Get the legal advice you need to cultivate, process or dispense.

The State of Medical Marijuana 1-5 p.m., August 20
Moore Norman Technology Center - South Penn Campus

Tickets
$250

The state of medical marijuana

The State of Medical Marijuana 1-5 p.m., August 20
Moore Norman Technology Center - South Penn Campus

Tickets
$250

For 118 years, we’ve helped clients prepare for growth, so when it comes to cannabis, we know what to expect.

Since Arkansas legalized medical marijuana in November of 2016, a multi-disciplinary team of attorneys has been working to advise our clients on the diverse range of issues raised by the emerging program. We now offer experienced counsel and representation on every aspect of medical marijuana in Oklahoma, including:

  1. SQ 788 is a great business opportunity.

    State Question 788 takes a free-market approach to the business side of medical marijuana, with no set limits on the number of cultivation facility, dispensary or processor licenses to be issued, and no lengthy merit-based approval process. The licenses will also be substantially cheaper than those in neighboring Arkansas, with an application fee of only $2,500.

  2. It is structured to encourage a large group of potential patients.

    SQ 788 breaks new ground by not limiting medical marijuana patients to a set list of qualifying conditions. Under this law, anyone over 18 may be a patient with a written physician’s recommendation.

  3. Oklahoma residents are at an advantage.

    Many out-of-state residents will be interested in the Oklahoma market, but SQ 788 allows no more than 25% of the ownership interests to be held by out-of-state residents.

  4. The legislature may get deeply involved in implementing SQ 788, and could change key aspects if there is no input from the industry or patient communities.

    From the public comments of legislators and other officials, we can expect that the legislature will pursue a range of changes to SQ 788 to implement a regulatory structure on top of the Board of Health’s newest rules. The timing of these changes could be difficult for new business owners because many of you will likely be operating by the time the completed structure is in place. You need experienced counsel to help you develop a business that will adapt to and thrive despite all of the regulatory changes. Make sure you have a seat at the table.

Taxes and Cannabis: How Section 280E Penalizes the Cannabis Industry

Cal Rose
Cal Rose

Associate

Rogers, AR

In addition to many other regulatory, legal and banking challenges, cannabis business owners and operators will be tasked with navigating the murky, unforgiving, waters of federal income tax law. Despite its legality at the state level, marijuana is currently classified as a Schedule I drug under the Controlled Substances Act. Because federal law does not differentiate between the taxation of legal and illegal income, cultivation facilities and dispensaries must pay federal income taxes on their taxable income. (See, e.g., James v. United States, 366 U.S. 213, 218 (1961)). However, unlike most businesses, cannabis businesses are prohibited from deducting many standard business expenses, such as employee salaries, rent, utilities and marketing costs due to a little-known tax law codified at Section 280E of the Internal Revenue Code of 1986.

In 1982, Congress enacted Section 280E, which specifically prohibits deductions incurred in the trafficking of Schedule I controlled substances. As a result, cannabis businesses pay significantly higher taxes than their more traditional counterparts, making it imperative for officers and directors of these businesses to develop a financial and operational strategy that adequately addresses the harmful effects of Section 280E. The chart below is an example of how Section 280E can drastically increase a cannabis business’s federal income tax burden.

With careful planning, medical marijuana businesses can take steps to minimize its federal tax burden. Although it prohibits most business deductions, Section 280E does not affect the ability of a medical marijuana business to take into account its Cost of Goods Sold (COGS).  (See Californians Helping to Alleviate Medical Problems, Inc. v. Commissioner, 128 T.C. 173 (2007) (“CHAMP”)). Additionally, cannabis businesses can conduct ancillary and separate businesses, in which case the expenses incurred in the conduct of the ancillary business could fall outside the scope of Section 280E.

COGS

Under federal tax law, COGS is not considered a business expense, meaning that some expenses that are not otherwise deductible under 280E may be excluded from taxable income if properly allocated to COGS. Depending on the specific business activities conducted, the medical-marijuana taxpayer may include all direct production costs and all indirect production costs in its calculation of COGS. Direct production costs are generally those material or labor costs that are necessary for production or manufacturing operations. Indirect production costs can include utilities, depreciation and the costs of quality control and inspection to the extent necessary in the production of inventory.

What does all of this mean? A producer of medical marijuana should be permitted to include in COGS its wages, rents and other direct expenses attributable to its production activities, but should not be permitted to deduct expenses attributable to its general business activities or marketing. For dispensaries that do not engage in cultivation (dispensaries in Arkansas may grow up to 50 of its own plants), this generally means that they can include the invoiced price of their inventory, plus any acquisition and transportation costs incurred in taking possession of the inventory. For cultivators, the COGS spectrum is much broader and could include a significant portion of rent, wages, utilities and other operating expenses to the extent that these expenses are necessary for the production of cannabis and cannabis products.

Other Trades or Businesses

Section 280E applies to taxpayers engaged in the trafficking of controlled substances, but it does not apply to a taxpayer who is engaged in another business that does not involve trafficking of a controlled substance. For instance, in CHAMP, the tax court held that the provision of caregiving services and the commercialization of medical marijuana were separate and distinct business activities. The taxpayer was able to allocate its expenses between the two activities, and the court held that Section 280E did not apply to the provision of caregiving services. Therefore, a cannabis business that also conducts other activities, such as traditional healthcare or caregiving, could decrease its tax liability if it can establish that the other activities constitute a separate trade or business. However, in other cases that are similar to CHAMP¸ the tax court has not been so kind; in Olive v. Commissioner, 139 T.C. 19 (2012), the tax court used a nine-factor test in its determination that the taxpayer’s caregiving activities were not sufficiently separate from the activities of the medical marijuana business. Operators should review the nine factors espoused in Olive when determining whether the ancillary business is adequately distinct from the cannabis business.

