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The Problem With Puerto Rico’s Medical Cannabis

By Dr. Ginette M. Collazo
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Recently Puerto Rico approved the law that regulates the production, manufacturing, dispensing and consumption of medical cannabis. Although medical cannabis was already “legal” through an executive order and was “supervised” by local regulation, there was no law to back up the industry and protect investors.

The creation and approval of laws resides in the hands of elected individuals. Expecting absolute knowledge is unrealistic, especially when we refer to cannabis as a medicine. Sadly, the lack of knowledge is affecting the patients, and an emerging industry that can be the solution to the Island’s current economic crisis.

I am in no way insinuating that Puerto Rico is the only example. I have seen this type of faulty thinking in many places, but cannabis is the perfect manifestation of this human defect. Check some of your laws, and you will find a few that nearly qualify for the same characterization.

As we can see, lack of knowledge can be dangerous. Objective, factual information needs to be shared, and our leaders need a formal education program. Patients need them to have a formal education program to better understand and regulate the drug.

The approval of this law is a significant step for the Island. Still, many Puerto Ricans are not happy with the result. The lack of legitimate information coupled with conservative views made the process an excruciating one. It took many hearings, lots of discussions and created tensions between the government and population, not because of the law, but for the reasons behind the proposed controls. Yes, it was finally approved, but with onerous restrictions that only serve as a detriment to the patient’s health, proving the need for an education program designed specifically to provide data as well as an in-depth scientific analysis of the information, then, you address the issue at hand.

Let’s take a look at some of the controls implemented and the justification for each one as stated by some members of the government.

  1. Patients are not allowed to smoke the flower in its natural state unless it is a terminal patient, or a state-designated committee approves it. Why? Because the flower is not intended for medical use (just for recreational) and the risks associated with lung cancer are too high. Vaporize it.
  2. It was proposed to ban edibles because the packaging makes it attractive for children. Edibles made it, but with the condition that the packaging is monochromatic (the use of one color), yes, insert rolling eyes here.
  3. It only allows licensed pharmacists to dispense medical cannabis at the dispensary (bud tending). The rationale? Academic Background.
  4. The new law requires a bona fide relationship between the doctor and the patient to be able to recommend medical cannabis, even if the doctor is qualified by the state and is a legitimate physician. This is contrary to their policy with other controlled substances, where a record is not required.

When there are different beliefs on a particular topic like it is with medical cannabis, you are not only dealing with the technical details of the subject; there is an emotional side to it too. Paradigms, stigma, stereotypes, beliefs and feelings affect the way we think. We let our judgment get in the way of common sense. When emotions, morals and previous knowledge are hurting objectivity, then we have to rely on scientific data and facts to issue resolution. However, when the conflict comes from opinions, we rely on common sense, and this one is scarce.

Now education: what can education do with beliefs, morals and emotional responses?

David Burns in his book Feeling Good: The New Mood Therapy discusses ten thinking errors that could explain, to those like me that want to believe this is a legitimate mistake, that there are cognitive distortions that affect the result of ours thoughts.

Now let’s analyze …

  1. There are many things wrong with this prohibition. First, the flower is natural and organic. It is the easiest to produce and the cheapest alternative for patients; there are more than 500 compounds all interdependent to make sick people feel better. There are seas of data, anecdotal information, serious studies collecting information for decades and opinions of highly educated individuals that support the consumption of flower in its natural state for medical purposes. The benefits are discarded, and personal opinions take the lead. Based on Burns’s work this is a textbook case of Disqualifying the Positive: dismissing or ignoring any positive facts. Moreover, let’s not forget the benefit for illegal growers and distributors.
  2. Keep out of reach of children, does it ring a bell? For years and years, we have consumed controlled substances, have manipulated detergent pods, bleach and so many other products that can be fatal. The warning is enough, just like is done with other hazardous Here we can notice how we can fall into the Fortune Teller Error, which believes that they know what will happen, without evidence.
  3. Not even the largest drug stores in the USA have this requirement. There is one pharmacist per shift, and a licensed pharmacist supervises pharmacy technicians. Medical cannabis is not even mentioned in current Pharmacy’s BA curricula. Most pharmacists take external courses in training institutes. On the other hand, bud tenders go through a very comprehensive certification process that covers from customer service to cash management and safety and of course all technical knowledge. If anything, a botanist (plant scientist) makes more sense. What a splendid example of magnification (make small things much larger than they deserve). This is an unnecessary requirement.
  4. The relationship between a certified doctor and patient has to be bona fide (real, honest). In practical terms, the doctor has to treat the patient for some time (sometimes six months) and have a history of the patient. Even though this sounds logical, not all doctors are certified to recommend cannabis, but all can diagnose. Are we penalizing the doctor or the patient? The only thing that you need to qualify as a patient is the condition. Besides, I had prescriptions filled for controlled medications at the drug store with no history. Why are we overgeneralizing Do we think that all doctors are frauds?

Is There a Medical Cannabis Crisis Brewing in Germany?

By Marguerite Arnold
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There is a great deal to be happy about with medical cannabis legalization in Germany. This is the first country that has mandated insurance coverage of the drug – at least at the federal legislative level.

However, as the government evaluates the finalists in the first tender bid for domestically grown and regulated cannabis, a real crisis is brewing for patients on the ground. And further one that the industry not only sees but is trying to respond to.

Spektrum Cannabis GmbH, formerly MedCann GmbH began trying to address this problem when they obtained the first import license for Canadian cannabis last year. They are also one of the apparent five finalists in the pending government bid to grow the plant domestically for medical purposes. According to Dr. Sebastian Schulz, head of communications for Spektrum, “Shortly after the new cannabis law was reformed we experienced a huge increase in demand from the side of patients. We had prepared for that. The German population is very curious about cannabis as a medicine and in general very open to natural remedies.”

