The Business of Cannabis in Illinois Current Legal Landscape · 1 Reinhart Boerner Van Deuren s.c....

© 2020 All Rights ReservedReinhart Boerner Van Deuren s.c.1

The Business of Cannabis in IllinoisCurrent Legal Landscape

Jessica Hutson PolakowskiShareholder in Reinhart’s Intellectual Property Litigation and Litigation Practices and chair of the Cannabis Law Group

608-229-2219 · [email protected]

Reinhart Boerner Van Deuren s.c.22 East Mifflin Street, Suite 600 · Madison, WI 53703 · www.reinhartlaw.com


Definitions

THC = Tetrahydrocannabinol--key psychoactive compound in the Cannabis plant.

Marijuana = All parts of the Cannabis sativa L. plant; excluding hemp.

Hemp = Cannabis plant with low THC (<=.3%).

CBD = Cannabidiol--chemical compound extracted from either hemp or marijuana plants.


Current Legal Landscape--Federal

• Marijuana is a Schedule I (illegal) drug. Marijuana was generally defined as any part of the plant genus Cannabis until 2018, when hemp was removed from the federal definition of marijuana.

• CBD is an extract from eithera) Marijuana plant (federally illegal); orb) Hemp plant (federally legal)

• Industrial hemp programs regulated by U.S. Department of Agriculture CBD derived from hemp is excluded from Schedule I drug

classification; CBD derived from marijuana still illegal; Interstate transportation of hemp is legal


Internal Revenue Code Section 280E

• Disallows business expense deductions for trade or business that consists of “trafficking” in Schedule I and II drugs

• Does not prohibit adjustments to income through Cost of Goods Sold (COGS) Resellers: only permitted cost of cannabis, no transportation or

other associated costs with gaining possession of the inventory Producers: wages, rents and repair can be included in COGS;

marketing and general business expenses are nondeductible• Code section 280E leads to effective federal income tax rates as high

as 70% to 90%


Food and Drug Administration

• Authority to regulate products containing cannabis or cannabis-derived compounds

• THC or CBD products may not be marketed as dietary supplements or added to food for humans or animals; any food containing CBD or purported CBD dietary supplement product in interstate commerce is in violation of the Food, Drug, and Cosmetic Act

• FDA-approved cannabis-derived drug product: Epidiolex


Initiatives for Reform--Federal

Most recent: Marijuana Opportunity Reinvestment and Expungement (MORE) Act:

Completely deschedule cannabis Expunge records for previous marijuana convictions Impose 5% tax on sales, which tax would be distributed to

communities harmed by the War on DrugsPassed House Judiciary Committee 11/20/2019.


Current Legal Landscape--States

• Marijuana: 22 states have legalized marijuana for medicinal purposes only 11 states and the District of Columbia have legalized marijuana

for both medicinal and recreational use by adults• Hemp:

47 states allow for the cultivation of hemp for commercial purposes

Hemp-derived CBD (federally legal everywhere) is legal in 48 states with varying restrictions


Current Legal landscape--Illinois

• Cannabis Regulation and Tax Act (410 ILCS 705) legalized recreational adult-use marijuana effective January 1, 2020

• Illinois retains Compassionate Use of Medical Cannabis Program Act (410 ILCS 130), in effect since January 1, 2014

• As of January 1, 2020, Illinois residents age 21 or older may legally possess: up to 30 grams flower (“weed”); 5 grams concentrate; 500 mg of edibles

at 100 grams per edible. (Non-Illinois residents may legally possess 50% of these amounts in Illinois.)

• In-home cultivation not allowed for recreational purposes; in-home cultivation allowed for medical purposes--up to 5 plants.


Current Legal landscape--Illinois (cont.)

• Taxes on the sale of cannabis products State: 16.25%; 26.25%; 31.25% Local: up to additional 3% marijuana tax plus local sales tax Chicago rate for product with greater than 35% THC is 41.25%

once additional Cook County 3% tax takes effect in June 2020.• January 2020: adult-use cannabis sales approximated $39.2 million• January 2020 saw a 34% increase over December 2019 in medical

marijuana applications


The Business of Cannabis in Illinois

Illinois Licensing


Illinois Cannabis Licensing Regulator Agencies

• Illinois Department of Financial and Professional Regulation (IDFPR) Adult Use Dispensing Organization Licenses Responsible Vendor Approval

• Illinois Department of Agriculture, Bureau of Medicinal Plants (IDOA) Adult Use Cultivation Center Licenses Adult Use Cannabis Craft Grower Licenses Adult Use Cannabis Infuser Licenses Adult Use Cannabis Transporter License Community College Cannabis Vocational Pilot Program


