Last week, I presented oral argument to the Fifth District Court of Appeal in support of the people’s right of referendum. Long story short, the Kern County Board of Supervisors banned medical marijuana dispensaries in 2011, the people protested via referendum petition, and to this day the County has refused to comply with the legal mandate to submit the ban to voters before giving it effect. The County contends that they may reenact a protested ordinance after the passage of time; however, neither the California Constitution nor the Elections Code allow for such limitation on the people’s right to referendum.

The Court of Appeal granted our motion for calendar preference in light of the upcoming March election, at which the people and the Board of Supervisors have submitted competing ballot measures on medical marijuana for consideration by the voters.

Measure D is a people’s initiative measure, meaning it originated with the people, and will be submitted to a vote of the people. If and when the people adopt this measure (it would need to get more votes than Measure E), the Kern County Board of Supervisors will not have the ability to amend or repeal it. In other words, the Kern County electorate would gain control over the issue.

Enter Measure E. The County Board has demonstrated over the past decade that it is unwilling to relinquish control over the issue of medical marijuana, and has persistently interferes with the will of the voters. Upon the qualification of Measure D for the ballot, the County Board cooked up Measure E, which would give the Board full control over the issue. If the voters approve Measure E, the Board could amend or repeal it at any time in the future.

The Board’s agenda, as shown through its actions over the past decade, is to continue to ban medical cannabis in Kern County. The Board’s proposal of Measure E is yet another maneuver to silence the voices of the electorate and maintain control over the issue.

The initiative and referendum are powerful direct democratic tools reserved to Californians to use when their institutions are unresponsive. Measure D is the people’s way of taking control on this issue and giving power their voices. We believe the voters in Kern County are smart enough to see through the County’s intentions with Measure E, and expect it to be rejected in March.

A couple of months ago I wrote a “Hemp/CBD litigation forecast.” (See here.) One topic of that post was the rise in class actions against Hemp-CBD companies and I noted the consumer class action complaint filed against JustCBD in the Southern District of Florida, Case No. 0:19-cv-62067-RS. The gravamen of the complaint is that JustCBD overstated the quantity of CBD contained in its products on numerous occasions and in violation of representations and warranties it made in connection with selling its products. The plaintiff seeks to represent a class of persons defined as all persons in the United States who purchased JustCBD products that contains specific representations about the amount of CBD in the product.  I write today with an update on that case.

On November 18, the defendants filed a joint motion to dismiss the complaint for failure to state a claim. This type of motion – for the unfamiliar – must be filed before a defendant answers the complaint and may be filed against some or all of the claims in the complaint. In simple terms, a motion to dismiss argues: “Court, even if everything alleged in the complaint were true, the plaintiff could not win her lawsuit, so the lawsuit should be dismissed.” More technically, federal courts apply the standards set forth in two Supreme Court cases, Twombly and Iqbal, colloquially referred to by lawyers as Twiqbal.  The guiding principle of these opinions is whether the complaint “plausibly” alleges a claim for relief and courts deciding these motions apply the following principles:

1. Although the court must accept as true all facts asserted in a pleading, it need not accept as true any legal conclusion set forth in a pleading.
2. The complaint must set forth facts supporting a plausible claim for relief and not merely a possible claim for relief.
3. Determining whether a complaint states a plausible claim for relief is a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.
4. A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.
5. Mere conclusory allegations do not suffice.

Although a complaint that does not plausibly allege a claim for relief will be dismissed, a plaintiff may be given leave to amend her complaint to cure the pleading deficiency.

The defendants filed a densely packed 27-page motion, let’s go over some of the key arguments that I’ll simplify in some respects for the sake of brevity:

1. Gaddis alleges he purchased two JustCBD products in November 2018 (Honey Tincture and Ribbons) and apparently tested the CBD content of one of the products, which he alleges was below the amount listed on the label. But Gaddis purports to bring claims on behalf of a class claiming that every product sold by JustCBD (roughly 50 different products) is mislabeled. Defendants argue that Gaddis lacks standing to assert claims for products he did not purchase. This appears a well-founded argument. In Twiqbal terms, the issue is whether the court may reasonably infer from Gaddis’ allegations every JustCBD product (roughly 50) had a lower CBD content? Or is Gaddis limited to bringing claims regarding only the products he purchased? I expect the defendants have the better argument here, which if accepted by the court would significantly constrain the class action and the potential liability of the defendants.
2. Gaddis seeks to pierce the corporate veils of the various entities he sued, alleging that a parent company “dominates and controls all aspects” the subsidiaries’ operation. But in Florida – as in most jurisdictions – piercing the corporate veil is a drastic measure taken only in rare circumstances. Defendants argue that the mere fact that one company is a corporate parent or affiliate is insufficient to pierce the corporate veil and that Gaddis’ allegations simply do not plausibly plead the circumstances necessary for a court to reasonably infer that the subsidiaries are “mere instrumentalities” of the parent. I believe the defendants have a good argument here as courts are generally loathe to disregard the corporate forms. A ruling in favor of the defendants would further limit the ability of Gaddis and his attorneys’ to reach into the pockets of the defendant corporations.
3. Gaddis alleges that he and the Class suffered economic injury as a result of the defendants’ conduct. Namely, that they paid a “price premium” for the JustCBD products based on defendants’ express representations about the CBD content of the products. Defendants argue that Gaddis has not plausibly plead a “price premium” injury because he did not plead the specific price he paid, how the price he paid compared to competitors, or how the competitors’ products are comparable to the products he purchase. This argument is persuasive, the deficiency in pleading probably is one that could be corrected. What I mean is that were the court to rule in favor of defendants on this argument, I expect the court would allow Gaddis to try and remedy the deficiency by filing an amended complaint.