People are curious here. But like other places, the law in Germany has evolved slowly. Much like Israel, the government has allowed a trickle of patients to have access to cannabis by jumping through multiple, time consuming hoops. The process of getting cannabis prescribed, much less getting a pharmacy to stock it, was difficult. Patients had to pay out of pocket – a monthly cost of about $1,700. While that is expensive by American standards, to Germans, this is unheard of. The vast majority of the population – 90% – is on public health insurance. That means that most Germans get medications for $12 a month, no matter what they are. Allegedly, German patients were supposed to get about 5oz a month for this price. At least that is what the law says.

People are curious here. But like other places, the law in Germany has evolved slowlyAs in other countries, no matter what Germans think about recreational reform, the clear majority of them at this point support medical use. And at this point, both legislatively and via the courts, the government has said and been required to provide the drug to Germans patients at low cost.

Unintended Effects & Consequences

Since the law went into effect in March of this year however, things have suddenly turned very dire for patients.

The handful of people who had the right to grow at home – established under lawsuits several years ago – were suddenly told they could no longer do so. They had to go to a doctor and regular pharmacy. Even regular patients in the system found that their insurance companies, allegedly now required to pay, are refusing to reimburse claims. Doctors who prescribed the drug were abruptly informed that they would be financially responsible for every patient’s drug cost for the next two years (about $50,000 per patient).

Photo: Ian McWilliams, Flickr

To add a final blow to an already dire situation, German pharmacies that carried the drug, then announced an additional fee. It is about $9 extra per gram, added at the pharmacy, pushing the price of legitimate cannabis north of $20 dollars per gram. This is justified as a “preparation fee.” Cannabis bud is technically marked as an “unprocessed drug.” This means the pharmacies can charge extra for “processing” the same. In reality this might be a little bud trimming. If that. The current distributors in the market already prep and pre-package the drug.

What this bodes for a future dominated by infused products, oils and concentrates is unclear. However the impact now is large, immediate and expensive in a country where patients also must still go to the pharmacy in person for all prescription drugs.

There is no mail order here, by federal law. Online pharmacies are a luxury for Auslanders.

At minimum, this could mean that without some relief, German patients will go right back into the black market and home grow.While nobody has challenged this situation yet en masse, it is already a sore point not only for patients but across the industry. It means that an already expensive drug has gotten even more expensive. It also means that the government regulations are not working as planned.

At least not yet. For the large Canadian companies now coming into the market with multimillion-dollar investments already sunk in hard costs, Germany will be a loss-leader until the system sorts itself out.

According to Schulz, whose company is now in the thick of it, the new law is very vague. “Currently, there are almost no cannabis flowers available in German pharmacies because companies like us are not allowed to sell them,” says Schulz. “Various different regulatory demands come up that seemed to change on a monthly basis. We are ready to deliver even large amounts of cannabis for a market that might well explode soon – but we first need to overcome the regulatory nightmare that leads to the suffering of so many patients here these days.”

At minimum, this could mean that without some relief, German patients will go right back into the black market and home grow. Black market costs for cannabis are about $10-15 a gram. In other words, exactly the situation the government was hoping to avoid.

What Is Causing The Situation?

The intended effect of the legislation was twofold, according to industry insiders: To legalize cannabis in such a way to meet a rising public demand and, in the face of a court decision, to limit the home grow movement. The latter of which, despite federal regulations, is thriving here. Germans like to grow things, and cannabis is a rewarding plant to nurture.

High attendance at the Mary Jane Grow Expo in Berlin in June is just one sign that the genie is out of this particular bottle. BfArM – the federal agency in charge of regulating narcotics and medical devices – cannot stuff it back.Patients are going back to the way things were

However home grow does not build a professional, high volume cannabis market, much less a highly regulated medical one make. The government also made clear that it is going to have strict inspections and quality controls, and will technically buy all the cannabis produced, per the terms of the bid application process.

However, it is not entirely clear when the government will start actually doing the buying. And why the buying has not started yet. If insurance companies are refusing to pay, this means the government is not reimbursing them. The same government, which has also agreed to do so, as of March 2017.

What Gives On Good Old German Efficiency?

On the streets, patients are going back to the way things were. Many are used to fighting for the only drug that makes them feel better. The euphoria in May, for example, has been replaced with weary acceptance that things might get a bit worse before they really improve.

That said, there is also a realization that more activism and lobbying are required on just about every front. If an extrapolation of data from say Colorado or California is applied to Germany, there are already at least a million eligible patients here, based on the qualifying conditions. The government is planning for an annual increase in medical patients of about 5-10,000 a year, including in the amount of cannabis they are planning on buying from the licensed producers they choose. The numbers, however, are already not matching.Even existing patients are literally being forced into the black market again.

Added to this wrinkle is the other reality that is also looming, particularly now.

With one exception, all of the firms now apparently in contention as finalists for the German government bid will also be supplying a domestic market in Canada that is going rec next summer. One year, in other words, before the German companies even begin producing.

What Is The Upshot For Patients?

Guenther Weiglein is one of the five patients who sued for home grow rights in 2014. He is now suing again for the right to extend home grow privileges until the government figures out its process. He is not the only one. Earlier this year he was told he had to stop his home grow and integrate into the “mainstream” system. So far, he, along with other patients who are suing, including for insurance coverage, have not been able to get cannabis easily through the system, although they are starting to make progress.

Weiglein’s situation is made even more frustrating by the fluidity of the situation. As of late July, he had finally gotten agreement from his insurance company to cover the drug. But now he cannot find a doctor willing to accept the financial risk of prescribing it to him. And in the meantime he has no access to medication.

Talk to any group of advocates right now, and there is one ongoing story. Even existing patients are literally being forced into the black market again.

And those that can’t afford it? They are out of luck. Some patients say a tragedy like someone dying will create the impetus to move this into public eye. A hunger strike here by a leading cannabis doctor earlier this summer has so far not had much impact on policy. There is a great deal of pessimism here, as promised change earlier this year has turned into a long and drawn out multiyear question mark.

If this sounds like a bubbling and untenable situation, especially before a national election, it is. The prospect of another four years of Angela Merkel does not bode well for fast cannabis reform.

That said, the German government is now in an interesting situation. The law has now clearly changed to say that sick Germans are allowed to use cannabis as a drug of choice for chronic diseases when all else fails. Further, the national government has bound the insurance industry to cover it. So far, every patient who has sued for coverage has won. That has not, however, moved the insurance industry altogether. Nor has it solved the problem with doctors prescribing the drug.

