Introduction & Overview
“Compliance” is a cannabis industry buzzword, and rightfully so given how heavily regulated the industry is across the United States. When business owners and ancillary service providers hear the term, however, their focus typically zeros in on the state and local cannabis regulations that govern a given license type. However, a singular focus on state and local cannabis regulations is recipe for disaster.
Focusing only on state and local cannabis regulations ignores potential local, state, and federal law that may apply to a cannabis business. Many state and local cannabis regulations either fail to mention relevant sources of outside law entirely or make cursory mention of them.
While this Cannabis Law Hub predominantly focuses on cannabis regulations, do not stop at your state and local cannabis regulations when developing a compliance program.
The Current State of Cannabis Law
Now that we are on the same page that we have to consider law outside of state and local cannabis regulations, let’s establish a baseline understanding of cannabis law at the federal, state, and local level(s). At the federal level, “marihuana” is found on Schedule One of the Controlled Substances Act (“CSA”) and is defined as “all parts of the plant Cannabis sativa L., whether growing or not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt, derivative, mixture, or preparation of such plant, its seeds or resin .” Title 21, United States Code (USC), Controlled Substances Act. In addition to excluding specific parts of the Cannabis sativa L. plant, (stalks, seed oil, etc.), the definition of “marihuana” explicitly excludes hemp .
If hemp is excluded from the definition of “marihuana,” then what is the difference between the two? In answering this question it’s important to remember that we are talking about varietals of the same cannabis plant. The distinction between the two varietals, therefore, is more of a legal distinction than a biological one. Hemp was removed from the CSA altogether by the 2018 Farm Bill, and is defined similarly to “marihuana,” except hemp is limited to containing 0.3% Delta-9 Tetrahydrocannabinol (“THC”). H.R.2 – Agriculture Improvement Act of 2018. The legal distinction between “marihuana” and hemp, therefore, comes down to whether or not a given cannabis plant has more than 0.3% Delta-9 THC. If a cannabis plant has more than 0.3% Delta-9 THC, it is considered “marihuana” by the federal government. Less than or equal to 0.3% Delta-9 THC, and it’s considered hemp.
State & Local Cannabis Law
States and local governments across the United States have legalized cannabis. While each state that has promulgated its own unique cannabis regulations, there are more similarities than differences from state to state. State regulations typically establish a commercial market that utilizes a dual licensing structure that requires an entrepreneur to obtain state and local approval prior to opening their business. Moreover, local government typically has the option to “opt-in” or “opt-out” when it comes to allowing commercial cannabis activity in its jurisdiction.
State law similarly distinguishes between “marihuana” (however, the term “marijuana” or “cannabis” is typically used by state and local regulators) and hemp by THC percentage, and establishes two separate regulatory and licensing scheme(s) for the two varietals of the cannabis plant. Whether an entrepreneur is able to sell both “marihuana” and hemp products in a retail store or otherwise operate in both industries concurrently, depends on the jurisdiction finds itself in. For example, cannabis dispensaries are currently prohibited from selling hemp products in California whereas this may be an option for entrepreneur in other states such as Massachusetts.
Conflict Between Federal & State Cannabis Law
Confusion tends to set in when entrepreneurs realize that federal and state/local cannabis law conflict. Who “wins” when federal and state/local cannabis law conflicts? The Supremacy Clause of the U.S. Constitution provides the general rule of thumb:
If federal law conflicts with state/local law, federal law “wins.”
Put another way, if federal cannabis law conflicts with state/local cannabis law, federal cannabis law preempts state/local cannabis law . Since “marihuana” is “illegal” under federal law, and federal law preempts conflicting state/local, isn’t “marihuana” still illegal in state/local jurisdictions that have legalized?
The answer? While the preemption issue presented by the conflict between federal and state cannabis law is a complicated one, the oversimplified answer is “yes.” State and local governments across the United States have not been able to “legalize” cannabis because of any clever legal theory or loophole, therefore. Instead, cannabis has been “legalized” without federal interference due to protections included by Congress in Spending Bills, as well as numerous political and logistical roadblocks that the Federal Government would face if it chose to enforce the CSA. Specifically, the federal government may not have the resources to enforce the CSA without state and/or local cooperation.
Alas, we arrive at an ironic realization when it comes to discussing expanding our definition of “compliance”: A business that enters the cannabis industry is violating federal law even if it maintains strict compliance with state and local regulations. Therefore, there is arguably no such thing as a “compliant” cannabis business.
The above statement may sound like semantics, but entrepreneurs must understand and appreciate the risk assumed by entering the cannabis industry. While strict compliance with state and local law is the best safeguard against federal enforcement, there is no such thing a complete safeguard against federal enforcement so long as “marihuana” remains a Schedule One drugs under the CSA.
Now that we have a bit of context, let’s shift gears and talk about the areas of law that entrepreneurs should focus on complying with outside of teh cannabis regulations. Cannabis regulations often fail to mention federal, state, and local law that may impact a business. To define “compliance” in the cannabis industry, therefore, we must identify and define the sources of law cannabis businesses most comply with. While it’s impossible to provide a definitive list of cannabis compliance considerations that typically fall outside of state and local cannabis regulations, here are five areas to think about:
Federal Trade Commission (“FTC”) Act
Any cannabis business working with celebrities or influencers should look into FTC requirements. Businesses should similarly consider similar state consumer protection laws.
Telephone Consumer Protection Act (“TCPA”)
Planning to use texting as a marketing channel? Check out the TCPA before you do.
Health and Safety Regulations
Look into state and federal OSHA requirements, and make sure your business has all required plans (Injury and Illness Prevention Plan, Fire Prevention Plan, etc.) in place, and is complying with applicable training and recordkeeping requirements.
Privacy and Data Law
Make sure your business’ website has a robust privacy and data policy that puts users on notice of their rights and otherwise complies with relevant law.
If a cannabis business is a public company or a private company raising money/issuing securities, it needs to consider relevant securities law and likely consult with a securities attorney.
Companies and service providers must ensure that compliance programs do not fall into the trap of only thinking about state and local cannabis regulations when defining “compliance.” Potential civil and criminal liability related to noncompliance with other relevant sources of law can be equally (if not more) crippling as enforcement actions related to cannabis regulations.
Federal, State, and Local Tax Law
Entrepreneurs must familiarize themselves with 26 U.S. Code § 280E before starting a cannabis business.