After months of uncertainty and delay, the Governor and state legislative leaders have reached an agreement on a package of bills to legalize the adult use and sale of cannabis, expand the medical marijuana program and reform the expungement process for prior cannabis convictions in the State of New Jersey.

On Monday, March 18, 2019, the Assembly Appropriations Committee and Senate Judiciary Committee will hold hearings on the foregoing bills which, as written, include the following provisions:

  • A flat tax of $42.00 per ounce, regardless of the price of cannabis. As a result, the higher the price per ounce the lower percentage tax rate and vice versa.
  • Allowing personal possession of up to one ounce of cannabis.
  • Formation of a New Jersey Cannabis Regulatory Commission (“CRC”) to establish rules, regulations and procedures for the New Jersey cannabis industry, issue licenses and investigate alleged violations of state laws and regulations. The CRC will also have oversight of the medical marijuana program that is currently under the supervision of the Department of Health. Once the new bill is signed into law, the CRC will have six months to issue new regulations to govern the adult use market in New Jersey.
  • The CRC will be comprised of five members, three appointed by the Governor and the remaining two appointed at the request of the Senate President and Assembly speaker. One commissioner would be a representative of a national social justice commission.
  • A licensed dispensary will be permitted to operate a cannabis consumption lounge subject to the approval of its local municipality.
  • Home delivery will be permitted by approved licensed dispensaries.
  • A fund will be established to offset some of the costs that local governments and State Police will incur in training officers as drug recognition experts who could determine whether a driver was operating a motor vehicle while impaired by administering a series of in field exams.
  • Most importantly, one of the bills includes an expedited process for expungement through the State Superior Court for past cannabis convictions.

Unlike most all of the other states that have legalized cannabis for adult use, home grown cannabis will remain illegal.

If the bills pass both committees, it is anticipated that they will be presented to the Assembly and Senate for vote as early as Monday March 25, but only if passage is assured according to legislative leaders.

On March 5, 2019, Scott Gottleib, the Commissioner of the Food and Drug Administrations (FDA) announced his resignation as of the end of March, 2019. This follows his recent statements as to the effect of the changes in law with respect to hemp under the 2018 Farm Bill (the “Farm Bill”). Under the Farm Bill, hemp, which is now defined as the plant Cannabis sativa L. and all derivatives of the hemp plant, with extremely low concentrations of THC (less than 0.3 percent on a dry weight basis) are no longer subject to the Controlled Substance Act (the “CSA”). In addition, it is now permissible to transport hemp across state lines. Although thought at first by many to allow the sale of cannabidiol (CBD) products across the United States, the Farm Bill preserved the authority of the FDA to regulate products containing CBD under the Food, Drug and Cosmetic Act (the “Act”).  On the same day that the Farm Bill was signed into law, Commissioner Gottleib reiterated that the Act allows the FDA to regulate all CBD products, whether or not the compound is derived from hemp, and that when these products are intended to be used for the diagnosis, cure, mitigation, treatment or prevention of disease, they are considered new drugs and it is a violation of law to market them as such if they have not gone through the FDA drug approval process. He also indicated that it remained unlawful under the Act to introduce into interstate commerce food or dietary supplements containing added THC or CBD.  Given that violations of the Act may result in monetary and criminal penalties, many entrepreneurs looking to enter the CBD market, along with those already in play, are grasping to understand the consequences of marketing and selling hemp derived CBD products nationwide.

Commissioner Gottleib did go on to acknowledge Congress’ clear interest in fostering the development of hemp products and to make CBD available outside of the pharmaceutical industry. Accordingly, he  announced plans to work on new rules to allow companies to produce consumable products containing CBD. The Commissioner stated that the FDA would kick off the rulemaking process in April by doing the following: (1) amassing a working group to examine the issues involved in regulating CBD and (2) holding a public meeting to investigate possible rulemaking that would allow CBD to be lawfully sold in food and supplements through a simpler review process than what comes along with being defined as a “drug” under the Act. The Commissioner also indicated that he was willing to work with Congress on a legislative solution if a rulemaking process was too burdensome for his agency.  The Commissioner’s statements signaled a clear commitment to address CBD regulation and institute a regulatory framework for the sale of hemp-derived CBD throughout the country.

