Nationwide Cannabis Market Still in Flux

By on February 6, 2023

Adult-use cannabis was first legalized in 2012 in Colorado and Washington. Since then, adult-use cannabis has been legalized in various jurisdictions throughout the country, opening up opportunities for entrepreneurs interested in entering the legalized cannabis market. Unfortunately, there was too much interest in this relatively new market, and now we are faced with an oversupply of cannabis, causing prices to decline rapidly. Who knew that too much of a good thing would be, well bad?

Several states are feeling the brunt of the problems caused by excess cannabis production. For example, in Michigan, the number of adult-use cannabis operations has grown exponentially in the last few years, causing a price drop in some areas up to almost 75%. According to the Michigan Cannabis Regulatory Agency (“CRA”), as of December 2022, there were just under 1,900 active cannabis licenses throughout the State of Michigan, including the 33 adult-use cannabis retail licenses that the City of Detroit issued on December 22, 2022. The price decrease—combined with the 16% sales and excise tax— has put Michigan cannabis growers and retailers in a tough spot. 

Michigan is not alone – prices for adult-use cannabis have likewise dropped in California, Colorado, Massachusetts, Missouri, Oregon, and many others. To explain the present climate, some point to simple economic principles that were gleaned from half-listening to your Economics 101 professor: when supply is greater than demand, the price drops. Others think that perhaps the novelty of adult-use cannabis has worn off and will be viewed more as a commodity akin to beer or liquor in the future. It is also essential to consider that cannabis customers are not only reaping benefits from lower prices but will likely be negatively impacted by lower state revenues available to fund public programs. For example, the California Department of Tax and Fee Administration reported a 7% decline (roughly $23 million) in cannabis tax revenues in the first quarter of 2022 compared to the last quarter of 2021.

What we do know, however, is that new industries generally start off hot and stabilize over time. Several states passed legislation legalizing adult-use cannabis and/or began the sale of adult-use cannabis in 2022— including New Jersey and Rhode Island— and several more states are slated to open up retail markets in 2023. In addition, the Food and Drug Administration (“FDA”) has recently made public its intention to pass regulations in conjunction with Congress pertaining to cannabis-containing products, which could significantly affect the overall cannabis market. All this shows that the nationwide adult-use cannabis market is still in flux and probably will be for some time.  

Isaac Newton has taught us that what goes up must come back down. But who’s to say it doesn’t eventually bounce right back?

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US Virgin Islands Legalizes Recreational Adult-Use Marijuana – Full Implementation Awaits

By on January 24, 2023

On Wednesday, January 18, the U.S. Virgin Islands (“USVI”) Cannabis Use Law (Act 8680) was signed by USVI Gov. Albert Bryan Jr., legalizing recreational cannabis use by adults aged 21 and over.

Richard Evangelista is Commissioner for the Department of Licensing and Consumer Affairs, which oversees the Office of Cannabis Regulation (granted exclusive authority to create rules and regulations for the cultivation, manufacture, sale, provision, testing, licensing, and use of cannabis). Evangelista pointed out to USVI Senators on December 20, 2022, that the applicable adult-use regulations would take up to 24 months to implement, as the bill requires regulations to be in place within two years. Further, the legislative sponsors of the new law estimated that, given the lack of administrative infrastructure and regulations to be drafted, it would take four to five years for the law’s provisions to be fully implemented.

The USVI already has a four-year-old medical cannabis law. Still, Evangelista said that once Gov. Bryan acted on the adult use bill, the proposed Rules and Regulations for Medical Cannabis “would be null & void.”

The 104-page signed bill had yet to be posted online as of the date of this article. However, according to secondary sources:

  • Persons 21 and older may possess up to 2 ounces of marijuana, a half ounce of concentrate, and 1 ounce of products such as edibles for recreational, sacramental, and other uses.
  • Medical marijuana patients can possess up to 4 ounces of cannabis, 1 ounce of concentrate, and 2 ounces of products.
  • In addition, sacramental use of cannabis is permitted for members of established Rastafari nonprofits, and such members may grow cannabis on private property for personal use once cultivation permits are awarded. Regulations governing the enforcement of that provision will need to be established.
  • One million dollars from the Tourism Advertising Revolving Fund is earmarked to operate the Office of Cannabis Regulation for two years.
  • Dispensaries will apply a tax of at least 18% on all sales, although medical marijuana patients are exempt.
  • Three-fourths of the tax revenue will go to the USVI general fund. Of that amount, 15% is earmarked for behavioral health programs, 5% to address homelessness, and 5% for youth programs. No tax revenue will go to support the Government Employees Retirement System.
  • Medical cannabis patients cannot grow their cannabis plants at home, but that aspect could be amended in the future.
  • A residency requirement is intended to prevent “predatory investors” from dominating the industry, and business applicants must have lived in the territory for at least 10 of the last 15 years.

