able to terminate or limit the deposit or share insurance of a depository institution solely due to that institution providing financial services to a state-sanctioned cannabis business. Further, the bill prohibits federal banking regulators from requesting or requiring depository institutions to terminate deposit accounts of cannabis businesses or service providers without valid cause. Valid cause includes reason to believe the depository institution is engaging in an unsafe or unsound practice; merely funding businesses in the cannabis industry is insufficient.
The proposed legislation holds great promise for the cannabis industry as it aims to improve access to capital and conduct safer and more transparent cannabis transactions. This, in turn, could potentially pave the way for greater expansion of the market. The SAFER Banking Act was initially referred to the United States Senate Committee on Banking, Housing, and Urban Affairs, and, after a favorable Committee report, it was placed on the Senate Legislative calendar and is awaiting a vote.
In October 2022, President Biden urged the Secretary of Health and Human Services and the United States Attorney General to initiate an expedited review of cannabis’s classification as a Schedule I Controlled Substance. On August 29, 2023, the Department of Health and Human Services (HHS) recommended to the Drug Enforcement Administration (DEA) that cannabis be rescheduled from Schedule I to Schedule III under the Controlled Substances Act (CSA).
While reclassifying cannabis from a Schedule 1 to a Schedule III substance may not have the same effect as descheduling the drug altogether (i.e., nationally legalizing cannabis), the repercussions of this shift are nonetheless significant. As a Schedule I drug, cannabis is considered a substance with a “high potential for abuse” and is considered to have no accepted medical use, despite multiple states enacting legislation to the contrary. If cannabis is reclassified to Schedule III, it will be considered a substance with less potential for psychological dependence and abuse, as well as acceptable for medical use. Rescheduling would result in fewer restrictions on cannabis testing, which could enable further research on cannabis’s medicinal value.
Moreover, rescheduling cannabis changes the way cannabis products are taxed. Currently, Internal Revenue Code 280E prohibits businesses trafficking Schedule I or II Controlled Substances from deducting the costs of selling product (such as payroll, rent, and advertising). Thus, rescheduling cannabis to Schedule III means cannabis businesses would be subject to a lower tax burden.
Finally, rescheduling cannabis results in an expansion of federal benefits currently unavailable to cannabis users (due to its Schedule I classification). For example, as a Schedule III drug, cannabis users would not be automatically precluded from federal employment, military service, or public housing based solely on their cannabis use.
On October 6, 2022, President Biden issued a proclamation pursuant to the grant of authority in Article II, Section 2, of the Constitution of the United States, wherein he granted a “full, complete, and unconditional pardon” to U.S. citizens and lawful permanent residents for the simple possession of cannabis. The scope of the pardon is very limited and includes only simple possession of cannabis subject to a charge or conviction in a federal court’s jurisdiction or in D.C. The pardon does not extend to state offenses. The United States Department of Justice released an application for eligible individuals to apply for pardons pursuant to President Biden’s proclamation. The need for the proclamation is illustrative of inequities that are caused by the current legal status of cannabis as a federally illegal and dangerous substance, while many states decriminalize and authorize the use of cannabis for therapeutic and recreational purposes.
President Biden signed into law the Medical Marijuana and Cannabidiol Research Expansion Act on December 2, 2022. Research on cannabis has been extremely limited due to its classification as a Schedule I Controlled Substance. The National Center for the Development of Natural Products at the University of Mississippi has been the exclusive supplier of cannabis for research purposes in the United States, producing cannabis solely for the National Institute on Drug Abuse. The Act expands cultivation of cannabis for research purposes by permitting registered entities (including institutions of higher education, practitioners, and manufacturers) to manufacture, distribute, dispense, or possess cannabis or cannabidiol (CBD) for the purposes of medical research. The Act also directs the Department of Health and Human Resources to evaluate the health benefits and risks of cannabis and directs the Drug Enforcement Agency to approve applications of manufacturers of FDA-approved drugs derived from cannabis. The Act also authorizes physicians to discuss the potential harms and benefits of cannabis and its derivatives (including CBD) with patients. It also requires HHS, in coordination with the National Institutes of Health and relevant federal agencies, to report on the therapeutic potential of cannabis for various conditions such as epilepsy, the impact on adolescent brains, and the ability to operate a motor vehicle. The Act simplifies a previously complicated research process in favor of a more streamlined research approach, which will almost certainly encourage more cannabis research.