With Commissioner Gottleib’s resignation, it remains to be seen whether his replacement will agree with his sentiment on creating new rules to establish a less burdensome regulatory pathway for CBD products, leaving a growing billion dollar industry with many questions.

Earlier this week, the New York City Department of Health and Mental Hygiene (the “Department”) issued a statement banning the addition of CBD, otherwise known as cannabidiol, to food and beverage items offered for sale across New York City. As CBD-infused products continue to gain widespread popularity, the Department’s enforcement efforts have left restaurant and business owners somewhat perplexed and in search of answers.

In apparent reliance on U.S. Food and Drug Administration (“FDA”) guidelines, the Department has prohibited New York City restaurants from “[adding] anything to food or drink that is not approved as safe to eat”, which the Department goes on to state includes CBD, a non-psychoactive chemical compound produced by the cannabis plant. Despite popular opinion regarding CBD and its curative impact on a wide range of conditions, the FDA maintains CBD as “unsafe for consumption” as a food and/or dietary supplement additive, based on the relative absence of substantiated scientific evidence.

While CBD derived from THC-producing cannabis plants remains classified as a Schedule I controlled substance under the Controlled Substances Act, hemp-derived CBD was de-scheduled as a controlled substance under the Agriculture Improvement Act of 2018, or the 2018 Farm Bill, signed into law on December 20, 2018. However, Congress explicitly preserved the FDA’s authority to regulate products containing cannabis and/or cannabis-derived compounds, regardless of derivation, under the Federal Food, Drug, and Cosmetic Act. As a result, it remains unlawful to introduce CBD-infused products into interstate commerce and to market CBD products as a dietary supplement and/or product offering therapeutic benefits, without requisite FDA approval.

As New Jersey remains in a holding pattern, the Empire State has made a revitalized push in the race toward legalization.  In his annual budget address last week, Governor Andrew Cuomo formally unveiled New York State’s plans for a “first-in-nation” comprehensive cannabis regulatory framework. Much like his colleague Governor Phil Murphy, Governor Cuomo is now calling for swift legislative action and expedited entry into a legal cannabis market estimated to generate up to $300 million in annual tax revenue for the State by the programs third year.

Governor Cuomo’s Fiscal Year 2020 Executive Budget Briefing (the “Budget”) proposes to enact the Cannabis Regulation and Taxation Act (the “Act”), aimed at regulating and controlling the manufacture, wholesale, retail production, distribution, transportation and sale of cannabis, cannabis related products, medicinal cannabis and hemp cannabis. Preliminary highlights of the proposed Act are as follows:

  • Establishment of a three-tier distribution model comprised of licensed producers, distributors and retailers, and imposition of a ban on ownership by producers of retail dispensaries
  • Creation of the Office of Cannabis Management to oversee administration of the Act and centralize all licensing, enforcement and economic development functions across the medical, adult-use and industrial cannabis markets
  • Three-tier taxation scheme at the cultivation and wholesale stages:
    • (1) Cultivation tax at a rate of $1 per dry weight gram of cannabis flower and $0.25 per dry weight gram of cannabis trim
    • (2) Wholesale tax imposed on the sale by wholesalers to retail dispensaries at a rate of 20% of the invoice price
    • (3) Wholesale tax imposed on the same sale at a rate of 2% of the invoice price, to be collected and held in trust for and on account of the county in which such retail dispensary is located
  • Establishment of Canopy Growth Corporation’s $100 million Hemp Industrial Park, headquartered in the Southern Tier, to include growing, processing, manufacturing and research facilities
  • Continued expansion of the current medical cannabis program and patient access
  • Establishment of restorative justice initiative, providing for review and sealing of cannabis convictions, elimination of collateral consequences of conviction (i.e., parole violations) and reinvestment in disproportionately impacted communities

Despite relatively broad strokes, the primary goals of the proposed Act are clear: to foster and protect public health, safety and welfare, encourage responsible, informed and carefully regulated production and use of cannabis, and to promote social justice and equity. Per Governor Cuomo’s Budget, tax revenue generated from the adult-use cannabis market will be deployed for various social and research-related causes, including research on cannabis uses and applications, small business development and loans, substance abuse, harm reduction and mental health treatment and prevention, and public health education and intervention. The Act also proposes to limit the number of producers and retail dispensaries to safeguard against “market collapse”, and encourage participation by underserved communities through social equity licensing opportunities, technical assistance, mentorship and access to capital.

