The cannabis industry is the latest target for cybercriminals. Why? Because many cannabis operations employ less than 100 workers and few are equipped with sophisticated IT systems and knowledgeable on-staff IT personnel, so they are often easier to exploit.
Add the all-cash nature of the business, along with the large amounts of protected health data and personally identifiable information medical dispensaries may store and the industry’s shift toward operational automation to increase yields and lower labor costs and you’ve got an industry that’s extremely vulnerable and a prime target for cyber extortion.
Safeguard your corporate networks and internet connections by encrypting information and using a firewall.
Take the cannabis businesses in Ontario that lost millions after a local distributor was hit by a cyberattack and was incapable to process or deliver orders to local retailers. In another cyberattack, hackers stole $3.6 million that an Australian medicinal cannabis firm intended to send to an overseas contractor.
A still prevalent tactic is for hackers to target workers with email-based phishing scams that enable the installation of malware or ransomware to obtain protected health information to sell or lists of high-profile clients to extort.
While there’s a lot to fear and be on the alert for, there’s also a lot that cannabis businesses can do to both reduce their risk of an attack and proactively protect themselves.
Six hallmarks of a strong cyber-defense program:
Assess the risk. One place to start building a comprehensive approach to cybersecurity is to conduct an appropriate cyber vulnerability or risk assessment of your cannabis business. This exercise can reveal gaps, but it also helps prioritize your effort and develop a vision for your goal state.
Train and test. Train employees on the importance of cybersecurity. Make sure employees undergo phishing training and conduct refresher courses at least annually. Then, test them. Are employees retaining the information shared in training? Send simulated phishing emails and track performance to determine if training hits the mark.
Secure the perimeter. Safeguard your corporate networks and internet connections by encrypting information and using a firewall. If your employees work remotely, consider use of a Virtual Private Network (VPN) to allow them to safely connect to your network from out of the office.
Engage protective tools. In addition to using antivirus software and keeping all software updated and patched,multifactor authentication (MFA) and endpoint detection and response (EDR) are crucial for maintaining a secure network. Most carriers require MFA for remote network access, on email, and to protect privileged user accounts. EDR monitoring of devices connecting to the network is also increasingly a minimum requirement for insurance coverage.
Develop a backup strategy. A solid data backup strategy makes companies less susceptible to ransomware attacks by allowing organizations to restore operations. Perform frequent backups — every day if possible — and consider leveraging cloud solutions along with storing backups in an immutable state off-site or off-network.
Build an incident response plan. Cannabis companies should have a plan for responding to an attack, a system for validating what happened and the resources to remediate the issue.
What if a breach occurs?
Even with a great incident response plan in place, the road to recovery from a cyberattack is a complex and rapidly evolving landscape. Should we communicate with the threat actor? Should we pay the ransom demand? How do we capture forensic evidence? What are the laws guiding notification of impacted employees or clients? When an organization has armed itself with a cyber insurance policy, they not only transfer much of their risk, but they often gain access to a carrier panel of specialized response providers that include breach coaches, forensic investigations firms and privacy attorneys.
In addition to leveraging the specialized post-breach expertise offered by carriers, insureds should also consider familiarizing themselves with and leveraging any pre-breach resources provided, which often include no-cost external vulnerability scans, employee awareness training and discounted technical security solutions.
According to a press release published on Monday, SC Labs has acquired C4 Laboratories, a cannabis testing lab located in Scottsdale, Arizona. The acquisition means SC Labs has expanded their footprint into five states total. Originally based in California, the cannabis testing company now has locations in Arizona, California, Colorado, Michigan and Oregon.
Ryan Tracy, Founder/CEO of C4 Labs.
Ryan Treacy founded C4 Laboratories and has been a vocal advocate for product safety testing since 2016. As CEO of the company, he led the laboratory through regulatory upheaval and a lot of changes the state has seen since legalization. He also co-founded the Arizona Cannabis Laboratory Association and led lobbying efforts on behalf of patients and stakeholders to require lab testing.
He says they are excited to join forces, becoming the largest cannabis testing platform in the US. “Our combined leverage of top scientists with specialized cannabis testing knowledge and a leadership team of industry experts will allow us to do everything from harmonizing R&D efforts to improving the data experience to pushing for positive regulatory change,” says Treacy. All current employees of the C4 team will stay on, joining the new SC Labs team.
Jeff Journey, CEO of SC Labs
This acquisition represents another important milestone for the SC Labs expansion plan. Last year, they hired a new CEO, Jeff Journey, and launched their national hemp testing partnership based in Colorado. That, coupled with the expansion through Can-Lab into Michigan last year along with the C4 acquisition, SC Labs has expanded into three new states within the last twelve months.
Journey says they’re thrilled to acquire the C4 team and that they have shared values, a proven track record and good expertise. “With this acquisition, we can continue to expand best-in-market cannabis testing services and the opportunity to service multi-state growers and manufacturers,” says Journey. “It is truly an exciting time for growth, and we know that the C4 team will be an invaluable addition to our team, culture and operations.”
ASTM International has announced the approval of a new standard in development that could have potentially wide-reaching influence on the cannabis industry throughout the world. ASTM’s cannabis committee (D37) has approved the new standard (D8449) for development that aims to develop internationally aligned label specifications for all products containing cannabinoids.
According to the press release, The new labeling standard is the first of its kind, attempting to harmonize regulations throughout the cannabis industry with universally recognized labels that could be adopted by regulators anywhere in the world. ASTM member Darwin Millard has spearheaded the development of this new standard and believes it will have countless practical applications.
“Having the same information presented in the same manner across jurisdictions means consumers of products containing cannabinoids will have consistent information conveyed to them in a way they are familiar with,” says Millard. “This ensures consumers have the information they need to make an informed purchase decision, and will ultimately lead to increased consumer safety and confidence.”
ASTM International is a nonprofit, voluntary consensus-based standards development group. They are inviting feedback and input as they refine the standard and work on presenting it to the international cannabis community. “We welcome regulators, producers, and consumers from around the world to give us feedback,” says Millard. “This is intended to be a living document to remain relevant throughout this ever-changing landscape.”
