In a recent decision, United States v. Gilmore, the U.S. Court of Appeals for the Ninth Circuit reinforced the importance of complying with drug laws for doing business in the Cannabis industry. In Gilmore, hunters provided a tip to local authorities on a cannabis grow site in El Dorado County, California. Upon executing a warrant, the officers seized over 100 cannabis plants and detained three men. One of the men claimed he rented the property with the intent to cultivate medical cannabis legally under California state law. Nevertheless, the authorities obtained an indictment charging the men with manufacturing cannabis plants due to the grow site being located on federal land.

Since 2015, Congress has barred the Department of Justice (DOJ) from using appropriated funds “to prevent [certain States, including California] from implementing their own State laws that authorize the use, distribution, possession, or cultivation of medical marijuana.” See Consolidated and Further Continuing Appropriations Act § 538 (“§ 538”). Although one defendant plead guilty, the other two defendants claimed that § 538 prevented the DOJ from prosecuting them since medical cannabis cultivation is legal under California state law. The Ninth Circuit rejected the defendants’ argument on the premise that “nothing in California law purports to authorize the cultivation of marijuana on federal land.”

As a result, the DOJ’s enforcement of federal laws on federal land does not prevent California from otherwise implementing its medical cannabis regime. The Ninth Circuit held that because § 538 does not apply to offenses committed on federal land, state law defenses are irrelevant. Also irrelevant, is whether the defendants knew the grow site was on federal land since the government is not required to prove such knowledge to convict under 21 U.S.C. §§ 841 and 846.

For New Jersey businesses involved or invested in the cannabis industry, Gilmore stands as a reminder that operations must comply with both federal and state law. New Jersey businesses should be concerned with doing their due diligence before utilizing any property on federal land or subject to federal laws. Overlooking to do so may not only be bad for business but could lead to criminal penalties.

Special thanks to Leo D. Bronshteyn, Summer Associate, for his contributions to this article.

A Sixth Circuit appeal from a Michigan court ruling may prove troublesome for property owners in the cannabis industry.  If the Sixth Circuit affirms the lower court’s decision, it would set a precedent whereby a landlord may be denied insurance coverage for damage done to his or her property by a third-party tenant who, without the landlord’s knowledge, used the property to illegally cultivate cannabis.  The real issue becomes apparent, however, when a landlord knowingly permits a tenant to cultivate cannabis on its property in compliance with state law but in violation of federal law.

This begs the question; if a property owner uses or permits the use of its property as a state compliant cannabis grow facility, can that property owner be confident that he or she will not be denied coverage?

In the case soon to be before the Sixth Circuit, K.V.G Properties, Inc. v. Westfield Insurance Company, the insurer’s position relies on an exclusion in the landlord’s insurance policy that denies coverage for loss or damage caused by or resulting from dishonest or criminal acts by a landlord or anyone to whom the landlord entrusts the property for any purpose.  Focusing largely on the above illegal acts exclusion and the fact that the tenant’s cannabis cultivating operations were illegal under federal law, the lower court ruled in favor of the insurer.

In its appeal, the landlord, K.V.G. Properties, Inc. (“KVG Properties”), asserts that the insurer cannot justifiably deny coverage by invoking a vague, broad, and convoluted illegal acts exclusion. Specifically, KVG Properties highlights that the exclusion cannot be invoked when the conduct is uncertain to be illegal under applicable state law and when the federal law largely relied upon is rarely enforced. If the Sixth Circuit agrees with KVG Properties’ reasoning and reverses the lower court’s ruling, it would provide more clarity on this issue for property owners using or permitting the use of their property as a state compliant cultivation facility.

Notwithstanding the arguments presented by KVG Properties on appeal, the Michigan lower court ruling establishes that landlords cannot assume that simply because conduct is legal under state law, that they’re protected from being denied coverage for conduct that is still deemed criminal under federal law. Ultimately, the outcome of each insurance claim for coverage is determined principally by specific facts and policy language. Property owners should consult with counsel prior to using or permitting the use of their property for cannabis-related uses.

Special thanks to Melanie M. Lupsa, Summer Associate, for her contributions to this article.

Since 5 new medical conditions were added to the list of conditions available for treatment with medical marijuana in the March 2018 Executive Order 6 Report, over 7,000 new patients have been added to the patient pool. Due to the significant expansion of the patient pool in the past few months, the New Jersey Department of Health (DOH) has determined that additional treatment centers are necessary to meet the needs of the current and future patients in the Medical Marijuana Program.