The legalization of medical cannabis under New Jersey’s Compassionate Use of Medical Marijuana Act (“CUMMA”), and Governor Phil Murphy’s recent expansion of the program, has created many questions for employers in adapting to the changing legal landscape.  With the impending legalization of the adult use of cannabis on the horizon, employers now more than ever need to understand their obligations to reasonably accommodate employees and their rights (if any) to terminate employees for cannabis use.

Cannabis is still classified as a Schedule I substance under federal law and therefore, any use of cannabis (medical and adult use alike) violates federal law.  Employers are accordingly not required to accommodate the use of medical cannabis under the Americans with Disabilities Act.  Despite this reality, more than half of states, including New Jersey, have enacted laws to allow the medicinal use of cannabis.

With the enactment of CUMMA, many New Jersey employers are left wondering whether they have to accommodate the use of medical cannabis both inside and outside the workplace.  Significantly, CUMMA states that “nothing in this act shall be construed to require . . . any employer to accommodate the medical use of marijuana in any workplace.”  N.J.S.A. 24:6I-14 (emphasis added).  As a result, an employee who is clearly found to be using cannabis at work, even a registered patient with a valid medical cannabis ID card from the New Jersey Department of Health, may be terminated by his or her employer.

Indeed, this past August, the United States District Court for the District of New Jersey in Cotto v. Ardagh Glass Packing, Inc. held that an employer was not required to accommodate a fork lift driver’s medical cannabis use, despite the fact that the driver’s doctor gave him a note stating that he could operate machinery while using his prescription.  In that case, the employer required the employee to pass a drug test before he could return to work after sustaining an injury while operating a fork lift.  In rejecting the fork lift driver’s claims under the New Jersey Law Against Discrimination (“LAD”), the court noted that the case concerned conduct resulting from the treatment of a disability, not the disability itself.  The court reasoned that nothing in LAD or CUMMA required an employer to accommodate the use of medical cannabis in the workplace.

Employers are faced with a more complicated situation when an employee uses medical cannabis outside of the workplace and tests positive for cannabis.  As an initial matter, testing for cannabis use is imprecise and only indicates whether cannabis was used within the past several weeks.  As such, employers are unable to determine the precise date of cannabis use and therefore whether the use impaired the employee’s ability to perform his or her job duties.

This past February, the New Jersey Superior Court addressed the issue of employee cannabis usage outside of the workplace in Wild v. Carriage Funeral Holdings, Inc. In that case, the employee, a funeral services director, was involved in an accident which occurred during the course of his employment through no fault of his own (and with no connection to his medical cannabis usage).  His employer learned about his lawful nighttime medical cannabis use and demanded that the employee take a drug test, which came back positive.  The employer terminated the employee for his violation of its drug and alcohol policy.  The employee brought a case against his former employer for violations under LAD.  In granting the employer’s motion to dismiss, the court held that CUMMA does not contain employment-related protections for users of medicinal cannabis and no accommodations are required to be made in the workplace.  Therefore, this decision indicates that at least in some instances, an employer may terminate an employee for cannabis use outside of the workplace.  Notably, this decision involved an employee whose job duties included operating a motor vehicle and the use of medical cannabis on the job would have directly affected his ability to perform that job duty.