Planning Today

Section 280E undoubtedly presents a significant challenge to the future owners and operators of Arkansas’s state-licensed medical marijuana industry. In order to properly address these challenges, medical marijuana businesses should carefully and appropriately develop a strategy that maximizes its allocations to COGS. Additionally, to the extent that a medical marijuana business provides ancillary services, the CHAMP case provides a second planning technique to minimize its tax burden. These techniques, however, are unlikely to fully address the punitive effects of 280E, and until Congress takes action to ease this untenable burden, state-sanctioned medical marijuana businesses will continue paying higher taxes than any other industry in the United States.

 
Wright Lindsey Jennings
 

OSHD Board Approves Emergency Rules on SQ 788

Kirby D. Miraglia
Kirby D. Miraglia

Associate

Little Rock, AR

On Tuesday, July 10th, the Oklahoma State Health Department (OSHD) board met to discuss the state’s proposed medical marijuana rules. The board unanimously approved the rules as proposed, except for the following sections:
  1. 310: 681-2-11 (Restrictions on Smokable Medical Marijuana and Medical Marijuana Products) – The rules, as amended at Tuesday’s meeting, limit the forms of medical marijuana that may be dispensed to patients and caregivers. Essentially, dispensaries can only dispense medical marijuana in non-smokeable forms.
  2. 310: 681-1-4 (Definitions) – The rules, as amended at Tuesday’s meeting, now require that a dispensary manager be a currently licensed pharmacist in good standing with the Oklahoma Board of Pharmacy. The change also removed a provision that a dispensary manager may also be a licensed health care provider.
The board discussed limiting the number of licenses that could be issued to dispensaries, processors or growers, but made no changes at this meeting. Despite speculation prior to the meeting, the board did not discuss the controversial limits on the amounts of THC in medical marijuana products. The final rules will not be effective until the end of August, providing some time to clarify and address other items, if the board chooses to do so. One other note of interest from the meeting is that Interim Commissioner Tom Bates agreed to send a letter to lawmakers outlining some of the issues and items that the board determined were outside their scope of authority to review and consider. Stay tuned for further updates.
 
Wright Lindsey Jennings
 

Medical Marijuana in the Workplace – Rights and Responsibilities of Oklahoma Employers

Neemah A. Esmaeilpour
Neemah A. Esmaeilpour

Partner

Little Rock, AR

Now that Oklahoma has become the 30th state to legalize medical marijuana, many employers are asking what they can do if an employee is using marijuana. The law prohibits employers from discriminating against an applicant or employee based on their status as a medical marijuana license holder. It also prohibits employers from taking an adverse action against an employee based solely on a positive drug test. But this does not mean that employers are prohibited from regulating marijuana in the workplace. First, an employer can still prohibit all employees from reporting to work under the influence of marijuana or from using or possessing medical marijuana on the worksite or during work hours. The fact that an employee has a medical marijuana card does not change this. Therefore, employers should draft clearly written policies outlining these prohibitions and provide them to all employees. Second, drug testing for marijuana is still permissible and relevant. Marijuana remains illegal under federal law and federal agencies (such as the Department of Transportation) have repeatedly stated that they do not recognize medical marijuana under state law as a valid medical explanation for an employee’s positive drug test. In fact, Oklahoma’s new law recognizes this conflict and exempts employers from its antidiscrimination provisions if the law “would cause an employer to imminently lose a monetary or licensing related benefit under federal law or regulations.” Therefore, at a minimum, employers can altogether exclude employees who use medical marijuana from safety-sensitive positions regulated by federal law (such as truck drivers, pilots, school bus drivers, train engineers, subway operators, aircraft maintenance personnel, transit fire‐armed security personnel, ship captains, pipeline emergency response personnel, etc.). State Question 788 may create traps for employers in other areas. Because the new law concerns marijuana use for medical purposes, employers should be on the lookout for disability and accommodation issues that could arise under the federal Americans with Disabilities Act or the Oklahoma Anti-Discrimination Act. Therefore, if a manager or supervisor learns that an applicant or employee has a medical marijuana card, they should avoid discussing any underlying medical conditions and discuss how to proceed with the employer’s HR department or legal counsel. State Question 788 is set to go into effect on July 27, 2018, so employers are likely to see issues related to medical marijuana use very soon. Although this is a new issue, it should be manageable with proper preparation. Given the short timeline, however, Oklahoma businesses should start developing personnel and drug-testing policies, training HR staff, and educating their workforce as soon as possible. Employers should also stay tuned to legislative developments because there are sure to be many changes to the law in the coming months.
 
Wright Lindsey Jennings
 

First Look at Oklahoma’s Initial Draft Emergency Rules Regarding Medical Marijuana

Antwan D. Phillips
Antwan D. Phillips

Partner

Little Rock, AR

On June 26, 2018, SQ 788 passed and it now begs the question, what’s next? Many anticipated that the next step would be the calling of a special legislative session to promulgate a framework for medical marijuana in the State of Oklahoma. However, on June 29, 2018, Governor Mary Fallin issued a statement stating that the special legislative session “is not necessary to implement provision of State Question 788.” Gov. Fallin also stated that the “Oklahoma State Department of Health [OSDH] has developed emergency rules that will ensure the health and safety of Oklahomans as well as being fair and balanced for the marijuana industry.”

