Lost in the rubble left by last week’s noisy collapse of H.R. 2 (the Agriculture and Nutrition Act, commonly known as the Farm Bill) are some significant developments in the United States’ progress towards legalizing the cultivation of industrial hemp. Industrial hemp is the same species as its THC-laden cousin marijuana, Cannabis Sativa L., but is cultivated differently to produce long, fibrous stalks suitable for industrial use, and to minimize the production of the characteristic flowers commonly associated with marijuana. Industrial hemp production is legal in the United States to the extent allowed by Section 7606 of the Agricultural Act of 2014 (the Farm Bill of 2014), which authorizes state departments of agriculture and educational institutions to regulate research and pilot programs to determine the viability of hemp as an industrial crop.

Since 2014, at least 35 states have implemented some kind of legislation regulating the production of industrial hemp. As with state marijuana laws, the result is an inconsistent patchwork of state regulatory systems. In contrast to marijuana, industrial hemp cultivation pursuant to a state’s pilot program has the qualified blessing of the federal government, which would seem to make it a more attractive opportunity than marijuana. Practically speaking, however, the current business climate for industrial hemp production is fraught with uncertainty and lacking basic business services like banking and insurance. This is due to a vague federal mandate combined with state regulatory frameworks that are much less rigorous as compared to those governing marijuana.

Leading up to the 2018 Farm Bill, this state of affairs seemed poised to change. Broad bipartisan support for industrial hemp resulted in a number of proposed amendments that would have:

  • Legalized industrial hemp and made crop insurance available,
  • Explicitly excluded industrial hemp from the Controlled Substances Act, and
  • Opened up banking for pilot program participants.

However, prior to the final vote on the 2018, Republicans on the House Rules Committee led by Pete Sessions (R-TX) (no, the other anti-cannabis Sessions) blocked consideration of these amendments. None of them made it into the final version of H.R. 2, which ended up failing amidst partisan wrangling over the content of the Farm Bill itself as well as some good old-fashioned hostage taking by conservatives over immigration issues.

All is not lost, however, as industrial hemp continues to gather bipartisan supporters, including Mitch McConnell (R-KY) himself, a champion of Kentucky’s early and successful pilot program. As the Senate considers its own version of the Farm Bill, expected to arrive with less controversy in June, look for hemp-focused fixes that may bring some needed clarity to a growing but uncertain industry.

Much has recently been discussed about the potential value to the cannabis industry of last Monday’s decision by the U.S. Supreme Court concerning states authorizing sports betting. Murphy v. NCAA, No. 16-476 (U.S., May 14, 2018).  For example, see “The Implications of Murphy v. NCAA for State Marijuana Reforms,” authored by Vanderbilt University Law School Professor Robert Mikos.

While some of the arguments are interesting, caution should be exercised here. The law at issue in the Murphy case, the Professional and Amateur Sports Protection Act, did “not make sports gambling a federal crime … Instead, [it] allow[ed] the Attorney General … to bring civil actions to enjoin violations.” (Slip Op., at 5.)  In contrast, federal law makes it a crime to possess, sell or manufacture marijuana, or to aid or abet others in doing so (12 U.S.C. § 841(a)(1) and 18 U.S.C. § 2). Judge Alito, in the majority opinion, supported the so-called “anticommandeering” doctrine as part of the Constitutional mandate “to withhold from Congress the power to issue orders directly to the States.”  However, he also reiterated that “when federal and state law conflict, federal law prevails and state law is preempted” (Slip Op., at 14-15).

While Murphy is an important decision, time will tell as to what — if any — effect it may have concerning the state laws permitting medical, and especially recreational, marijuana use.


If you are involved in the marijuana industry in Oregon, and haven’t yet seen today’s pronouncement from the U.S. Attorney for the District of Oregonthen you should stop what you are doing and listen up: the Feds will not continue to look the other way with respect to certain categories of crimes illegal under federal law (many of which are also crimes under Oregon law).   