Defendants’ motion includes several other arguments including attacks on Gaddis’ claims for (i) violations of New York’s General Business Law §§ 349, 350, (ii) fraud, (iii) violations of the Florida Deceptive and Unfair Trade Practices Act, and (iv) breach of express and implied warranties. I won’t get into those here except to note that fraud claims are subject to a heightened pleading standard under the federal rules and that at least some of the purported deficiencies may be curable.

We will continue tracking this lawsuit and update the blog accordingly. In the meantime, any company involved in selling Hemp-CBD to consumers ought to be working closely with their regulatory attorneys to avoid getting snared by a class action lawsuit. For more reading about advertising and other statements about products see here, here, here, here and here.

Recently, Jonathan Bench wrote about the importance of insurance coverage for your hemp or recreational marijuana business. His first article provided the basic anatomy of such policies and his second discussed the importance of product liability insurance. This post highlights recent litigation in which insurance is at issue, or ought to be.

Hemp insurer seeks declaration of no coverage

Regular readers may recall the Big Bush Farms case —in which Big Bush brought a $57 million lawsuit arising from a hemp production contract against Boones Ferry Berry Farms and others. (See here for more detail). That lawsuit has now given rise to a coverage lawsuit by Boones Ferry Berry Farms’ insurer.

Recently, American Family Insurance filed a lawsuit in the federal district court of Oregon seeking a declaration from the court that it has no duty to extend to a defense to co-defendants Boones Ferry Berry Farms, LLC and its principals the Snegirevs (together the “Insureds”). American Family sold the Insureds a farm/ranch policy in which it agreed to provide the Insureds “a defense against liability for pay damages because of ‘property damage’ caused by a covered ‘occurrence.”  The policy excludes coverage for “‘property damage’ expected by, directed by, or intended by any ‘insured.’” I expect your eyes are glazing over so I’ll cease quoting language from the insurance policy!

The gist of the federal lawsuit is that American Family contends the claims against the insureds in the underlying state-court lawsuit do not give rise to a duty to defend or indemnify the insureds.

Oregon retailer sued for damages allegedly caused by exploding vape pen

As I noted, Jonathan also wrote about the importance of product liability insurance. (See here). He described is as a non-negotiable priority. A recent lawsuit filed in Oregon state court demonstrates why.

The plaintiff alleges personal injury resulting from a vaping device exploding while touching his mouth, causing part of the device to shoot through his teeth and into his face. The plaintiff alleges he bought this device from an OLCC retailer based in Bend, which device was manufactured by Korean company. The plaintiff sued both the Oregon-based retailer and the Korean company. The plaintiff alleges claims for strict liability, negligence, breach of the implied warranty of fitness for a particular purpose and breach of the implied warranty of merchantability and seeks $1 million in economic and non-economic damages.

For those thinking this lawsuit arises from the recent ban on flavored vape products, it does not. The events at issue occurred in October 2017 but the lawsuit was not filed until October 2019. Questions for the Oregon retailer include: Do you have product liability insurance? Did you have coverage during the applicable period (occurrence v. claims-made)? When, if at all, did you tender the claim to your insurer?

What ought you do?

First—have insurance.

Second—at the outset of any business dispute consider whether the loss may potentially be covered by insurance. This is not usually an enjoyable experience, as Jonathan pointed out, given the labyrinth of policy language, endorsements, exclusions, and exceptions to exclusions. As someone who has represented numerous insureds in disputes with their commercial general liability and other policies, my advice is to tender any potentially covered claim to your insurer ASAP. And I mean do it immediately after the loss or as soon as you become aware of the potential of a claim so that your insurer cannot argue you did not timely tender the claim. Your policy will spell out the how and when of tendering.

Third—review the insurers coverage position with a coverage attorney if the insurers denial or reservation seems at all tenuous. After you tender a potential claim, the insurer will provide its own coverage analysis and either accept coverage, decline coverage, or accept coverage subject to a reservation of rights. The insured then has the option of disputing the insurer’s coverage analysis and this is where a careful reading of your policy is just the first step. Determining whether to challenge an insurer’s coverage position requires insureds to evaluate policy language in light of general insurance law principles of the insureds jurisdiction as well as relevant case law interpreting terms within different kinds of policies. Insureds should remember that the duty to defend is broader than the duty to indemnify and that ambiguities in policies are resolved in favor of the insured. Nonetheless, insurers often find reasons to decline coverage and your coverage attorney may help you gain leverage and reach an agreement with your insurer regarding defense and/or indemnity.