Stated differently, Oklahoma’s governmental leaders are relying on the OSDH to regulate the growing, processing and dispensing of medical marijuana. On June 26, 2018, the OSDH released a 61-page draft of the emergency rules. Because SQ 788 becomes law a month after its passing, the OSDH is required to have an application for medical marijuana growers, processors and dispensers available on July 25, 2018. Due to the one-month turnaround to enact SQ 788, it is anticipated that the current working draft of the emergency rules will be substantively similar to the version of rules effective on July 25, 2018.

For example, the current emergency rules define a dispensary as an entity that has been licensed by OSDH to purchase medical marijuana from a licensed processor or grower to sell medical marijuana only to qualified medical marijuana patients and caregivers. Under the current draft rules, to become a licensed medical marijuana dispenser, an entity must complete the application that will be made available by OSDH and submit a non-refundable application fee in the amount of $2,500.00. In addition, the dispensary applicant must also provide proof that the dispensary’s location is not within 1,000 feet of any school; the entity is, at least, 75% owned by Oklahoma residents; and proof of $50,000.00 bond. Moreover, if the dispensary’s location is not owned by the dispensary applicant, then the applicant must provide proof of consent from the owner/landlord that the applicant can operate the location as a medical marijuana dispensary. If an applicant (processor, grower or dispenser) is awarded a license, then the license is only valid for one year. After one year, the license expires, because it is not automatically renewed – in other words, the licensee must apply every year to maintain its license. There are pretty harsh consequences for not timely renewing the license. “A commercial establishment licensee whose license is not renewed shall cease all operations immediately upon expiration of the license” and either sell all of the remaining medical marijuana products to another licensee or dispose as required by the rules.

The emergency draft rules also discuss the logistics of the dispensary’s operations. For instance, the dispensary cannot be co-located with any other business entity. So, no existing bar, restaurant or clothing store can also serve as a medical marijuana dispensary. Similarly, a license cannot be transferred to another entity. Additionally, a dispensary is prohibited from allowing consumption on its premises or providing the delivery of medical marijuana. Practically speaking, the OSDH’s draft rules prevent “medical marijuana bars” or “medical marijuana delivered to your doorstep.” Importantly, and although not required in SQ 788, the OSDH’s emergency rules state that a medical marijuana dispensary can only operate Monday through Sunday, from 10:00 a.m. to 9:00 p.m. This is consistent with Oklahoma’s current rules on the sale of alcohol.

On July 10, 2018, the OSDH will consider the emergency rules regarding implementation of SQ 788. The applications are required to be available on July 25, 2018, and the OSDH is scheduled to begin accepting applications no later than August 25, 2018.

 
Wright Lindsey Jennings
 

The Nuts and Bolts of State Question 788

Erika Ross Gee
Erika Ross Gee

Partner

Little Rock, AR

On June 26th, Oklahoma may become the 31st state to broadly legalize marijuana for medical use. Although Oklahoma currently allows the use of non-psychoactive cannabidiol (CBD) for certain limited purposes, State Question (SQ) 788 would authorize a comprehensive program beginning 30 days after the vote. This article will examine the provisions of the proposed law and predict some likely potholes in the road to implementation.

Oklahoma would be breaking new ground with this law, as it does not delineate any “qualifying conditions,” which have become the common regulatory shorthand for determining whether a patient would benefit from medical marijuana. Rather, in order to qualify for a patient’s license, an Oklahoma Board-Certified physician must recommend the use of medical marijuana, using “the accepted standards a reasonable and prudent physician would follow when recommending or approving any medication” as a guide. This provision has been controversial, with many in the Oklahoma medical and business communities opposing it as too broad and in need of safeguards to prevent recreational use. On the other hand, proponents argue that leaving the recommendation entirely in the professional judgement of the physician is actually a more stringent standard than a set list of conditions.

In most ways, the Oklahoma framework is similar to other states with medical marijuana programs. It authorizes possession and use of marijuana by persons holding a state-issued medical marijuana license. It sets limits based on the form of marijuana—11 ounces of marijuana split between the patient’s person and residence, one ounce of concentrated marijuana and 72 ounces of edible marijuana. The law also allows patients to “grow your own,” with up to six mature plants and six seedlings, and reduces criminal penalties for possession by non-license holders in some circumstances. Patients under 18 must have written recommendations from two physicians in order to qualify for a license.

State Question 788 takes a free-market approach to the business side of medical marijuana, with no set limits on the number of cultivation facility, dispensary and processor licenses to be issued or a lengthy merit-based approval process. Each of these types of businesses will be able to submit an online application 30 days after legalization, with the requirement that the Oklahoma Department of Health “must approve” all applications that meet basic criteria within 14 days. It provides that no more than 25% of the ownership interests in an applying entity can be held by out of state residents. It is also noteworthy that these licenses will be substantially cheaper than those in neighboring Arkansas, with an application fee of only $2,500.

Other key points of State Question 788 address protections against discrimination against medical marijuana patients by schools, landlords and employers; require all medical marijuana businesses to be located at least 1000 feet from a school; and prohibit city and county governments from enacting zoning laws to prevent the opening of a licensed medical marijuana business. The law would also establish a seven percent tax on all retail sales, with the proceeds dedicated to financing the regulatory office.