The Memorandum was issued by Billy Williams, the U.S. Attorney for Oregon (the “Williams Memo”).  It sets forth guidelines of how his office will exercise prosecutorial discretion.  Mr. Williams explains that Federal prosecutors in his office will do what (IMHO) both the (since withdrawn) Cole Memo and the (now controlling) Sessions Memo always contemplated they would do: enforce federal law against marijuana operations with a primary (but not exclusive) focus on the following five enforcement priorities:

  • Overproduction and interstate trafficking;
  • Protecting Oregon’s children;
  • Violence, firearms, or other public safety threats;
  • Organized crime – including tax evasion and money laundering; and
  • Protecting natural lands, natural resources, and Oregon’s environment.

Significantly, Mr. Williams shares his thoughtful reasoning employed in the development of these guidelines.  Presumably these Oregon-specific guidelines will also serve as a foundation for the issuance of similar guidelines by U.S. attorneys in other states where cannabis has been legalized for adult use.  

However, Oregon may be a particularly troublesome jurisdiction for federal prosecutors because its regulatory scheme basically contemplates an unlimited number of licenses and there is no vertical integration requirement.  The number of licensed growers, coupled with efficient cultivation techniques and the seasonality of outdoor growing, has led to significant overproduction in Oregon.  Indeed, many growers have been imploring the Oregon regulators to beef up their enforcement efforts to prevent both unlicensed growers (i.e., competition that does not have to incur costs of regulatory compliance) as well as licensed growers whose produce sometimes seems to find its way into the black market notwithstanding their cannabis tracking software, METRC.

Query whether the Williams Memo’s express focus on “excess production” in Oregon is a thinly-disguised “suggestion” that the Oregon legislature needs to increase funding for local enforcement and oversight if they don’t want the Federales stepping in and asking questions later.  Remember, even the prosecutorial “protection” afforded under the withdrawn Cole Memo was premised on a robust state regulatory regime, including monitoring and enforcement oversight.  The Williams Memo was not shy about emphasizing the following three problems:

A lack of comprehensive and accurate data from regulators at the Oregon Liquor Control Commission,

Too few resources dedicated to enforcement and oversight, and

Significant overproduction.

Unfortunately but hardly surprisingly, the Williams Memo expressly refuses to make any promise to overlook state-legal and regulatory compliant marijuana businesses because Mr. Williams took an oath to uphold federal law as the supreme law of the land.  

Readers interested in this topic also might be interested in today’s fine Oregonian article by Noelle Crombie.

Last week, Tom Angell from the Marijuana Movement reported on bipartisan U.S. Senate legislation. He noted the legislation would end the federal war on cannabis to exempt cannabis-related activities under federal law. We obtained a draft of this legislation and there are several noteworthy items.

280E Fix

The draft bill notes that conduct in compliance with the bill does not constitute trafficking a controlled substance under the Controlled Substances Act and more importantly any other provision of law. One well-known provision of law that relies on trafficking of controlled substances is section 280E of the Internal Revenue Code. Section 280E denies deductions to any taxpayer trafficking in a Schedule I or Schedule II controlled substance. Therefore, most participants in state or tribal cannabis programs will no longer be subject to section 280E if this bill passes in its current form.

Lack of Clarity 

The mechanics of the draft bill are interesting. The draft provides that the provisions of the Controlled Substances Act related to “marihuana” do not apply to any person acting in compliance with state or tribal laws with some exceptions. The current definition of marihuana is as follows:

The term “marihuana” means all parts of the plant Cannabis sativa L., whether growing or not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt, derivative, mixture, or preparation of such plant, its seeds or resin. Such term does not include the mature stalks of such plant, fiber produced from such stalks, oil or cake made from the seeds of such plant, any other compound, manufacture, salt, derivative, mixture, or preparation of such mature stalks (except the resin extracted therefrom), fiber, oil, or cake, or the sterilized seed of such plant which is incapable of germination.