On April 13, 2023, The New Jersey Cannabis Regulatory Commission (CRC) announced that Curaleaf would not be able to renew their cultivation and retail licenses for adult use cannabis for violating labor rules under the state’s cannabis regulations. In a surprise reversal, the NJ CRC voted to approve the license renewals with some caveats during an emergency meeting on April 17.
According to Commissioner Krista Nash with the NJ CRC, Curaleaf did not abide by the law when it failed to recognize workers’ vote to unionize in a timely manner. She says evidence includes testimony from workers and the union. “In my opinion, Curaleaf, in several of its locations, have not complied with the mandatory labor provisions set forth in the law,” says Nash. “And that alone was reason to deny their application for renewal.”
In a press release published by Curaleaf following the reversal, the company say they will be complying with the demands set by the NJ CRC to provide documentation of its labor practices, confirm ongoing compliance and provide evidence of good faith efforts to negotiate collective bargaining agreements. “Today’s decision by the CRC Board to vacate their unprecedented action last week is an incredible victory for our 500 NJ team members and vindication for what we knew all along: Curaleaf is in good standing with the CRC and has fulfilled every requirement necessary for the renewal of our licenses,” says Matt Darin, CEO of Curaleaf in the same statement.
While the second chance comes with a number of caveats, the decision reversal is definitely unprecedented. The Board at the NJ CRC said that if Curaleaf does not comply with those demands, they have the ability to take further action at the next meeting. “Either we hold true to the law and protect the hard-working men and women of New Jersey who want fair wages and working conditions, or we can reward bad behavior and ignore these mandates for the sake of money and profits,” says Nash. “The conditions contained in these resolutions presented today offer Curaleaf a second chance to course correct.”
Even the most traditionally-minded, tech-averse entrepreneur accepts their success relies on providing customers with a superior online experience in 2023. Trying to succeed without a robust web presence is akin to running the 100-meter with your legs tied together.
On that note, the legal cannabis industry might have a leg up over other sectors in providing superior experiences online. After all, the legal cannabis market is relatively new, meaning no legacy systems require any rehauling. Still, many dispensaries must start their websites from scratch.
A website bolstered by an excellent user experience offers many benefits (e.g., branding and additional revenues), but ground-up projects are daunting. Fortunately, the insights below will make your web design process more manageable.
Design Your Website To Click With Your Customer Base.
The primary commodity of all dispensaries is the same. Yet, each dispensary is different. They all have unique branding, voices, and stories they’re trying to tell.
Moreover, every dispensary wants to provide customers with a brand-specific experience. There’s no one-size-fits-all dispensary website for the above reasons.
A brand-specific experience can have a sense of familiarity that customers may desire
Even so, the following general best practices will be conducive to streamlined, successful dispensary website design. While every website designer or agency has their own process, this process has proven to be extremely effective for the dispensary clients we’ve helped:
Develop an outline and wireframe for the website’s structure and content:
A guiding principle during this process is to include the necessary pages and sections to optimize vital brand components and effectively promote products.
Other factors to consider are sections, features and calls to action.
Dispensary websites should contain educational content and resources.
Fluid, straightforward navigation should also be prioritized.
Move onto the front-end design:
Incorporate and harmonize multiple brand elements.
Identify aesthetically pleasing typographies and imagery.
Design each page outside of the content management system. This makes it easier to make changes and adjustments after the first draft has been completed.
Get feedback from relevant parties (e.g., clients, colleagues, management, or other stakeholders):
Transparency and open communication are paramount to this step.
This phase will ensure that all expectations for the new design are met while providing a platform for course correction as needed.
Use the feedback to create a foundational website framework:
Meet for a second feedback session before committing 100% to a web design framework.
Develop the website inside of your content management system of choice:
Now that the front-end design has been created, the website will be built out in the actual CMS platform, ex. WordPress.
Share every page with other relevant parties to maintain and foster the web design process’s fluidity.
By now, you should have a solid base for the website’s final form:
The stage involves fine-tuning as the launch date nears.
Also included at this point are the following:
Ancillary page development.
Dispensary menu integration.
Tablet/mobile optimization.
Speed/performance tests.
Contact form designs.
Lead capture setup.
One last guiding principle in web design is to view your website through a user’s eyes. Continually assess how intuitive and convenient it is to navigate your site as a customer.
Optimize The Customer Experience With Seamless Navigation
Dispensaries benefit by guiding visitors to their website’s most important sections.
It’s an understandable oversight only to prioritize seamless navigation to the menu page. However, customers will be less inclined to order if they can’t access educational content to learn more about your products. Plus, they may want to visit your physical store, so they’ll wish to view your location information.
Furthermore, visitors sometimes need clarification about what they want from your website. Build their pathway with insightfully structured navigation systems with clear prompts, calls to action and an emphasis on the following:
Specifics about store and location
Brand information
Where to find responses to FAQs
Lastly, be mindful of the mobile experience on your website. Your customers expect seamless navigation on their phones and tablets as much as on their laptops and desktops.
More people will visit and shop your menu on the mobile version of the website than the desktop version, so it needs to take priority in the design process.
Create an Intuitive Online Ordering Process
The ordering component of the customer experience is integral to receiving desirable returns on your online investment.
Intuitive, easy-to-parse menu systems are a must when optimizing online ordering.
Of course, every visit counts and brands are happy to educate consumers. A steady, always-growing stream of eCommerce transactions paints a winning picture of your site’s navigation. More to the point, success with online orders means you’ve optimized the ordering experience.
Intuitive, easy-to-parse menu systems are a must when optimizing online ordering.
Ensure that your customers are one click away from their preferred menu and location (if you have multiple locations), regardless of where they are on your website. It’s even better if those pages can rank on Google based on local searches (e.g., Pennsylvania dispensary menu).