The case of Eteros Technologies USA, Inc. v. United States marked a significant legal milestone as it was the first of its kind. This ruling sets an important precedent for international trade in cannabis paraphernalia by recognizing that states’ authorization of persons to manufacture, distribute, or possess cannabis paraphernalia triggers the “authorization exemption.” In turn, this allows the importation of such products into the United States. The decision essentially directs United States Customs and Border Protection (CBP) to permit the import of cannabis paraphernalia into states where these items are legalized for manufacturing, distribution, and possession. Given the booming $38.8 billion cannabis market in 2023 and the substantial capital expenditures by multi-state operators—accounting for up to thirty percent of revenue—this ruling could significantly impact billions of dollars of cannabis equipment imports annually.
In Eteros, the United States Court of International Trade addressed whether a Washington State company, Eteros Technologies USA (Eteros), could import drug paraphernalia, specifically cannabis-trimming equipment. The CSA prohibits importing or exporting such paraphernalia but includes an exemption for those authorized by local, state, or federal law to possess, manufacture, or distribute these items. This law means that CBP is instructed to seize any paraphernalia that it finds. However, the CSA also states that “[t]his section shall not apply to any person authorized by local, state, or federal law to manufacture, possess, or distribute such items.” The court found that “Eteros is ‘authorized’ under 21 U.S.C. § 863(f)(1) and thereby exempted in Washington State from subsection 863(a)’s prohibition on importing drug paraphernalia.” As a result, CBP was not justified in seizing or forfeiting Eteros’s trimmer.
The Eteros decision included an analysis of the United States Supreme Court case Murphy v. NCAA, where the Supreme Court determined that New Jersey’s sports-betting law “authorized” sports gambling, despite contradictory federal law. As a result, the court in Eteros determined that Washington law did authorize the importation of the trimmer and instructed the Port of Blain, Washington to release the trimmer. In essence, this case suggests that importers of cannabis-related paraphernalia are exempt from CBP’s otherwise existing authority to seize drug paraphernalia as long as the final destination is to a state that has a legal cannabis market. However, at this point, Eteros does not necessarily establish a firm precedent, as the United States government is likely to appeal the ruling to the United States Court of Appeals for the Federal Circuit.
Instances of individuals traveling by plane with cannabis have drawn significant media attention this year. For example, American basketball star Brittney Griner possessed vape cartridges containing hashish oil in her luggage at the airport, which resulted in a criminal case and detainment in Russia. Griner received a sentence of nine years in prison, and she served nearly ten months before she was released in a prisoner swap. Similarly, supermodel Gigi Hadid was arrested for alleged cannabis possession in the Cayman Islands after CBP discovered alleged cannabis and paraphernalia in her luggage. Although she was released, others like Raquel Rivera, the defendant in the United States v. Rivera case, faced severe consequences.
CBP officers at the Saint Thomas airport found cannabis in Rivera’s suitcases during a search. The exact THC concentration was not determined, a crucial factor since the 2018 Agricultural Improvement Act (the 2018 Farm Bill) amended the CSA to exclude hemp from the definition of marijuana, meaning hemp with a THC concentration of 0.3% or less is no longer a controlled substance.