If State Question 788 passes, as it appears likely to do, the residents of Oklahoma will awake on June 27thwith a whole new set of questions before them, as the state begins the process to implement the new law. The provisions of State Question 788 itself are remarkably straightforward. Perhaps ironically, the simplicity of the measure makes it more likely to be the subject of legislative attention, if only to establish a comprehensive regulatory framework. From the public comments of legislators and other officials, it appears likely that a third special session may be convened if SQ 788 passes. Based upon the statements of local opponents and the recent experience in Arkansas, likely topics for the legislature to tackle may be:

  • Creating a list of qualifying conditions to replace the physician-recommended standard;
  • Creating a new agency or commission to oversee the industry or moving the authority away from the Oklahoma Department of Health to an existing agency;
  • Replacing the short timeline for implementation with a longer set of deadlines;
  • Enacting limitations on smokeable and edible forms of medical marijuana;
  • Restricting pediatric access to medical marijuana;
  • Enacting employer-requested language regarding a drug-free workplace and other employment-related protections;
  • Limiting the number of licenses to be issued;
  • Changing the licensure process to a merit-based system; and
  • Authorizing local government to restrict or ban medical marijuana businesses.

Because State Question 788 is a statutory and not a constitutional provision, it will take only a simple majority of the legislative body to modify, replace or remove provisions of the new law. For this reason, if the law passes, participants on both sides of the issue can expect continued discussion and debate as Oklahoma works to create a safe and healthy medical marijuana system.

Erika Gee is a partner in the Little Rock-based firm of Wright, Lindsey & Jennings, LLP, where she has been actively representing clients in the emerging Arkansas medical marijuana industry.

 
Wright Lindsey Jennings
 

Arkansas Supreme Court hears Oral Arguments on Medical Marijuana Ruling

Kirby D. Miraglia
Kirby D. Miraglia

Associate

Little Rock, AR

On June 7, 2018, the Arkansas Supreme Court heard oral arguments on the granting of a temporary restraining order (TRO) by Pulaski County Circuit Judge Wendell Griffin to stop the Arkansas Medical Marijuana Commission (MMC) from awarding cultivation licenses. Due to this TRO, the MMC has also stopped the selection process for the dispensary applicants.

Attorney Casey Castleberry, who represents cultivation companies who were awarded licenses by the MMC, argued that there was no adjudication at the agency level and therefore, neither the Court nor Judge Griffen had subject matter jurisdiction to hear the case. Additionally, he argued that the recipients of the licenses had a protected property interest in the licenses and that Judge Griffin did not provide any notice or an opportunity to be heard to the recipients of the licenses. Instead, Castleberry argued that Judge Griffen took it upon himself to rule on the merits of the case in violation of the recipients’ due process rights. The Court questioned Castleberry about the current process allowed under the MMC rules, and he responded that since there were no denial letters sent to those who did not receive licenses there was no adjudication to appeal. Castleberry went on to state that he believed his clients have been issued licenses and there is a process for the MMC to consider protests (which were to be heard at a March 16, 2018, meeting). In addition, a party could lodge a complaint with the Alcohol Beverage Control Board, which oversees the MMC, to revoke a currently issued license, and the Board would afford the parties notice and a hearing. At that point, there would be an adjudication and an appeal could be brought to the circuit court in accordance with the MMC rules.

Arkansas Solicitor General Lee Rudofsky agreed with Castleberry that Judge Griffen did not have subject matter jurisdiction because there was no adjudication at the agency level and therefore the Court should reverse Judge Griffen’s ruling. When asked, Rudofsky stated that the Court should be very careful when deciding this matter because he believes that this issue is not properly before the Court under the rules regarding of subject matter jurisdiction. Rudofsky briefly mentioned the issue of impropriety of two of the commissioners and stated that, if you excluded Dr. Roman’s scores, the same entities would have been awarded the licenses.

Attorney Jay Bequette, representing Naturalis Health who was not one of the five selected to receive a license, told the Court that the actions by the MMC were arbitrary and capricious and the process was fundamentally flawed and corrupt. He believed that a decision by the MMC had been made but that no licenses had been issued before the issuance of the TRO. Justices Wood and Womack questioned Bequette about what process was reviewable, how the Court should define adjudication, what rights are afforded to a person with a future interest, and what notice was given to the parties. These Justices on multiple occasions asked Bequette if he wanted them to change the law to reflect his point of view. It seemed from the questioning by Justices Wood and Womack that they were in favor of reversal because, as they alluded to, there is a process in place that would afford parties a hearing and an opportunity to be heard and that only when that takes place can the issue be appealed and the Court step in.

After oral arguments, the Supreme Court released a letter filed by Attorney General Leslie Rutledge revealing that there is an ongoing investigation that a commissioner was offered a bribe by an applicant of a license. The letter further revealed that the applicant was not one of the five selected to receive a license.

 
Wright Lindsey Jennings
 

Investing in Medical Marijuana is a High Risk, High Reward Venture

Cal Rose
Cal Rose

Associate

Rogers, AR

In November, Arkansas voters passed the Medical Marijuana Amendment of 2016, which legalized marijuana use for medicinal purposes and created a state regulatory regime for the cultivation, distribution and sale of marijuana through licensed cultivation facilities and dispensaries.

The Arkansas Medical Marijuana Commission is making steady progress toward reaching its July 1 deadline to launch Arkansas’ medical marijuana program. Application fees and annual license fees have been tentatively set, rules and regulations are coming together and medical marijuana supporters, investors and entrepreneurs are jockeying to obtain one of the five cultivation licenses or 32 dispensary licenses to be established in Arkansas over the next six months.