Fourth—consider commencing a declaratory judgment action. The purpose of the action is to have the court “declare” whether or not the facts alleged in a complaint give rise to a duty to defend and/or whether or not the insurer must indemnify its insured’s loss. This is usually a last resort but it may be necessary in some circumstances.

Early last week, we covered Governor Brown’s Executive Order No. 19-09 banning flavored vaping products. That ban is six months in duration, and it covers all flavored tobacco and nicotine vaping products, as well as marijuana products flavored with non-marijuana terpenes. As expected, the Oregon Liquor Control Commission (OLCC) and Oregon Health Authority (OHA) quickly released temporary rules enacting the ban, both inside and outside the marijuana context. No one in the OLCC world challenged this ban, which is surprising given the significant industry impact.

Outside of the marijuana context, it’s a different story. Yesterday afternoon, the Oregon Court of Appeals granted a request for an immediate and temporary stay from enforcement of the new OHA rules found at OAR 333-015-1000. These rules prohibit retailers from “offer[ing] for sale a vapor product containing a flavor, to a consumer in Oregon.” The Petitioners here are a series of vape businesses and interest holders, which filed two separate lawsuits. The first lawsuit was filed by a national trade group known as Vapor Technology Association along with southern Oregon outfits Vape Crusaders Premium E-Liquid, LLC and Smokeless Solutions, LLC. The second lawsuit was filed by a Portland shop called Division Vapor and its owner, Paul Bates.

Interestingly, the “Division Vapor” name registration has long since expired and ORS 648.135(1) should have prevented that outfit from joining the fray. Somehow that seems to have slipped through: along with other Petitioners, Division Vapor argued that “as a result of the [emergency OHA] rule, they, along with numerous other similarly situated businesses, will be forced to permanently close within weeks.” That was enough for the Court, which halted the rule and gave all Petitioners the opportunity to duke it out with the Oregon Department of Justice in motion practice. Eventually, the court will reach a decision on the merits.

Will the vape shops ultimately prevail? It’s hard to say; a full analysis is beyond the scope of this post. Could OLCC licensees have made identical arguments to the Court to buy some time? Absolutely. Could they still? You bet. Overall, however, industry response has been staid, including from the Oregon Cannabis Association and other trade groups. And though our office has heard client complaints about business interruption–including talk of losses and layoffs–no one has stepped up to challenge the temporary rules at OAR 845-025-2805. That may change if someone is emboldened by yesterday’s ruling.

The big question in any marijuana business challenge would be whether the court would think of that challenge in the same manner as the vape shops. The two sets of petitioners are not perfectly analogous, of course, and the Court could determine that vape shops are more dependent on sales of newly banned products than affected OLCC businesses. Still, given various factors including: 1) the highly competitive nature of the OLCC market, 2) the razor-thin margins of many licensees, and 3) the flavor-dominant product lines of many processors, a compelling argument could be made that the emergency rules will have a fatal effect on one or more businesses. In light of yesterday’s ruling, it might be worth a shot.

1. If the other side breaches this cannabis contract and we sue them, will they just claim that the contract is federally illegal to get off the hook, and if so, will the judge agree?
2. Does federal law apply to our cannabis business?

The answer to the first question is admittedly pretty tough. Our cannabis attorneys see parties put all kinds of things in contracts to try to avoid this problem—from acknowledgements of federal illegality, to waivers of the right to bring a case in federal court, to outright waivers of the illegality defense. Whether any clauses could make a difference in litigation is not clear, and depending on the jurisdiction, a court could theoretically agree that the contract is illegal and can’t be enforced, though we believe that’s unlikely to happen in any state court in a state with a commercial cannabis licensing system. After all, one would hope that a judge wouldn’t sympathize with a party who signed a contract, breached it, and then claimed the whole thing was illegal.

The answer to the second question is much easier: federal law almost certainly applies. A good rule is that if the federal government says that a business has to do something, they have to do it. On the other hand, when federal laws offer protections or benefits to normal businesses, those often don’t apply to cannabis companies (such as bankruptcy protection or certain tax deductions). Here are a series of examples:

• The Controlled Substances Act: Even though the federal government hasn’t really enforced the CSA against state-lawful operators in a few years, it actively enforces it against allegedly unlicensed operators. Theoretically, nothing is stopping the federal government from bringing charges against every licensed dispensary in the United States (with the exception of strictly medical operators as protected by the Rohrbacher Blumenauer amendment, as extended from time to time). In reality, it doesn’t look like the federal government will abandon its current policy of non-enforcement any time soon.
• Federal Trademark Laws: Thinking of using an established company’s trademarks on cannabis goods? Well, they might haul you into court under the federal trademark laws. A federal trademark registration offers the holder the right to seek certain remedies against unlawful users of that trademark (the “infringer”), regardless of whether the infringer was selling a legal or illegal good. Even businesses without federal trademark registrations can bring trademark actions against infringers.
• Federal Trade Secret Laws: If a cannabis company improperly acquires information, data, methods, or any other kind of secret from any other company, the cannabis company could be sued under the federal Defend Trade Secrets Act.
• Federal Environmental Laws: Cannabis companies that don’t comply with federal environmental laws risk being penalized or even criminally indicted.
• Federal Tax Laws: Yes, cannabis companies need to pay federal taxes, but unfortunately, thanks to Internal Revenue Code section 280E, they cannot take regular business deductions, so they end up paying taxes on their gross receipts less their allowed cost of goods sold.
• Federal Employment Laws: Thanks to the Tenth Circuit Court of Appeals (a federal appellate court based in Denver that is one step below the U.S. Supreme Court), we can now add compliance with the Fair Labor Standards Act (“FLSA”) to this list.

The case at issue is Kenney v. Helix TCS, Inc., which we’ve been following for about a year. As we explained previously:

Helix TCS, INC. (“Helix”) provides security services to cannabis businesses. Kenney, an employee of Helix, was classified as an exempt employee, meaning Helix did not pay him overtime pursuant to the requirements of the FLSA. Kenney brought suit against Helix claiming he was misclassified as exempt and should have been paid overtime.

Helix moved to dismiss the case, arguing that Kenney was not entitled to the protections of the FLSA because cannabis was entirely forbidden under the CSA. The district court denied the motion to dismiss but certified the ruling for immediate appeal to the Tenth Circuit Court of Appeals.

On Appeal, Helix contends that its employees are not entitled to the protections of the FLSA. Helix’s main argument is that all participants in state recreational marijuana industries assume the risk that their activities will subject them to federal criminal sanctions and therefore they are not entitled to benefits under federal law, and cannot expect federal court to aid their conduct. Essentially Helix is arguing that the federal government would be assisting employees in drug trafficking if they afforded the employees the protections of the FLSA.

On September 20, 2019, a three-judge panel of the Tenth Circuit issued a concise, 12-page opinion unanimously disagreeing with Helix and holding conclusively that the FLSA does apply to cannabis businesses. In one part of the Kenney opinion, the court noted that “case law has repeatedly confirmed that employers are not excused from complying with federal laws just because their business practices are federally prohibited.” After reviewing this law, the court held that “the FLSA is focused on regulating the activity of businesses, in part on behalf of the individual workers’ well-being, rather than regulating the legality of individual workers’ activities.” In conclusion, the court held that the FLSA does apply to cannabis companies and allowed the case to proceed.

There is an important note in the wake of the Kenney case: the case is only “binding” on jurisdictions within the Tenth Circuit, which are the District of Colorado, District of Kansas, District of New Mexico, Eastern District of Oklahoma, Northern District of Oklahoma, Western District of Oklahoma, District of Utah, and District of Wyoming. The decision will just be “persuasive” authority for federal courts elsewhere in the U.S., which means that they don’t necessarily need to be adhered to. Even though Kenney won’t be binding on federal courts outside the Tenth Circuit, we don’t see many courts departing from the Kenney rule.

You may be asking why this case is relevant to the illegality defense. The answer is simple—the court’s reasoning is broad enough to apply outside of the context of the FLSA. In other words, courts across the country could either cite the case persuasively outside the FLSA context, or just come to different conclusions based on the same reasoning. Even if federal legality doesn’t happen soon, we expect that the federal illegality defense will continue to weaken substantially over the next few years.

We’ve written a lot about cannabis and the Controlled Substances Act.  From immigration to waste dumping. From the Fair Labor Standards Act to the STATES Act, our articles run the gamut. Not long ago we wrote about a decision by the Second Circuit that may force the DEA to re- or deschedule marijuana after writing about the lawsuit when it was first filed last year. This lawsuit, you may recall, was brought by a group of five plaintiffs comprised of a child who uses cannabis oil successfully to treat life-threatening seizures, another child who treats with cannabis for Leigh Syndrome, a terminal neurological disorder, a former NFL linebacker, an Iraq War veteran, and a nonprofit. As sympathetic a group of plaintiffs as there ever were – and in my eyes equaled by the parents and child in the discussion that follows.

A recent federal court decision addresses the relationship between the Controlled Substances Act, the Individuals With Disabilities Education Act (“IDEA”), and state laws permitting the medical use of cannabis.  The ruling is Albuquerque Public Schools v. Sledge, Civ. No. 18-1029 KK/LF, Civ. No. 18-1041 KK/LF (D. Ariz. Aug. 8, 2019). (Email me if you’d like a copy of the ruling.) Briefly, IDEA makes available a “free and appropriate public education” (or FAPE) to eligible children with disabilities. IDEA requires that schools provide special education services as outlined in a student’s Individualized Education Program (“IEP”). The decision addresses several issues arising under the IDEA, but since this is a cannabis blog and since we are not education lawyers, this post focuses on the cannabis related issues.