Governor Bryan also issued a proclamation that allows persons convicted of simple possession of marijuana to apply for a pardon through the USVI Department of Justice, and $250,000 will be provided to the Governor’s office to establish a task force to tackle expungement of cannabis convictions.

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Oregon Passes Series of Laws To Encourage Further Cannabis Growth

By on March 9, 2022

For the next two years, the Oregon Liquor and Cannabis Commission (“OLCC”) will roll out a series of recently enacted rules and regulations designed to further expand the already successful Oregon cannabis industry. The revised and amended rules and regulations will relax regulations that many have believed to be an overregulation of certain parts of the industry and combat federal taxation issues that are financially impacting the cannabis industry. The amended rules also address concerns on consumer health and safety, licensing regulations for all sized operations in the industry, loopholes in the Farm Bill of 2018 in regards to industrial hemp, and the black market farm production that has extended its reach from the coast of California to Southern Oregon. The highlights of the amendments are as follows:

Senate Bill 408: Benefits to Licensees

S.B. 408 relaxes regulations and removes punitive measures for violations of the regulation and instead focuses on compliance supported by education and training. The easing of regulations will make it easier for people entering into the cannabis market and encourages growth to those already working within the industry. For example, S.B. 408 improves licensees’ ability to self-distribute by reducing the time and costs to submit information into Oregon’s Cannabis Tracking System. S.B. 408 also places stricter guidelines surrounding when the Oregon Liquor Control Commission can delay the processing, approval, or denial of a license application.

S.B. 408 will also increase the amount of cannabis consumers may purchase from one to two ounces, and concentration limits in edibles increased to 100 mg per package, double the current limit. Both these amendments are effective as of April 1, 2022.

House Bill 2519: Home Delivery

One of the more progressive changes arises from H.B. 2519 which opens the door for cannabis retail delivery services directly to the consumer. Home delivery will be permitted in any city or county that permits cannabis production, procession, or retail use within its boundaries.

House Bill 3000: Curtails THC-hemp products sold in unregulated market

H.B. 3000 omnibus bill makes significant changes to the Oregon cannabis laws by authorizing OLCC to further regulate artificially derived cannabinoids and prevent hemp products with THC over the federally allowed 0.3 percent from being sold by prohibiting anyone who is not a licensed cannabis retailer from selling industrial hemp product to consumers. H.B. 3000 requires delta-8 products and other artificially derived cannabinoids to go through a review process to ensure it meets the regulated standard of “New Dietary Ingredient” within 18 months. H.B. 3000 also establishes a task force to monitor and report on cannabis and cannabinoid products’ sale, public health, legality, and safety.

Social Justice and Illegal Market

The Oregon legislature failed to follow in the path of many other states in initiating a social justice component to its cannabis regulation. However, the legislature did pass two laws that are directed toward the illegal cannabis operations in southern Oregon. Senator Jeff Golden authored the bill and explained that the illegal market has been, “using our limited water supply, abusing local workers, threatening neighbors, and negatively impacting businesses run by legal marijuana growers.” The legislature approved $25 million to be set aside to address illegal grow operations, with $20 million earmarked for the Illegal Marijuana Market Enforcement Grant Program, and $5 million for Oregon’s Water Resources Department to combat water theft.

The amended laws and regulations will become effective throughout 2022 and 2023.

Filed under Cannabis, Oregon, THC

Cannabis Taxation: Let’s Do It for Our Children?

By on February 23, 2022

A new bill introduced on February 15, 2022 by State Sen. Michael McGuire from Healdsburg, California is facing significant resistance from multiple children’s advocacy groups because of its future effects on how cannabis will be taxed. Senate Bill 1074 seeks to amend Sections 34011 and 34012 of the Revenue and Taxation Code, effective immediately. The amendments change how cannabis is taxed in two different ways.