However, the Controlled Substances Act includes “marihuana” and other cannabis related items in its list of Schedule I controlled substances. Schedule I controlled substances includes “marihuana,” “tetrahydrocannabinols” — the primary psychoactive substance in cannabis — and “cannabimimetic agents.”  The drafters should update the bill to clarify that, in addition to marihuana, the Controlled Substances Act’s provisions related to tetrahydrocannabinols and cannabimimetic agents do not apply to any person acting in compliance with state or tribal laws.  Otherwise, the bill may not accomplish what the drafters intended.

A (Truly) Modest Proposal for Compromise on Cannabis

So many issues in our country are polarized, with each side convinced they have the greater understanding of what our country needs or what their God wants. We would not attempt to suggest a compromise on abortion or deficit spending. But, federal treatment of cannabis seems ripe for a compromise position, and this blog demonstrates our hubris by suggesting just such a compromise.

One view, publicly advanced most notably by Attorney General Jeff Sessions, seems to most of us like a giant step backwards into the days of Reefer Madness: marijuana — in all its forms including CBD-only products — is a gateway drug that is responsible for all that is evil in our society including opioid addiction.[1]

On the other hand, some industry advocates are equally confident that the right dosage/mixture of cannabinoids can save Western Civilization, or at least reduce the harmful societal effects of, and addiction to: opioids, tobacco and alcohol — as well as offer cures (or amelioration of symptoms) for epilepsy, arthritis, nausea, insomnia and serious pain (including horrible cancer-caused pain).

In between such extremes is the bulk of Americans, the majority of whom clearly believe cannabis should be legalized, especially for medical use. By the end of this year’s election cycle, over half of the adult population of the United States will have some sort of state-legal access to marijuana, even if they have to drive to a neighboring state to find a state-legal dispensary.

At last count, researchers (outside the U.S.) had identified 142 discrete “cannabinoids” that are produced in the cannabis plant. Only one of those cannabinoids, THC, is psychoactive. That is, THC is the only one that can get a user “high.” Many of the rest of these cannabinoids have been shown (in studies conducted outside the U.S.) to ameliorate serious disease conditions. Indeed, a committee of the FDA just unanimously recommended that a cannabis plant extract (CBD) be approved as a prescription drug for the treatment of severe childhood epilepsy. There is credible scientific evidence that other cannabinoids, and particular combinations of cannabinoids, have potential to treat MS, obesity, traumatic head injury, PTSD, pain and so on.

The blunt instrument of the federal government does not draw distinctions among cannabinoids. In the world’s most sustained and committed act of throwing-the-baby-out-with-the-bathwater, the U.S. federal government has decreed that any products made from the cannabis plant, including products containing no psychoactive THC, are treated the same as crack cocaine and heroin. Yet even Jeff Sessions’ Justice Department tacitly acknowledges that cannabis may not be as evil as advertised. Sessions has given the various local U.S. Attorneys the authority to prioritize drug enforcement in a manner that generally looks the other way in states where marijuana is legal, so long as the activity is legal in that jurisdiction and there is no evidence of organized crime or money laundering.[2]

Nevertheless, so long as cannabis remains a Schedule 1 controlled substance, state-legal businesses in this space generally will lack access to banks and other financial institutions, so there is a lot of cash sloshing around and cash breeds crime and violence in addition to management headaches and cost. Further, maintaining cannabis as a Schedule 1 controlled substance impairs U.S. research into its potential medical benefits[3], giving countries like Canada and Israel a technological advantage and leaving many U.S. customers at the whim of snake-oil salesmen.[4] Nor is there research into the potential harm — personal, health and societal — from legalizing a product that was not even state legal until a few years ago.

Proposals for federal legalization are themselves complicated. Some want to see cannabis rescheduled (mostly big pharma). Others would like to see cannabis unscheduled (mostly big tobacco, big liquor and big agriculture). Others want to protect small entrepreneurs, who took material risks jumping into this space, from the market-dominating influence of mega-corporations with the economic power to crush the competition.