Ms. Rivera contested the government’s case, asserting a lack of evidence proving the THC content exceeded 0.3%, rendering the substance illegal under the CSA. Ms. Rivera’s case introduced no evidence at trial that the cannabis was 0.3% or less THC, the permissible range outlined in the CSA. Despite her conviction at the trial level, Ms. Rivera appealed, arguing that the government failed to demonstrate the THC content surpassed the legal limit. However, the Third Circuit upheld the conviction, noting that, under the law, the burden falls on the defendant to introduce evidence showing the cannabis was 0.3% or less THC (akin to an affirmative defense of self-defense in some states). The appeals court examined the 2018 Farm Bill’s amendments to the CSA and congressional intent when enacting it, focusing on 21 U.S.C. § 885(a)(1), which provides that the government does not need to “negative any exemption or exception set forth” in the subchapter of the CSA that defines marijuana. Through this same section, Congress placed “the burden of going forward with evidence” of this nature on “the person claiming [its] benefit.” This case establishes that, in trafficking cases involving cannabis, the burden of proving exemption from the marijuana classification lies with the defense rather than the prosecution.
It is evident that Congress intended to regulate the distinction between legal hemp and cannabis markets in the United States. Congressional, DEA, and federal court interpretations of relevant federal laws emphasize that the sole statutory measure for differentiating controlled cannabis from legal hemp is its delta-9 THC concentration level.
The 2018 Farm Bill defines hemp as “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 [THC] concentration of not more than 0.3% on a dry weight basis.” Tetrahydrocannabinolic acid (THCA) is a hemp-derived cannabinoid, which falls under a federal law “loophole,” excluded from the Controlled Substances Act’s definition of “marijuana” under the 2018 Farm Bill, as it contains 0.3% or less THC. This quasi-legal status means selling THCA could be costly, if not criminal. Consequently, harvested cannabis containing less than 0.3% THC is classified as hemp, not a federally controlled substance, irrespective of THCA presence. However, THCA is the precursor to THC, found in the flowers and leaves of the cannabis plant and converted into psychoactive THC when exposed to heat via a process called “decarboxylation.” THCA also decarboxylates to form THC during storage and fermentation. It is crucial for cultivated hemp to maintain a total THC concentration (THCA + THC) of 0.3% or lower to meet regulatory standards before harvest.” Regardless of the black letter of the law, THCA is accessible online and in physical stores. This is true regardless of whether the state defines hemp by its delta-9 THC or total THC content, or if the state expressly prohibits inhalable hemp products. In such cases, the relevant issue is one of enforcement.
As more states legalize medical and recreational cannabis use, there is a trend to include explicit employee protections against discrimination related to off-duty or pre-employment cannabis use. These protections may preclude employers from (1) discriminating based on an employee’s use of cannabis off the job and away from the workplace; and (2) drug testing of job applicants or current employees for non-psychoactive cannabis metabolites, which are substances that can stay in the body for weeks after cannabis use but do not indicate whether an employee’s brain function is impaired at the time of testing. For example, California provided these employee protections with the recently passed Assembly Bill 2188, an amendment to the California Fair Employment and Housing Act, which will go into effect January 1, 2024. The District of Columbia also provides similar employment protections in the D.C. Marijuana Employment Protections Amendment Act of 2022 (MEPAA), which went into effect October 22, 2023, and requires employers to provide annual notice to all employees of their rights under the MEPAA.
Some states also implement so-called “Ban-the-Box” laws, which prohibit employers from requiring job applicants to disclose information regarding cannabis arrests, criminal charges, or convictions. Proponents of “Ban-the-Box” legislation argue that self-disclosure or background checks revealing cannabis possession charges and convictions discriminate by disproportionately affecting certain protected classes and communities of color. California extended “Ban-the-Box” legislation to include conditional offers of employment. Many state statutes expanding employee protections for off-duty cannabis use also include exceptions for so-called “safety sensitive” positions, which are discussed further below.
When adopting laws prohibiting discrimination of off-duty cannabis use, states often include “safety sensitive” exceptions for jobs with inherent health and safety risks to the employee or others. Often “safety sensitive” jobs may involve potentially dangerous tasks, such as administering medical care, handling firearms, operating heavy machinery, or working with hazardous materials. In states with a “safety sensitive” exception, employers may implement zero tolerance drug policies for “safety sensitive” positions that prohibit employees’ use of cannabis at any time, including all off-duty medical or recreational use.
