Cannabis Law

Editor's Note xiii

Preface xv

Acknowledgments xvii

Chapter 1

Basic Issues: The Tension between Federal and State Law and Policy 1

• Introduction 1
• Definitions 2
• Overview of Law and Regulation 2
• Federal Law and Enforcing Agencies 2
• U.S. Congress and DOJ 3
• U.S. Food and Drug Administration (FDA) 3
• Federal Trade Commission (FTC) 3
• U.S. Department of Agriculture (USDA) 3
• U.S. Department of Treasury (Treasury) 4
• Cannabis and Hemp: Enforcement 5
• DOJ 5
• FDA and FTC 6
• Treasury 7
• Proposed and Pending Federal Legislation 7
• Decriminalization 7
• Banking 8
• Looking Forward 8
• States 9
• Afterword 9

Chapter 2

Transactional Considerations 11

• Introduction 11
• Private Company Transactions 13
• Federal Legal Considerations 13
• State Regulatory Considerations 14
• Transfers of Applicable Licenses 15
• Restrictions on Ownership of Cannabis Businesses 15
• Reporting Requirements for Owners of Cannabis Businesses 16

Contract Considerations 17

• Structure 17
• Representations, Warranties, and Indemnification 18
• Covenants and Conditions 19
• Dispute Resolution 20
• Minority Investments and Joint Ventures 21

Public Company Transactions 21

• Disclosure Requirements 21
• Exchange Rules 22

Chapter 3

Banking and Finance Issues 25

• Introduction 25
• Federal Controlled Substances Act 26
• Dual-Banking System 27
• Bank Secrecy Act and Anti-Money Laundering Laws 28
• Asset Forfeiture 29
• Fines and Imprisonment 29
• Bank Regulator Oversight 30
• BSA Requirements 30
• Establish Written Internal Policies, Procedures,

and Controls 31

• Conduct Independent Testing 32
• Designate a BSA/AML Compliance Officer 32
• Provide Ongoing Training to Relevant Employees 33
• Customer Due Diligence 33

Suspicious Activity Report Filing 35

• Hemp Business and SARs 36

Currency Transaction Reporting 37

• Federal Legislation 38
• State Marijuana Banking Innovations 39
• Identifying a Bank for MRBs 42
• Payments for Marijuana 42

Chapter 4

Employment 45

• Federal Law Grants Employers Greater Rights to Regulate

Cannabis in the Workplace 46

• Cannabis and the Hiring Process 47
• Background Checks and Consideration of Cannabis-Related Arrests and Convictions in Hiring Decisions 47
• Pre-Employment Drug Testing 49
• Consideration of an Applicant's Participation in a Medical Cannabis Program or an Applicant's Off-Duty

Use of Cannabis 52

• Cannabis Use during Employment 53
• On-Duty Use or Possession of Cannabis Products 53
• Off-Duty Use of Cannabis Products 53
• Post-Hiring Drug Testing for Cannabis Use 55
• Accommodating Cannabis Use 59
• Accommodating Cannabis Use under the

Americans with Disabilities Act 59

• Accommodating Medical Cannabis Use under

State Law 61

• Accommodating Recreational Cannabis Use

under State Law 64

• Carve-Outs from State Cannabis Laws 64
• Safety-Sensitive Positions 64
• Exception for Compliance with Federal Law, Contracts, Funding, or Licensing Requirements 65
• Job Positions Regulated by Federal Agencies 67
• Related Topics Associated with Cannabis Use and Employment 68
• Workers' Compensation Benefits 68
• Unemployment Benefits 69

Chapter 5

Cannabis and Real Property 71

• Acquisition of Real Property for Cannabis-Related Uses 71
• Real Estate Broker Issues 71
• Financing Issues 72
• Investors 72
• Banks and Other Financial Institutions 73
• Hemp and Hemp Derivatives 74
• Title Insurance Issues and Real Estate Due Diligence 75
• Property Insurance 76
• Commercial Leasing for Cannabis-Related Uses 76
• Leasing Due Diligence and Loan Document Review 77
• Enforcement Issues 78
• Drafting Considerations 78
• License Contingency or Condition