So, here is our grand compromise proposal effectively a stand-still agreement.

First, all sides would acknowledge that nobody really knows enough about the societal and health benefits — and risks — of cannabis to develop thoughtful public policy. Likewise, we all acknowledge that the conflict between federal and state laws is causing unnecessary confusion, uncertainty and risks, including risks by communities trying to come to grips with the impact of state legalization efforts, patients who clearly aren’t getting the benefit of rigorous product efficacy and safety testing/research, and by business owners (from the risk of dealing in large amounts of cash and the potential prosecution as drug traffickers).

Second, to answer open issues, we suggest that for a reasonable period of time (we will open the bidding with five years), Congress or the administration would enact laws or rules that would:

  1. Not attempt to enforce the federal Controlled Substances Act prohibitions against anyone for cannabis-related “violations,” as long as the activity complies with the laws of the state in which the activity occurs (this is basically a resurrection of the original Cole memo without the fear of reversal on short notice).
  2. Expressly encourage serious research into the benefits — and potential for harm — to individuals and communities from cannabis legalization. Sociological research in this area would have the benefit of control groups because researchers could compare and contrast the implications of different regulatory methods adopted by the different states. Medical researchers, likewise, could engage in controlled studies of multiple strains and different combinations of cannabinoids.
  3. Expressly allow all accountants (including auditors) and financial institutions to accept customers (as both depositors and borrowers), from all state-legal operators, as long as they otherwise comply with FinCEN guidelines.
  4. Expressly allow the cultivation of hemp and interstate sales of hemp-derived CBD-only products for commercial purposes.[5] There seems little risk or harm in allowing free transport across state lines of products that are undisputedly free of psychoactive effect or addictive properties but which seem to provide relief for many ailments including insomnia, stress, joint and muscle pain.
  5. Suspend application of 280E for any business operating a state-legal business.

In exchange, during the stand-still experimental period, states would agree not to materially expand their cannabis laws during the five year stand-still period. States already allowing adult use would continue to allow such use, and states allowing medical-only cannabis would neither materially restrict access for medical use nor would they expand their laws to allow non-medical adult use. In addition, all states that are still prohibiting cannabis on the effective date would not be able to alter their laws during the stand-still period. Any states violating the stand-still arrangement would not be entitled to benefits from certain federal government authorizations, such as relaxed banking restrictions for state-legal marijuana businesses. To the extent the industry can speak with one voice (which is, admittedly, hard), the industry would need to stand together to support this stand-still compromise.

Finally, we propose that Congress appoint a non-partisan task force or blue-ribbon commission to assess the state of the research at the end of the stand-still period, which will be charged with the responsibility for proposing a national cannabis policy informed by the data.[6]

Who stands with us on this modest proposal? [7]  Before joining this chorus, note that our proposal may become moot if a draft bipartisan Senate bill (Warren-Gardner), expected to be offered as soon as next week, is enacted. This bill, currently titled the Strengthening the Tenth Amendment Entrusting States (“STATES”) Act, is intended to reflect the compromise between Senator Gardner from Colorado and President Trump (in exchange for Senator Gardner’s support for White House Justice Department nominees) is expected to (1) exempt (with a few carve-outs) state legal marijuana activity from the Controlled Substances Act, (2) state that compliant financial and banking transactions are not “trafficking,” and (3) carve out industrial hemp from the Controlled Substances Act. Until the actual bill is introduced in the Senate, any prediction about whether it might be enacted is premature.

 

 

[1] In fairness, AG Sessions has recently backtracked somewhat on his typical hard-nosed approach. He recently stated it is appropriate to study medicinal benefits.

[2] https://www.lanepowell.com/portalresource/PDF_Sessions-Memorandum .

