Tag Archives: general

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Politically Motivated Investigations of Legitimate Cannabis Businesses: One More Reason for Cannabis Operators to Return to the Black Market?

By Tracy A. Gallegos
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In June 2020, John W. Elias, a prosecutor in the United States Department of Justice’s Antitrust Division, testified to the U.S. House Committee Judiciary that investigations of cannabis mergers were pursued based on Attorney General William Barr’s personal dislike for the cannabis industry rather than legitimate antitrust issues. Specifically, Elias testified, among other things, that since March 2019, the Antitrust Division has conducted ten investigations of mergers in the cannabis industry. Further, Elias testified that, “While these were nominally antitrust investigations, and used antitrust investigative authorities, they were not bona fide antitrust investigations.” Elias went on to state that, with respect to a proposed $682 million merger between two cannabis companies, MedMen and PharmaCann, career staff in the Antitrust Division initially examined the transaction to determine whether there should be no investigation, a brief investigation or a full investigation. Upon conclusion of its review, career staff determined that “the cannabis industry appeared to be fragmented with many market participants in the states that had legalized the product.” Accordingly, staff concluded that the proposed combination between MedMen and PharmaCann was “unlikely to raise any significant competitive concerns.”

John W. Elias, DOJ whistleblower and acting Chief of Staff to the Assistant Attorney General

Notwithstanding the career staff’s determination, Attorney General Barr ordered the Antitrust Division to issue “Second Request” subpoenas. According to Elias’s testimony, a “Second Request” subpoena is a full investigation of a proposed merger. Moreover, Elias stated, “Across the entire American economy, the Antitrust Division performs the full Second Request investigation on around 1-2% of the thousands of mergers filed each year – ordinarily, only the most concerning deals.” Based on the foregoing, Elias testified that Attorney General Barr’s decision to pursue the MedMen/PharmaCann combination was based on his dislike for the cannabis industry rather than any legitimate antitrust concerns.

There are some immediate impacts to Attorney General Barr’s decision – not limited to the MedMen/PharmaCann merger but potentially reaching any cannabis companies considering a merger or similar transaction. For example, a politically motivated probe would more than likely result in a drop of stock prices for publicly trade cannabis companies. Moreover, non-bona fide antitrust investigations of cannabis businesses could result in proposed merger transactions eventually not coming to fruition.

However, Attorney General Barr’s decision could arguably have longer term and more widespread effects on the cannabis space, and could affect situations not involving mergers or other proposed business combinations. In particular, the fact that legitimate cannabis businesses that comply with all applicable laws are still subject to unwanted and unnecessary scrutiny conceivably could lead to something that regulators had hoped would be curbed through the legalization of cannabis for adult use: cannabis operators gravitating towards the omnipresent black market. Despite cannabis being legal in 33 jurisdictions for medicinal use and 11 jurisdictions for adult use, the black market continues to thrive for several reasons, one of them being that the cost of regulatory compliance is so significant. Attorney General Barr’s decision may have created another reason for cannabis operators to abandon their plans to continue operating as or become legitimate businesses and instead revert back to operating in the black market.

Indeed, Attorney General Barr’s decision is a concern for cannabis operators because it shows that, notwithstanding that any particular operator may be compliant with state and/or local regulations, it does not mean that such cannabis operator is going to be permitted to conduct “normal” business that a non-cannabis business would be able to conduct, simply because of the underlying nature of the business. Stated differently, following the rules does not mean that a cannabis business will be left alone by people in charge who simply do not like the cannabis space.

Attorney General William Barr

Cannabis operators are very mindful of being targeted because of the nature of their business, and having regulations in place with which they could and would comply provided them with some level of certainty that they would not be targeted, or so they thought. Particularly in states like California where the regulations are complex, current and aspiring cannabis operators tend to be very concerned about being compliant with cannabis regulations from the inception of their business operations, believing that being compliant will assist them in flying under the proverbial radar and not become targeted unnecessarily simply because they are in the cannabis space. Attorney General Barr’s decision may have taken away or, at the very least, significantly decreased, that level of certainty. His decision to investigate a proposed merger of two legitimate cannabis businesses sends the message that it does not matter if a cannabis business is being compliant, and that there are other, completely subjective reasons why its operations could be investigated. This makes it extremely difficult for current and aspiring cannabis operators to determine what actions they can take to avoid unwelcome investigations or other scrutiny. If a cannabis operator is unable to mitigate scrutiny by complying with rules, this raises the concern that cannabis businesses will go back to black market activity, not only because the cost of compliance is high, but because being compliant does not necessarily protect them.

Attorney General Barr’s decision is likely not the only instance of a decision regarding cannabis businesses that was made notwithstanding existing statutes or regulations that do not support such a decision. In fact, since adult use became legal in certain jurisdictions it is not uncommon to see news discussing applicants for cannabis licenses who were denied licenses, notwithstanding that those applicants complied with all applicable laws and regulations. When applicants were denied even after complying with all rules and regulations, and when no other legitimate reason was cited for the denial, there is an indication that the denial was based on political or other personal feelings concerning the cannabis space. This not only potentially calls into question the integrity of the cannabis space, but again could lead cannabis operators back to the black market.

There are many costs of regulatory compliance for a cannabis operator, including, without limitation, high application and license fees, development and mitigation fees and exorbitant taxes. Other than the fees and taxes assessed on cannabis businesses, there are other expenses, such as the cost to construct a facility, security costs and the general operational costs that all businesses must pay, such as rent or payroll. What incentive does a cannabis operator have to expend significant resources – time, money and otherwise – to become a legitimate, licensed cannabis business if doing so does not provide any type of protection against investigations that are politically motivated or otherwise based on negative personal feelings toward the cannabis space? It may be that Attorney General Barr’s decision has given cannabis operators one more reason to reconsider going back to black market activity.