Medical marijuana is expected to have a significant economic impact in the state. In 2015, U.S. marijuana sales reached $5.4 billion, and conservative estimates predict sales will eclipse $11 billion by 2020.

However, operating in the industry is not without risk — marijuana is still classified as a Schedule I drug under the federal Controlled Substances Act, making it illegal under federal law. This conflict between state and federal law has created many unique legal, financial and regulatory obstacles for medical-marijuana businesses and their owners.

Banking difficulties

At this time, no major banking institutions or credit-card companies are providing financial services to medical marijuana businesses, forcing most of the industry to operate on a cash-only basis and without access to traditional payment-processing services. Medical marijuana businesses generate a lot of cash that banks would love to access — cash deposits increase a bank’s lending capabilities while decreasing overall lending costs.

However, because marijuana is federally illegal, banks simply don’t want to risk criminal liability for aiding and abetting the distribution of a controlled substance. Banks could also face liability under the Bank Secrecy Act for money laundering. Marijuana businesses in other states have found some success with small, state-chartered credit unions, which typically charge higher fees and place caps on deposits in order to limit their exposure.

Section 280E of the U.S. tax code

Section 280E of the Internal Revenue Code prevents businesses that engage in the distribution of controlled substances from taking certain tax deductions, such as rent and salary payments to employees. Interestingly, Section 280E was originally enacted in response to a 1981 court case where a Minneapolis drug dealer deducted expenses associated with his cocaine distribution business (and then successfully defended the deductions in tax court).

Today, it significantly increases the tax burden faced by marijuana businesses; because they are unable to deduct most customary business expenses, medical-marijuana businesses can end up paying income tax on gross revenue rather than profit. In certain situations, IRS rules allow cultivation facilities to take advantage of some deductions that are unavailable to medical-marijuana dispensaries, and careful tax planning and accounting is key for the long-term success of these businesses.

Intellectual property

Marijuana businesses also face legal hurdles with respect to intellectual property and brand protection. The U.S. Patent and Trademark Office will not register trademarks for marijuana retailers or for products that contain marijuana. As a result, it can be very difficult for marijuana businesses to protect their brand and to prevent competitors from selling products under their brand. One potential solution, which has not yet been proven, is for marijuana businesses to trademark branding placed on ancillary products, such as T-shirts, hats and vaporizers.

Until the Trump administration signals its enforcement policy with respect to marijuana businesses operating in compliance with state law, cannabis entrepreneurs and investors will continue to face legal and financial uncertainty. Due to the lack of access to traditional financing, many prospective cultivation facility and dispensary operators have turned to private equity for seed capital, and medical marijuana businesses must exercise proper diligence in these discussions.

Businesses and their management team can be held liable for providing potential investors with untrue, inaccurate or fraudulent information, and investment documents should adequately disclose the many legal, financial and regulatory risks associated with the current uncertainty surrounding the marijuana industry.

 
Wright Lindsey Jennings
 

The State of Medical Marijuana

Erika Ross Gee
Erika Ross Gee

Partner

Little Rock, AR

There have been years of public discussion on both sides of the issue of medical marijuana in Arkansas. Surprising many observers, a ballot measure which would have legalized medical marijuana nearly passed in November of 2012, with a final tally of 51.44% against with 48.65% for the measure.

After that near-victory, two separate medical marijuana measures were certified for the November 2016 ballot: the Arkansas Medical Marijuana Amendment of 2016 (Issue 6) and the Arkansas Medical Cannabis Act (Issue 7). In the months leading up to the November 2016 election, many members of the community, including the Governor and the State’s Surgeon General, were opposed to both measures, chiefly due to concerns over treating marijuana as a medication. Nevertheless, after Issue 7 was removed from the ballot by the Arkansas Supreme Court,2 Issue 6 passed with 53.09% to 46.91% of the votes cast and became effective the very next day, November 9, 2016.

This article will summarize the current state of medical marijuana after all of the changes made to Issue 6 by the 91st General Assembly, with the addition of the clarifications provided by the rulemaking by the Arkansas Department of Health (DOH), Department of Finance and Administration’s Alcoholic Beverage Control Board (ABC) and the Arkansas Medical Marijuana Commission (MMC).

Download the full article.

 
Wright Lindsey Jennings
 

In the Workplace 2018: Medical Marijuana: Getting Ready for Summer

Stuart Jackson
Stuart Jackson

Partner

Little Rock, AR

This is the last in a series of articles by Wright Lindsey Jennings’ labor and employment team examining key trends for employers and the workplace in 2018. The series was featured in Arkansas Business.

When the Arkansas Medical Marijuana Amendment passed just over a year ago, businesses with employees in the Natural State were not quite sure how to deal with the issue. Many questions were being asked, including would all Arkansas employers be covered and how would those businesses ensure the safety of all employees?

With the passage of Act 593 by the General Assembly, employers in Arkansas now have some clarity about what they can and can’t do when it comes to medical marijuana. But that clarity only goes so far.

Employment-Related Provisions

From an employment perspective, the original terms of the amendment gave “qualifying patients” who had “qualifying medical conditions” and “designated caregivers” (those who have agreed to assist disabled qualifying patients with the medical use of marijuana) certain protections in the workplace.