Many now ask what will? It is clear, however, that it will change. The question is when, how fast, and in what situations.

The problem will undoubtedly ease by 2019, when the first German crops are finally ready, although it will be far from completely solved.

What’s Happening on Capitol Hill? Part 2: A Bill-By-Bill Review

By Brian Blumenfeld, J.D., M.A.
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Since the first session of the 115th Congress convened on January 3, 2017, twenty-four cannabis reform bills have been introduced, fifteen in the House and nine in the Senate. All of them address in varying ways the puzzles that have emerged as more and more states legalize cannabis in the face of federal prohibition. Some are narrow, some are broad, some are for medical cannabis only, some for recreational too, some have more bipartisan support than others, but all indicate in some manner the direction federal reform will eventually take.

H.R.1227 – Ending Federal Marijuana Prohibition Act of 2017

Understanding the content and status of these bills and what they would mean for the industry if/when they are enacted, will help stakeholders anticipate changes that we know are bound to drop, and therefore be better prepared to adapt to them when they do.

Generally lacking in the journalism on cannabis is coverage and analysis of federal proposals deep enough to provide a useable understanding of the policies they stand to codify. As CIJ is dedicated to providing just such useable information to industry-insiders, this bill-by-bill review fills the gap.

All twenty-four bills fit rather neatly into one of three categories: De-scheduling/State Control Reform, Medical Cannabis Reform and Banking/Tax Reform. This second article in the series will look at the first category, and the next article will wrap up the last two.

De-Scheduling/State Control Reform

HR 1227 – Ending Marijuana Federal Prohibition Act of 2017

Policy: The bill proposes two major changes to the CSA. The first is to strike cannabis from the statute, essentially leaving the regulation or prohibition of it up to each state. The second is to insert into the CSA a provision that makes it a federal offense to transport cannabis from one state to another in any way that violates state law. In other words, if a state wished to continue prohibiting cannabis, it would be both a federal and state crime for anyone to transport cannabis into that state. Likewise, if a state wished to legalize and regulate cannabis, but wanted to prevent out-of-state cannabis from entering, the transportation provision would permit that state to do so.

Impact: Industries in states that have already legalized cannabis will structurally remain the same. Banking will open up for these state businesses, and so will the opportunity to write-off ordinary business expenses. Questions about contract enforcement and risks of federal prosecution will become moot, and when state regulatory bodies make decisions on how to govern the industry, they will no longer have to concern themselves with U.S. DOJ enforcement and/or prosecutorial policies. The big potential change will be seen if two or more contiguous states that have legalized cannabis decide to permit transport of the drug between their states. Markets will expand, opening access to new customers and challenges from new competitors. Licensees may also have the option to venue shop, and we could see states themselves competing with one another to attract cannabis business with the carrot of favorable regulations.

Representative Thomas Garett (R-VA)
Photo: C-SPAN

One possible pitfall to keep in mind is that this legislation could violate something in constitutional law known as the Dormant Commerce Clause—a topic CIJ will cover should it surface.

Procedural Status:

  • Introduced on February 27, 2017 by Representative Thomas Garett (R-VA)
  • Cosponsors: 4 Republican, 11 Democrat, 1 At-Large
  • Referred to House Committees on:
    • Judiciary
      • Subcommittee on Crime, Terrorism, Homeland Security, and Investigations
    • Energy and Commerce
      • Subcommittee on Health

HR 2528 – Respect States’ and Citizens’ Rights Act of 2017

Policy: This bill would add to the CSA a provision specifically declaring no congressional intent to preempt state cannabis laws.

Representative Diana DeGette (D-CO)
Photo: Center for American Progress Action Fund, Flickr

Impact: HR 2528 would rule out the potential for a judicial resolution to the federalism controversy. Most legal challenges to state legalization regimes have relied on a theory of Supremacy Clause preemption. Most notably was the 2014 case initiated by Oklahoma and Nebraska against Colorado, which you can find broken down here. Although the Supreme Court denied to hear that case, the issue is outstanding and remains an important factor, if not the central factor, in cannabis cases currently pending in federal court. Under this reform, state cannabis laws would be safe from invalidation, but it is less clear whether a mere anti-preemption clause would strip the federal government of its other powers under the CSA, or alter in any way the current status of cannabis as a Schedule I controlled substance. Questions arising under such uncertainty would likely have to go through long and hotly contested litigation before we have concrete answers. So although this proposal would resolve the ticklish issue of preemption, it leaves unaddressed the many other conundrums posed by federal-state divergence.

Procedural Status:

  • Introduced on May 18, 2017 by Representative Diana DeGette (D-CO)
  • Cosponsors: 1 Republican
  • Referred to House Committees on:
    • Judiciary
      • Subcommittee on Crime, Terrorism, Homeland Security, and Investigations
    • Energy and Commerce
      • Subcommittee on Health

HR 1841 – Regulate Marihuana Like Alcohol Act

Policy: This bill sets to accomplish a number of different reforms: remove cannabis from CSA; allow for import and export except into states that wish to prohibit cannabis altogether and/or prohibit its importation into the state; decriminalize cannabis use on national forest land; require a permit from the Secretary of the Treasury to import cannabis and to engage in any cannabis business activity; mandate businesses that obtain a Treasury permit to also comply with all State laws (so if state wants to continue to prohibit, they may); share jurisdiction over the administration and enforcement of the new federal laws between the DEA and the Bureau of Alcohol, Tabaco, Firearms and Explosives which is to be renamed the Bureau of Alcohol, Tobacco, Marijuana, Firearms and Explosives.