Online shoppers also respond well to search filters on your menus, such as:
Products with the highest or lowest THC levels
Products with the highest or lowest CBD levels
Specific strain types (i.e., Indica, Sativa and Hybrid)
Product types (e.g., flower, concentrate, oil or edible)
Build A Robust Resources/Information Section
Almost every branded website has a resource/information section. In some instances, it’s a blog. For other brands, it’ll be eBooks, guides, case studies, press releases, videos or news articles.
Customers respond well to search filters on your menus
A resource/information section is uniquely vital to cannabis brands. Many prospective customers will be first-timers and require sure-handed wisdom to guide them through the experience. Also, many seasoned enthusiasts want to learn about the latest trends and the best new strains.
Furthermore, providing resources and information is a form of education. This “teacher” approach helps push back against stigmas by focusing on cannabis’s nuances and benefits.
Consider using a “pillar page” system to organize your informational content (e.g., blogs, videos, eBooks). Doing so will make it seamless for website visitors to learn about strains, terpenes, upcoming community events, consumption methods or information about local cannabis laws.
It helps to customize each pillar page with an icon and create an individual page for every post in a given category. This way, newly published content will automatically appear under its associated pillar page.
Other Considerations
We understand the budgetary challenges many dispensaries face when getting off the ground. You can grow your budget by making decisions and taking educated risks that generate returns.
Your customers’ online experiences are a worthy investment. Nonetheless, are you investing wisely by building (or redesigning) your website in-house? After all, your team’s expertise is in cannabis sales (or cultivation). They’re smart enough to learn as they go, but would this trial-and-error web design process be efficient or ideal for your dispensary’s bottom line?
Conversely, working with a Consulting Group like MOST who specializes in dispensary website design can ensure your website generates the desired returns and results. Contact us today to learn more.
By Abraham Finberg, Simon Menkes, Rachel Wright No Comments
A little over a year ago, we at AB FinWright took a look at the newly-opened adult-use cannabis market in Montana and posed the question: Is Cannabis the Next Gold Rush for Montana? Now, with our 20-20 hindsight, we can see that cannabis sales have taken off in the Treasure State and the tax dollars are rolling in. But political infighting has arisen that threatens to derail the will of the voters who approved adult-use. In addition, arbitrary local approval has set many cannabis entrepreneurs on edge, wondering if they’ll have a business a year from now.
Sales: Predicted Versus Actual
When voters passed Initiative I-190 in 2020 and adult-use commenced January 1, 2022, the Cannabis Control Division (CCD) of the Montana Department of Revenue expected total adult-use sales in 2022 to top $130M. Montana’s imbibers blew that figure out of the water. By the end of last year, the Treasure State had notched up almost $210M of adult-use sales, alongside $93M of medical sales, for a total of almost $304M. With a state population of only 1,085,000, that translates into $280 of cannabis sales per capita. For context, Oklahoma sold $214 of cannabis per person in 2022, while California did only $135/person last year. (It’s estimated that 55% of California’s sales are made by illegal dispensaries, which would translate into a far more robust total of $301 of cannabis/person.)
How Has the Tax Situation Changed in Montana?
At the beginning of 2022, we noted that Montana charges a 4% cannabis tax on medical sales and a 20% cannabis tax on adult-use sales. A 3% maximum local tax was part of the new law, but only 3 counties had enacted it. Fast forward a year and 17 more counties have chosen to enact the local tax, all of them charging the maximum 3%. 10 states allow adult-use sales and have no local tax, which leaves 26 counties that have prohibited adult-use sales (the red counties).
The good news: wholesale sales are exempt from cannabis taxes, and there is no regular sales tax on retail sales, so there is no tax-on-tax (unlike California, which has sellers calculate and collect sales tax on the sale price of their cannabis products plus the cannabis excise tax they’re required to collect).
Montana does not follow Internal Revenue Code 280E and allows normal business deductions for licensed (legal) cannabis corporations, as well as pass-through entities and individuals with licensed cannabis operations.
As State Cannabis Tax Revenue Goes Up, Fights Break Out Over the Funds
Total cannabis tax revenue for 2022 was almost $46M and is projected to rise to $53M for the fiscal year 2023-2024, which starts this July 1, 2023.
Eyeing this revenue, Governor Gianforte (R) initiated House Bill HB 462 on February 17, 2023, whose intent is to funnel revenue away from state parks and wildlife as approved by the voters, and more towards law enforcement and the state’s general fund.
I-190, along with approving adult-use cannabis, specified that the first $6M in tax revenue would go for the state program Healing and Ending Addiction through Recovery and Treatment. All remaining funds would be split between the general fund 65%, various parks and wildlife programs (32%) and veterans and surviving spouses (3%).
HB 462 would see the general fund receiving 75%, law enforcement 7.5%, veterans and surviving spouses 5%, with parks and wildlife reduced to 12.5%. Many feel this subverts the will of the electorate.
On almost the same day as HB 462 was introduced, another bill was put forward, AB 420, which would eliminate the 4% cannabis tax and 3% local tax on medical marijuana. The bill’s sponsor, Representative Mike Hopkins, a Republican from Missoula, believes that adult-use tax revenues are “more than capable” of funding the adult-use program as well as the other addiction and parks and wildlife programs enumerated in I-190. The bill is being countered by the Montana League of Cities and Towns which believes that repealing that tax would create a $4.5M dent across those communities who instituted the local tax.
Both bills have been tabled in committee and will continue to be debated in the second half of the 2023 legislative session.
Retail, Cultivation & Manufacturing – Grandfathered Licenses Only, for Now
Original adult-use legislation stated that, from January 1, 2022, until July 1, 2023, only Montana medical licensees who were licensed on November 3, 2020 (or had an application pending with DPHHS on that date) might be issued a license for cultivation, manufacture or sale of adult-use marijuana. In an explicit effort to give current Montana-based dispensaries a temporary advantage over out-of-state players, the new law imposed an 18-month moratorium on all new licenses. Once the moratorium expires, new license holders will be limited to a small Tier 2 license, which restricts the amount of cannabis they can grow.