For instance, under the amendment:

  1. Employers cannot discriminate against an individual (which includes not hiring, disciplining, failing to promote or terminating employment) or otherwise penalize an individual based upon the individual’s past or present status as a qualifying patient or designated caregiver – basically, you should think of this as another “protected class” under state employment law;
  2. Employers cannot discipline a qualifying patient or designated caregiver for the medical use (which includes actual use or mere possession) of marijuana in accordance with the amendment if he or she possesses not more than 2 ½ ounces;
  3. Employers cannot discipline a qualifying patient or designated caregiver for giving a permitted amount of usable marijuana to another qualifying patient or designated caregiver for medical use if nothing of value is transferred in return; and
  4. Employers cannot discipline a qualifying patient or designated caregiver for possessing marijuana paraphernalia to facilitate the use of medical marijuana or for giving another “qualifying patient” marijuana paraphernalia to facilitate the use of medical marijuana.

Of course, the protections in the amendment are contingent on the qualifying patient or designated caregiver actually possessing a medical marijuana card issued by the Department of Health and a permissible amount of medical marijuana from a state dispensary

Earlier this year, the General Assembly passed and Gov. Asa Hutchinson signed into law Act 593, which modified the amendment’s provisions to provide significant protections for employers (now specifically defined as those with 9 or more employees in Arkansas), including:

  1. Allowing employers to have and enforce drug-free and substance-abuse testing policies that apply to both applicants and employees (which in some situations could be problematic under the original terms of the amendment). Federal contractors are certainly happy to see this;
  2. Permitting the discipline of an employee if there is a good faith belief that he or she used or possessed medical marijuana on site or during work hours;
  3. Permitting the discipline of an employee if there is a good faith belief that he or she was under the influence of medical marijuana on site or during work hours; and
  4. Allowing employers to exclude a person (an employee or an applicant) from a safety-sensitive position, as defined by the amendment, if there is a good faith belief that person is a current user of medical marijuana. Be sure to note the difference between simply being a current user and actually being under the influence at work – a current user might never be under the influence at work.

But, a word of caution — just because one has the right to do something under the protections added by Act 593 doesn’t necessarily mean that one should. With the mix of state and federal employment-related issues swirling around medical marijuana, employers need to be very careful how they treat employees with a medical marijuana card. For example, anyone possessing a medical marijuana card may very well have a disability covered by the Americans with Disabilities Act and the Arkansas Civil Rights Act. Knee-jerk personnel decisions will not serve employers well.

Medical Marijuana Discrimination Claims

Let’s say you make a mistake with one of your employees – for instance, you misclassify a job as safety-sensitive and decide to terminate an employee based on his current medical marijuana cardholder status.

What could happen? A lot — you could get sued and face damages for months or years of lost wages and benefits. You could also face paying other types of compensatory damages, punitive damages and the terminated employee’s attorney’s fees and expenses. Plus, you might even have to reinstate the employee!

Do not underestimate the consequences of running afoul of Arkansas’ medical marijuana law.

Planning for Medical Marijuana

Even though medical marijuana probably won’t be available in Arkansas until the latter half of 2018, start planning now. Here’s a list of things to do:

  1. Take a hard look at your written job descriptions, especially the ones you consider to be safety-sensitive. Update them as needed and be sure to indicate in writing which ones are in fact safety-sensitive. But don’t lose your common sense when determining whether a job is safety-sensitive.
  2. For truly safety-sensitive positions, make it a requirement that an applicant or employee disclose to your human resources manager that he or she is using medical marijuana. The timing of the disclosure for applicants could be tricky – we suggest after a conditional offer of employment has been made.
  3. Make sure your handbook is up-to-date and include in it prohibitions against the use and possession of medical marijuana at work or during work hours (if you so choose) and being under the influence of medical marijuana at work or during work hours.
  4. Talk to your MRO about how positive tests for marijuana will be reported if the person tested (an applicant or employee) has a medical marijuana card.
  5. Don’t lose sight of the fact that other employment laws, like the Americans with Disabilities Act, the Family and Medical Leave Act or the Arkansas Civil Rights Act, may come into play not because of the use of medical marijuana, but because of an underlying health issue.

Arkansas employers will be faced with all sorts of scenarios in the coming months and years – from the long-time employee who is legitimately in need of medical marijuana to the employee who posts a video on Facebook of himself or herself using medical marijuana at home.

 
Wright Lindsey Jennings
 

Appellate Decision Leaves Cannabis Credit Union in a Haze

Johnathan D. Horton
Johnathan D. Horton

Partner

Little Rock, AR

Bankers are subject to numerous federal laws and regulations, so banking highlights the tension in the current legal environment for marijuana-related business like no other industry. While at last count 28 states and the District of Columbia had legalized either the medical or recreational use of marijuana, bankers working with marijuana-related businesses risk a range of consequences from additional costs to comply with existing federal oversight to possible prosecution for aiding and abetting drug traffickers or money laundering. In light of the risks and uncertainty of enforcement, many banks refuse to work with marijuana-related businesses. This reality has led to a shortage of available banking channels for many marijuana-related businesses, in an industry driven largely by cash. One creative attempt to solve this dilemma resulted in a recent appellate opinion from the Tenth Circuit Court of Appeals.

A Creative Solution

To address the lack of access to banking channels, a group of Colorado business owners sought to create a state-chartered credit union. In November 2014, the State of Colorado issued a charter to The Fourth Corner Credit Union, a credit union open to any legal marijuana enterprise in Colorado and anyone who is a member of a nonprofit that supports legalized cannabis. Fourth Corner promptly obtained a bank routing transit number from the American Bankers Association and applied for a master account from the Federal Reserve Bank of Kansas City (the Fed). (If you do not know, a master account permits an institution to access the Federal Reserve payment system and transact business. Without access — either through a master account or a correspondent bank — Fourth Corner will find it difficult to conduct its business.) Unfortunately, the Fed denied its application. So, Fourth Corner filed suit asking the court to make the Fed issue it a master account. The Fed asked the court to dismiss the suit for three reasons. First, federal law, which criminalizes marijuana, preempts Colorado state law. Second, the Court ought not to use its equitable powers to facilitate a crime. Finally, Fourth Corner misinterpreted the controlling law.