Representative Jared Polis (D-CO)
Photo: Joshua Lawton, Flickr

Impact: If enacted, this bill will have many of the same impacts as the abovementioned HR 1227- Ending Marijuana Federal Prohibition Act of 2017. The IMPACT section for that bill will also pertain to this bill, with the following exception: by requiring a permit to operate a cannabis business from the Department of Treasury, the bill would add a layer of regulation on top of state law. Treasury Permits would be conditioned on permitees complying “with all other Federal laws relating to production, sale and consumption of marijuana.” Although §302 of the bill limits Treasury’s discretion in denying applications to only certain, enumerated disqualifying factors, the “other Federal laws” the bill refers to could embody any number of policy and jurisdictional preferences either enacted by the Congress or promulgated by the executive agencies charged with administration. At the current stage of speculation the best we can say is that descheduling cannabis under this bill would be a benefit to the industry, but out of all of the present proposals the provisions authorizing federal regulation present the greatest uncertainty for the shape the future of the industry might take.

Procedural Status:

  • Introduced on March 30, 2017 by Representative Jared Polis (D-CO)
  • Cosponsors: 1 Republican, 14 Democrat
  • Referred to House Committees on:
    • Judiciary
    • Energy and Commerce
    • Ways and Means
    • Agriculture
      • Subcommittee on Conservation and Forestry
    • Natural Resources
      • Subcommittee on Federal Lands

HR 975

Statute: Adds one sentence to the CSA that excludes its application to any person acting in compliance with State cannabis laws.

Representative Dana Rohrabacher (R-CA)
Photo: Gage Skidmore, Flickr

Impact: The bill would have the same impact as the above HR 1227 – Ending Marijuana Federal Prohibition Act of 2017, with the only exception that the transportation provision in HR 1227 makes it clear that states will be permitted to prohibit the importation of cannabis from other states if they want to. This bill, without speaking directly to the matter of interstate importation, could leave the question open-ended until resolved through judicial interpretation.

Procedural Status:

  • Introduced on February 7, 2017 by Representative Dana Rohrabacher (R-CA)
  • Cosponsors: 8 Republican, 12 Democrat, 2 At-Large
  • Referred to House Committees on:
    • Judiciary
      • Subcommittee on Crime, Terrorism, Homeland Security, and Investigations
    • Energy and Commerce
      • Subcommittee on Health

Legislative Update

On Tuesday, August 1st, Senator Cory Booker (D-NJ) introduced the twenty-fourth cannabis reform bill. The bill has yet to be assigned a number or referred to committee, but it is called the Marijuana Justice Act of 2017, and makes some interesting contributions to the lineup of reform proposals.

Sen. Cory Booker (D-NJ)
Photo: Nick Fisher, Flickr

For legalization purposes, the bill both removes cannabis from the CSA and removes prohibitions on importing and exporting. The above analysis for descheduling and import/export would apply to Booker’s bill in the same way. The interesting twist thrown in is how criminal and racial justice objectives are linked to incentives for states to legalize. The ultimate decision to legalize or not in a given state will continue to be the prerogative of each state, but the catch is that if a state does not legalize cannabis and the number of arrests for cannabis offenses in that state disproportionately impacts minority or low-income citizens, then the federal government will pull funding it provides to that state for criminal justice-related programs. This could push more states who would otherwise not legalize onto the reform bandwagon. Such states will have to pit how much they value federal funds against how much they value criminalizing cannabis. If the former outweighs the latter, policy logic will dictate that they legalize. Updates on this bill, and movement on any others, will be tracked by CIJ.

For the next piece in this series, we will review the bills currently pending in Congress that cover medical cannabis reform and banking/tax reform. Stay tuned for the latest on what’s happening around Capitol Hill and in federal cannabis policy circles.

Senate Committee Votes to Keep Medical Cannabis Protections

By Aaron G. Biros
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The Senate Appropriations Committee approved the amendment to continue protecting state-legal medical cannabis markets from the Department of Justice. The amendment, previously known as the Rohrabacher-Farr Amendment, prevents the DOJ from using funds to target medical cannabis operations, patients and businesses in states where it is legal.

Every time Congress reviews the budget, this amendment needs to be included to keep protecting the medical cannabis community. While the rider still needs to make it through the final version of the appropriations bill, it is a big win for the status quo.

According to Aaron Smith, executive director and co-founder of the National Cannabis Industry Association (NCIA), this indicates that Congress is resisting Attorney General Jeff Sessions’ calls to end the protections. In a letter sent back in May, Sessions urged the Senate on both sides of the aisle to stop protecting medical cannabis.

Many see this morning’s vote as Congress standing up to Jeff Sessions, and standing up for medical cannabis patients. In a letter to NCIA members, Smith says that a lot of work still needs to be done, but this is an important first step. “This is not the end of the story. There are still many steps to go before a new budget is finalized,” says Smith. “But this is an important indicator that our allies in Congress are standing up for us, even in the face of DOJ opposition.” In an official NCIA statement, Smith acknowledges the hurdles that still face the amendment. “Now it’s time for the House to do the same,” says Smith. “Patients deserve access to care, states deserve respect, and members of the House deserve the opportunity to vote on amendments like this that have the strong support of their constituents.” Bipartisan support like this in Congress is needed to prevent the current administration and the DEA from meddling in states with legal medical cannabis.

 

Massachusetts Lawmakers Reach Compromise on Cannabis Bill

By Aaron G. Biros
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On Election Day last year, voters in Massachusetts approved a measure to legalize recreational cannabis. With recreational sales beginning in July of 2018, lawmakers have tried to get a bill through the state legislature to settle on, among other things, a tax rate and regulatory framework.

On Wednesday, multiple news outlets reported that the legislature has reached a compromise on a bill that would change the measure that voters passed to allow for lawmakers to implement higher taxes, a strategy on local bans and a regulatory framework, reports The Boston Globe.

mpp logo
MPP logo for the Regulate Marijuana Like Alcohol Campaign in Massachusetts

In a statement to supporters, Matt Schweich, director of state campaigns at Marijuana Policy Project (MPP), the biggest changes are in local control and taxation. “After weeks of persistent advocacy from Massachusetts residents, the Senate and House have reached a compromise that largely respects the will of the people,” says Schweich. “The legislation adjusts the local control policy, allowing local government officials in towns that voted “no” on the 2016 ballot initiative to ban marijuana businesses until December 2019. For towns that voted “yes” in 2016, any bans must be placed on a local ballot for voters to approve.” Therefore if a town wants to ban cannabis sales, they need to bring it to a vote for the people to decide. 72% of the population voted in favor of the ballot initiative. “The maximum tax rate — which depends on whether towns adopt optional local taxes — will increase from 12% to 20%,” says Schweich. “Under the bill, the state tax will be 17%, and the local option will be 3%.” A major push behind increasing the tax rates concerned lawmakers’ worries that the original 12% tax rate would not cover regulatory costs and government expenditures on the industry.