[3] Even if a U.S.-based researcher can (a) convince her institution to support the research, (b) obtain grant money for the research, and (c) obtain a very restrictive DEA Schedule I license to conduct the research, she still needs to get test material — which is only available from the National Institute on Drug Abuse (NIDA) cannabis farm maintained at the University of Mississippi. NIDA is highly restrictive about sending out material, and the material is of such poor quality that many researchers simply choose to work in other countries.

[4] Some states are permitting research activities under state law.

[5] The legal status of hemp-derived CBD oil is uncertain. The Controlled Substances Act excludes certain parts of the cannabis plant commonly used to create CBD oil from its definition of “marihuana,” a controlled substance. However, the Controlled Substances Act does not permit the cultivation of industrial hemp. Therefore, the majority of CBD products available in the U.S. originate from hemp oil or exempted parts of the hemp plant that are imported from outside the U.S. The so-called farm bill permits the production of industrial hemp for scientific and research purposes but does not permit cultivation for commercial purposes. The “Hemp Farming Act of 2018” introduced by Republican Senator Mitch McConnell would legalize the cultivation of hemp in the United States.

[6] The challenge here, of course, is that Congress could bow to pressure from powerful lobbying interests — such as, big pharma or tobacco — to grant them an oligopoly. But, that risk already exists if nothing is done.

[7] Not even all of our colleagues in our firm’s Cannabis group would adopt this approach, so we recognize that we may be on thin ice, but still believe an approach like this is worth discussing.

On June 7, 2018, a supermajority of the Washington Legislature blessed financial institutions and accountants providing services for the licensed marijuana industry.[1]

The new law is comfort legislation for a special class in Washington. It is also a protest against impressions about the threat of federal prosecution. But what comfort is the legislation for persons falling outside the protected group? Does it provide any comfort or is it the proverbial cold comfort? The answer may be economics and politics (limited funds to target violent crime, federal/state relations and votes) should reduce the threat of prosecution, regardless of the new legislation.

Discussion

The new state law had broad support; supermajorities passed the law, 81 percent in the senate and 85 percent in the house.[2]

Public safety and other policies. The law targets the public safety problem caused when licensed businesses move cash in 80-pound duffel bags and thieves drill through roofs to steal the stored cash. Overlapping policies support the law:

  • The adage (less cash, less crime);
  • The elimination of the black market;
  • The promotion of transparency and traceability of funds; and
  • The promotion of access to banking and regulated financial services.

Public testimony and lawmakers’ statements.[3] Who supports the Comfort legislation? The support was wide spread.  The Northwest Credit Union Association supported the law. Three credit unions serve the industry and provide almost $1 billion in safe banking. The testimony emphasized the public policies listed above along with the stringent compliance requirements and due diligence for each transaction, and the risk of prosecution for money laundering. Additional policies were the promotion of small marijuana businesses, health research, the protection of employees of the licensed marijuana businesses to have bank accounts and credit cards rather than cash, especially the young, entry-level workers who may be unfamiliar with the financial services world.

Washington Association of Sheriffs and Police Chiefs supported the law as amended. Their support rested on the “incredible public safety issue” stemming from the amount of cash from the industry that was not safeguarded in a financial institution.

The staff summary of the public testimony was:

Washington needs to shut down the black market for marijuana and get cash out of the marijuana market. Having financial services that are traceable would improve the regulation of the industry. Previously, there was federal guidance for financial institutions interacting with the regulated marijuana industry. However, recent guidance by the federal government has caused uncertainty regarding providing financial services to the marijuana industry.[4]

The sound bites from the hearings included:

  • Important first step.
  • Step in the right direction.
  • Can’t wait for the feds to act.
  • Position for time when action is taken by Congress.
  • Eliminate some of the uncertainty resulting from the Sessions memo.

Testimony alluded to one bank stopping services to the industry after the Sessions memo.