New license holders will need to show one year of Montana residency in order to even apply. That being said, there’s nothing stopping an out-of-state business from buying an existing business from a current Montana resident.
Near the North entrance of Yellowstone in Park County, Montana
In an update to this legislation, a rider was recently added to HB 128 that would extend the licensing moratorium two more years, to July 1, 2025. The bill was approved by committee on February 14, 2023 and will come before the House later in this legislative session. In a recent presentation on cannabis in Montana, Bozeman cannabis attorney Christopher Young commented, “I’ve talked to Jason Ellsworth (R, Senator, President of the Montana Senate), and I’ve been told HB 128 is going to pass.”
HB 128 Has Many Medical Cannabis Businesses Worried
The number of medical cannabis cardholders has dropped drastically since adult-use became legal, from 40,522 registered cardholders on January 1, 2022, to 22,325 on January 1, 2023, a reduction of 45%. For those dispensaries that initially chose to remain exclusively medical (18% of all dispensaries), as well as those that, for one reason or another, missed the boat to sell adult-use, they have seen a significant decline in revenue. Consequently, a significant number have been eagerly awaiting the July 1, 2023 to apply to sell adult-use cannabis. The possibility of having to wait an additional two years has them very concerned.
At a hearing on HB 128, Norman Huynh of Pacific Valley told lawmakers he believes he can’t continue to sell only to medical cannabis cardholders because he doesn’t make enough. “There are only a finite amount [sic] of cardholders left,” he stated.
An adjustment in HB 128 is being debated which would allow 16 medical shops to become adult-use that had applied for adult-use before January 1, 2022 but who didn’t complete the process. Without this adjustment, many of these medical dispensaries believe they’ll face bankruptcy.
Opt-In, Opt-Out – Fickle Counties Have Cannabis Companies Nervous
Initiative 190 legalized adult-use cannabis by default in the counties that voted for it. In 2021, the Montana legislature hammered out implementation of adult-use cannabis in House Bill 701, and one provision of this bill allows counties and municipalities to vote to opt-out of legalization.
Pray, a town near Livingston, Montana
Granite County, which became a green county when nearly 55% of voters approved I-190, chose to do just that, opting-out of adult-use sales on June 7, 2022. The county’s sole dispensary, Top Shelf Botanicals, had begun selling to recreational users and estimates 80% of its customers are now adult-use. It has responded to the opt-out by drafting a new initiative to get voters to opt-back-in to adult-use sales. Their struggle to re-win the hearts of Granite County’s voters is ongoing and appears to be an uphill battle.
While Granite is the first county to opt-out of adult-use sales, changing them from a green county to a red county, movement is under way to opt-out in Cascade County, Carbon County, Ravalli County and Flathead County, among others. The opt-out movement is gaining strength in the state and has Montana dispensaries concerned. “The opt-out provision is very problematic, and I think it’s more problematic than people recognized at the time,” says Kate Cholewa, lobbyist with the Cannabis Industry Association. “What other business would people accept being in the position of potentially losing their business every two years?”
Taxability of Discounted Products – Department of Revenue Parses the Details
Initially, it was thought that the Department of Revenue required cannabis tax to be assessed on the regular retail price of a product, even though that product might be discounted. However, the DOR now says this is not always the case. “If the discount is offered to all customers, as opposed to a discount that is offered to only a particular individual or group, the established retail price can change.”
Examples where the discounted price becomes the new, lower established retail price: every Friday you offer everyone a 20% discount on certain products, or, you offer discounts to medical cardholders only. An example of when you must charge cannabis tax on the original, non-discounted price: a discount offered to a particular group, such as veterans or students. (Why medical cardholders are not considered a particular group is unclear, but this information is from the state’s website.)
Tax Comparison to Other States
We stand by our original assessment that Montana is actually a low-tax state for cannabis operators. First of all, it doesn’t follow federal statute 280E, but instead allows the deduction of regular operating expenses on state income taxes. In addition, unlike some states like California, Montana does not charge sales tax on top of cannabis taxes i.e., it doesn’t charge tax-on-tax.
If one examines tax rates, while Montana’s adult-use tax is high at 20%, its medical tax of 4% is a low one. The local tax of 3% (compared with Los Angeles’s 10% adult-use local tax, for example) is quite low and is not charged by 37% of the counties that have adult-use sales.
And if AB 420 is passed and the medical and local cannabis taxes are repealed, Montana will truly enter the ranks of low tax cannabis states.
Following years of attempts by legislators and activists to get legal medical cannabis moving in Kentucky, the state just legalized medical cannabis last week, making it the 38th state in the country to legalize medical cannabis. In front of a crowd of stakeholders, advocates, patients and legislators, Governor Andy Beshear signed SB 47 into law along with a sports betting bill as the crowd erupted in applause.
Crowds cheer as Gov. Beshear signs the bill into law
“I have been pushing for medical cannabis and sports betting for years,” Gov Beshear wrote in a tweet. “Today, I signed these two bills into law. Team Kentucky delivers and we get results. Congrats, Kentucky.” The Cabinet for Health and Family Services is tasked with developing the regulations for medical cannabis, which are due by July 1, 2024. The law doesn’t go into effect until 2025 though. That agency will be in charge of implementing the medical cannabis program, operation, oversight and regulation for growing, retail and production.
Each state legalizes cannabis in its own weird way and Kentucky is no different. The bill does not allow cannabis smoking, but does allow for raw cannabis flower to be sold and vaporization. Qualifying conditions include PTSD, epilepsy, cancer, nausea, MS and pain management, but the bill allows for more conditions to be approved for medical cannabis prescriptions later on. This sort of foot-in-the-door approach has been used by plenty of other states and often carves a path for a broader, more sensible medical cannabis framework following legalization.
Rep. Jason Nemes, R-Louisville is a major proponent of medical legalization in Kentucky and has sponsored bills in the past. While he stressed the importance of the weird no-smoking provision, he also praised the legislature for finally getting this done. “There are thousands and thousands of Kentuckians who just want to be and want to feel better, and this will help them with that,” says Rep. Nemes.
