Five cannabis cases to watch in 2022

8 minute read

REUTERS/Rafael Marchante

Register now for FREE unlimited access to Reuters.com

March 9, 2022 - Earlier this year we wrote about trends to watch in the U.S. cannabis industry, which continues to grow rapidly. Those trends include the headwinds the industry faces as a result of cannabis' continued federal prohibition. Unsurprisingly, industry players continue to push the envelope, with the hope that courts will begin recognizing the "realities on the ground," notwithstanding congressional inaction. Here are five cases we are keeping an eye on, which might have a significant impact on the U.S. cannabis industry in 2022.

Northeast Patients Group et al. v. Figueroa

As a result of federal prohibition — tempered by an annual congressional budget rider commonly known as the "Rohrabacher Amendment" which prohibits the Department of Justice (DOJ) from using appropriated funds to interfere with medical marijuana industries that operate in accordance with state law — the cannabis industry in the United States is a patchwork of state laws. Many of those laws contain in-state residency requirements for license applicants and operators. This has inevitably led to challenges by out-of-state operators on the grounds that such requirements are discriminatory.

Register now for FREE unlimited access to Reuters.com

The 1st U.S. Circuit Court of Appeals is poised to issue the first precedential opinion addressing the constitutionality of state laws that bar or restrict nonresidents from holding cannabis licenses or, in some cases, from even investing in local cannabis businesses. The case, Northeast Patients Group et al. v. Figueroa, involves a challenge to a Maine rule requiring medical cannabis businesses to be owned by state residents.

Last August, the District Court of Maine struck down the rule, finding that Maine's residency requirement violated the Dormant Commerce Clause of the U.S. Constitution, which prevents states from discriminating against interstate commerce. Maine appealed the decision, urging the First Circuit to find that the Dormant Commerce Clause does not apply to the cannabis industry, which remains illegal under federal law.

While similar challenges have been brought to other states' residency requirements, Northeast Patients Group et al. v. Figueroa is the first case of its kind to reach a federal court of appeals. A decision from the First Circuit in this case could have widespread ramifications for the U.S. cannabis industry, which has evolved as a series of siloed markets in response to the patchwork of state laws.

Bierbach v. Digger's Polaris and Musta v. Mendota Heights Dental Center

Although the Supreme Court traditionally has been hesitant to wade into the federal-state divide on cannabis, recent remarks by Justice Clarence Thomas expressing skepticism about the sustainability of the federal government's "half-in, half-out regime that simultaneously tolerates and forbids" such activity, have given industry participants hope that the High Court is getting ready to change course.

In February of this year, the U.S. Supreme Court invited the Solicitor General to submit an amicus brief addressing whether state laws requiring workers to be reimbursed for the cost of medical cannabis to treat work-related injuries are preempted by the federal Controlled Substance Act (CSA). The request was made in connection with a pair of cases — Bierbach v. Digger's Polaris and Musta v. Mendota Heights Dental Center — seeking review of decisions from the Minnesota Supreme Court finding that a state workers' compensation law requiring employers to cover the cost of medical cannabis prescribed for work-related injuries was preempted by the CSA.

Courts in several other states have faced similar challenges to their states' workers' compensation laws, resulting in conflicting decisions on the question of federal preemption. Maine's highest court, for example, has held that the CSA preempts Maine's workers' compensation law requiring reimbursement for medical cannabis. The high courts of New Hampshire and New Jersey, on the other hand, have ruled that reimbursements to medical marijuana patients are permissible despite continued federal prohibition.

It seems unlikely that the Solicitor General, and by extension the DOJ, will take a pro-cannabis stance. Nevertheless, it is possible that they will use this opportunity to reaffirm their support for the 2013 Cole Memorandum — which outlined the DOJ's enforcement priorities related to state legal medical and adult-use industries (until it was rescinded on Jan. 4, 2018, by then Attorney General Jeff Sessions).

While it appears that, for all intents and purposes, everyone involved continued to operate as though the guidance was never rescinded, it remains the case that the Cole Memorandum was never reinstated by Sessions' successors. This would be a good opportunity to do so.

Bierbach v. Digger's Polaris and Musta v. Mendota Heights Dental Center

A recent lawsuit filed in the Central District of California by a cash-in-transit company — Empyreal Enterprises LLC v. United States — highlights the unique risks faced by legal cannabis industry participants, whose access to traditional banking is constrained in many instances, when crossing state lines.