Matt Engle
Soapbox

Insurers Must Play Catch-Up to Meet Cannabis Industry Needs

By Matt Engle
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Matt Engle

As the cannabis industry continues to grow, demand for insurance products is also increasing. While insurers have been cautious about entering a market that carries the stigma of a Schedule I drug, the cannabis industry is clamoring for insurance coverage options tailored to meet the needs of key players— distributors, growers, processors and retail dispensaries.

The escalating need for insurance products tailored to these cannabis business sectors has not expedited an increase in coverage offerings. The slow entry of insurance carriers into the cannabis sector can be tied to a reluctance to insure an industry with emerging and often unknown risks. This will begin to change as more information becomes available on what loss ratio trends look like in the cannabis industry.

For now, there is a wait-and-see stance held by insurance carriers. This presents a major concern for cannabis-related businesses that are subject to risk at every stage of the supply chain, with particular exposure for theft, general liability, crop loss, and product liability.some degree of crime and theft coverage is needed for these enterprises to help manage the risks associated with a cash-based business

Theft

For cannabis companies, the use of paper currency is a huge part of their risk exposure. Federal banking regulations have limited these businesses to dealing mostly in cash, which makes them a prime target for crime and fraud. Currently, only one carrier will insure coverage for cash and theft risk, and the policy is limited to $1 million for most risks. This is inadequate coverage since many operators have more than that amount on-site.

In states with legislation legalizing cannabis, the cannabis sector will be able to move away from operating in cash if Congress passes the Secure and Fair Enforcement (SAFE) Banking Act, which would protect financial institutions from liability for federal prosecution that could arise from servicing cannabis-related businesses authorized under state law. Until banking regulations give the cannabis industry the ability to operate as legitimate businesses with the stability and safety that would deter criminal activity, some degree of crime and theft coverage is needed for these enterprises to help manage the risks associated with a cash-based business.

General Liability

Cannabis-related businesses need the same general liability coverage as other businesses to protect their premises and operations from lawsuits involving public contact. However, standard general liability policies—which exclude Schedule I substances from coverage—were not created with cannabis businesses in mind. It is still difficult for these businesses to obtain adequate general liability as a result of the legal uncertainty associated with the industry.

Product Liability

Product liability exposures for cannabis businesses encompass a wide range of areas, including edibles, vaporizers, pesticides, mold/fungus, misrepresentation, label claims, breach of warranty, deceptive practices, and failure to warn.

A major area of exposure concerns accidents resulting from impairment. A cannabis cultivator, processor, distributor, or retailer potentially may be considered liable in the event a product defect results in injury after reasonable use or when label defects fail to warn users that a product may have psychoactive effects.

Another area of risk exposure involves products that contain THC, the psychoactive compound that gives cannabis users a high. As the number of THC-containing products such as edibles and tinctures increases, so does the potential exposure to product liability claims for manufacturers and retailers.

The California Cannabis Track-and-Trace (CCTT) system also has implications for product liability. The CCTT is a statewide system used to record the inventory and movement of cannabis and related products through the commercial supply chain. All state cannabis licensees, including those with licenses for cultivation, manufacturing, retail, distribution, testing labs and microbusinesses, are required to use this system. The product liability impact lies in its capacity to determine responsibility along the supply chain from seed to sale.

For example, if a plastic vape pen explodes, a product liability lawsuit could have repercussions for many touch points across the supply chain beyond the manufacturer of the pen–all of which can be identified through CCTT. Entities that touch cannabis products such as soil suppliers or delivery persons also have product liability risk exposure. Personal injury attorneys can find incident-related parties easily and determine liability. This makes it particularly important to add these parties to the policy as additional insureds to help reduce claims exposure.

Crop Loss

Another area of concern for risk exposure is crop loss. Crop insurance is generally hard to obtain due to the significantly different nature of cannabis crops compared to traditional crops like corn or soybeans.

Fires in Sonoma County devastated cannabis crops in Northern California back in 2017.

An indoor crop insurance policy covers cultivators when there is loss resulting from threats such as fire, theft, and sprinkler leakage. However, crop insurance policies generally do not cover losses resulting from mold, rot, disease, changes in climate, or fertilization issues. Many growers forgo this coverage and instead elect to absorb losses and regrow their crops.

Outdoor crop coverage is generally unavailable, or the cost is prohibitive. Any potential for writing outdoor crop insurance for the cannabis industry essentially disappeared as a result of the recent wildfires in California. These devastating fires highlighted the pressing need for property damage and business interruption coverage for growers and dispensaries and other downstream businesses whose supply was disrupted. This lack of available outdoor crop insurance is one of the more notable gaps in available cannabis business insurance coverage.

While cannabis businesses operating in states that have legalized medical and/or recreational cannabis use have challenges getting adequate insurance coverage, there is some good news on the insurance front for those in California. Last year, California’s insurance commissioner announced approval for carriers to offer insurance coverage specifically to cannabis businesses. The state also approved a cannabis business-owners policy (CannaBOP) program that provides a package policy containing both property and liability coverage for qualifying dispensaries, distributors, manufacturers, processors and storage facilities. Colorado is on the verge of being the second state to approve its version of a CannaBOP program.

While more insurance carriers are beginning to write cannabis coverage, the limited insurance options and policies with restrictive plans currently offered todaydo not meet the needs of the cannabis industry. Insurers must catch up to the coverage requirements of this sector by offering more options tailored to growers, retail dispensaries, processors and distributors with better terms and better pricing.