As of today, the New Jersey Department of Health Division of Medicinal Marijuana released a  Request for Applications (RFA) for up to six (6) vertically integrated alternative treatment centers. The applications will be divided between the Northern, Central and Southern regions of New Jersey with up to two alternative treatment centers per region. The DOH stated in the RFA that it anticipates the release of two additional RFAs in the Fall of 2018 and Winter of 2019 for additional cultivator and manufacturer licenses and dispensary licenses, respectively.

In the wake of Governor Phil Murphy’s Executive Order 6 and subsequent issuance by the New Jersey Department of Health (the “Department”) of its report on the expansion of the State’s medical marijuana program, prospective New Jersey patients continue to seek entry into the existing framework. Currently, the State is attempting to serve approximately 22,000 patients via only five operating dispensaries (with a sixth to open in the near future, pending final approval from the Department). In an effort to meet seemingly exponential demand, many patients, lawmakers and medical professionals are focused on expanding access under the existing program – most recently evidenced by the introduction earlier this month of Senate Bill No. 2426 (the “Bill”), a bi-partisan bill sponsored by Senators Joseph Vitale (D-Middlesex), Nicholas Scutari (D-Union) and Declan O’Scanlon (R-Monmouth).

Through a combination of new regulations and amendments to the existing New Jersey Compassionate Use Medical Marijuana Act (the “Act”), the Bill seeks primarily to increase patient access to medical marijuana and to address increasing demand through the licensing of additional cultivation facilities and dispensaries across the State. With a specific eye toward expansion, the Bill proposes to increase the number of alternative treatment centers (“ATCs”) to 40 licensed medical marijuana dispensaries and 12 medical marijuana cultivator-processors, evenly distributed across the State. The Bill would also allow license holders to operate from more than one physical location, thereby increasing the scope of service of these facilities. Licenses would be valid for three years, renewable on a biennial basis, and would be transferrable upon Department approval of the proposed transferee.

For interested applicants, the Bill provides guidance with respect to application criteria and evaluation metrics, based on a proposed 100-point rubric. In addition to any “bonus points” awarded by the Department, the Bill sets forth the following proposed benchmarks:

  • Operating Plan Summary (up to 21 points)
  • Environmental Impact Plan (up to 4 points)
  • Safety and Security Plans and Procedures (up to 7.5 points)
  • Summary of Applicant’s Business Expertise (up to 15 points)
  • Summary of Proposed Location for ATC (up to 15 points)
  • Community Impact and Social responsibility (up to 15 points)
  • Workforce Development and Job Creation Plan (up to 7.5 points)
  • Business and Financial Plan (up to 15 points)

In evaluating an application, the Department shall place emphasis on the experience of the applicant, the controlling owners and entities under common ownership or control with the applicant, and the experience of its officers, directors and full-time employees.

In addition to the modified application and ownership and operational requirements for ATCs described above, the Bill proposes to broaden the scope of the Act by increasing patient eligibility for treatment of any medical condition diagnosed by a physician, rather than a list of enumerated conditions as provided under the Act. Further, the Bill increases the maximum amount of medical marijuana that may be dispensed to a patient in any 30-day period from two ounces to four, and allows for the distribution of edible forms of medical marijuana to qualifying patients who are minors. The Bill also places limitations on application fees and procedural hurdles for both patients and primary caregivers, while also removing registration requirements for treating and/or referring physicians, all facilitating ease of access for qualifying New Jersey patients.

As New Jersey proactively addresses increasing demand, New York appears to be prepared to follow suit. Once stark opponents of legalized cannabis, both Mayor Bill de Blasio and Governor Andrew Cuomo seem to have acquiesced to the idea as an inevitable outcome. In the past month, Mayor de Blasio directed NYPD officers to cease arresting individuals using marijuana in public, while Governor Cuomo ordered an official state-commissioned study on the impact of legalization – all on the heels of a report issued by New York State Comptroller Scott Stringer earlier this month, concluding that legalized marijuana could create a $3.1 billion market in the state. These measures find federal support from U.S. Senators Chuck Schumer and Kirsten Gillibrand, each who continue to vocalize support for legalization.