In response to the motion to dismiss, Fourth Corner amended its complaint to allege that it would serve marijuana-related businesses only if it was authorized to do so. Fourth Corner then sought a ruling in its favor without a trial. The Fed renewed its motion to dismiss.

District Court Ruling

The District Judge dismissed the case and denied Fourth’s Circuit’s motion. In a nine page opinion, he noted that, in 2015, the Bankruptcy Appellate Panel for the Tenth Circuit had rejected bankruptcy relief for marijuana-related businesses because the business activities were federal crimes, and thought he ought not to support violating federal law. While not directly quoting Captain Hector Barbossa from Disney’s Pirates of the Caribbean: The Curse of the Black Pearl, who of the Pirate’s Code said, “The Code is more of what you would call guidelines, than actual rules,” the district judge took a similar approach to Fourth Corner’s argument that the Cole Memorandum and the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) guidance had changed the law. The judge said the Cole Memorandum set the Department of Justice’s (DOJ) enforcement priorities for the Controlled Substances Act, while the Treasury Department’s guidelines simplified reporting requirements for marijuana-related businesses. While he characterized the guidance as suggesting “prosecutors and bank regulators might ‘look the other way’ if financial institutes don’t mind violating the law,” the court could not. He dismissed the suit with prejudice, meaning it could not be re-filed, and granted costs to the Fed.

Appeal

Fourth Corner appealed to the United States Court of Appeals for the Tenth Circuit, which includes the states of Colorado, Kansas, Oklahoma, New Mexico, Utah and Wyoming. On June 28, 2017, the three-judge panel of the Tenth Circuit issued its opinion. The remainder of this article will look at the parties’ arguments on appeal, and the fractured ruling issued by the appellate court.

Fourth Corner argued that the district judge erred by finding federal law prevails against Colorado state law. It argued that the Fed overstepped its role by essentially acting as law enforcement in denying its application, because only the Justice Department can assert preemption, not banking regulators. Because the Justice Department is still working on regulations, it is still determining whether Colorado law impacts federal and state enforcement of anti-marijuana trafficking laws. Until it decides, the court should state the rule of law on state-regulated marijuana that controls its decision, not merely recite the federal marijuana prohibition.

In response, the Fed said the district judge correctly considered the Controlled Substances Act and related laws – making marijuana illegal – so, as a matter of federal law, it wins. Similarly, no preemption analysis was necessary because federal law makes marijuana illegal, and the Supremacy Clause means that federal law controls over conflicting state law. Creation of a state-chartered credit union cannot trump the Controlled Substances Act. In a friend of the court brief, the Board of Governors of the Federal Reserve System unsurprisingly pressed similar arguments.

After the initial briefs, the three judges on the panel asked the parties to brief the issue of whether the court should consider prudential ripeness sua sponte, i.e., on the court’s own motion. Essentially, the judges brought up the ripeness issue and asked for briefing.

Tenth Circuit’s Ruling

The three judge panel (Judges Moritz, Bacharach and Matheson) of the Tenth Circuit could not agree on how the case ought to be decided. Two judges agreed on the same result – remanding the case with instructions to dismiss the case without prejudice – so that view ultimately prevailed. The three way split of opinions, however, demonstrates the complexity of the issue.

Judge Moritz

To Judge Moritz, this case was not that complicated. He voted to affirm the district court’s dismissal based on the Fed’s illegality defense. Because Fourth Corner intended to provide banking services to compliant, state-licensed marijuana-related businesses, it violated the Controlled Substances Act, even if the businesses complied with Colorado state law. Fourth Corner would, therefore, be facilitating illegal activity by giving these businesses the bank access they currently lack. Under the Supremacy clause, acts illegal under federal law are illegal, regardless of Colorado law. The Executive Branch’s guidance, namely the Cole Memorandum and the Treasury Department’s FinCEN guidance, did not change federal law. Nor did the court have to give credence to the complaint’s allegations that Fourth Corner intended to abide by federal law. Despite its allegations, Moritz was concerned equitable relief would facilitate illegal activity because, in its complaint, Fourth Corner never said it would not serve marijuana-related businesses or stated what it believed the law was. He departed from Judge Bacharach because he disagreed with Bacharach’s suggestion that the complaint’s request for declaratory judgment implied that Fourth Corner had agreed to be bound by a ruling regarding the legality of servicing marijuana-related businesses. Moritz felt that in ruling on that issue the district court “answered a question that the Credit Union never asked.” Ultimately, the illegality defense resolved the material issue, so the court did not need to address the other issues, including whether Fourth Corner was entitled to a master account or whether federal law preempted its charter.

Judge Matheson

Judge Matheson thought the case should be dismissed on ripeness grounds. He suggested that the amended complaint’s allegations that Fourth Corner would only serve marijuana-related businesses, only if it was legal, differed from an application by a credit union focused on serving such businesses. Because Fourth Corner never resubmitted an application to the Fed saying the credit union would only serve marijuana-related businesses, if it was legal, Fourth Corner never gave the Fed the opportunity to decide whether to approve the master account (which would make the case advisory) or reject the application on other grounds (which would make the case about a different dispute). He did not believe that resubmission was futile. Accordingly, Matheson agreed with the Fed that Fourth Corner sought review of a case that was not made and the district court did not consider. So, he felt the present case was premature, so it should be dismissed without prejudice.