By Andrew Solow, David Kerschner, Alessandra Lopez No Comments
In 2022, product liability lawsuits in the cannabis/cannabidiol (CBD) industry continued to focus on levels of THC and the psychoactive ingredient in cannabis, while federal agencies continued issuing warning letters for CBD products (including CBD-infused food and dietary supplements) that made misleading medical claims. Against this backdrop of ongoing litigation and regulatory enforcement, 2022 showed that at the Federal level, there is more recognition that marijuana is becoming increasingly normalized. For example, President Biden pardoned federal offenses of simple marijuana possession and requested a reassessment of marijuana’s classification as a Schedule I drug under federal law. Additionally, Congress passed its first standalone piece of cannabis reform with the Medical Marijuana and Cannabidiol Research Expansion Act (MMCREA) which, among other things, will ease restrictions on cannabis research and allow for more clinical trials. And even though the Food and Drug Administration (FDA) declined to act on CBD products, the agency announced that it will work with Congress to create a new regulatory framework for CBD products (2023 FDA Announcement).
These events of the past year provide a glimpse into what the future may hold for cannabis and CBD companies when it comes to product liability risks. This article looks at the types of product liability actions that the cannabis and CBD industry faced in 2022 and may encounter in the future, and provides some basic guidance on how to best mitigate, and if necessary, defend these potentially costly litigations.
Focus on Cannabis and CBD Risks
A central part of any product liability lawsuit—regardless of whether brought under a design defect and/or adequate warning theory—is that a product caused or was a substantial contributing factor to a Plaintiff’s injury or illness. Thus, any potential safety concerns over cannabis/CBD could end up as the subject of litigation in the future. In the 2023 FDA Announcement, the FDA recognized that “the use of CBD raises various safety concerns, especially with long-term use,” including potential harm to the liver and negative interactions with certain medications. The agency also noted that questions still exist on how much CBD can be consumed, and for how long, before causing harm. Furthermore, on December 2, 2022, President Biden signed the MMCREA into law, which is intended to advance research on the potential risks and medical benefits of cannabis and cannabis products.1 This additional funding will not only help researchers learn more about possible safety risks that may lead to future product liability claims, but will also allow for better exploration of the benefits of these products to possibly expand product indications and help reach new customers.
Given the FDA’s statements and the increased funding for new research, CBD and cannabis companies should ensure that they are properly monitoring both regulatory communications and new research regarding risks that may be associated with their products. As new information is released, companies should evaluate how their product labels and marketing messages should be altered. Announcements like this one by the FDA can be seen as providing industry participants with knowledge about certain risks, and how companies react could be analyzed, post hoc, in any litigation down the road.
2022 Product Liability Actions
Over the last year, misbranding/mislabeling issues presented some of the most prevalent litigation risks for industry participants.
An example of a warning letter the FDA sent to a CBD products company making health claims
For example, at the Federal level in 2022, the FDA issued thirty-three warning letters to CBD companies, a nearly 400% increase from 2021. These letters generally focused on CBD products that made medical claims. Some of these warning letters addressed misbranding, where the product labels provided inadequate directions for consumer use. In one letter, the FDA noted that because the CBD products were “offered for conditions that are not amendable to self-diagnosis and treatment by individuals who are not medical practitioners,” ranging from cancer to diabetes, labeling compliance was only possible if the product was an FDA-approved prescription drug with FDA-approved labeling. Other companies receivedwarning letters in March of 2022 for making misleading representations that their CBD products were safe and/or effective to prevent or treat COVID-19. Many of these representations were made via companies’ websites and social media platforms. The warning letters—often triggers for product liability actions, as well as consumer protection/fraud actions—serve as a reminder that companies cannot make medical claims on non-FDA approved drug products and must otherwise present accurate information to consumers not only on product packaging, but any form of marketing or advertising, including company websites and social media platforms.
Turning to state-level regulatory actions, Oregon’s Liquor and Cannabis Commission fined a cannabis company $130,000 and suspended the company’s license for 23 days over an alleged label mix-up between its CBD and THC products. According to the state’s investigative report, a company employee allegedly confused two product buckets with similar identification numbers, one that contained THC and the other CBD, and accidentally switched the labels of the two products. In addition to the fine and license-suspension, the state agency also issued a mandatory recall on the CBD drops based on the alleged undisclosed levels of THC.
This same incident also spurred a string of civil lawsuits, resulting in several settlements by the company in 2022.2 Numerous customers reported experiencing “paranoia,” “mind fog,” and feeling “extremely high,” with at least five people going to the emergency room with serious health issues due to use of the CBD drops. One lawsuit, which was publicly settled for $50,000 in January of 2022, alleged that the company failed to warn the plaintiff that the CBD drops contained THC or that the product may have been contaminated with foreign substances like THC, and that the company failed to exercise quality control standards that would have detected the THC.3 Nine other lawsuits made similar failure to warn allegations based on the same batch of CBD drops and were settled by January of 2022, although those settlements were not disclosed.4 In October of 2022, the company agreed to pay a settlement of $100,000 in a class action suit, which alleged that the company failed to disclose that the CBD product contained substantial amounts of THC.5 The class action focused on unlawful trade practices claims, including that the company falsely represented that the product had the characteristics, uses, and benefits of a CBD product that did not contain THC.6 Also in October 2022, the company settled a wrongful death lawsuit—alleging that the company failed to warn the plaintiff that the drops contained THC and had negligent quality control standards—stemming from the same CBD drops,7 where the plaintiff suffered stroke-like-symptoms, allegedly due to the tainted CBD product, and ultimately died.8
Other recent lawsuits have also focused on mislabeled cannabis products, alleging that companies failed to inform customers that products contained THC. For example, in Kentucky, a man who drove into a bus after using a CBD vape sued both the CBD manufacturer and retailer on December 14, 2022, claiming that he was not warned that the vape contained a substance that would make him intoxicated.9 According to the complaint, the store employees told the man that the vape was “all natural” but made no mention that the product contained THC.10 The man alleged that the vape actually contained Delta-8 THC and brought negligence, failure to warn, and state consumer protection law claims.11
As noted above, in addition to traditional product liability actions, companies are likely to face increased consumer fraud and false advertising actions in the absence of personal injuries. Two class actions brought in December of 2020 against a hemp tea maker alleged that the company’s website and the product’s packaging fraudulently stated that a tea contained zero THC.12 Plaintiffs claimed that they tested positive for THC after drinking the tea and that product testing similarly revealed that the tea contained some THC.13
Potency inflation marketing communications from a laboratory
Last year also saw a rise in cases focused on potency inflation, alleging that cannabis companies knowingly overstated the amount of THC in their products to charge higher prices.14 Again, while these actions focused on consumer fraud allegations rather than product liability claims, these cases underscore the importance of accurate labeling. Due to potency inflation concerns, states have started investigatinglicensedcannabis testing labs within their respective jurisdictions, resulting in product recalls and fines. Some states have also updated their regulations, requiring cannabis companies to test their products through two separate labs.
