Cannabis Litigation to Watch

As the cannabis economy tanks (with the exception of states that just came online for medical and/or adult-use), cannabis litigation is picking up. Most of this litigation revolves around partnership disputes, unpaid bills, breached contracts, and solvency. All cannabis entrepreneurs and businesses should be mindful of cannabis litigation trends, especially in these lean times. To make your lives easier, below is the list I’m keeping of cannabis lawsuits and litigation trends to watch and study this summer and into fall, beyond run-of-the mill partnership and small business contests.

Cannabis-related gun bans

Cannabis users cannot own or possess firearms under federal law. This is true even in states where cannabis is legal, and even for medical patients. These gun rights are very likely going to be held unconstitutional, and already have been in multiple federal cases (see here and here). But the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) is clinging to them nevertheless. Even in states that legalize cannabis, gun buyers must fill out an ATF 4473 form which asks for a “Yes” or “No” to the following:

Are you an unlawful user of, or addicted to, marijuana or any depressant, stimulant, narcotic drug, or any other controlled substance?

Warning: The use or possession of marijuana remains unlawful under Federal law regardless of whether it has been legalized or decriminalized for medicinal or recreational purposes in the state where you reside.

Persons who answer “no” when they should have answered “yes” may face felony charges (more on that below). Persons who answer “yes” must be denied a firearm– again, even in states that allow cannabis use. A federal firearm license (FFL) holder that sells a firearm to such a person risks loss of license and even potential prosecution – as the ATF reminded FFL holders in Michigan when Michigan legalized recreational cannabis in 2020.

Despite the ATF’s position here, federal courts have not been so quick to agree (see here and here). These kinds of Second Amendment cases are interesting because they touch on, among other things, the government’s attempts to assert, de facto, that cannabis users are dangerous and “unvirtuous” and therefore should be barred from gun ownership. Look for these cases to continue to emerge in a variety of federal courts across the country as the year goes on.

Municipal litigation

Oftentimes, even if voters vote in favor of legalization, it doesn’t mean that they want cannabis grown nearby (cannabis NIMBYs are alive and well). And that goes double for city and county governments, even if their residents voted in favor of legalization. Of course, in some way, shape, or form, cities and counties can completely opt out of legalization (and they definitely still do). Other times, cities and counties are going to regulate for commercial cannabis activity, and this is where the municipal litigation can be found. Such lawsuits have ripple effects in that other local governments will or won’t follow suit depending on how the cannabis litigation goes.

Given that most cannabis states are local control states, the cities and the counties are hugely important steps to securing a state license; if they say “no”, your chances of getting a state license drop to zero in most jurisdictions. When cities and counties regulate for cannabis, they have to be mindful of not only time, place, and manner restrictions but also the extent of their police powers (designed to protect the health and welfare of the community).

Even though many cities and counties claim to intend to “regulate,” they actually create de facto bans out of zoning, distance buffers, and other permitting requirements (see here, for example, in Malden, MA;  here for another example out of Pennsylvnia; and here in Pontiac, Michigan). Cannabis owners in local control states should be closely watching municipal litigation trends because one wrong move will put you in court– either suing to try to enforce your rights or getting sued to cease building and operational plans.

And, minor footnote, don’t forget to keep an eye on once enthusiastic cities and counties that put the brakes on further cannabis development by enacting moratoria, which could even lead to the mandatory shutdown of existing businesses over time.

Illegal product diversion (and other “bad boy” behavior)

Lately, everyone has been chatting about the Glass House Brands lawsuit. California has a pretty big illegal market problem due to lack of consistent enforcement, overwhelmingly negative local control, and high taxes. The lawsuit alleges that the state’s apparently largest cultivator, Glass House Brands, is “one of the largest, if not the largest, black marketers of cannabis in the State of California, if not the country.” The lawsuit claims that Glass House Brands is a major participant and benefactor of California’s burner license epidemic.

Only time will tell if those allegations are true (and, if they’re not, probably expect some counterclaims around defamation and libel). In any event, we’re bound to see more lawsuits alleging illegal activity and/or bad corporate behavior, as it is increasingly difficult to survive in cannabis given a multitude of macroeconomic factors including the raging illegal market, and federal illegality. Also, expect a panoply of lawsuits alleging corporate fraud and other bad behavior based on the back of these routine cannabis scams. It is buyer beware out there from all angles!

Receiverships and insolvency

Because federal bankruptcy (which is litigation) is not available to plant-touching cannabis companies, many of those failing companies look to receivership for some kind of resolution. Court-appointed receivers are neutral, third-parties that will take over a distressed cannabis business’s operations.

A receiver’s sole purpose is to preserve and protect the business during a problematic period – and, if you take care to ensure that your receiver is well-versed in the cannabis industry, he, she or it can typically handle everything from sales to personnel to accounting (their powers can be very broad). Keep in mind that the point of the receiver is not to run the business for the benefit of creditors or even to re-structure–it’s to run the business until the underlying legal proceedings are concluded.

The appointment of receivers and their treatment by cannabis regulators is also going to change from state to state (see here for Oregon, for example) with things like disclosures, changes to the license, and continued reporting.

More and more flailing cannabis companies are seeking out receivership to deal with their financial problems and their mounting legal issues. We recently wrote about Chalice in Oregon, which is one of the larger receiverships in the industry, and bound to create ripple effects. There’s also the increasing issue of cannabis companies not being able to pay their bills, and especially in the State of California. Expect to see more and more collections efforts and lawsuits for non-payment as a result.

Corrupt or flawed cannabis bids for competitive or limited licensing

As I’ve written many times, cannabis is a local control game. And that often leads to these incredibly convoluted and expensive competitive licensing regimes. To even apply in some of these cities and counties, depending on license type, will cost you hundreds of thousands of dollars. And sometimes, lawsuits will emerge from folks who didn’t win, which allege things like corruption, a flawed process, or an arbitrary use of power.

If you win a competitive licensing contest (whether on the state or local level), expect to see some cannabis litigation from those who didn’t prevail. On the flip side, it seems that corruption claims are on an upswing in cannabis depending on the state or city; we’re already seeing a corruption lawsuit come out of the very limited and competitive Georgia medical cannabis licensing process, and we’ve seen some bad government behavior in places like Michigan as well as allegations of “pay-to-play” schemes in cities, like in El Monte, California.

It’s definitely not impossible to hold government regulators to account, and all cannabis business applicants should be on the look out for nefarious public official behavior for the betterment of the industry as a whole.

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