Parents seek to have their daughter treated with cannabis oil for seizures that occur at school

P.S.G. (“Student”) was born in 2013. She has Dravet Syndrome and as a result has had life-threatening seizures since infancy. Her doctors have prescribed legal medications that have not always worked and have caused serious side effects including inconsolable screaming and respiratory depression. Student visited the emergency room frequently when these were the only medical treatments she took. In 2016, the New Mexico Department of Health (“NMDOH”) gave Student’s mother (“Mother”) authorization to treat her daughter with cannabis pursuant to New Mexico’s Lynn and Erin Compassionate Use Act (“CUA”), whose purpose is to allow the use of medical cannabis in some circumstances.

Parents found the administration of CBD three times daily and cannabis oil at the onset of a seizure greatly reduced the frequency and duration of Student’s seizures without any serious side effects.

In 2016, the Albuquerque Public Schools (“APS”) informed Mother that Student could not receive cannabis oil on school grounds. Mother then requested permission from APS for “homebound services.” The APS held a meeting to develop an IEP which proposed Student attend a special education preschool for one hour a day. Student began attending preschool accompanied by Mother, who sat in the classroom every day so she could remove Student from school to administer cannabis oil in the event of a seizure. This continued until Student reached kindergarten age.

In 2018, the APS held another meeting to develop Student’s IEP for the 2018-19 school year – her kindergarten year. Mother wanted Student to receive a public education and did not want to homeschool Student. APS proposed that Student attend full-day kindergarten at a neighborhood school with an one-on-one educational assistant. Mother proposed an abbreviated schedule because she was unable to accompany her daughter to school all day every day and was unwilling to send her daughter to school without the means for her to receive cannabis oil as a rescue medication.  APS rejected Mother’s proposal.

Parents then submitted a request for an IDEA hearing. Parents proposed that their daughter attend kindergarten full-time and receive cannabis as needed from trained school personnel. After receiving evidence over the course of three days, the hearing officer ruled that “[g]iven the child’s need for medication that the school cannot legally administer,” Student’s least restrictive environment was “the homebound setting with socialization opportunities.” The hearing officer described this educational plan as “a hybrid, homebound kindergarten placement” where Mother may attend school at her option with the school nurse administering Epidiolex.

The hearing officer also found that APS failed to provide Student with the services required by IDEA. APS appealed the ruling to the federal district court and argued the hearing officer erred exercising jurisdiction over issues related to medical cannabis and in concluding that Parents met their burden of proving that Student needs cannabis to treat her seizure disorder. APS also alleged that “the IDEA does not require a school district to accommodate the use of an illegal substance to provide a FAPE.”

The federal court rules that the IDEA does not require the Arizona Public Schools to administer or accommodate the administration of cannabis to satisfy its obligation to provide students with a free and public education

The court began its analysis by explaining that with one exception, the possession, use, and distribution of cannabis for any reason is criminalized under federal law. The court further noted there are no federal exemptions for medical use. This meant that applying federal preemption principles, the CUA must give way to federal law. (Where state and federal law conflict, federal law wins.)

The court then addressed Parents’ claim that their daughter may receive cannabis “legally” under the CUA.  First, said the Court, the CUA does not make the possession, distribution or use of cannabis lawful but merely extends qualified immunity to qualified patients and their caregivers from state prosecution. This is different from making cannabis “legal,” and reading the CUA to do so would conflict with federal law (and federal law prevails).  The court also noted that the CUA did not extend its waiver to school staff who administer cannabis.

Next the court ruled that the IDEA cannot be interpreted to require APS to “accommodate” a federal crime to satisfy its obligations to provide student with a FAPE.  In so ruling, the court relied on cases holding that the Americans with Disabilities Act does not require the accommodation of medical cannabis use. The court then reasoned that cannabis could not be reasonably deemed a “related service” under the IDEA.

This ruling leaves the parents of a five-year old girl with undesirable options: send her to kindergarten and hope she doesn’t have a seizure since they cannot send her to school with what they know prevents seizures (cannabis oil), or homeschool her and provide her “socialization opportunities.”

In this author’s view, this decision is a sound reading of federal law and establishes the need for reforming marijuana laws at the federal level. The media is abuzz with articles about the so-called “vaping crisis,” but all too often ignore important stories like this in the ongoing conversation about marijuana reform.

Regular readers know that we are in the midst of presenting a 50-state series analyzing how each state treats hemp-derived cannabidiol (“Hemp CBD”). Recently we covered Idaho, which we neatly summarized as “probably the worst state in the country to get caught with hemp.” The article explains why this is so in detail.  Among the reasons is that last winter the Idaho State Police seized a shipment of 13,000 pounds of hemp which was being transported across Idaho from Oregon to Colorado. (See here.) The case has received considerable attention from the press and the hemp industry. Indeed, the American Trade Association of Cannabis and Hemp filed amicus briefs in both the federal district court and the Ninth Circuit in support of the owner of the hemp.