As with many state-specific cannabis laws, not all “safety sensitive” carve-outs are identical. Some statutes define specific job duties or positions as inherently dangerous and “safety sensitive,” while other statutes allow employers discretion to designate positions as “safety sensitive,” regardless of the specific tasks of the position. The Western District of Arkansas examined this distinction in Prinsen v. Domtar A.W., LLC. In Prinsen, the district court examined the Arkansas Medical Marijuana Amendment of 2016 (AMMA), which expressly included in the definition of “safety sensitive” any position “so designated by an employer.” The employer in Prinsen, a pulp and paper mill, adopted a drug-free workplace policy that listed all mill jobs as “safety sensitive” regardless of specific tasks. Two qualified cannabis patient employees who failed drug tests and lost their jobs challenged their discharge on the basis that their jobs were not truly “safety sensitive” as contemplated under AMMA. The court in Prinsen rejected the employees’ argument, ruling that AMMA explicitly permits an employer to designate any position as “safety-sensitive,” even through a blanket categorization for all positions at a given location. Not all states or municipalities adopted “safety-sensitive” exceptions for off-duty cannabis use discrimination statutes, and, of those that do, not all clearly define the term “safety sensitive.” For states, like Arkansas, where statutes provide employers with discretion to designate positions as “safety sensitive,” courts may be unlikely to second guess an employer’s determination as to “safety sensitive” positions.
In June 2022, the Occupational Safety and Health Administration (OSHA) cited ParmaCann Inc. for potential workplace hazards at a greenhouse facility. It also issued a hazard letter to Trulieve, Inc. after a Trulieve employee, responsible for grinding and handling cannabis, died due to asthma-related complications following exposure to “occupational quantities of whole and ground cannabis.” OSHA’s regulatory actions followed the federal courts’ and agencies’ awkward trend that ignores the illegality of cannabis in some federal law applications while pointing to its illegality in others to deprive cannabis users and business from accessing other federal law protections and benefits of federal law, such as federal workplace accommodations for disabilities and bankruptcy protections and processes.
Despite cannabis remaining classified as an illegal substance under federal law, cannabis and cannabis-ancillary businesses cannot hide behind federal illegality to shield against federal employment statutes and regulatory actions aimed at protecting employees. Particularly, cannabis businesses may still be required to adhere to discrimination statutes (Title VII of the Civil Rights Act of 1964), provide wage and hour protections (Fair Labor Standards Act), and ensure workplace safety regulations are followed (OSHA). In contrast, federal courts routinely point to the illegality of cannabis under the CSA to rule that Titles I and II of the Americans with Disabilities Act (ADA) provide no employee protection against discrimination for medical cannabis use, even when it is state-authorized, physician-supervised, and used to treat a recognized disability under the ADA. Further muddying the waters, federal courts may require cannabis businesses to comply with Title III of the ADA, which prohibits discrimination in public accommodations on the basis of disabilities.
In the first quarter of 2023, the social media site X (formerly Twitter) became the first social media website to permit U.S. cannabis businesses to advertise their goods and services on its platform. Prior to this policy change, X only allowed the advertising of CBD products. Now, X permits the advertising of products containing more than 0.3% THC, CBD, and other cannabis-related goods and services. This authorization presents a potentially lucrative opportunity for cannabis business owners, who can now access a larger target audience online. Cannabis businesses influencers can now monetize their content while promoting their products.
In the Federal Communications Committee’s (FCC) effort to combat illegal, unwanted, spam, and scam text messages, many cannabis, hemp, and CBD businesses have been prohibited from sending SMS/MMS text messages to their customers. In 2022, the FCC estimated that consumers lost over $20 billion from illegal text messages (text messaging scams). The influx of these text messaging scams—and the great financial loss to consumers caused by these scams—triggered a requirement for text message providers to register all ten-digit-long code phone numbers (10DLC) with the Campaign Registry.