Subsequent Clause 78

• Permitted Use 79
• Applicable Laws/Compliance with Laws 80
• Rent and Form of Payment 81
• Security and On-Site Cash 81
• Landlord's Access 81
• Tenant Improvements 82
• Common Areas/Odors/Etc. 82
• Utilities and Operating Expenses 83
• Environmental Concerns 83
• Insurance and Indemnification 83
• Surrender and Other End-of-Term Provisions 84

Forfeiture 84

• Use Restrictions 85
• Conclusion 86

Chapter 6

Tax Law Issues 87

• Federal Income Tax Issues 87
• General Principles 87
• Internal Revenue Code Section 280E-Operating

Expenses Not Deductible 89

• "Trafficking" 89
• "Controlled Substances" 90
• Application to Non-Cannabis Lines of Business 90
• Application to Internal Revenue Code

Section 199A 92

• Constitutional Issues-Eighth Amendment 92
• Constitutional Issues-Fifth Amendment 93
• Constitutional Issues-Sixteenth Amendment 93

Reductions to Gross Income-Internal Revenue Code

Section 471 (Cost of Goods Sold) 93

• Resellers 94
• Producers 95

Reductions to Gross Income-Internal Revenue Code

Section 164 (Taxes) 95

• Internal Revenue Code Section 501(c)-Exempt

Organizations 96

• State Tax Issues 96
• Income Taxes 96
• California 97
• Colorado 97
• Illinois 98
• Oregon 98
• Other General Business Activity Taxes 98
• General Retail Sales Taxes 99
• "Sales" 99
• Exemptions 99
• Business Inputs Exemptions or Incentives 100
• Cannabis Excise Taxes 101
• Weight-Based Excise Taxes 101
• Price-Based Excise Taxes 102
• Stamp Taxes 103
• Non-Marijuana Forms of Cannabis (Hemp and CBD) 103

Chapter 7

Marketing 105

• Marketing Cannabis Products in the United States 105
• Cannabis, Marijuana, and Hemp 105
• Cannabis Derivatives 106
• Legality of Advertising Cannabis Products 106
• Regulatory Framework for Hemp and Hemp Derivative

Advertising 107

• Federal Advertising Laws 107

2.1.1 FTC 107

2.1.2 Lanham Act 108

2.1.3 Federal Food, Drug, Dietary Supplements,

and Cosmetics Regulation 108

• State Laws 108
• Mini-FTC Acts and Consumer Protection Laws 108
• State Hemp and Hemp Derivative Laws 109
• National Advertising Division 109
• Advertising Basics 110
• Identifying an Advertising Claim 110
• Puffery 111
• Disclosures 111
• Substantiating Advertisement Claims 113
• Generally 113
• Scientific Claims 113
• Health Claims 115
• Generally 115
• Examples of Prohibited Health Claims 115
• Advertising Issues Regulated by the FDA 116
• Drug Advertising 117
• Dietary Supplement Advertising 118
• Food Product Advertising 118
• Cosmetic Advertising 119
• Unapproved New Animal Products 120
• Special Advertising Issues 120
• Endorsements and Testimonials 120
• Comparative Advertising 121
• Price Advertising 122
• Contest and Sweepstakes Promotions 122

• Marijuana and Marijuana Derivative Advertising 123
• Federal Law 123
• State Laws 124
• Conclusion 125

Chapter 8

Trademarks 127

• Federal Overview of Cannabis Trademarks 127
• The Federal Lanham Act and the Lawful Use

in Commerce Requirement 127

• Compliance with the Controlled Substances Act 128
• The 2018 Farm Bill and Examination Guide 1-19 130

Alternative Trademark Protection for the Cannabis Industry

and Its Limitations 132

• State Trademark Registrations 132
• Federal Registration for Ancillary Goods or Services 134

Trademark Infringement and Dilution 137

• Likelihood of Confusion 137
• Dilution by Tarnishment 139

Takeaways 141

Chapter 9

Patent Law in the Cannabis Industry 143

• Introduction 143
• How Can the Industry Protect Its IP? 145
• Utility Patents 145
• Design Patents 148
• Plant Patents 149
• Plant Variety Certifications 150
• Why Is Patentability Important? 151
• Marketability for Future Consolidation 151
• Enforceability in the Courts 151
• Potential for Patent Challenges via Inter Partes Review 153
• Conclusion 154