Finally, contamination and the existence of impurities and other byproducts has been a recent focus of several product liability lawsuits across the life sciences space, and this trend is something that cannabis and CBD companies should be aware of and take steps to mitigate.
For example, a Canadian cannabis producer reached a $2.31 million settlement over a class action brought in March of 2017 regarding pesticide-contaminated medical marijuana. The marijuana was recalled due to the presence of myclobutanil and bifenazate pesticides, neither of which were authorized for use on cannabis plants in Canada. The lead plaintiff experienced nausea and vomiting, allegedly from consuming the medical cannabis, and brought numerous claims on behalf of the class, including negligent design, development, testing, manufacturing, distribution, marketing, and sales.15 In the United States, California’s Department of Cannabis Control issued a mandatory recall on January 26, 2022 for a batch of cannabis flower that was contaminated with mold. On March 25, 2022, the New Mexico Cannabis Control Division recalled cannabis products sold by a local medical cannabis company because the product contained impermissibly high levels of mold. New Mexico’s Cannabis Control Division also required the company to immediately cease and desist operations at its production and manufacturing site.
A Look at the Future and What Companies Can do to Mitigate Product Liability Risks
The FDA’s 2023 announcement means that the industry will have to wait for Congressional action for the development of a regulatory scheme that can help standardize requirements and provide industry players additional defenses when facing product liability actions. Many of the proposed risk management tools in the FDA Announcement could help companies mitigate future litigation risks if implemented. These risk management tools may include “clear labels, prevention of contaminants, CBD content limits, and measures, such as minimum purchase age, to mitigate the risk of ingestion by children.” Although the FDA has had regulatory oversight over CBD and other hemp-derived products for nearly four years, the agency has not developed a regulatory framework for these products aside from issuing warning letters, leaving manufacturers and distributors without much guidance. The FDA has also left the states to fill the void, resulting in a patchwork of differing—and sometimes conflicting—state laws. Additional guidance and regulation on labeling at the federal level for cannabis and cannabis-derived products will make compliance a more straightforward proposition and may provide avenues for industry participants to explore preemption defenses in the face of future mislabeling claims.
Just some of the many CBD products on the market today
In addition to following the changing regulatory landscape and understanding how regulatory changes can impact litigation defenses, cannabis and CBD companies can continue to take various steps to help mitigate future litigation risks.
Quality Control: Adequate testing procedures and effective quality control procedures can help avoid contamination issues and situations where products are mixed up during the manufacturing process. For example, the company whose license was suspended in Oregon due to the alleged mix up between CBD and THC subsequently implemented new ingredient tracking protocols, adopted a policy to retain samples from each batch of product, and now sends additional samples to an independent lab to ensure product compliance before anything is sold.
Proper documentation of testing and quality control procedures, as well as maintaining records of compliance checks, can also help companies put together a defense to state regulatory actions or lawsuits relating to contamination or manufacturing defects. Indeed, in February of 2022, an Arizona marijuana testing lab was fined $500,000 for various incomplete records and documentation as well as improperly calibrated machines for contamination testing, with an inspector also noting that one of the employees was trained to use a technique that produced inflated potency results.
Ongoing Safety & Regulatory Review: Keeping up to date with regulations and science will play a key role in making sure labels are accurate and defendable. Working directly with regulators and seeking guidance from regulators on labeling can help potential defendants present a clear and compelling labeling defense. Moreover, the 2023 FDA Announcement made clear that the agency will not pursue rulemaking on CBD’s potential use in foods and dietary substances. Thus, industry players should monitor agency announcements and engage with the FDA’s Cannabis Product Committee (CPC) and Congress to better understand the potential structure of this new regulatory pathway.
Stay on Top of the Science: A boost in cannabis research is on the horizon, as the Medical Marijuana and Cannabidiol Research Expansion Act (MMCREA) will advance research on the potential risks and benefits of cannabis products and promote the development of FDA-approved drugs derived from marijuana and CBD. On the litigation front, causation is an essential element in most causes of action, and plaintiffs will have to prove that the cannabis caused their injury. Thus, industry players should be aware of the current science, including potential side effects.
Litigation Monitoring: Finally, companies will also be well served by following court decisions involving CBD and cannabis products. For example, courts in 2022 were split over the legality of Delta-8 THC, a substance typically manufactured from hemp-derived CBD. The Ninth Circuit held in AK Futures v. Boyd Street Distro that Delta-8 THC found in e-cigarettes and vape products is legal under the 2018 Farm Act, at least in the intellectual property context.16 But in Kansas, a federal judge ruled that the 2018 Farm Act does not make selling hemp-derived products such as Delta-8 THC legal.17 In Texas, litigation initiated in 2021 is ongoing over the legality of Delta-8 THC.18 There, a hemp company sued the Texas Department of State Health Services for its classification of Delta-8 THC as a Schedule I drug, making the sale of this substance a felony offense. A temporary injunction was granted on November 8, 2021—temporarily lifting the ban on sales of Delta-8 THC products—but the plaintiff’s request for a permanent injunction remains pending.19 As these lawsuits show, the legality of different products may vary by jurisdiction, whether by regulation or a judicial decision.
