The Pot Industry’s Legal Minefield—How To Negotiate State Rights Versus Federal Restrictions

Slowly and surely, on a state by state basis, the Cannabis Industry is bracing for an influx of cash—an influx that will largely have no bank to call home. This is because Federal Laws are blatantly behind the curve.

Despite considerable support from individuals on all ends of the political spectrum, the Trump administration has only made a few nebulous attempts that suggest support for the use of medical marijuana. In particular, Pence has been anything but progressive or remotely curious about a concept which helps millions to improve their health. He also appears to be unware of the plain fact that medicinal Cannabis has helped millions to recover from or to avoid the dreaded opioid addiction.

NOTE: The issues facing the Cannabis space are huge. I’m touching briefly on some of them; I would urge anyone who has started or is about to start a Cannabis-related business to seek out an attorney who understands and can navigate what are increasingly murky waters.

BANKING AND INTELLECTUAL PROPERTY

Federal law labels marijuana a controlled substance. For businesses operating in the cannabis industry it means any money earned from the production or sale of marijuana is federally illegal. This is an important issue for many sectors of the Cannabis space.

It’s not illegal for banks to provide these businesses with accounts. Under federal law, banks must disclose marijuana-related transactions as suspicious activity. This potentially means bringing unwanted regulatory scrutiny and federal attention to the banks and opening themselves up to government seizure by the Federal Deposit Insurance Corporation (FDIC). This is why large banking institutions and credit unions are mostly refusing to touch the industry.

As a result, companies within the Cannabis Industry have trouble getting loans, maintaining a company bank account, cannot advertise or even have a long-lasting social media account. But these and many other challenges haven’t stopped the growth train. In fact, the challenges have driven industry growth in a way that is both entrepreneurial and creative.

Abe Cohn, Manager of Operations at THC Legal Group, a division of Howard M. Cohn & Associates, started out as a Tech Entrepreneur. Becoming increasingly interested in public policy, he merged his interests and intertwined Tech and Entrepreneurship with the growing marijuana and cannabis industry. “Even though I don’t smoke it,” said Cohn in a recent interview, “I’ve always been deeply offended that people who do choose to exercise this privacy right may wind up in jail.”

Cohn’s convergence of interests has served him well at THC, a practice area of the larger intellectual property law firm. Specializing in helping companies within the Cannabis space—predominantly startups and small to mid-sized businesses—their core competency being intellectual property protection: Patents, trademarks, copyrights, licensing agreements and other kinds of intangible assets.

Abe Cohn
Abe Cohn

“All challenges stem from the fundamental incongruence between state and federal legalization,” said Cohn. “On a strictly federal level, cannabis is a schedule I drug under the controlled substance act, designating it as a substance with zero medicinal value with a huge propensity for substance abuse.”

This incredible statement by the DEA wrongfully places cannabis on the same level as heroin, LSD and all sorts of other addictive and potentially dangerous drugs.

“On a banking level,” said Cohn, “very often they will not accept and open accounts for marijuana businesses—it’s too risky for them.”

This situation did not go unnoticed by Anthony Newman, a trial lawyer for over 30 years and founder of Cash Management Systems (a complete financial management service designed for legal cannabis cultivators, dispensaries and retailers).

“Handling cash in a cash-only business results in about a 20% loss on average to the retailer every year,” said Newman during an interview last week. “This is due to theft, lost time due to sorting and bulk packaging, cash delivery services, off-site storage and redelivery to payees.”

Anthony Newman
Anthony Newman

“Working with software and hardware engineers, we’ve developed a new system which states are supposed to be providing for medicinal THC (or tetrahydrocannabinol, the chemical responsible for most of marijuana's psychological effects) and C.B.D. (one of the most prevalent chemical compounds in the cannabis plant which, unlike THC, is completely non psychoactive) businesses.”

What they’ve done is to create a mechanism that doesn’t rely on traditional banking. I can’t help but wonder what the banks will think of this once they realize how much they are losing in revenues.

Regardless of what we think about it, the Justice and Treasury Departments have real power to prosecute owners of cultivators, dispensaries and retailers, and financial institutions that do business with them.

“Until such time as Congress changes the classification of cannabis under the Controlled Substances Act,” said Newman, “access to commercial banking services will continue cause the industry a huge headache.”

SELLING AND MARKETING

Another issue plaguing the Cannabis space is the inability to ship product from state to state—not even from one state legalized program to another. “For example,” said Cohn, “it can’t go from California to Colorado, despite each state having recreationally and/or medicinally legal laws.”

As Cohn points out, the shocking weight of the Schedule I designation has not gone unchallenged and is reflected in various State legislatures establishing their own medical/recreational marijuana legalization schemas. “These pro-marijuana states embody the 10th amendment imperative to allow each state to govern itself as its citizens see fit.”

This is one point where my perspective diverges from Cohn’s. Although I recognize the potential issues when it comes to shifts in political power bases, I believe the Federal government is there to do what is best for people all around. The only “special interests” are those of people who seek to decrease the rights of others—not those who seek to increase them in keeping with our founding principles. And in fact it is the Federal laws which are stifling the Cannabis space—that needs to change.

A good example of how those laws are negatively affecting the Cannabis space is that of Isaac Dietrich, 24-year old CEO and Founder of MassRoots, the largest and only publicly traded social media platform in the cannabis industry. MassRoots has over 1 million users throughout the world and connects with them via an app which is currently available in Apple’s store. I spoke to Dietrich at length about his near-catastrophic run-in with Apple.

