Yes, cannabis is nevertheless federally illegal. But no, that does not imply cannabis firms ought to act as if federal law does not exist. It does, and it possibly applies to any cannabis small business. Nonetheless, our cannabis attorneys frequently hear claims that federal law does not apply. In reality, two inquiries that I’ve heard several occasions are:

  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 small business?

The answer to the initially query is admittedly quite hard. Our cannabis attorneys see parties place all types of issues in contracts to attempt to steer clear of this problem—from acknowledgements of federal illegality, to waivers of the appropriate to bring a case in federal court, to outright waivers of the illegality defense. No matter whether any clauses could make a distinction in litigation is not clear, and based on the jurisdiction, a court could theoretically agree that the contract is illegal and cannot be enforced, although we think that is unlikely to occur in any state court in a state with a industrial cannabis licensing program. Immediately after all, one particular would hope that a judge wouldn’t sympathize with a celebration who signed a contract, breached it, and then claimed the complete issue was illegal.

The answer to the second query is substantially a lot easier: federal law just about undoubtedly applies. A very good rule is that if the federal government says that a small business has to do a thing, they have to do it. On the other hand, when federal laws present protections or positive aspects to standard firms, these frequently do not apply to cannabis businesses (such as bankruptcy protection or particular tax deductions). Right here are a series of examples:

  • The Controlled Substances Act: Even although the federal government hasn’t genuinely enforced the CSA against state-lawful operators in a handful of years, it actively enforces it against allegedly unlicensed operators. Theoretically, practically nothing is stopping the federal government from bringing charges against each licensed dispensary in the United States (with the exception of strictly health-related operators as protected by the Rohrbacher Blumenauer amendment, as extended from time to time). In reality, it does not appear like the federal government will abandon its existing policy of non-enforcement any time quickly.
  • Federal Trademark Laws: Pondering of making use of an established company’s trademarks on cannabis goods? Properly, they could haul you into court below the federal trademark laws. A federal trademark registration delivers the holder the appropriate to seek particular treatments against unlawful customers of that trademark (the “infringer”), regardless of regardless of whether the infringer was promoting a legal or illegal very good. Even firms without the need of federal trademark registrations can bring trademark actions against infringers.
  • Federal Trade Secret Laws: If a cannabis corporation improperly acquires facts, information, techniques, or any other sort of secret from any other corporation, the cannabis corporation could be sued below the federal Defend Trade Secrets Act.
  • Federal Environmental Laws: Cannabis businesses that do not comply with federal environmental laws danger becoming penalized or even criminally indicted.
  • Federal Tax Laws: Yes, cannabis businesses will need to spend federal taxes, but regrettably, thanks to Internal Income Code section 280E, they can’t take common small business deductions, so they finish up paying taxes on their gross receipts significantly less their permitted expense of goods sold.
  • Federal Employment Laws: Thanks to the Tenth Circuit Court of Appeals (a federal appellate court primarily based in Denver that is one particular step beneath the U.S. Supreme Court), we can now add compliance with the Fair Labor Requirements Act (“FLSA”) to this list.

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

Helix TCS, INC. (“Helix”) supplies safety solutions to cannabis firms. Kenney, an employee of Helix, was classified as an exempt employee, which means Helix did not spend him overtime pursuant to the needs of the FLSA. Kenney brought suit against Helix claiming he was misclassified as exempt and ought to have been paid overtime.

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

On Appeal, Helix contends that its staff are not entitled to the protections of the FLSA. Helix’s major argument is that all participants in state recreational marijuana industries assume the danger that their activities will topic them to federal criminal sanctions and as a result they are not entitled to positive aspects below federal law, and can’t count on federal court to help their conduct. Basically Helix is arguing that the federal government would be assisting staff in drug trafficking if they afforded the staff the protections of the FLSA.

On September 20, 2019, a 3-judge panel of the Tenth Circuit issued a concise, 12-web page opinion unanimously disagreeing with Helix and holding conclusively that the FLSA does apply to cannabis firms. In one particular portion of the Kenney opinion, the court noted that “case law has repeatedly confirmed that employers are not excused from complying with federal laws just mainly because their small business practices are federally prohibited.” Immediately after reviewing this law, the court held that “the FLSA is focused on regulating the activity of firms, in portion on behalf of the person workers’ nicely-becoming, rather than regulating the legality of person workers’ activities.” In conclusion, the court held that the FLSA does apply to cannabis businesses and permitted the case to proceed.

There is an significant note in the wake of the Kenney case: the case is only “binding” on jurisdictions inside 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 selection will just be “persuasive” authority for federal courts elsewhere in the U.S., which indicates that they do not necessarily will need to be adhered to. Even although Kenney will not be binding on federal courts outdoors the Tenth Circuit, we do not see several courts departing from the Kenney rule.

You could be asking why this case is relevant to the illegality defense. The answer is simple—the court’s reasoning is broad sufficient to apply outdoors of the context of the FLSA. In other words, courts across the nation could either cite the case persuasively outdoors the FLSA context, or just come to unique conclusions primarily based on the very same reasoning. Even if federal legality does not occur quickly, we count on that the federal illegality defense will continue to weaken substantially more than the subsequent handful of years.