Boston, MA
Photo: Trenton Kelley, Flickr

The ballot initiative created the Cannabis Control Commission, the regulatory body overseeing the industry, with three board members. That agency will remain in the new bill, just with five board members that will write the rules on things like marketing, safety, fines and penalties and fair business practices.

Schweich says the MPP helped orchestrate over 1,000 calls to legislators, urging them to reject the House’s version of the bill, which some have called draconian. “The bill isn’t perfect, and we preferred the original language of the ballot initiative,” says Schweich. “However, given how problematic the House bill was, we are satisfied with the final compromise.”

The bill is expected to pass votes in both the House and Senate on Thursday and Governor Charlie Baker is expected to sign the bill that same day.

What’s Happening on Capitol Hill? Cannabis Reform Proposals and the 115th Congress

By Brian Blumenfeld, J.D., M.A.
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As CIJ readers are probably aware, last month Congress passed the Consolidated Appropriations Act of 2017—the annual budget, in other words. Lying within this 1,665-page document is Section 537, which for one year restricts the Department of Justice from using any funds to prevent states from implementing their medical cannabis laws. Medical cannabis businesses and patients can take some solace in this restriction. Last summer, the influential U.S. Court of Appeals for the Ninth Circuit, sitting in San Francisco, confirmed that this appropriations rider prevents federal prosecutors from bringing suit against medical cannabis businesses and users operating in compliance with state law. Two problems remain glaring, however: one, the protection only applies to medical cannabis activity, not recreational; and two, it is only guaranteed to last for one fiscal year.

To be sure, for the 115th Congress to address the profusion of issues emerging from the nationwide legalization movement, they must do something more. Various reform proposals have in fact been introduced during the current congressional session, and in order to fully digest where they stand and what they have the potential to accomplish, it will help to make sure that we know how they fit within federal legislative procedure.

Catching Up to Speed with the Legislative Process 

How A Bill Becomes A Law
Photo: Mary-Frances Main

Whenever confronting a question about government and politics, it is never a bad idea to start at the source of authority. In America, that source is of course the Constitution, and in Article 1, Section 5, Clause 2, We The People have given to Congress the power to “determine the rules of its proceedings”.  When we remember back to the School House Rock cartoon for How A Bill Becomes A Law, the majority of political maneuvering behind the basic process taught in the cartoon actually happens according to these ‘rules’ or ‘resolutions’. In fact, at the beginning of each new Congress (every two years) each chamber, and each committee and subcommittee within each chamber, votes on the rules that will govern how they are to go about their legislative business. Traditionally, the rules from the previous Congress are carried over by this vote with only minor tweaks. On top of that, both parties in each chamber have their own internal rules and procedures for setting their policy agenda, directing political strategy, and determining which members will be nominated to certain leadership positions and committee posts. Playing the game of politics according to this layer cake of rules is a necessary part of the work of a legislator, and is often as important a factor in how our country is actually governed as is who wins election to office and what substantive provisions are formally enacted into law. So for the purposes of understanding federal cannabis reform, let’s take a quick look into the procedural status of the relevant legislation and who is in a position to influence what happens to it; then, when reviewing the policies they stand to codify, we will also understand the legislative landscape they must navigate.

Rep. Rohrabacher launches the Cannabis Caucus, Photo via Earl Blumenauer/YouTube

A good place to start is February 16, 2017 when Republican Congressmen Dana Rohrabacher (R-CA) and Don Young (R-AK) along with Democratic Congressmen Earl Blumenaur (D-OR) and Jared Polis (D-CO) launched the Congressional Cannabis Caucus. Under House and Senate rules, such a caucus must formally register with the House Committee on Administration as a Congressional Member Organization (CMO), disclosing its officers and members and declaring its purpose. These CMOs are sometimes referred to by different names: caucuses, conferences, coalitions, task forces, etc. The best known of these are the House and Senate Democratic Caucuses and the House and Senate Republican Conferences. By setting party policy, driving legislative strategy, promoting party cohesion and rewarding party loyalty, these largest of CMOs dominate partisan activity on Capitol Hill. Smaller CMOs, on the other hand, advance only specific interests and often cross the partisan divide. The Cannabis Caucus, for instance, was formed to catalyze a federal response to the nationwide legalization movement, and its “Path to Marijuana Reform” is a large part of the spate of bills that have been dropped into the congressional hopper over the past six months.

All in all there are twenty cannabis reform bills currently pending in Congress. In the House, all but two of the fourteen bills there have been referred to either the Energy & Commerce Committee or the Judiciary Committee, and all but one of the six in the Senate have been referred to either the Finance or Judiciary Committees.

A Note on Committees & Procedure

Rep. Earl Blumenauer (D-OR), is on the Ways and Means Committee
Photo: Michael Campbell

Under House and Senate rules, bills are referred to committees by matching the former’s subject matter to the latter’s jurisdiction. In the House, the Speaker may attach time limits for committee action, refer a bill or portions of a bill to multiple committees and determine the sequence in which they are to be considered. The Speaker may also convene an ad hoc committee to consider a bill, and “make such other provision as may be considered appropriate.” As can be gleaned, the Speakership holds substantial procedural powers, and is in fact the only congressional leadership position created by the Constitution. The Senate’s counterpart, the majority leader, has in comparison less discretion in moving along legislative business.