“In Nov 2104, MassRoots app broke into the Top 100 Fastest Growing Platforms in the App store. Not long after this we got a call from Apple, during which I was told they did not want a social platform for Cannabis available for Apple devices and were permanently banning MassRoots’ app from their platform.”

Isaac Dietrich
Isaac Dietrich

That could have been the death of the company because at that important growth stage, they were negotiating with investors. “Obviously no investor wants to put money into an app that’s not on the app store,” said Dietrich.

Dietrich’s tenacity kicked in. MassRoots contacted their user base to let them know what was happening. Within 48 hours, thousands of their users flooded Apple with emails to let them know why they used, loved and needed the app.

The National Cannabis Industry Association (NCIA), (the only national, industry-led organization promoting the growth of a responsible and legitimate cannabis industry and working for a favorable social, economic, and legal environment for that industry in the United States) also contacted Apple, stating that their policies were stifling innovation and social progress.

Within a few weeks Apple reversed its decision and added the app back into the store. “Obviously I’m incredibly grateful that Apple was willing to listen to our user base, reassess the situation from a more enlightened perspective and let us back into the store.”

This shows how powerful the voice of those who understand the benefits of Cannabis is, and how important it is to have a unifying voice for the purpose of the industry.

TRADEMARKS, INTELLECTUAL PROPERTY AND SPREADING THE WORD

As the industry’s national trade association, The National Cannabis Industry Association (NCIA) works every day to ensure that the growing business sector in the Cannabis space is represented in a professional and coordinated way on the national stage. They also work to keep over 1200 Cannabis-related businesses and entrepreneurs connected and well-informed.

“Our organization was founded on the principle of power in numbers,” said Taylor West, Deputy Director and with whom I have also conducted a lengthy interview. “State-legal cannabis industries are in the thousands, representing a tremendous economic force in this country.”

Taylor West
Taylor West

It’s vital for those who are joining the Cannabis space to do more than merely start a business. They’ve got to show perspective customers that they’ve got their act together and are covering all of their bases. And they’ve got to stand together.

I find this issue of obtaining trademarks both fascinating and of critical concern. As Cohn pointed out, a trademark is a source identifier for a company (think of the Nike symbol as a good example); Businesses need to be able to protect their brand name via trademarks.

“On an intellectual property level,” said Cohn, “under the Lanham Act, which governs trademark law, you cannot get a trademark on goods or services that cannot be legally sold in commerce; Marijuana cannot be sold in commerce.

“It’s the name of company, a logo, a tagline from a slogan…these things act as identifiers to consumers with respect to the origin of the product on which these logos or slogans are placed. By seeing these well-known trademarks, the consumer immediately knows the source of the product and (hopefully) the quality of the product they are buying.”

This being the case what can cannabis industry companies do to protect their intellectual property? Cohn suggests the following:

If you are a company providing ancillary services (such as accounting), you’re most likely safe because you’re not touching the substance.
If you are a dispensary or a cultivation center, you may Prima facie be precluded from obtaining a Federal trademark. This does not mean, however, that you cannot obtain a less powerful and protective State Trademark.

There are no guarantees, but Cohn stated that lawyers have posited a potential (but perhaps not foolproof) way to get around this second issue.

“The same company that originally touches the plant (like an edibles company) may seek to develop a good or service that does not touch the plant. You can imagine a gummy bear company with a product which uses infused cannabis oils. They could develop a product without those oils and apply for a trademark under the name of the product as it pertains to the sale of the non-cannabis product. They might then use that trademark as a sort of umbrella protection for the cannabis goods as well.”

It’s a challenging, trick of the trader service that most firms appear not to be providing.

Cannabis & Trump

Although some huge strides were made in the 2016 elections, Obama clearly dropped the Cannabis ball. But the budding marijuana industry might face even more challenges under the Trump presidency.

According to the Pew Research Center, 41% of Republicans support use of medical marijuana. By early 2017, one in five adults was living in a state where medicinal marijuana is legal.

Last November 8, California, Maine, Massachusetts, and Nevada joined Alaska, Colorado, Maine, Oregon and Washington in legalizing recreational marijuana; Arkansas, Florida, and North Dakota joined the 25 other states that already allow marijuana use for medical purposes. You can see the map here.

Clearly the desire to legalize Cannabis crosses all party, socio-economic and cultural lines. Expected to generate $22 billion in annual sales nationwide within the next 4 years, the cannabis industry leaders wonder if the Trump White House will create a barrier to growth.

The industry would like Congress to pass an amendment to the financial services spending bill that would prevent the federal government from penalizing financial institutions that do business with legal marijuana clients. Whether the Trump administration backs the banking reform necessary for recreational and medicinal marijuana sales to flourish remains to be seen.

None of us will be surprised if, when nationwide legalization happens, big pharma and big tobacco step in and try to take over what until now has been a grassroots, entrepreneurial effort. For their own self-interested reasons, both industries have historically taken a public stand against legalization.

But as has always been the case, I don’t doubt for a moment big pharma and big tobacco will use their political clout in an effort exploit those who benefit from medicinal cannabis in the same ways they have done with opioids and tobacco.

We’ll just have to hope that the industry as it is will continue to stand together as a unified body against the sort of corporate greed which has destroyed many a good thing in the name of the almighty dollar and power grab.

Time will tell.

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