As state, federal and public support continue to mount, New Jersey appears poised to expand its medical program, trending toward Governor Murphy’s original campaign goal of full scale legalization. With New York potentially close behind, this could be the catalyst for a shift in the cannabis narrative on the East Coast.

 

As the State of New Jersey continues to evaluate the expansion of current legislation related to medicinal use cannabis and the legalization of recreational cannabis, proposed legislation advancing in the New Jersey legislature has set its sights on marijuana’s less psychotropic relative – industrial hemp.

If passed, Assembly Bill No. 1330 (the “Bill”), introduced in February of 2018 and sponsored by Assemblyman Reed Gusciora, would enable licensed businesses to plant, grow, harvest, possess, process, distribute, buy and sell industrial hemp for commercial purposes. The Bill defines industrial hemp as an agricultural product that is part of the plant of any variety of Cannabis sativa L. with a delta-9-tetrahydrocannabinol (“THC”) concentration of 0.3% or less on a dry weight basis. This threshold of THC is intended to ensure that legally harvested industrial hemp maintains no more than a small percentage of THC, the psychoactive, “high-producing” ingredient in marijuana. To ensure compliance, the Bill requires that licensees submit, on an annual basis, documentation confirming that such industrial hemp is of a permissible type and THC concentration.

Pursuant to the Bill, prospective growers and distributors must apply to the Secretary of Agriculture (the “Secretary”) for an industrial hemp license, which must include specific documentation with respect to, and a legal description of, the land to be used for growth and production of the crop. Applicants are also required to submit to fingerprinting and both a nationwide and statewide criminal history and background check by the Department of Law and Public Safety and/or the Federal Bureau of Investigation. All issued licenses will be valid only for the site or sites specified in the license, and for a period of one (1) year from the date of issuance, unless otherwise adjusted by the Department of Agriculture to align with the normal growing season and to facilitate reasonable harvesting, processing and sale or distribution timing.

The Bill also tasks the Secretary, in consultation with the Attorney General, to adopt certain rules and regulations facilitating administration and enforcement. These regulations include (1) the establishment of approved varieties of industrial hemp and methods to distinguish it from other types of marijuana, (2) testing protocol for THC levels, (3) licensing requirements, fees and renewal procedures, and (4) penalties for administration and enforcement. Finally, the Bill requires that licensees notify the Secretary and the Attorney General of all sales or distributions of industrial hemp during the calendar year, and identify by name and address each distributee of industrial hemp for such calendar year.

Beyond the Bill, industrial hemp would be subject to the protections of the Right to Farm Act, and the land used for its cultivation may be eligible for valuation and taxation benefits provided by the New Jersey Farmland Assessment Act of 1964 – an Act permitting land actively devoted to agricultural use to be assessed at its productivity value, which is often less than the property tax assessment value of the property.

The enactment of the Bill is poised to offer a substantial boost to New Jersey’s agricultural industry, introducing what some view as a new “cash crop” to New Jersey’s repertoire and would afford New Jersey farmers the opportunity to diversify their products and compete in a nearly $500 million industry, catalyzing manufacturing and economic opportunity across the State. The Bill now also finds federal legislative support, following introduction of the Hemp Farming Act of 2018 in late April, co-sponsored by Senate Majority Leader Mitch McConnell (R-KY) and Senate Minority Leader Charles E. Schumer (D-NY). The federal bill, among other things, would remove industrial hemp from Schedule I of the Controlled Substances Act, and would empower the states to be the primary regulators of the industry.

On March 23, 2018,  in response to Governor Murphy’s Executive Order 6 which directed the New Jersey Department of Health (“Department”) to review New Jersey’s Medical Marijuana Program (the “Medical Marijuana Program” or “Program”), the Department issued  its report  focusing on how to expand the Program’s scope and patient access to medical marijuana (the “Report”).

The Report focused on the following four principal areas:

  • The rules for siting of dispensaries and cultivation facilities and the number of alternative treatment center (“ATC”);
  • The conditions for physicians participating in the Program and prescribing medical marijuana;
  • The number of medical conditions which qualify for the Program; and
  • The maximum monthly product limit, THC dosage limits and the types of medical marijuana products available for patient use.

Certain aspects of these recommendations may be affected by Department regulatory action, while others will require amendment of the existing New Jersey Compassionate Use Medical Marijuana Act (the “Act”).