At the next step, both the House and Senate grant each committee the authority to make their own rules on how they are to consider bills. Once referred, committee chairs generally decide to further refer a bill to a subcommittee, hold hearings, subpoena evidence and witnesses, call ‘markup’ sessions to propose and debate amendments, and finally to schedule a vote to report bills back to the chamber floor. If a committee chair wishes to kill a bill, these procedural powers provide wide, though not absolute, authority to do so. Jockeying for a chairmanship is therefore big game in the life of a legislator. Ultimately, members are nominated and elected to their respective committees and chairs according to the rules of their parties’ caucus or conference, and upon a vote of approval on the floor. Seniority is only one factor in these votes, and so because nothing is predetermined, these intraparty contests can explain a great deal about member behavior.

With that background to help triangulate Capitol Hill politics, we should now be better equipped to look into the cannabis bills pending before the 115th Congress, the committees to which they have been referred, and their procedural status. Stay tuned for the next article in this series when we will begin our bill-by-bill review.

Cannabis M&A: Practice Pointers and Pitfalls When Buying or Selling a Cannabis Business

By Soren Lindstrom
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The Stage is Set

According to the Marijuana Policy Group, the U.S. cannabis industry is expected to reach more than $13 billion in sales by 2020 and create more jobs than the U.S. manufacturing industry. According to Viridian Capital’s Cannabis Deal Tracker, there were close to 100 M&A transactions in the U.S. cannabis industry in 2016 and approximately $1.2 billion was raised in equity and debt. As the cannabis industry has grown more mature and businesses begin to have more capital available, the M&A activity within the industry is poised to grow significantly over the next years to assist businesses gain necessary scale and take advantage of synergies and diversification.

The Obvious Wrinkle

U.S federal law has prohibited the manufacture and distribution of cannabis since 1935. The U.S. regulates drugs through the Controlled Substances Act, which classifies cannabis as a Schedule I drug (i.e., drugs determined to have a high potential for abuse with no currently accepted medical use and a lack of accepted safety regarding their use). Yet, more than 25 states have by now legalized cannabis for medical and/or recreational purposes and, as a result, there is a clear conflict between such state laws and existing federal law. To possibly help bridge that conflict, the U.S. Attorney General’s office in 2013 issued guidance directing the federal government not to intervene with state cannabis laws except in specific, limited circumstances, but, contrarily, the DEA has shown no desire to re-classify cannabis. To add to the confusion, President Trump and the new U.S. Attorney General have provided mixed statements and signals about their positions.

All of this means that it continues to be risky to acquire cannabis businesses. The requirements to legally grow, distribute, prescribe, and use cannabis for either medical or recreational purposes vary widely by country, state, and local jurisdiction, making it tricky to determine whether such businesses can be legally combined, in particular, across state lines.

Pick the Right Team of Advisors

When preparing to sell or buy a cannabis business, it is important to pick the right team of advisors. Your regular legal counsel, accounting firm or CPA may not be the right advisors for a cannabis M&A transaction. Choose a legal counsel that not only has experience with cannabis laws and regulations, but also has cannabis M&A experience and can offer expert advice on areas like IP, employment, tax matters, etc. Similarly, verify that your accounting firm or CPA has real experience with financial and quality of earnings analysis and due diligence.

Conduct Gating Due Diligence Up Front

In any contemplated M&A transaction, it is wise to prioritize your due diligence investigations. There will always be some more prominent risks and business objectives in a particular industry or with respect to a specific target business. It will be more cost and time effective if those specific risks and business objectives are prioritized early in the due diligence process. These can dictate whether you even want to pursue the target further before you dig into a deeper and broader due diligence investigation. Conducting gating due diligence up front is even more important in an industry like cannabis that contain complex and thorny regulatory hurdles.

So, before you spend money and time on a broader legal, business and financial due diligence investigation, have your legal counsel analyze and confirm that the potential transaction is feasible from a regulatory perspective. This will include whether it is possible to obtain or transfer necessary local and/or state licenses and whether a combination or sale can occur across state lines if necessary. Early on in the process, It is also advisable to request that the target business complete a legal compliance questionnaire or discuss with the target its regulatory compliance program, policies and training. Such up front due diligence will either clear a path to negotiations and broader confirmatory due diligence or flush out “red flags” that may kill a possible deal or require the buyer to investigate further before proceeding.

Important Terms and Pitfalls in the M&A Agreement

Generally, a sale or purchase agreement for a cannabis business does not appear to vary much from a similar agreement in any other industry. However, the complex environment and the premature nature of the industry impacts certain deal terms and processes in different ways from most other developed industries.

Here are few examples to keep in mind when preparing and negotiating a sale or purchase agreement:

  • Third Party and Governmental Consents: Buyer’s legal due diligence must focus on the consents that may be required from seller’s suppliers, customers, landlords, licensors or other third parties under relevant contracts. Additionally, the due diligence should focus on consents and approvals required by local and state regulators as a result of the sale. The M&A agreement should contain solid seller representations and warranties about all such consents and approvals and any such material consents and approvals should, from a buyer’s perspective, be a condition precedent to closing of the transaction.
  • Legal Compliance: A buyer should not agree to a boilerplate seller representation about the target’s compliance with laws. Be specific and tailor seller’s legal compliance representation to relevant state and local cannabis laws, regulations and ordinances. From a seller perspective, be careful and thoughtful about any appropriate exceptions (including the federal prohibition) to be disclosed to buyer in the disclosure schedules underlying the sale or purchase agreement.
  • Financial statements: The cannabis industry is very fragmented and consists of many small businesses. Many of these small businesses do not have financial statements prepared in accordance with GAAP and may consist of only management prepared financials. In that scenario, a buyer should have its financial advisor do an analysis of the financials available and ask seller to provide a representation and warranty about the accuracy and good faith preparation of the provided financials.
  • Escrow: Typically, a buyer will request some part of the purchase price be placed with an independent financial institution for a period of time post-closing as a source of recovery for losses as a result of breaches by seller of any of the representations and warranties in the definitive sale or purchase agreement. Due to the federal cannabis and banking regulations, many of the larger commercial banks will not provide financial services to cannabis businesses, in particular if the business touches the plant. The parties must therefore consider alternatives, including local financial institutions with more relaxed compliance requirements or perhaps place the escrow in a trust account of a law firm or other independent party.
  • Working Capital Dispute Procedures: Similar to the escrow, larger accounting firms generally do not provide services to cannabis businesses. Due to the rapid evolution of cannabis related regulations, if the terms of the transaction include provisions for a post-closing working capital/purchase price adjustment and related dispute procedures, it is advisable to not name an arbiter in the agreement. Instead, parties should agree to mutually select the arbiter if and when a dispute should arise.
  • Indemnification: Because of the tricky legal environment of the cannabis industry, it may be prudent for a buyer to request, at the very least, that certain parts of seller’s legal compliance representation and warranty not be subject to the “regular” caps, deductibles and other indemnification limitations. Also, if a buyer has unearthed a significant issue in its due diligence investigation, it should consider asking seller for a special indemnity for such issue that would be indemnifiable regardless of buyer’s knowledge of the issue and not be subject to the general indemnification limitations.
  • R&W Insurance: If there’s a lot of competition for the purchase of a target, particularly in a bidding process, it is now common for buyer to offer to purchase a representation and warranty insurance policy (“R&W Insurance”) to possibly gain an advantage by limiting the seller’s post-closing indemnification exposure. The good news is that many of the R&W Insurance carriers do offer such insurance in connection with the sale and purchase of cannabis businesses. However, typically, R&W Insurance cannot be obtained for insured amounts of less than $5 million. Experienced M&A counsel can advise of the advantages and disadvantages of R&W Insurance and assist in the negotiation of the related terms.