The Ninth Circuit sends hemp owner to Idaho state court on the basis of the Younger abstention doctrine.

The seizure led to a federal lawsuit by the owner of the seized load. Big Sky Scientific, LLC v. Jan M. Bennetts, No. 1:19-cv-00040-REB (D. Idaho).  Big Sky sought a declaration that (i) the cargo is industrial hemp under provisions of the 2018 Farm Bill, (ii) hemp is not a controlled substance under federal law, and (iii) Idaho cannot interfere with the interstate transportation of hemp.

Big Sky also quickly moved for a preliminary injunction asking the federal court to compel the Idaho State Police (“ISP”) to return the hemp. Big Sky contended the cargo was deteriorating and losing its value as it sat in ISP’s possession. Meanwhile, ISP filed a state-court complaint in rem for forfeiture of the hemp under Idaho state law.

In considering the motion, the federal district court directed the parties to address “whether the Court has jurisdictional authority to compel the relinquishment of property seized in connection with a state criminal case.” ISP drew upon the Younger abstention doctrine to argue the federal court lacked jurisdiction and ought to abstain from exercising jurisdiction over Big Sky’s request for equitable relief.

The federal court denied the motion for a preliminary injunction and ruled that it need not decide the abstention question. Big Sky appealed the denial to the Ninth Circuit, wherein ISP argued the district court abused its discretion by not abstaining pursuant to Younger.

In a short, unpublished opinion issued on September 4, 2019, the Ninth Circuit agreed with ISP and reversed the district court’s decision not to apply Younger abstention. The decision was based, in part, on ISP’s representation at oral argument that (i) Idaho will immediately move to lift the stay in the in rem forfeiture action, and (ii) the assumption that the Idaho state court would proceed expeditiously with the in rem action, including Big Sky’s challenge to Idaho’s interpretation of the 2018 Farm Bill.

In plain terms: the Ninth Circuit ruled that the federal district court should refrain from exercising jurisdiction over Big Sky’s case because doing so may interfere with the ongoing proceedings in Idaho state court. (Feel free to email me for a copy of the opinion.)

What is Younger abstention?

The Younger abstention doctrine is named after the Supreme Court’s 1971 decision in Younger v. Harris which held that federal courts may not enjoin state court criminal proceedings. At heart the Younger abstention doctrine arises from our system of federalism and its separation of powers. States are independent sovereigns (as are Indian tribes in many respects) and most abstention doctrines proceed from this understanding. Since 1971, federal courts have applied the principles of Younger to proceedings far beyond the criminal context. Generally speaking, the doctrine operates to prevent federal courts from enjoining pending state court proceedings.

The doctrine is controversial in several respects for reasons we won’t get into here. (See Federal Jurisdiction by Erwin Chemerinsky for a thorough analysis). Other abstention doctrines include Colorado River abstention – which is concerned with avoiding duplicative litigation; the Rooker-Feldman doctrine – which concerns federal court review of state court decisions; Pullman abstention – which concerns refraining from deciding questions based on unclear state law; and Burford abstention – which concerns deferring review of complex state administrative procedures.

For now, I’ll briefly explain the elements of Younger abstention and turn to the implications of the Ninth Circuit’s decision. As the Court explained, “Younger abstention is appropriate when (1) there is an ongoing state judicial proceeding; (2) the proceeding implicates important state interests; (3) there is an adequate opportunity in the state proceedings to raise constitutional challenges; and (4) the requested relief seeks to enjoin or has the practical effect of enjoining the ongoing state judicial proceeding.”

In Big Sky, the Ninth Circuit found these elements met because of the pending in rem forfeiture proceeding in Idaho state court in which Big Sky may raise its federal claims. Although the state courts had stayed that action, ISP’s promise to move to lift that stay, and the “assumption” the state court would proceed to resolve that action expeditiously and permit Big Sky to raise its constitutional challenges led the Ninth Circuit to conclude Younger abstention was appropriate.

What are the implications of the Ninth Circuit’s ruling in Big Sky for shipping Hemp-CBD across state lines?

The Ninth Circuit’s decision has several immediate consequences relevant to anyone operating in the Hemp-CBD marketplace:

1)            Big Sky (and others) who have Hemp-CBD shipments seized in Idaho may ending up winding their way through state court and the state court appellate process (this is less than ideal);

2)            Other states that take a dim view of hemp (we are looking at you, South Dakota) may see this as a template for seizing Hemp-CBD shipments and keeping related proceedings out of federal court (though South Dakota is in the Eighth Circuit so not bound to follow the Ninth);

3)            Trucking and shipping companies may decline to offer Hemp-CBD shipping services because of the potential of seizure;

4)            The risk and costs of shipping Hemp-CBD ought to be addressed in your contracts – as we have said before – and you should consider spelling shipping routes to lessen the risk of seizure;

5)            Ensure that your Hemp-CBD shipments and shippers have the proper manifests and other chain-of-custody documents; and

6)            Finally, if one of your Hemp-CBD shipments is seized by law enforcement, act quickly with your litigation attorneys to commence a federal court action and be prepared to make sophisticated jurisdictional arguments.

