What’s the Verdict?

Columns - Technically Speaking

Recent federal and state decisions reflect a wider judicial acknowledgment of medical marijuana protections.

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America’s courts—seemingly the least known and least understood branch of our government—have added their decisions to our industry’s imprecise relationship with the rest of our society. Two recent employment-related decisions have meaningfully raised the legal profile of cannabis and deserve our attention.

In the first, on July 17, the Massachusetts Supreme Judicial Court, the highest state court in Massachusetts, reasoned: “To declare an accommodation for medical marijuana to be per se unreasonable out of respect for Federal law would not be respectful of the recognition of Massachusetts voters, shared by the legislatures or voters in the vast majority of States, that marijuana has an accepted medical use for some patients suffering from debilitating medical conditions.”

In the second, on Aug. 8, the Connecticut federal district court held that the federal Controlled Substances Act does not preempt, or, in other words, overrule, the patient-employee protections established by Connecticut’s medical marijuana law.

Each court quoted the National Conference of State Legislatures’ July 7 publication of “State Medical Marijuana Laws,” in which the organization reported that 29 states, the District of Columbia, Puerto Rico and Guam allow for “comprehensive public medical marijuana and cannabis programs,” while 17 other states (the Connecticut court mentioned 16, and the National Conference of State Legislatures’ website now specifies 18) allow use of “low THC, high cannabidiol … products for medical reasons in limited situations or as a legal defense.”

Although the legal landscape is complicated, these are significant decisions. Before discussing a few other noteworthy court decisions, let’s review the basics.

The Judicial Branch

In America, our federal government includes the executive branch (the president and the federal agencies), the legislative branch (Congress, including the Senate and the House of Representatives) and the federal courts, or judicial branch. Our state governments typically have a similar executive branch/legislative branch/judicial branch structure and, depending on the issue in question, function more or less independently of the federal government.

Also part of the basics: the federal Constitution’s Tenth Amendment and its Supremacy Clause.

According to the Tenth Amendment, powers not specifically allocated by the Constitution to the federal government nor prohibited by the Constitution to the States remain reserved to the states or to the people. The Tenth Amendment is particularly significant with respect to the general police power, which has been widely recognized as having been left to the states.

According to the Supremacy Clause, in the case of a federal law that addresses a subject in a manner consistent with the federal Constitution and that conflicts with a state law— the federal law preempts, or overrules, the state law. If a court finds that the federal law is not consistent with the Constitution or if the court finds that Congress, in passing the law in question, did not intend to preempt relevant state law—then the state law will prevail.

Into this admittedly complex setting, the recent decisions by the Massachusetts Supreme Court and the Connecticut federal district court, a significant state court and a significant federal court, have brought American common law concepts to bear on matters relevant to our industry. In addition, this column has previously reviewed how our industry had been recognized in certain ways: one, by federal executive branch agencies, including the Department of Justice, the Treasury, the Internal Revenue Service (IRS), the U.S. Food and Drug Administration (FDA), and the National Institutes of Health (NIH); and two, by Congress with the Rohrabacher-Farr and the Rohrabacher-Blumenauer amendments. Now these courts have given significant legal recognition to our presence in 46 states.

280E and Medical Marijuana Protection

In laying out recent meaningful decisions by the courts, we should also review the CHAMP and Martin Olive decisions, as well as the Marin Alliance and Harborside matters, the former two of which reflect the federal courts’ position on section 280E of the Internal Revenue Code, and the latter two that reflect the federal courts’ position on the Rohrabacher-Farr/Rohrabacher-Blumenauer amendment.

In Californians Helping to Alleviate Medical Problems, Inc. (CHAMP) v. Commissioner of Internal Revenue, a federal tax court in California found that a California taxpayer providing both care-giving services and medical marijuana to its members carried on two distinct businesses. Consequently, the court allowed the taxpayer to deduct the “ordinary and necessary expenses” (distinguished from its cost of goods) of its care-giving business from its taxable income.

In Olive v. Commissioner, both the federal tax court and the federal Court of Appeals for the Ninth Circuit distinguished Martin Olive’s facts from the facts in CHAMP. In the Martin Olive case, both federal courts found a single business, the business of selling marijuana. Both courts found Olive’s care-giving services to be no more than amenities to Olive’s single profit-making business of selling marijuana. Thus, while CHAMP’s ordinary and necessary expenses of providing care-giving services were deductible, Martin Olive’s were not. The best way to understand the difference between the CHAMP decision and the Martin Olive decision would be to acknowledge that details really matter.