Judge Bacharach

Judge Bacharach thought the district court was wrong for two reasons. First, he thought that, at the pleading stage, the district court should have presumed that Fourth Corner’s allegation that it would follow the law, as articulated by the court, was true. He felt by ignoring this allegation, the district court erred. Second, in the amended complaint, Fourth Corner promised to obey the law and, by seeking a declaratory judgment, acknowledged the court determined the law. Bacharach felt that the district court erred by not presuming that Fourth Corner would obey the ruling that servicing marijuana-related businesses is illegal. As a result, the district court erred by misapplying the standard for motions to dismiss.

Bacharach also rejected the Fed’s two arguments for dismissal: (1) Fourth Corner has no statutory right to a master account and (2) Fourth Corner’s charter is preempted by the Controlled Substances Act.

As to the first, he began with the text of the federal law providing for a master account, 12 U.S.C. § 248a(c)(2) (2012). Bacharach found that the text created a nondiscretionary right that required Federal Reserve Banks to make all services covered by the “fee schedule” available to “nonmember depository institutions.” A nonmember depository institution, like Fourth Corner, could operate only by having its own master account or by using a middleman with an account, so Bacharach did not buy the Fed’s argument that because the statute did not list “issuing a master account” specifically, it could deny one. He thought that interpretation was contrary to the statute’s text. Nor did he agree with the interpretation offered by the Fed and the Board of Governors: because the statute did not say that its services had to be available to “all” nonmember depository institutions, it could reject some nonmembers. Bacharach felt the statutory text obligated regional Federal Reserve Banks to make the services available to all nonmembers. He rejected this argument, which the Board of Governors made in its friend of the court brief, by devoting more than seven pages of his opinion to an exposition of how the argument in litigation differed from its past pronouncements, official interpretations by the regional Federal Reserve Banks, legislative history, cases, scholarship and even its current website.

Bacharach also rejected the argument that Fourth Corner’s charter was preempted by the Controlled Substances Act. He noted that the charter was only partially preempted – to the extent it authorized servicing marijuana-related businesses – and Fourth Corner was free to pursue servicing supporters of legalization. Preemption would not completely undermine the charter, so Fourth Corner was entitled to a master account.

Finally, Bacharach disagreed with Matheson. He thought it clear that the Fed would refuse a master account, even if Fourth Corner promised to refrain from servicing marijuana-related businesses, and that dismissal was a hardship for Fourth Corner because it would prevent the credit union from accessing basic services from the Federal Reserve for any patron. Bacharach thought that the panel’s opinion (joined by two of the three judges) that servicing marijuana-related business was illegal provided Fourth Corner sufficient guidance, so that the district court had no reason to doubt Fourth Corner’s sincerity when it alleged it would service marijuana-related businesses, only if providing such services was legal. He thought it made no sense to require Fourth Corner to reapply to the Fed and say specifically “it will service marijuana-related businesses only if it is legal.” He noted the potential for delay in processing the new application, which would continue to drag the matter out and prevent Fourth Corner from operating. So, he would not have required it to apply again.

So, Bacharach ultimately would have reversed the district court, and remanded the case.

Analysis

The ultimate result is a Pyrrhic victory for Fourth Corner. After nearly a year of time spent waiting on the Fed to process its application and about another two years of litigation, not including the amount spent on attorneys’ fees and related expenses, the change of the dismissal to one without prejudice means that Fourth Corner lives to fight another day, but it now has to start the process over again. Fourth Corner will likely reapply to the Fed for a master account. The Fed will then have to determine its new application. If Fourth Corner loses again, which appears likely, another suit and undoubtedly another appeal will follow.

While the panel fractured on other issues, at least two judges agree on one point: servicing marijuana-related businesses is illegal. This conclusion imposes a significant limitation on Fourth Corner’s clientele. While it is still free to service the other groups referenced in its charter, Fourth Corner cannot service marijuana-related businesses, the very businesses that led to its formation and which it has suggested may need its services the most.

Access to the Fed is, however, not the only issue preventing Fourth Corner from operating. It has also sought deposit insurance from the National Credit Union Administration, but that application was denied. That denial is the subject of a separate, pending lawsuit. So, deposit insurance remains an obstacle to be resolved, along with capital requirements and other issues raised by the Fed, even if Fourth Corner convinces the Fed to grant a master account to it in response to its new application.

Finally, more than six months into the current administration and the executive branch has offered no assurances that it will not change the Justice Department’s enforcement priorities again, just as the Obama administration did in the Cole Memorandum and FinCEN guidance. The current partisan tenor of Washington suggests a legislative solution to the present tension between federal and state laws is unlikely. While Congress could step in and address how marijuana is treated by amending the Controlled Substances Act, that appears unlikely to occur in the immediate future.

Until there is a change to address the differing federal and state laws, it is unlikely that most banks (or their bankers) will risk the criminal penalties that could result from accepting deposits from marijuana-related businesses, or deposits they either know or have reason to suspect come from marijuana-related transactions. The lack of access to traditional banking channels appears likely to continue to be a problem for marijuana-related businesses for the foreseeable future. However, if one business gets its way, at least legalization supporters may soon have access to banking services through a state-chartered credit union.

 
Wright Lindsey Jennings
 
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