For now, it may be best to stay away from Idaho.

In following the progress of the first-ever cannabis patent litigation case, United Cannabis Corporation v. Pure Hemp Collective, Inc., the parties are now in a special phase of patent litigation called “claim construction.” Claim construction is specific to patent cases, and it’s the process of deciding what the various terms of the asserted patent claims actually mean. Claim construction is generally where most cases are decided.

The process begins when the parties actually go through the claims and propose their definitions to each other. Typically, the parties will end up agreeing on a lot of the terms so that the Court only has to decide a few things (which the Court usually appreciates). Then, the parties will prepare briefs and advocate their own meanings at a hearing. That hearing is called a “Markman hearing” (after the Supreme Court case that created this process), and it usually requires each side to present experts, scientists, demonstratives, and technological tutorials to ascertain the appropriate meaning of relevant key words used in the patent claim. Although Markman hearings can occur at different times in different cases, they generally occur during discovery and well in advance of trial.

Here, the parties dispute just two terms: “cannabinoids” and “infused in a medium chain triglyceride (MCT).” Let’s discuss the parties’ arguments concerning “cannabinoids”:

The patent claim includes the phrase, “at least 95% of total cannabinoids,” and Pure Hemp argues that “cannabinoids” should be interpreted as cannabinoid content – a term to describe different amounts of cannabinoids, and to describe how to calculate cannabinoid content as a percentage. On the other hand, UCANN argues that “cannabinoids” should simply be construed as “more than one cannabinoid.” This is a small, technical, but really important distinction to make because Pure Hemp’s proposed interpretation would really limit what UCANN is attempting to claim as its own.

After the parties present their interpretations, the Court will decide how to construe the patent claims at issue by undertaking the following process:

1. Read the claims at issue.
2. Read the “written description” of the patent specification, and any drawings if they exist.
3. Consider which terms of the claim are at issue or in dispute as to its meaning.
4. Read the other claims in the patent to obtain a holistic understanding.
5. Read the prosecution history if it exists.
6. Consider any other objective evidence of the meaning of claim language that is available – specification, prosecution history, ordinary/dictionary meaning, evidence that a specific term means something different to a person having ordinary skill in the art (“POSITA”).
7. Understand the invention that is described in the specification.
8. Determine what the claims objectively disclose to the POSITA as to what the inventor actually claimed (whether or not that objective meaning corresponds to the invention that was just determined to be disclosed in the specification and without regard to how that objective meaning will affect validity or infringement).

For each term, the judge can adopt either party’s definition or neither party’s definition. Regardless, once the Markman opinion issues, it’s often clear whether the patent is valid and if the defendant is liable for infringement.

In our case, the parties jointly requested a Markman hearing in mid-June. On July 15, 2019, the Court issued an order denying their request, and indicated: “Having reviewed the claim construction briefs, the Court finds that no evidentiary hearing is necessary to resolve the parties’ disputes … the Court will resolve the claim construction dispute in due course.” We’ll continue to monitor the docket and provide an update on how the Court rules as soon as we can. Previous updates on this case can be found here, here, here, and here.

Just a few weeks ago, Curaleaf Holdings (“Curaleaf”) announced that it would pay $875 million, mostly in stock, to acquire a Chicago based cannabis company, Grassroots. (See here.) This followed news in May that Curaleaf had reached a nearly $1 billion all-stock deal with one of Oregon’s biggest cannabis companies, Cura Partners, Inc. (See here).  These deals made Curaleaf one of the world’s largest marijuana companies, if not the largest.

Not much later, Curaleaf found itself on the wrong side of the FDA with respect to health claims Curaleaf had made about its CBD products. As this CNBC report explains,

The FDA told the cannabis company earlier this week that it was ‘illegally selling’ CBD products with ‘unsubstantiated claims’ that the products treat cancer, Alzheimer’s disease, opioid withdrawal, pain and pet anxiety.”

The article explains that in response to the FDA warning letter, Curaleaf (wisely) scrubbed its website and social media accounts of health claims about its CBD products. How and why a company of this size was making these types of claims in the first place, however, is truly puzzling.

We have written extensively about the FDA’s increasing intolerance for companies making “over the line” health claims about CBD and warned that retailers ought to be concerned about selling hemp-derived CBD in cosmetics. Yet everywhere our CBD business lawyers go, including in our Washington, Oregon and California offices, we see products extolling the benefits of CBD for nearly any kind of ailment – whether it affects adults, children, or pets. Although the FDA’s enforcement against businesses making health-related CBD claims has not been universal, that doesn’t make its warning letters without force as Curaleaf has learned. (Even if consumers don’t appear overly concerned.)