References
Medical Marijuana and Cannabidiol Research Expansion Act, Pub. L. 117–215, 136 Stat. 2257 (2022).
Agbonkhese v. Curaleaf Inc., No. 3:21-cv-01675, (D. Or. Jan. 5, 2022).
Agbonkhese v. Curaleaf Inc., No. 3:21-cv-01675, ECF 1, 6 (D. Or.).
See Crawforth v. Curaleaf, Inc., No. 3:21-cv-1432 (D. Or. Sept. 29, 2021); Lopez v. Curaleaf, Inc., No. 3:21-cv-1465 (D. Or. Oct. 6, 2021);
Williamson v. Curaleaf, Inc., No. 3:22-cv-782, ECF 1, 8 (D. Or.).
Williamson v. Curaleaf, Inc., No. 3:22-cv-782 (D. Or. May 30, 2022).
Estate of Earl Jacobe v. Curaleaf, Inc., No. 3:22-cv-00001, 19 (D. Or. Oct. 18, 2022).
Estate of Earl Jacobe v. Curaleaf, Inc., No. 3:22-cv-00001 1 (D. Or. Jan. 1, 2022).
Howard v. GCHNC3 LLC et al., No. 5:22-cv-00326 (E.D. Ky. Dec. 14, 2022).
Complaint at ¶ 11, Howard v. GCHNC3 LLC et al., No. 5:22-cv-00326 (E.D. Ky. Dec. 14, 2022).
Complaint at ¶¶ 15-33, Howard v. GCHNC3 LLC et al., No. 5:22-cv-00326 (E.D. Ky. Dec. 14, 2022).
Williams v. Total Life Changes, LLC, No. 0:20-cv-02463 (D. Minn. Dec. 3, 2020); Santiago v. Total Life Changes LLC, No. 2:20-cv-18581 (D.N.J. Dec. 9, 2020).
Complaint at ¶¶ 54-59, Williams v. Total Life Changes, LLC, No. 0:20-cv-02463 (D. Minn. Dec. 3, 2020); Complaint at ¶¶ 21-25, Santiago v. Total Life Changes LLC, No. 2:20-cv-18581 (D.N.J. Dec. 9, 2020).
See Centeno v. Dreamfields Brands Inc., No. 22STCV33980 (Cal. Superior Ct. L.A. Cnty. Oct. 20, 2022); Shanti Gallard v. Ironworks Collective Inc., No. 22STCV38021 (Cal. Superior Ct. L.A. Cnty. Dec. 6, 2022).
Downton v. Organigram Holdings Inc., Hfx No. 460984 (Sup. Ct. Nova Scotia Mar. 3, 2017).
AK Futures LLC v. Boyd St. Distro, LLC, 35 F.4th 682 (9th Cir. 2022).
Dines v. Kelly, No. 2:22-cv-02248, 2022 WL 16762903 (D. Kan. Nov. 8, 2022).
Hometown Hero v. Tex. Dep’t of State Health Services, No. D-1-GN-21-006174 (Travis Cnty., Tex. Oct. 20, 2021).
Hometown Hero v. Tex. Dep’t of State Health Services, No. D-1-GN-21-006174 (Travis Cnty., Tex. Nov. 8, 2021).
The New Jersey legislature recently approved legislation that would allow licensed cannabis businesses to deduct ordinary business expenses on their state tax return that they are prohibited from deducting on their federal tax return, and such legislation has been sent to Governor Phil Murphy to potentially sign into law. This relates to the universally dreaded (among those in the cannabis industry, at least) Section 280E prohibition. This legislation is important because it would change current law to allow legal cannabis businesses in New Jersey to operate on more of a level playing field with other businesses in the state.
Cannabis operators and applicants are penalized by their inability to deduct certain expenses on their state and federal tax returns. The cause for this frustration is twofold. First, under federal law, cannabis is considered a Schedule I controlled substance under the Controlled Substances Act, 21 U.S.C. § 801 (CSA). Second, under IRS Tax Code Section 280E, cannabis businesses that are legal under state law are still considered drug traffickers for the purposes of federal tax law. While a related issue that is often considered along with Section 280E is whether or not it is sound public policy to continue to classify cannabis as a Schedule 1 drug, that is beyond the scope of this article.
It is important to understand the history and purpose behind Section 280E. The history is unusual in that Section 280E was enacted in 1982 as a reaction to a court case in which a convicted cocaine trafficker asserted his rights under federal tax law to deduct certain business expenses, including a portion of his rent, the cost of a scale and packaging expenses. The court agreed that the cocaine trafficker should be legally able to deduct his ordinary business expenses as part of his criminal enterprise. The federal government then created Section 280E to punish drug traffickers by removing the profit out of drug deals. Section 280E provides, generally, that no deduction or credit will be allowed in running any business that consists of trafficking any controlled substances (within the meaning of schedule I and II of the Controlled Substances Act).1
Fast forward several decades and New Jersey has legalized medical and adult-use commercial cannabis activities. Still, because cannabis remains a Schedule 1 controlled substance, federal law prohibits legal cannabis companies from deducting ordinary business expenses and New Jersey has similarly applied the Section 280E prohibitions. New Jersey’s legislators understand the inequity in having legalized, State-compliant cannabis cultivation, processing and retail businesses, where those same businesses cannot take advantage of standard expense deductions applicable to other legal businesses.