Likely because of this FCC rule, Twilio, a consumer engagement platform used by over 300,000 businesses across the globe, implemented a new policy banning cannabis, hemp, and CBD businesses from using its platform to send text messages. Twilio’s Help Center now explicitly states:
Cannabis, CBD, Kratom, or drug paraphernalia product businesses are prohibited from utilizing SMS/MMS messaging on Twilio in the US and Canada, regardless of content. These restrictions apply regardless of the federal or state legality. All use cases for these are disallowed from sending SMS whether it contains cannabis content or not, even for [two factor authentication] purposes it is not permissible for such entities.
Text messaging as a marketing channel enables businesses to target and communicate with customers effectively and efficiently, which can lead to an increase in revenue via marketing and sales promotions. The FCC’s policy change directly impacts revenue potential for cannabis and hemp businesses.
The FCC makes it clear that they will prohibit all types of illegal text messages. The Cellular Telecommunications Industry Association (CTIA), an organization that advocates for legislative and regulatory policies for the wireless industry, is a leader in creating best practices for the cell phone wireless industry. According to its most recent publication on industry best practices, consumer messaging platforms like Twilio are advised to use reasonable efforts to prevent and combat unwanted or unlawful messaging traffic, including spam and unlawful spoofing. Furthermore, CTIA recommends that message senders, such as Twilio, proactively utilize tools to monitor and prevent unwanted messages and content—which may include cannabis-related content.
Hemp, grown in accordance with the 2018 Farm Bill, is no longer considered a Schedule I Controlled Substance. Despite its federally legal status, Twilio made it clear that even hemp businesses are prohibited from using their platform for business communications. Twilio’s blanket restriction on hemp, cannabis, and CBD businesses imposes more stringent limitations than the existing state and federal legal frameworks. Recently, the National Cannabis Industry Association (NCIA) issued a letter calling the text messaging ban a “[c]rackdown [i]mpacting the [c]annabis [i]ndustry.” Furthermore, Twilio’s restriction has fundamentally disrupted the way numerous cannabis, CBD, and hemp businesses conduct business.
The NCIA is urging fellow impacted stakeholders to contact their organization if they are interested in “fight[ing] this attack on the legal cannabis industry.” As of the date of this writing, there are no pending lawsuits or legislation against Twilio or other text messaging service providers for banning cannabis, CBD, and hemp business communications.
Although there are some exceptions, it is legal for cannabis and/or CBD brands to obtain certain trademark protections, despite cannabis’s illegal status under federal law. The United States Patent & Trademark Office (USPTO) is clear that the use of a mark in commerce must be lawful under federal law to be the basis for federal registration. Thus, the USPTO refuses to register marks for goods and/or services that show any violation of federal law, regardless of the legality of the activities under state law. As a result, cannabis flower, isolate, distillate, tincture, and other cannabis products do not qualify for federal trademark protection. However, cannabis brands can meet the qualifications for federal trademark protection by creating ancillary products and services for their businesses (such as clothing, publications, podcasts, events, machinery, etc.). Because these products and services do not contain cannabis, they are eligible for federal trademark protection.
In states where cannabis and CBD are legalized, businesses can obtain state trademark protection for their plant products. State trademarks are typically considered to provide limited protection compared to federal trademarks, as they only safeguard the mark (i.e., brand name) within the geographical boundaries of that specific state. Despite this limitation, state trademark protection proves effective for cannabis businesses, given the nature of the state legalization framework.
The United States Bankruptcy Court for the District of Massachusetts denied confirmation of a cannabis company employee’s Chapter 13 plan and dismissed his bankruptcy case. In In re Blumsack, employee Scott H. Blumsack is a general manager licensed in Massachusetts to work for Society Cannabis Co., a Massachusetts-licensed retailer, wholesaler, and producer of cannabis products. In his role, Blumsack oversees sixteen full-time employees and directly serves cannabis products to customers, earns a $75,000 annual salary, and does not have equity ownership in Society Cannabis Co. Despite operating legally in Massachusetts and his mere employee status, the court found that Blumsack violated federal statutes criminalizing controlled substances and held that he objectively lacked good faith by reasoning it would be an abuse of process to confirm Blumsack’s Chapter 13 plan. Interestingly, the court still found bad faith, despite Blumsack’s proposal to fund his bankruptcy plan using his wife’s retirement funds, because he intend to continue working in the cannabis industry, which was in further violation of federal law. As a result, the court held that Blumsack could not satisfy the good faith requirement under §§ 1325(a)(3) and (a)(7) of the Bankruptcy Code and also found “cause” for dismissal under § 1307(c)(5) of the Bankruptcy Code.