As a result of its claims about CBD and the subsequent warning from the FDA, Curaleaf now finds itself on the wrong side of a class-action securities complaint that was filed on August 5 in the Eastern District of New York, Michael Skibbe v. Curaleaf Holdings, Inc. et al., No. 1:19-cv-04486. The complaint alleges violations of Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated by the SEC. (Feel free to email me if you’d like a copy of the lawsuit).

The gravamen of the lawsuit is that Curaleaf violated federal securities law by making knowingly making materially false and misleading statements to the investing public that artificially inflated the market price of Curaleaf securities. The complaint quotes liberally from Curaleaf’s press releases and audited financial statements concerning its line of hemp-based CBD products.  These include statements such as:

CBD has been shown in initial third-party studies to support a pet’s overall wellness including the potential to help manage pain and anxiety.

Our human customers are already reaping the benefits of CBD with Curaleaf Hemp. The same care and research went into the development of Bido. We are excited to be extending our high quality, trusted products to pet owners,” said Joe Lusardi, President and Chief Executive Officer of Curaleaf. “The launch of Bido is just one more way we are the most accessible cannabis company in the U.S.”

These statements and others drew the ire of the FDA. The FDA letter warns Curaleaf that some of the CBD products it sells are classified as “drugs under section 201(g)(1) of the FD&C Act, 21 U.S.C. 321(g)(1), because they are intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease and/or intended to affect the structure or any function of the body.” The FDA letter goes on to say that Curaleaf is wrongly marketing CBD products as “dietary supplements . . . because they do not meet the definition of a dietary supplement under sections 201(ff)(3)(B) and 201(ff)(2)(A)(i) of the FD&C Act, 21 U.S.C. 321(ff)(3)(B) and 321(ff)(2)(A)(i).” And finally, the FDA letter takes issue with Curaleaf’s marking of “Bido CBD for Pets” line of products.

The FDA letter, says the complaint, caused damage to investors when shares of Curaleaf fell 7.27% on July 23, 2019. The plaintiffs now seek to represent a class of “all person other than defendants who acquired Curaleaf securities” between November 18, 2018 and July 22, 2019 with damages to be calculated at trial. Will this lawsuit mark the end of Curaleaf? Probably not, but my guess is that Curaleaf won’t get rid of it for pennies.

Once again:  regardless whether your company is publicly traded, your company is at risk if you are making claims about the therapeutic value of CBD products. Setting aside Curaleaf, companies making health claims about CBD may be subject to claims arising under state laws prohibiting unfair and deceptive trade practices, or under the federal Lanham Act for false and misleading advertising, or even run-of-the mine personal injury claims allegedly caused by your product.

So ask your hemp-CBD regulatory attorneys to review your marketing and merchandising materials before you find yourself on the wrong side of a lawsuit. And take their advice! Curaleaf probably wishes it had done exactly that.

As we predicted, litigation concerning hemp production continues to rise. At this point, it is the rare week that we do not see at least one new lawsuit on the state or federal docket– and that is just in Oregon. Given the extraordinary growth in hemp licensure and cultivation nationwide, it seems the courts will have their hands full for the foreseeable future with hemp industry litigation.

This post concerns a contract to purchase between 9,000 to 14,000 pounds of industrial hemp at $50 per pound. The Oregon state-court lawsuit, Boring Hemp Company v. Natural Health Resources, LLC, is simple enough: Natural Health, the purchaser-defendant,  picked up a load of industrial hemp from the producer’s (Boring Hemp) warehouse. Per the agreement, the purchaser transported the hemp to a certified scale in Oregon where the hemp was weighed – the load net weight was 10,240 pounds.  The terms of payment were “net 30 days” with a ten-day grace period and a 10% fee added to the balance if payment was not made within that period.  The complaint alleges the purchaser has not made any payments to the producer and the producer seeks to recover approximately $560,000 under breach of contract and unjust enrichment theories.  Run-of-the-mine stuff.

What is worth mentioning is the one-page “Hemp Purchase Agreement” between the parties. The agreement does not require the industrial hemp contain a certain percentage of cannabidiol (CBD). The agreement does not place any limitation on the moisture content of the hemp (an important term when you pay by the pound). The agreement does not make any reference to THC content, or “total THC” content, nor any other of the terms that hemp producers and purchasers ought to be thinking about such as testing, pesticide content, and so forth.

To be sure, a better contract may not have prevented non-payment for the hemp (though a better contract may have provided some form of security or other terms to lessen the chance that the purchaser simply decide not pay the producer). But we continue to be somewhat alarmed at the poor quality of the hemp production contracts we see.  For further reading on hemp production contracts, see below – and note that it may be no coincidence that the hemp contracts ending up in court are the poorly drafted ones.

Not only do many of the contracts we see lack what ought to be basic provisions, many hemp production contracts fail to account for the evolving federal and state regulatory environment – including those governing the growing, handling, processing, testing, and the manufacturing of hemp and CBD products. Feel free to email me if you’d like a copy of the complaint.