Employers, however, should be wary of the law surrounding workplace drug testing as employers are not permitted to blindly force their employees to take drug tests without meeting certain criteria first.  While New Jersey has not enacted any specific law to regulate private sector drug testing, in 1992, the New Jersey Supreme Court set forth several guiding principles in Hennessey v. Coastal Eagle Point Oil Co.  Generally, private sector employers are prohibited from “random” drug testing except for employees in “safety-sensitive” positions.  Indeed, employees that do not hold “safety-sensitive” positions should only be tested for individualized cause that is job-related.  While there is no one definition of a “safety-sensitive” position, the job duties likely entail tasks like the operation of heavy equipment, driving a motor vehicle, or providing medical care.  Moreover, any drug testing program must meet certain procedural requirements, including, but not limited to, a procedure that allows as much privacy and dignity as possible and employee notice of the program, which details the method of testing.  In sum, employers do not have an absolute right to require employees to submit to drug testing.

Overall, New Jersey employers should carefully consider making termination decisions based on employees’ cannabis usage and abide by the drug testing principles set forth by the New Jersey Supreme Court.  Employers should also continue to closely monitor any developments in the law.  While CUMMA currently does not require employers to accommodate medical cannabis usage in the workplace, other states have recently decided otherwise.  Moreover, proposed legislation, such as Senate Bill Number 830 (which would legalize the adult use of cannabis for recreational purposes), would prohibit an employer from taking an adverse employment action against an employee for cannabis use, unless the employer has a “rational basis for doing so which is reasonably related to the employment, including the responsibilities of the employee or prospective employee.”  This proposed legislation does not require employers to permit or accommodate the use of cannabis in the workplace or affect employers’ ability to maintain/enact drug-free workplace policies that prohibit the use of cannabis in the workplace.

In sum, employers should review their current anti-discrimination and drug and alcohol policies to ensure compliance with the current state of the law and continue to follow any developments in new legislation.  Significantly, even though New Jersey employers are not presently required to accommodate use of medical cannabis in the workplace, they are still under an obligation to engage in the interactive process with employees to reasonably accommodate their underlying medical conditions in other ways.  Employers with any questions should consult counsel to ascertain their specific rights and obligations.

After waiting months for word on cannabis legalization talks in New Jersey, budgetary committees from both the state Senate and Assembly approved the New Jersey Marijuana Legalization Act (“Act”), thus, paving the way for the New Jersey Legislature to fully vote on the Act. This marks a historic time in New Jersey for those fighting for the further expansion of medicinal use and legalization of adult-use cannabis in New Jersey as this is the first adult-use legalization bill to make it past introduction in New Jersey. The Legislature is scheduled to be back in session December 17th. This is an exciting time for our existing Clients and friends in the cannabis community as we look forward to the future expansion of the cannabis industry in New Jersey.

We have received an unusually high number of inquiries from clients and commentators concerning the patent infringement action filed by United Cannabis Corporation (UCANN) against Pure Hemp Collective Inc. late last month.  (See United Cannabis Corp. v. Pure Hemp Collective Inc., Case No. 1:18-cv-01922-NYW (D.Colo).)  For those not paying attention, the case involves allegations that Pure Hemp’s tinctures, gel capsules, vape pens, and other cannabis products infringe one or more claims of UCANN’s patent for “cannabis extracts and methods of preparing and using same.”  (U.S. Patent No. 9,730,911.)

The hype is not unwarranted.  The case, filed in federal court in Colorado, has major implications on two fronts: (i) the enforcement of the UCANN patent specifically; and (ii) the overall viability of litigation concerning cannabis-related patents.  First, at the industry level, a determination as to the validity and enforceability of what most consider to be a rather broad patent could dictate whether UCANN will be able to successfully enforce this patent against all others utilizing a liquid cannabinoid formulation containing 95% cannabidiol (CBD).  From a broader perspective, this is the first infringement suit concerning a patent on a cannabis-related product that, while patented, is used in connection with a substance that remains illegal at the federal level – leaving open a threshold question concerning the ability of the courts to even hear such cases.

Absent a quick settlement, it is difficult to conceive of any outcome, whether it be at the motion to dismiss stage or at trial, that will not send shockwaves through the industry.  Who those shockwaves impact most remains to be seen, and we will certainly update this blog as the case proceeds.

 

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.