Chapter 10

Cannabis Litigation: Trends and Considerations 155

• Cannabis and Civil Litigation 155
• Types of Cases 156
• Consumer Protection 156
• Products Liability and Negligence 158
• California Proposition 65 158
• Contract Law 159
• Class Actions 160

• Common Defenses 163
• Pleading with Specificity 163
• Reasonable Consumer 164
• Preemption 164
• Primary Jurisdiction 165

Conclusion 166

Chapter 11

Insurance Considerations for the Cannabis Industry 167

• Overview of Basic Insurance Products 167
• Comprehensive General Liability 168
• Property Loss and Business Interruption Insurance 168
• Commercial Crime or Fidelity Insurance 169
• Cyber Insurance 170
• Network Security 170
• Privacy 171
• Business Interruption 172
• Directors and Officers (D&O) Liability 172
• Overview of Key Risks and the Corresponding Insurance Product 173
• Product Liability 173
• Fires, Bugs, and Other Sources of Property Loss 175
• Theft 175
• Improper Release of Customer Information 176
• Loss of Share Value 177
• Judicial Guidance 178
• Conclusion 181

Chapter 12

Bankruptcy 183

• Introduction to Bankruptcy, Receiverships, and Assignments

for the Benefit of Creditors 183

• Treatment of Cannabis in Bankruptcy Cases 186
• Treatment of Cannabis in Receiverships and ABCs 191
• Receiverships 191
• ABCs 194

Chapter 13

Regulation of Cannabis-Containing Products in the U.S. Food

and Beverage Supply 199

• Federal Food Safety Oversight 199
• Food-Related Provisions of the Food, Drug, and Cosmetics Act 201
• Adulteration and Food Ingredients 201
• Dietary Supplements 204
• Misbranding of Foods and Dietary Supplements 205

• Application of Statutes and Regulations to Cannabis and Cannabis-Derived Compounds in the Food Supply and

Current Status 206

• Cannabidiol (CBD) 208
• Cannabigerol (CBG) 212
• Animal Foods 212

FDA Regulatory Actions 213

Chapter 14

Regulatory Overview of the Canadian Cannabis Industry 215

• Federalism and Legislative History 215
• Federally Regulated Activity 218
• Licenses Issued under the Cannabis Regulations 220
• Cultivation Licenses 221
• Processing Licenses 222
• Analytical Testing License 223
• Medical Sale License 223
• Research License 224
• Licenses Issued under the Industrial Hemp Regulations 225
• National Cannabis Tracking and Licensing System 226
• Promotional Activity 226
• Blanket Prohibition and Specific Prohibitions

on Content 227

• Exceptions to Blanket Prohibition, and

Requirements and Prohibitions on Venue 228

• Prohibition on Inducements 229

Import and Export 230

• Provincially Regulated Activity 231
• Cannabis Products 233
• Good Production Practices 234
• Classes of Cannabis 236
• Dried Cannabis and Fresh Cannabis 236
• Cannabis Plants and Seeds 236
• Edible Cannabis 237
• Cannabis Extracts and Cannabis Oil 237
• Cannabis Topicals 239
• Packaging and Labeling 239
• Packaging 241
• Labeling 241
• Corporate Finance 243
• Distribution of Securities in Canada 243
• Prospectus and Other Disclosure Requirements Applicable to Cannabis Companies 244

• Canadian Stock Exchange Requirements 246
• TSX and TSX-V 246
• Canadian Securities Exchange (CSE) 247
• NEO Exchange 248
• Compliance with Proceeds of Crime Legislation 248

Regulatory Approvals Relevant to Mergers and Acquisitions

in the Cannabis Industry 248

• Health Canada Notices and Approvals 249
• Foreign Investment Review 249
• Canadian Competition Law Considerations 250

About the Editors 253

Chapter Authors 255

Index 257