Under current law, Section 34011 imposes an excise tax on purchasers of cannabis and cannabis products at the rate of “15% of the average market price of any retail sale by a cannabis retailer.” If SB-1074 is approved as-is and takes effect, cannabis purchasers would see an increase in excise taxes starting July 1, 2025. The Department of Finance reports that it would determine the increase based on historical average values of quarterly cultivation taxes collected from the third quarter 2018 through the fourth quarter of 2021. An increase will take place on July 1, 2025 and July 1, 2026.

Senate Bill 1074 also proposes to remove the entirety of Section 34012 as of July 1, 2022. Currently, Section 34012 imposes a cultivation tax on all harvested cannabis. No cultivation taxes would be collectable after July 1 if the new bill passes. The immediate loss of this funding source motivated 152 different children’s advocacy groups to sign their name and support to a letter opposing the bill.

One of the arguments advanced in the letter is the significant negative impact it would have on children already living in poverty, many of whom are children of color. Many nonprofit organizations are said to rely on Proposition 64 funding to support programs for low income children. Nonprofit organizations including First Five Sonoma, First Five Marin and the Napa County Office of Education, were among the signatories to the letter.

On the other hand, Sen. McGuire has also been vocal about his reasoning for supporting the tax cuts. On Twitter, he has stated that “cultivation taxes are crushing small farmers throughout the North Coast and California.” His focus is on helping small cannabis farmers drowning under what he considers an unfair tax burden. Legitimate cannabis businesses in California are also experiencing unfair competition from the black-market.

The issues presented by both sides of the debate are significant. As of now, it is unclear how the legislature will vote on this important issue. Gordon Rees Scully Mansukhani’s Cannabis, Hemp and CBD group will continue to monitor this important legislation and will provide an update as to which position the legislature ultimately voted for and the impact that the vote will have on the interested parties.

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The Cannabis Black Market in California: Challenges for 2022 and Beyond

By and on January 13, 2022

In 2019, California’s Bureau of Cannabis Control reported that upwards of 80% of California’s cannabis industry remains illegal. Spurred by the inability to obtain permits at the local level, high taxes, and inability (or unwillingness) to comply with the law, these unwelcome entrants to the industry have made remain a significant impediment to those cannabis business owners that seek to comply with the law.

The impact of the black market on California’s legal industry cannot be understated. Legal business owners absorb costs for compliance (both employment and environmental), local taxes, security, permitting, and business organization. As with other industries, legal business owners pass those costs on to customers. But black market growers and sellers who are unfettered by these issues can and do underprice legal operations, resulting in inexpensive, illegal cannabis flooding the market at the expense of the legal industry.

The only meaningful solution to the problem is enforcement. Thus, expect 2022 to be a year where the state if California attempts to find its footing in this area.

California authorities have shut down illegal grows near lakes and rivers, where use of illegal and unapproved pesticides are used on cannabis crops which are released directly into the waters, and in which water is frequently illegally diverted. It has been widely reported that this has deleterious impacts on wildlife and water.

 

Source: CA Water Board, 2018

Illegal grows have been identified (and in some cases, shut down) in nearly all areas of the state. Between December 20 and 26, 2021, the San Bernadino County Sherriff’s department arrested nearly 33 suspects in the ongoing enforcement action Operation Hammer Strike confiscating more than 14,000 cannabis plants, 21 pounds of extracted THC concentrates, more than $350,000 in cash, and firearms. In 2019, more than $1.5B worth of illegal cannabis was confiscated.

The widespread shutdowns during the pandemic have hamstrung law enforcement efforts, but an outcry from legal business owners – many of whom have been driven to the brink of financial ruin by the black market – have cried out for more enforcement. As the pandemic crests and (hopefully) recedes during 2022, state regulators will attempt to step up enforcement – first by getting local businesses licensed, and then by bringing enforcement actions to push back against the illegal industry. California cannabis business owners are well advised to consult their local regulations and make sure they maintain compliance.

Filed under Black Market, California, Cannabis

Not in My Backyard! Odor-Based Nuisance Claims and the Cannabis Industry

By on December 9, 2021
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Cannabis cultivation has had a significant and often transformative impact on the local economies and communities where it is grown. Cannabis has become a multibillion-dollar industry, which is projected to continue to expand as more jurisdictions fully legalize cannabis. By way of example, industrial hemp—which the 2018 Farm Bill removed from the Controlled Substances Act—was grown on approximately 511,442 acres in 2019, representing a 455 percent increase over 2018.1 Cannabis workers were deemed “essential” during the pandemic.2 And support for federal legalization is at an all time high.