In order to service the growing population of patients with conditions treatable by medical marijuana, the Department plans to amend the existing regulations to permit ATCs to dispense medical marijuana at satellite locations and permit more than one cultivation site per ATC, subject to Department approval. The Department also plans to create an endorsement system to allow ATCs to engage in some combination of production (including edibles), cultivation, and dispensing designed to increase the supply and availability of medical marijuana.  As stated in the Report, the goals of these amendments are to increase the supply and access to medical marijuana for qualifying patients. The Report also makes the statutory recommendation to amend the Act to permit the existing six (6) licensed ATCs, which are statutorily required to be non-profits, to operate as for-profit companies.

The current regulations require that a physician interested in providing care to patients who qualify for medicinal marijuana to first register with the Department, creating a limited number of doctors who can prescribe and treat qualifying patients. The Report indicates that the Department plans to eliminate the physician registry in Spring of 2018 to ensure that any and all New Jersey doctors meeting the good standing  requirements set forth in N.J.A.C. 8:64-2.5 may prescribe medicinal marijuana for patients meeting Program requirements.

Prior to March 22, 2018, the conditions that qualified for treatment by medicinal marijuana under the  Act  were limited to (i) seizer disorders, intractable skeletal muscular spasticity or glaucoma (provided that  such conditions were resistant to conventional medical therapy), (ii) HIV, acquired immune deficiency syndrome or cancer (provided that  sever or chronic pain, nausea, vomiting, cachexia or wasting syndrome resulted from such condition or treatment thereof), (iii) amyotrophic lateral sclerosis, multiple sclerosis, terminal cancer, muscular dystrophy or inflammatory bowel disease, (iv) a terminal illness (provided that a physician determined a prognosis of less than 12 months of life), or (v) other medical conditions approved by the Department by way regulation. As outlined in the Report, a final agency decision was made to effectuate the addition of the following categories to conditions qualifying for treatment by medical marijuana: chronic pain related to musculoskeletal disorders, migraines, anxiety, chronic pain of visceral origin, and Tourette’s syndrome. The Report also recommends an amendment to the Act permitting medical marijuana to be used as a first-line treatment rather than a last resort for the illnesses described in section (i) above.

Under the current Program, physicians are limited to prescribing two ounces of medicinal marijuana to patients within a 30 day time period. According to the Department’s findings set forth in the Report, physicians should have discretion to authorize more than the Program’s current two ounce limit. As a result, the Department is recommending that the statutory limit be increased to four ounces, which aligns more with our neighboring states such as New York, Pennsylvania and Delaware. The Act presently restricts use of edible marijuana products to qualifying patients who are minors. As stated in the Report, the ingestion of medical marijuana is healthier than smoking, the Report, therefore, also recommends amending the Act to permit the manufacture of edible and topical products and their use by patients.  The Report also provides that the Department will eliminate the regulatory dosage limit of 10% THC limit to allow for more effective treatment of the debilitating medical conditions covered under the Program.

The Report and recommended expansions to New Jersey’s Program  set forth above evidence both the Governor’s and the Department’s goal of growing all aspects of the Program related to the production of and access to medicinal marijuana.

After months of uncertainty surrounding the enforceability of state marijuana legislation in light of federal prohibitions, President Trump may have offered the legal cannabis industry some solace.

Late last week, President Trump promised to abandon Justice Department efforts to target recreational marijuana in states that have legalized adult use. The threat of increased federal enforcement came in early January, with Attorney General Jeff Sessions’s rescission of the Obama-era “Cole Memorandum”. The issuance of the Attorney General’s competing memo garnered opposition from Senator Cory Gardner – a top Senate Republican from the State of Colorado, who immediately blocked nearly twenty Justice Department nominees in retaliation. After a months-long stalemate, President Trump assured Senator Gardner that rescission of the Cole Memo would not adversely impact the legal cannabis industry in Colorado, and committed to supporting a “federalism-based legislative solution to this states’ rights issue”.

For many, including Senator Gardner, this proclamation by the President assuages concerns about a cannabis industry stifled by federal regulation and fear of prosecution.  At a minimum, many feel that this demonstrates a shift in the federal narrative toward looser regulation, governed on a state-by-state basis. On the other hand, many remain cautious in light of mixed signals from the administration, fearing that the President’s commitment applied only to Colorado under these narrow circumstances.