Plaintiff Empyreal is a Pennsylvania-based company offering cash collection and transport services to state-licensed medical cannabis businesses in several states. In its January 2022 complaint, Empyreal alleges that law enforcement officers in Kansas, working in conjunction with a DEA task force, wrongfully seized $165,620 in cash proceeds from an Empyreal vehicle. According to the complaint, the proceeds were entirely from state-licensed medical cannabis dispensaries operating lawfully in Missouri and were being transported by Empyreal for deposit in another state.

Empyreal's suit includes counts of ultra vires — actions by a government agency beyond its legal authority — violations of the Fourth Amendment and due process violations, and seeks to block defendants from unreasonably stopping, searching or seizing Empyreal's vehicles or their contents. In addition, Empyreal sought an emergency order, also in the Central District of California, enjoining defendants from carrying out these allegedly unconstitutional stops and seizures of Empyreal's property or possessions.

In January, U.S. District Court Judge John W. Holcomb denied Empyreal's request for an emergency order without prejudice, indicating that Empyreal may still seek appropriate injunctive relief through a regularly noticed motion.

Bierbach v. Digger's Polaris and Musta v. Mendota Heights Dental Center

As more states legalize recreational cannabis, makers of well-known candies and sweets are becoming increasingly concerned about look-alike cannabis products and have become more aggressive in asserting their IP rights. In recent years, companies such as the Hershey Company, Mondelez International, and Ferrara Candy Company have brought trademark lawsuits against cannabis companies that were allegedly selling look-alike cannabis products. These lawsuits have all been settled, with the cannabis companies agreeing to halt production and sales of the disputed products.

More recently, the maker of Skittles, Wm. Wrigley Jr. Company, initiated a similar lawsuit against Terphogz, LLC, a California-based cannabis company. In its initial complaint in Wm. Wrigley Jr. Company v. Terphogz, LLC, filed last May in the Northern District of Illinois, Wrigley alleged that Terphogz's Zkittlez-branded cannabis products and marketing strategy infringed upon its Skittles trademark. In an amended complaint filed the following month, Wrigley asked the court to find Terphogz acted willfully, seeking treble damages.

Terphogz moved to dismiss Wrigley's suit for lack of personal jurisdiction and improper venue, arguing that it does very little business in Illinois. In the alternative, Terphogz argued that the case should be transferred to the Northern District of California where the company is headquartered. In November 2021, the Northern District of Illinois rejected Terphogz's motion to dismiss, allowing the case to proceed to the next phase of litigation.

Investigations into sales of unlicensed cannabis

Over the past year, we have seen a growing number of states enact laws legalizing adult-use cannabis. This does not mean, however, that there is a complete hands-off approach to cannabis sales. Especially where it comes to sales of unlicensed cannabis. A recent investigation into a chain of smoke shops operating in New Jersey, which legalized adult-use cannabis in February 2021, serves as an illustrative cautionary tale.

Earlier this year, New Jersey authorities announced the arrests of five individuals accused of illegally selling cannabis. The arrests followed an investigation by the Bergen County Prosecutor's Office, in which it is alleged that a business called Dirty Jerzy Supplies LLC was operating as an illegal marijuana dispensary selling recreational cannabis products. In addition, law enforcement seized hundreds of pounds of cannabis and approximately $305,000. The individuals face multiple charges, including possession of marijuana with intent to distribute and money laundering.

Conclusion

The cannabis industry is going to continue experiencing unique challenges, and growing pains, as long as federal prohibition remains the law of the land. Many industry participants, and increasingly some courts, are viewing the federal government's "half-in, half-out" approach as unsustainable. Nevertheless, until Congress or the U.S. Supreme Court steps in, this will likely remain the status quo.

Alex Malyshev and Sarah Ganley are regular, joint contributing columnists on legal issues in the cannabis industry for Reuters Legal News and Westlaw Today.

Register now for FREE unlimited access to Reuters.com
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. Westlaw Today is owned by Thomson Reuters and operates independently of Reuters News.

Alex Malyshev is a partner at Carter Ledyard & Milburn LLP, and the chair of its Cannabis, Hemp & CBD Industry Group. He contributed the chapter, “Banking and Investment Considerations for Cannabis Businesses” in “Health Care and the Business of Cannabis: Legal Questions and Answers,” (American Health Law Association 2021). He is based in New York and can be reached at malyshev@clm.com.

Sarah Ganley is an associate in the Litigation Department of Carter Ledyard & Milburn LLP and can be reached at ganley@clm.com. She is based in New York.