Yet in spite of this progress, the industry remains dogged by anti-cannabis interests, as well as neighbors concerned by the cannabis farm next door. Some of these neighbors of hemp and cannabis operations have begun to push back—largely citing odor concerns—both in court and with local regulators. The result has been environmental enforcement actions brought by state regulators, state-level nuisance suits, and claims brought under the Racketeer Influenced and Corrupt Organizations Act (RICO).

State Regulators

Cases like Green Freedom, LLC v. Olympic Region Clean Air Agency illustrate the powers of state regulators to respond to and enforce citizen complaints. In Green Freedom, Washington’s Pollution Control Hearings Board (PCHB) the PCHB considered a violation and a civil penalty imposed by the Olympic Region Clean Air Agency (ORCAA) against cannabis business Green Freedom.3 At issue was the odor regulation promulgated by ORCAA, a clean air agency serving six counties, which provided that “[n]o person shall cause or allow the emission or generation of any odor from any source, which unreasonably interferes with another person’s use, and enjoyment of their property.” One of Green Freedom’s neighbors, who operated a trucking business on a 10-acre parcel of land adjacent to the cannabis facility, submitted an online complaint on the date of the violation claiming that the odor was causing “nausea, watery eyes, and ‘feeling of not being able to go outside and enjoy my property.’” An ORCAA investigation revealed marijuana odors that were noticeable on the breeze and confirmed that the complainants’ property was affected. Ultimately, the regulators affirmed two $1,000 civil penalties against Green Freedom. Though the fines were relatively small, the key takeway is the reach that the regulators had – and the risk that future enforcement actions might also encompass injunctive relief. And these issues are not just confined to the Pacific Northwest. They have been identified as concerns in other states and jurisdictions where cannabis is heavily cultivated. For example, Santa Cruz County’s Planning Department recognized in its 2017 cannabis draft environmental impact report (EIR) that “[c]annabis cultivation, and to a lesser degree manufacturing, is often accompanied by strong odors. Odors vary by variety, including pepper, balsamic vinegar, pine, citrus, and skunk-like odors.”4

Nuisance Claims

Nuisance is a common tort claim and is divisible into two classes: public and private nuisance. The landmark case of Spur Industries, Inc. v. Del E. Webb Development Co. held that the difference between them is one of degree.5 A private nuisance affects “a single individual or a definite small number of persons in the enjoyment of private rights not common to the public,” while a public nuisance affects “the rights enjoyed by citizens as a part of the public.”6 The Spur court further noted that a public nuisance must affect a considerable number of people or an entire community or neighborhood.

A key aspect of nuisance claims is that a plaintiff must demonstrate that an ordinary person would be reasonably annoyed or disturbed by the condition alleged to be a nuisance; the nuisance complained of must be “indecent or offensive to the senses.”7 In states with legal cannabis, including California and Colorado, complaints have been made to state and local enforcement authorities during the growing season, including during flowering. Once the cannabis is harvested, new opportunities for odors arise. The cannabis must be dried, with the process typically taking 5–15 days to complete; this is usually done indoors in a temperature-controlled facility with proper air circulation and ventilation. Extraction of cannabidiol (CBD), tetrahydrocannabinol (THC), and other compounds from the cannabis plant can also release odors. Indeed, the Colorado DDPHE specifically recognized that both the growth of cannabis and the extraction processes emit VOCs; and while certain solutions exist for odor management—for example, carbon filtration—no available technology can completely prevent odor and VOC emissions.8

Some local authorities have imposed stringent bans on cultivation as a result of odor concerns. For example, even after the 2018 Farm Bill legalized industrial hemp, Sonoma County, California, supervisors voted in April 2019 to ban its cultivation. Other odor complaints are made by private businesses that share the agricultural space. Wineries are a prime example of such businesses, which have brought multiple actions against the industry in the past. These concerns and issues were recently highlighted in a June 2020 report of the Santa Barbara County Grand Jury, which provides oversight of county governance. The grand jury concluded that the Santa Barbara County Board of Supervisors erred in permitting cannabis operations near wineries, focusing on disruption of the tasting experience due to odors, as well as “terpene drift” and the impact on grape growing.9 Other outdoor-based businesses, such as equestrian facilities, have also reported impacts.