For the last scene in the landscape of court decisions, on Oct. 19, 2015, in the Lynette Shaw and Marin Alliance case (U.S. v. Marin Alliance for Medical Marijuana), the federal district court for the Northern District of California ruled that section 538 of the federal appropriations act for 2015 (the Rohrabacher-Farr amendment) prohibits the federal Department of Justice from using federally (by Congress) appropriated funds to prevent California (a state) from implementing its medical marijuana laws. That 2015 federal court decision prompted the federal Department of Justice in 2016 to drop a case against Harborside Health Center in Oakland, Calif. (More information on this case can be found at: bit.ly/harborside-case-dropped). Further, on Aug. 16, 2016, the U.S. Court of Appeals for the Ninth Circuit examined a similar provision in the federal appropriations measure for 2016 and applied the same logic to a series of federal medical marijuana prosecutions, and reached a similar decision.

So much for the basics of a complex situation. Turning back to the recent Massachusetts state court decision and the Connecticut federal court decision, we should appreciate each court’s citation of the Conference of State Legislature’s publication that by July, 46 states had recognized some legitimate medical application of marijuana.

For lawyers, the common law describes a fundamental feature of American jurisprudence, and the Massachusetts and Connecticut cases have expressed a legal reality in terms of the common law. In each case, the court’s approach was quintessentially one based deeply in the common law.

Thus, although the Massachusetts and Connecticut cases have direct relevance only in the employment setting, they add something far more significant to the legal landscape.

But Still More to Achieve

As the legal glacier that carries our industry moves at its glacial speed toward the end of the irrational War on Drugs and its collateral damage, we should be able to appreciate some of the milestones that our particular glacier has passed, and some yet to come. The Controlled Substances Act remains in effect, but only to some extent and not for all purposes. The marijuana legislation passed by 46 states matters quite a bit, but not as much as it should. The federal agencies’ recognition of various realities and their guidance as to various issues also matters. Congress’ various Rohrabacher amendments limiting the use of federal funds to interfere with the states’ implementation of their various medical marijuana programs also matter. Together with these recent court decisions, all these federal and state governmental actions define the imprecise environment in which our industry now operates.

Precisely how Congress will modulate the War on Drugs as it affects marijuana remains to be seen. The result will very likely be nuanced, with regulations similar to those that govern, but do not prohibit, the consumption of wine, beer and other alcohol. It also is likely that the eventual federal position will reflect some or all of the state and federal guidance that currently exists.

Nevertheless, it would seem that we are far past the time when medical marijuana’s scientific research, capital formation and jobs should all be pushed abroad, as they are now. Marijuana’s medical potential creates a situation that had no parallel in alcoholic beverages. A very modest first step for Congress would be decisively to allow the research related to medical marijuana, the related capital formation and the related jobs to move here, to the United States, where they have always belonged.

The authors do not provide legal, accounting, or tax advice. This material has been prepared for informational purposes only, and is not intended to provide and should not be relied on for legal, accounting or tax advice. You should consult your own legal, accounting and tax advisors before acting on any related matters.

Rino Ferrarese is the COO of Connecticut Pharmaceutical Solutions, one of four licensed producers in the state. He has experience as a compliance officer working in FDA-regulated industries under the guidelines of current Good Manufacturing Practices (cGMP) for the production of prescription, Over-The-Counter (OTC) and homeopathic human drug products. He is a certified Six Sigma Black Belt and ISO auditor. Ferrarese also works with Elite Cannabis Enterprises developing and submitting competitive medical marijuana license applications for clients across the United States. Thomas Schultz is president of Connecticut Pharmaceutical Solutions. He is a Wall Street lawyer and investment banker turned pharmaceutical executive. In 1996, Schultz completed an IPO-oriented merger of the last major producers of witch hazel, the EE Dickinson Company and the TN Dickinson Company. He assumed leadership of Dickinson Brands Inc., the resulting firm, until 2014. By 2003, Schultz had led the buyout of the EE Dickinson interests and managed the acquisition of Humphreys Pharmacal Inc., a company that marketed witch hazel to Central and South American markets.