The above are just some examples of what to expect in a cannabis M&A transaction. Every M&A transaction will have its unique issues that will need to be appropriately reflected in the sale or purchase agreements and good M&A practices will continue to evolve with the industry. If you are an owner of a successful cannabis business, buckle your seat belt and be prepared for an exciting ride as the industry gets closer to significant consolidation.

NCIA: 280E, Federal Reform & Cannabis Lobbying Efforts

By Aaron G. Biros
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With the 2017 Cannabis Business Summit just around the corner, we sat down with Taylor West, deputy director of the National Cannabis Industry Association (NCIA), to hear about their lobbying efforts and what they’ll discuss in the keynote panel discussion on Taxes, 280E and the Path to Federal Reform. Henry Wykowski, Esq., attorney, Steve DeAngelo, founder of Harborside Health Center and Michael Correia, director of Government Relations for NCIA will join her on that panel discussion.

According to West, the 280E tax code issue has an enormous impact on the industry. This tax code essentially means that businesses cannot make deductions for normal business operations from the sale of schedule I narcotics. Because cannabis is still listed as schedule I, businesses touching the plant often pay a majority of their profits to federal taxes. “When they are handing over 80% of their profit to the federal government, which is a lot of money that isn’t being pumped into the local economy, that is a big problem,” says West. “We want to highlight how 280E isn’t just harmful to businesses, but also harmful to the local economies and states that have businesses dealing with cannabis in them.” As the primary organization lobbying on behalf of the cannabis industry in Washington D.C., they have three full-time staff as well as a contracted lobbying firm working there. “We are the voice on Capitol Hill for the businesses of the cannabis industry,” says West. “We primarily focus on a couple of core issues, and one of them is 280E tax reform since that is such a significant issue for our members touching the plant.”

Taylor West, deputy director of NCIA

Another important issue they have been lobbying on is banking access. According to West, banks and credit unions are regulated on the federal level, and as a result, are largely still reluctant to serve cannabis businesses. “The inconsistency between federal and state law means they are concerned their federal regulators will flag them for working with cannabis businesses,” says West. “It is very difficult to operate without a bank account- this creates a lot of transparency, logistical and safety issues. We are working with lawmakers to try and make a change in the law that would make it safe for banks to serve state-legal cannabis businesses.” NCIA’s lobbying efforts have long engaged a few core allies on Capitol Hill, including the representatives that formed the Congressional Cannabis Caucus. “They have been champions of broader reform issues around cannabis,” says West. “But we are also starting to see new faces, new members of congress getting interested in these issues, beyond the traditional champions.” A lot of NCIA’s recent lobbying efforts have focused on recruiting members of Congress for those issues.

One example of their success came by teaming up with Rep. Carlos Curbelo, a Republican Congressman from Florida serving on the House committee overseeing tax issues. “He hasn’t previously been involved with cannabis legislation, but because Florida moved forward with the medical program, he got more interested in the issue and we helped educate him about the problem with 280E,” says West. “Having a republican that sits on the committee dealing with these issues is a huge step forward as we build the case for reform in D.C.” A lot of these efforts will be discussed in greater detail at the upcoming Cannabis Business Summit June 12-14. “We want to talk about the work we are doing just now in Washington D.C.; we have been doing a significant amount of work helping to draft legislation that would fix the 280E issue,” says West. “We will talk about those efforts as well as what businesses are currently doing to deal with the issue of 280E.” For readers interested in getting tickets, seeing the agenda and learning more about NCIA’s lobbying efforts, click here.

What Does The Constitution Have To Say About Cannabis Legalization?

By Brian Blumenfeld, J.D., M.A.
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With the Trump Administration sending mixed signals on legal cannabis, and with Congress beginning to ramp up efforts for reform, in order for industry stakeholders to best understand where we are headed, it will be helpful to remember how we got here. As readers may be aware, the current status of federal cannabis law can be traced back to the legislative prong of Richard Nixon’s War on Drugs. His Controlled Substances Act of 1970 (CSA) made it a federal crime for anyone to use or possess any amount of marijuana anywhere in the U.S. Current federal cannabis policy, on the other hand, complicates the matter, and can be traced back to a memorandum issued in 2013 by then-Deputy Attorney General James M. Cole. The Cole Memo instructed U.S. attorneys general in states that have legalized marijuana to use their limited resources in prosecuting CSA offenses only if they violated specific federal enforcement priorities. The highest of these priorities include diverting legal marijuana business revenues to illegal drug operations, transporting marijuana over state lines, making marijuana accessible to minors, and growing marijuana on federal lands. The problem is that the Cole Memo is only a policy, it is not law; and so not only can the current administration unilaterally change it whenever it wants, but state-legal cannabis businesses, their employees and customers are breaking federal law every single day!