If enacted, this New Jersey legislation would decouple New Jersey’s business tax provisions from the Section 280E rule barring deductions for cannabis businesses. Under the proposed New Jersey tax code revisions, a licensed cannabis business’s gross income would be determined without regard to Section 280E of the Internal Revenue Code.2 The legislation was approved overwhelmingly in both chambers: by the New Jersey Senate in a vote of 32-3; and by the New Jersey assembly in a vote of 69-8. It would apply to tax years beginning on January 1 of the year following the date the Governor enacts the legislation.
The State Capitol in Trenton, New Jersey
Under Section 280E, a business may not deduct expenses unrelated to its costs of goods sold (COGS), which are, generally, the costs to a cannabis business of producing cannabis products and inventory, including transportation costs to purchase the wholesale cannabis. Virtually everything else is subject to the Section 280E prohibition and non-deductible. So, all other typical costs, such as wages and salary, overhead, advertising, insurance, travel expenses and depreciation do not reduce taxable income. These ordinary expenses are still necessary for the operation of all businesses (to varying degrees). If businesses cannot legally deduct such expenses on their tax returns, their tax liabilities will increase and they will have less money to invest in their facilities and equipment, pay higher salaries and expand their operations.
The impacts of Section 280E are dramatic. An example helps to illustrate this. Consider a hypothetical C Corp. with gross sales of $1 million, COGS of $600,000 and other expenses of $300,000. Such business has a gross profit of $400,000 and net income of $100,000. If the business is normally taxed as a C Corp. at the 21% Federal tax rate, it would pay $21,000, or 21% of $100,000 net income and also $9,000 in State taxes (applying 9% State tax rate on $100,000 net income), for a total tax liability of $30,000. However, that same business in the cannabis industry would pay $120,000 in combined Federal and State taxes, with 21% Federal tax on $400,000 gross profit plus 9% State tax on $400,000 gross profit. As this demonstrates, a cannabis business may be taxed on 100% of the expenses a non-cannabis business could write off. Instead of a 30% effective income tax rate, the cannabis business in this example would have a 120% effective income tax rate. Such business that would otherwise have a profit instead would have a deficit.
Section 280E places a significant tax burden on legal cannabis operators that does not exist for other businesses. While New Jersey’s legislators cannot change the Federal tax code, they are taking action to revise New Jersey’s tax code to level the playing field. Let’s hope the Governor signs into law the pending New Jersey legislation to decouple its tax law from Section 280E.
The views and opinions expressed in this article are those of the author and do not necessarily reflect those of Sills Cummis & Gross P.C.
References
1. The relevant text of Section 280E provides: No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.
2. The full text of the legislation provides: In the case of a taxpayer that is a cannabis licensee, there shall be allowed as a deduction an amount equal to any expenditure that is eligible to be claimed as a federal income tax deduction but is disallowed because cannabis is a controlled substance under federal law, and income shall be determined without regard to section 280E of the Internal Revenue Code (26 U.S.C. s.280E) for cannabis licensees.
In New Jersey’s legal cannabis market and other states with newly legalized cannabis, a new market for security agencies has emerged. The increased demand, much like other aspects of the industry, has created a gold rush mentality with plenty of new and old security agencies looking to earn the industry’s business.
Kelly Conklin, founder and president of Superior Protection Professionals (SPP), wants to show people in the industry the difference between quality security agencies and those that simply hire guards and adjust their marketing for a new industry. Along with his son, Kelly Jr. vice president of SPP, they have developed a team of professionals that pride themselves in quality, integrity and trust.
Here, we sit down with Kelly Conklin for a brief chat to get his thoughts on New Jersey’s legalization and the need for heightened security in cannabis facilities.
Cannabis Industry Journal: How did you get into this business and how are you helping cannabis businesses stay safe?
Kelly Conklin (left) and Kelly Jr. (right)
Kelly Conklin: Thanks for speaking with us. We started SPP primarily because of the horrible uptick in mass shootings happening in all sorts of public spaces, like churches, synagogues, schools, and we wanted to do something that would make a positive and meaningful impact on people’s lives, to help people. We had a clear objective when we started. We wanted to build a premium brand and deliver a quality product.
CIJ: From licensing and planning to running a cannabis business, security is a big part of being in this market. What’s required and what do you suggest cannabis companies do to get ahead of the curve?
Kelly: The state requires security for all cannabis facilities. Theft at every step of the way, from the cultivation to manufacturing, to transportation and the dispensary, is a big potential problem. The presence of our agents helps to prevent these crimes. We also help to provide electronic security such as cameras, alarms, key FOB entry doors, monitoring and much more. Things like these are also mandatory for the facilities. You should take a good, hard look at the state’s requirements for security when developing your standard operating procedures and make sure you have every area of security covered.
CIJ:We’ve seen reports of armed robberies at dispensaries in various parts of the country. How do you staff a dispensary to help prevent those?
Kelly: Each dispensary has different needs based on their locations and foot traffic. We tailor our services to each and every client and give them exactly what they need specific to their facility. For example, at one of our dispensaries we have 2 armed guards inside and one unarmed guard at the door scanning IDs. Whatever’s needed, we provide. We like to provide an assessment done at each facility so the client knows exactly what to do to be compliant with all local and state regulations. We insist that if we work with someone, we want them to know us, and feel comfortable with us, knowing they are in good hands. We’re a quality security agency and we want our clients to understand exactly how to operate safely.
CIJ: You mentioned “quality security agency,” what do you mean by that?
Kelly: We work hard to deliver quality. To us, that means trained professionals, be it veterans of the military or federal, state and local law enforcement. Our staff are highly trained, skilled and capable, but most importantly, they care. We’re fully insured, licensed and bonded. Quality also means good customer service. Again, we tailor services to each individual client, we want people to feel comfortable, safe and happy around us. The state conducts audits with us as required by law and we pride ourselves in our ‘above and beyond’ approach. We’re looking forward to the industry’s growth and feel that we can lend a helping hand where it’s needed. Security isn’t just a state requirement that you have to comply with, it’s unfortunately necessary in the cannabis market to keep employees, customers and products safe. We welcome folks in the industry to reach out to us, by phone (908-783-1939) or email as well and we can answer any questions whatsoever.
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