With this backdrop, lawmakers continue to pursue a bi-partisan legislative solution, aimed at prohibiting the use of federal funds and resources to target recreational marijuana businesses operating legally under state law. If successful, these measures would provide much needed comfort to the legal cannabis industry, likely fostering rapid growth and increased investment opportunities.

Growing cannabis, especially indoors, is energy-intensive. It can take upwards of 5,000 kWh to grow just one kilogram of cannabis (2,000 kWh to grow one pound) as compared to 10,000 kWh of energy to power a residence in the United States for one year. Recent reports show that the cannabis industry is having a significant impact on the use of electricity in states that have legalized it for medical and/or adult use. In 2015, various reports concluded that cannabis growers accounted for approximately 1.7% of the United States’ total electricity usage, a cost of upwards of $6 billion. The vast majority of states that have legalized cannabis cultivation, for medical and/or adult use, have not addressed the issues surrounding energy consumption prior to enacting legislation. As a result, municipal governments, state agencies and public utilities have had to take a reactive approach to the astronomical utilization of energy.

Currently, states and municipal governments that have legalized medical and/or adult use are implementing various techniques in order to curtail electricity use. The techniques vary, but the most common are taxes and/or fees on energy consumption. For example, Boulder County, Colorado has a requirement that growers either offset energy consumption with the use of renewable energy or pay a $0.02 charge per kWh of energy use. In addition, some state regulations have an adverse effect on energy consumption and compliance results in an increase in energy consumption by growers. For example, when Pennsylvania legalized cannabis in 2016 for medical use, its regulations required growers to contain their entire crop in indoor facilities  without addressing how the State would cope with the corresponding energy use from such requirement.

Although New Jersey has not yet weighed in on the energy use issues associated with the emerging cannabis industry, it is imperative that growers (and those that are contemplating growing operations) consider the impacts of their operations regarding electricity use in order to be prepared for any future regulations and/or taxes that might negatively affect their operations and profitability.

Upon assuming office earlier this year, New Jersey Governor Phil Murphy emphasized his intention to legalize marijuana for adult use throughout the State as a priority item. To that end, the State of New Jersey has already taken visible steps toward legalization, namely through the recent introduction of proposed legislation in both the State Senate and Assembly.

Senate Bill 830 and Assembly Bill 1348 (collectively, the “NJ Bill”) propose  legalizing the possession of small amounts of marijuana for personal use for persons age 21 and over, and set forth a licensing scheme intended to facilitate the manufacturing, production and distribution of marijuana across the State. The NJ Bill would establish the Division of Marijuana Enforcement, a governmental agency vested with broad oversight and implementation authority pertaining to enforcement, licensing and general regulation. The regulations to be promulgated to facilitate implementation of the NJ Bill set forth, among other things, a proposed sales/transfer taxation scheme, in addition to regulations regarding advertising and marketing of marijuana products.

Introduction of the NJ Bill comes almost concurrently with the introduction of similar federal bills, Senate Bill 1689 and House Bill 4815, sponsored notably by Senator Cory Booker of New Jersey and co-sponsored by Senator Kirsten Gillibrand of New York. The push for legalization also comes amidst policy change at the federal level, following U.S. Attorney Jeff Sessions’s decision to overturn the Obama administration’s “Cole Memo” and issue a new memo, once again placing state-compliant marijuana-related businesses at risk of federal prosecution under the Controlled Substances Act.

Despite being a priority item for Governor Murphy, the legalization movement has encountered some skepticism and resistance. According to a survey recently conducted by NJ Cannabis Insider, the NJ Bill would fail in the State Senate if a vote were conducted today – with only 5 of the 40 senators polled committing to an affirmative vote in favor of the proposed legislation. Another 20 members indicated that they would vote against the NJ Bill, while 15 were either undecided or did not respond. Several New Jersey municipalities have also joined in the opposition, preemptively passing measures and/or resolving to oppose marijuana legalization and the institution of cannabis business enterprises within their bounds. Such locations include Middleton Township, Wall Township, Toms River and Seaside Heights.

While the NJ Bill remains pending, Governor Murphy has taken interim steps toward legalization, calling for a 60-day review of the State’s current medical marijuana program, potentially resulting in large-scale reforms to the program aimed at expanding access and loosening restrictions on both prescribers and users. These anticipated reforms, together with the proposed legislation, present a unique opportunity for entrepreneurs and investors to get in on the ground floor of what appears to be a rapidly emerging market sector.