Former Deputy Attorney General James M. Cole
Photo: Shane T. McCoy

This is a very unusual situation to be in for both the states and the feds, and it raises two basic constitutional questions: What gives the feds the right to make cannabis illegal everywhere in the U.S.? And how can states simply defy the prohibition?

The first question was in fact answered by the U.S. Supreme Court in 2005 when two California women (Diane Monson and Angel Raich), both with very serious illnesses, sued the federal government for confiscating their state-legal medical cannabis. The feds defended their actions by claiming that the Constitution’s Commerce Clause gave them the authority to march into California, march into the homes of these women, and enforce the CSA. Diane and Angel argued that the Commerce Clause only gives the feds the authority over interstate commerce; and since their cannabis was grown by themselves, used by themselves, never bought or sold, or transported out of the state, it was therefore wholly intrastate cannabis and had nothing at all to do with interstate commerce. The Court sided with the feds, ruling that even though the cannabis was intrastate, when you take all intrastate cannabis activity like that and add it together, it will have a substantial impact on the interstate cannabis market. Because of that connection it was ‘necessary and proper’ for the feds to enact the CSA and enforce it anywhere in the country they wanted. Although there is still much debate over this ruling, it remains the law of the land to this day.

United States Constitution
Photo: National Archive

Fast forward to 2014. The states of Nebraska and Oklahoma sued Colorado claiming that by legalizing marijuana, Colorado was violating federal law under the CSA. Because federal law overrides state law when they conflict, then Colorado’s cannabis laws must be struck down, or so they argued. In response Colorado took a very interesting position that built on the hard realities of the cannabis market. It is best to explain it in four parts. First, they cited the fact that the federal government lacked the resources to enforce the CSA, a claim which the feds have admitted to themselves. Second, Colorado pointed to a constitutional doctrine called ‘anti-commandeering’, which says that they have no obligation to criminalize cannabis at all. If the feds want to make it a federal crime, that is one thing; but that does not mean CO must make it a state crime as well. Third, Colorado said that by regulating cannabis as extensively and strictly as they have done, they are reducing the amount of cannabis activity compared to not regulating it at all. Taken together, this means that because Colorado does not have to criminalize cannabis, and because the federal government cannot enforce their own criminalization, then Colorado is actually helping out the feds by regulating the drug instead of allowing for a free-for-all under state law.

The Congressional Cannabis Caucus Announced

In March of 2016 the Supreme Court declined to hear the case in full or issue an opinion, which had the effect of giving a default victory to Colorado. Among political and legal commentators the speculation is that enough justices on the Court either agreed with the logic of Colorado’s position or wanted to wait for this federal-state controversy to be worked out by Congress. Because it was only a default victory, the constitutional status of the legal cannabis industry remains on unprecedented and unstable ground. The Controlled Substances Act has not yet been found to preempt state law, so cannabis businesses are still able to operate legally in their state. But because the CSA still applies to everyone, they do so at the whim of the Trump Administration’s policy preferences. The confusion that this presents has put cannabis businesses in many difficult situations, and it serves as the legal backdrop for such familiar problems as access to banking and contract enforcement.

Currently, legislative and judicial fixes are in motion. Related cannabis litigation is pending in federal court at the 10th Circuit Court of Appeals in Denver. And a Cannabis Caucus has formed in the U.S. Congress to address the shortcomings of the CSA. In the coming articles we will explore both of these routes to reform, the likelihoods of various possible outcomes, and the impact they will have on the legal cannabis industry.


Editor’s Note: For readers interested in learning more about this topic click here for Brian’s research article published by the Virginia Journal of Social Policy & the Law

Congress Passes Budget With Protections for Medical Cannabis

By Aaron G. Biros
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On May 1st, Congress reached a bipartisan deal to keep the government open and funded through September 30th, 2017. Congress approved the appropriations bill that sets the government’s spending with an important section in it relating to cannabis. Section 537 on page 230 states that the Department of Justice cannot use funds to interfere with states’ legal medical cannabis programs.

The bill uses similar language to The Rohrabacher–Farr amendment, a bill that was originally introduced in 2013 to prevent the Department of Justice from spending money on enforcing the Controlled Substances Act in states with legal medical cannabis programs. This new appropriations bill, with the language in section 537, effectively achieves the same thing. “None of the funds made available in this Act to the Department of Justice may be used, with respect to any of the States of… to prevent any of them from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana,” reads the bill. The language includes a mention of the 40 or so states and territories with some form of medical cannabis program, legislation or bill.

The language of section 537 (second half)

This means that Attorney General Jeff Sessions is relatively powerless to go on a sort of ‘crackdown’ on medical cannabis programs. Given Sessions’ previous comments and general views on cannabis, this should put cannabis industry stakeholders at ease for the time being. Of course, this budget is only for the 2017 fiscal year, so come September, the same or similar language needs to be included in the next appropriations bill. With Jeff Sessions’ task force still investigating federal cannabis policy, it is still very possible we could get a clear policy decision in the near future.

“We are encouraged that the Federal Government and NIDA are recognizing the true and powerful medical benefits that cannabis provides, especially in the war against devastating opiate-based drug addiction, abuse and death,” says Sally Vander Veer, President of Medicine Man Denver. “We have seen anecdotal evidence of this as reported by our patients/customers (and the beneficial effects of cannabis in numerous other conditions) since we opened our doors in 2010. Our hope is that this acknowledgment will open the door to additional research, eventually leading to legal and safe access to cannabis medicine for all Americans.”

The following section also includes a protection of industrial hemp research, as defined in the Agricultural Act of 2014, which basically means universities and institutions can research it. SEC. 538. “None of the funds made available by this Act may be used in contravention of section 7606 (‘‘Legitimacy of Industrial Hemp Research’’) of the Agricultural Act of 2014 (Public Law 113–79) by the Department of Justice or the Drug Enforcement Administration.” With all of the uncertainty and inconsistent comments coming out of the Trump administration, at least we have a sense of security in the medical cannabis community through the summer.