But why did the lawmakers feel the need to adopt special legislation when the number of financial institutions nationally reporting that they served state licensed marijuana businesses rose from 340 to 400 by September 2017?[5]

Continue Reading 2018 Washington State <em>Comfort Legislation</em> for the Financial Industry and Accountants Dealing With Licensed Marijuana Businesses

Josephine County responded aggressively to a recent adverse decision by the Oregon Land Use Board of Appeals (LUBA), bringing suit against the State of Oregon to invalidate the state’s marijuana laws.  The complaint, filed April 3, 2018, argues that the federal Controlled Substances Act (CSA) preempts Oregon’s recreational and medical marijuana schemes.

The LUBA decision remanded a Josephine County ordinance that would have restricted marijuana production on significant portions of land in the county.  The decision was made on procedural grounds and left open several substantive challenges, one of which dealt with the county’s authority (or lack thereof) to retroactively prohibit marijuana production.  The county seeks to resolve this issue outside of LUBA by addressing ORS 215.130(5)—which protects existing land uses that were “lawful” when started—in its lawsuit.  The county asserts that ORS 215.130(5) does not apply to marijuana production, which is prohibited by the CSA.

The county asserts that the state requires it to “allow,” “facilitate,” and “accommodate” marijuana production in violation of the CSA.  Measure 91, which legalized recreational marijuana in Oregon, allowed local jurisdictions to opt out so long as 55% or more of local voters voted the measure down.  Voters in Josephine County voted no by a very narrow margin (17,313 to 17,311), making the county unable to opt out.

The county’s preemption arguments could have broad impact, implicating both recreational and marijuana legalization schemes throughout the nation

Attached is an interview in the recently issued Royal Society of Arts Journal with the distinguished and controversial UK psychiatrist and neuropsychopharmacologist Professor David Nutt, currently the Edmond J. Safra chair in Neuropsychopharmacology at Imperial College London. Professor Nutt, Cambridge and Oxford trained, has held significant positions in the UK and the USA, including being a National Institute of Health Section Chief in Maryland for two years. He was the Chairman of the UK Advisory Council on the Misuse of Drugs and, in 2009, was fired from that position by the Home Secretary for his stated position, in The Lancelot, that the harm of certain drugs, including marijuana, has been exaggerated. In any event, this is an interesting interview that will likely be little seen in the US.

In Cossins v. Josephine County, issued March 14, 2018, the Oregon Land Use Board of Appeals (LUBA) remanded a recently adopted ordinance to Josephine County.  The ordinance, No. 2017-002, would have restricted marijuana production on land zoned Rural Residential to lots and parcels larger than five acres, effectively prohibiting marijuana production on anything less than a double lot on much of Josephine County’s Rural Residential land.  The ordinance was also intended to apply retroactively, putting existing producers out of business.

Several producers petitioned LUBA to review the ordinance, raising procedural and substantive challenges.   LUBA held that the ordinance met the statutory definition of “rezoning,” which required advance, individual, written notice to affected landowners, and which notice the county failed to provide.  LUBA remanded the ordinance to the county with instructions to provide the required notice and to conduct at least one additional hearing after such notice.

The producers also argued that the ordinance was “unreasonable” and in violation of ORS 215.130(5), which prohibits land use ordinances from having retroactive effect.  In light of the procedural error, LUBA did not reach these two substantive issues.

LUBA has exclusive jurisdiction to review all governmental land use decisions in the state of Oregon.  This is its second opinion addressing a marijuana-related land use decision since the legalization of recreational marijuana.  In its first, Diesel v. Jackson County (2016), LUBA found a complete ban on marijuana production on land zoned Rural Residential to be “reasonable” because more than a million acres in the county were still available for marijuana production.  Various statutes allow local governments to place “reasonable” conditions on the manner that marijuana is produced and “reasonable” limitations on the location of marijuana production.

These decisions highlight the evolving nature of marijuana-related land use regulation and illustrate the need to review the local political climate in addition to any land use regulations already in effect.