Civil RICO Suits

RICO authorizes treble damages, attorney fees, and potential injunctive relief in a private cause of action. Because marijuana remains illegal at the federal level, civil RICO claims are available as a weapon by anti-cannabis interests. Initially, a series of RICO suits against the cannabis industry prompted settlements, due to concern that these cases could decimate the industry. In one such case, Safe Streets Alliance v. Hickenlooper, the Tenth Circuit Court of Appeals held that landowners in Colorado could move forward with a civil suit under RICO against a licensed marijuana cultivation enterprise located on an adjacent property.10 The plaintiffs owned a parcel of land in Pueblo, Colorado, with two agricultural buildings. The plaintiffs used their land for hiking, riding horses, and visiting with friends. A newly constructed marijuana grow soon began operating on an adjacent plot of land. The plaintiffs alleged that the operation of the business, together with the “noxious odors” released from that business, injured the value of their property, and brought suit against multiple entities operating that business or affiliated with it. However, rather than allege common-law nuisance claims, the plaintiffs brought suit under RICO’s citizen suit provision, alleging that the cannabis businesses were co-conspirators.

Because cannabis is illegal at the Federal level, cannabis growth will be found to constitute illegal racketeering activities. Thus, there is always a danger that a plaintiff in a civil RICO suit may be able to persuade a federal court and jury to impose civil damages against a cannabis business.

Key Takeaways

Cannabis businesses should pay attention to the impacts that their odors may cause. Importantly, even if a business is operating legally under state and federal law (for example, an industrial hemp facility), they may still face nuisance claims from NIBMY neighbors. This will survive broad legality of the industry for years to come. In order to navigate this reality, cannabis cultivators must take steps recommended by regulators to minimize odor and other impacts that might prompt a nuisance suit or regulatory violation.
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1 Tom Angell, Hemp Farming Quadrupled in the U.S. This Year, New Report Shows, Forbes (Sept. 5, 2019), https://www.forbes.com/sites/tomangell/2019/09/05/hemp-farming-quadrupled-in-the-u-s-this-year-new-report-shows.
2 Dana Hull, Cannabis Is Deemed Essential Business in Bay Area Virus Shutdown, Bloomberg (Mar. 17, 2020), https://www.bloomberg.com/news/articles/2020-03-18/cannabis-is-deemed-essential-business-in-bay-area-virus-shutdown; Dan Levin, Is Marijuana an “Essential” Like Milk or Bread? Some States Say Yes, N.Y. Times (Apr. 10, 2020), https://www.nytimes.com/article/coronavirus-weed-marijuana.html.
3 No. 16-048, 2016 WL 7233503 (Wash. P.C.H.B. Dec. 2, 2016).
4 Cty. of Santa Cruz Planning Dep’t, SCH No. 2017022052, Draft Environmental Impact Report (EIR) for the Commercial Cannabis Cultivation and Manufacturing Regulations and Licensing Program 3.3-6 (2017), http://www.sccoplanning.com/Portals/2/County/Planning/env/Cannabis_EIR/Santa%20Cruz%20Co%20Cannabis%20Draft%20EIR.pdf.
5 108 Ariz. 178 (1972).
6 Id. at 183.
7 See Venuto v. Owens-Corning Fiberglas Corp., 22 Cal. App. 3d 116, 124 (1971).
8 See DDPHE Cannabis Best Practices Guide, supra note 9.
9 Santa Barbara Cty. Grand Jury, Cannabis (2020), http://www.sbcgj.org/2020/Cannabis.pdf.
10 859 F.3d 865 (10th Cir. 2017).

Filed under Cannabis, Controlled Substances Act

Welcome to Gordon Rees Scully Mansukhani’s Cannabis Law Blog!

By , , and on December 9, 2021
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We want to welcome you to the Gordon Rees Scully Mansukhani cannabis law blog, Cannabis Chronicles! The mainstreaming of cannabis has proceeded at breakneck speed over the past five years. Fifteen states have legalized cannabis for both medicinal and recreational use, with 36 states having at least full medicinal cannabis. The 2018 Farm Bill exempted industrial hemp from the Controlled Substances Act and the hemp industry exploded.

However, with cannabis still listed as a Schedule 1 drug, cannabis with a greater than .3% THC content is remains illegal at the federal level for all purposes. This leaves intact a patchwork of state laws and regulation, complicated by the threat of federal enforcement at any time. With the new Biden administration at the helm, and public interest for full federal legalization at an all-time high, the next four years will prove to be even more consequential than the last.

This blog will attempt to address new and diverse legal issues relevant to the cannabis industry, including business issues, conflicting state and federal laws, environmental issues, and employment issues. We hope you will accompany us on our journey!

Filed under Cannabis, Controlled Substances Act, THC