In contrast, the court in a more recent Chapter 11 bankruptcy case in California—In re The Hacienda Company, LLC—took a different stance. Despite finding a cannabis industry debtor’s post-petition violation of federal drug laws, the court rejected a motion to dismiss the bankruptcy filing. The Hacienda court’s refusal to dismiss and instead confirm the debtor’s Chapter 11 plan represents a departure from a majority of bankruptcy court decisions, which have typically dismissed bankruptcy cases based on perceived violations of federal drug laws alone.
In this case, the debtor was in the business of wholesale manufacturing, packaging, and distribution of cannabis products to dispensaries in California under the brand name Lowell Herb Co. The debtor ceased its operations and transferred its assets to Lowell Farms, Inc. (Lowell Farms), a Canadian entity, whose sole business was cannabis growth and sales. In return, the debtor received approximately 9.4% of Lowell Farms’ shares, valued at approximately $35 million at the time of sale. The court’s refusal to dismiss was based on several grounds: it found no ongoing violation of federal law, noted that mere ownership of stock intending to pay creditors did not constitute a connection with cannabis and highlighted that a violation of the CSA alone might not warrant dismissal. Nevertheless, the court—in a footnote—kept the door open to revisiting its decision, observing: “Perhaps, if all the facts and circumstances were known to this Bankruptcy Court, and if this Bankruptcy Court were to engage in independent research beyond the authorities cited by the parties, Debtor’s proposed liquidation actually would be a violation of the CSA or some other criminal statute.” This case signifies a potential avenue for bankruptcy relief in the cannabis industry.
A recent decision from the Court of Appeals of Ohio, Grange Insurance Co. v. Cleveland, addressed the novel issue of whether insurance companies should be permitted to exclude coverage for individuals driving under the influence of cannabis when the state prohibits insurance companies from denying coverage for accidents caused by alcohol. While this ruling may have stirred more uncertainties than resolutions, it serves as a cautionary tale for all drivers and businesses that employ drivers, irrespective of personal cannabis use.
In effect, the decision implies that in Ohio—and in the fifteen other states (plus D.C.) that also prohibit Alcohol Exclusion Laws—insurance companies must cover claims from accidents caused by drunk drivers, but the same laws do not require them to cover claims resulting from “drugged” drivers—i.e., drivers under the influence of cannabis. Notably, medical cannabis use was not at issue in this case; however, the Ohio Court of Appeals cited three reasons justifying the differential treatment between cannabis and alcohol use: (1) cannabis remains illegal under federal law; (2) Ohio had only legalized the use of cannabis for medicinal purposes (at the time of the case); and (3) the absence of legal precedence extending policies beyond the state’s stance on alcohol exclusions to include cannabis.
IRC 280E, a tax code impacting the cannabis industry, prohibits cannabis businesses from deducting most operational expenses due to the federal classification of marijuana as a Schedule I Controlled Substance. Recent cases, like Lessey v. Department of Revenue, highlight how misallocation of expenses affects taxes in this industry. In that case, the court differentiated between costs that qualify as Cost of Goods Sold (COGS) and those considered general business deductions, or even personal expenses. The Lesseys made the common mistake of lumping all of the expenses they sought to exclude from their farm’s gross receipts in their 2016 taxable year into the COGS category, totaling $57,654. The court examined the various claimed expenses and determined which ones should be classified as COGS (e.g., air condition units were capital improvements to the farm building rather than product costs and thereby not included as COGS), and which ones should be classified as general administrative business deductions (e.g., an office rental), or, in some cases, personal expenses (e.g., internet service). Neglecting these tax intricacies often hampers cannabis businesses, affecting profitability and compliance with both federal and state laws.