Illinois Cannabis Dispensing Licenses

• Early Approval Adult Use Dispensing Organization License (48 issued) Issued to medical marijuana businesses in existence on June 25, 2019 Approved for adult-use sales as of January 1, 2020

• Conditional Adult Use Dispensing Organization License (75 available) Application period ended January 2, 2020 Awarded by May 1, 2020 within 17 Illinois regions based on population according to

U.S. Bureau of Labor Statistics Not entitled to purchase or sell cannabis

• Adult Use Dispensing Organization License Application to be released after issuance of Conditional Licenses in May 2020 Awarded to Conditional License holders after location passes inspection by IDFPR and

registration fees are paid


Illinois Cultivation, Grower, Infuser Licenses

Early Approval Adult Use Cultivation Center License (21 issued in 2019)• Cultivation Center: “cultivate, process, transport cannabis and cannabis-

infused products to cannabis business establishments”Applications accepted through March 16, 2020; to be issued on or beforeJuly 1, 2020:• Craft Grower (40 available in 2020): cultivate, dry, cure and package

cannabis. Growers are allowed to extract cannabis concentrate.• Infuser (40 available in 2020): directly incorporate cannabis or cannabis

concentrate into a product formulation to produce a cannabis-infused product. Infusers are not allowed to extract cannabis concentrate.

• Transporter (unlimited)


The Business of Cannabis in Illinois

Emerging Issues


Emerging Issues

• Illinois: shortages, high prices, illicit market• Insurance:

Massachusetts--a worker using medical marijuana to treat chronic pain from an injury incurred on the job cannot pursue a workers’ compensation claim to be reimbursed for the cost because federal law preempts Massachusetts’ medical marijuana law

• FDA warning letters• Intellectual property• Employer concerns• Banking


Questions?

Thank You!

This presentation provides information of a general nature. None of the information contained herein is intended as legal advice or opinion relative to specific matters, facts, situations or issues. Additional facts and information or future developments may affect the subjects addressed in this presentation. You should consult with a lawyer about your particular circumstances before acting on any of this information because it may not be applicable to you or your situation.

reinhartlaw.com · 800.553.6215MILWAUKEE · MADISON · WAUKESHA · CHICAGO · ROCKFORD · MINNEAPOLIS DENVER · PHOENIX


Gordon M. WrightShareholder and registered patent attorney in Reinhart’s Intellectual Property Practice and Cannabis Law Group

815-654-5646 | [email protected]

Reinhart Boerner Van Deuren s.c.12215 Perrygreen Way · Rockford, IL 61107 · ww.reinhartlaw.com

Trademarking Cannabis-Related Products


Trademarks

• To obtain a federal trademark, the applicant must show use of the mark in interstate commerce

• The word "commerce" means all commerce which may be lawfully regulated by Congress--which means “Use of a mark in commerce must be lawful use to be the basis for federal registration of the mark.” Gray v. Daffy Dan’s Bargaintown,(Fed. Cir. 1987).

• As a Schedule 1 drug, cannabis cannot be lawfully regulated by Congress

• No federal trademarks for products or services related to cannabis


Trademarks (cont.)

• But state-based trademark registration may be available in states where cannabis is legal

• Arizona, California, Colorado, Illinois, Maine, Massachusetts, Nevada, New Mexico, Oregon, Rhode Island, Vermont and Washington permit registration of cannabis-related trademarks

• To register in Illinois--complete application, evidence of use (specimen), pay fee ($10)--5-year duration

• Illinois registration does not provide rights throughout the state--only where used

• Not as strong as a federal trademark, but can provide some protection within the state where registered


What can be Trademarked at theFederal Level?• 2018 Farm Bill legalized commercialization of hemp as of December 20, 2018

(no longer under CSA)

• Hemp defined as “The plant Cannabis sativa L. and any part of that plant, including the seeds, all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol [THC] concentration of not more than 0.3 percent on a dry weight basis”

• CBD products (for humans and pets) must also be legal under the federal Food, Drug, and Cosmetic Act (FDCA) in order for marks covering such products to be registrable

• Registration available for ancillary goods and services is legal under federal law


What can be Trademarked at theFederal Level? (cont.)Registrations

• TÖKR: (1) Application software that enables a user to locate pricing for medical marijuana and recreational marijuana from nearby dispensaries owned by others; (2) Providing internet marketing and advertising services for medical and recreational marijuana dispensaries owned by others; (3) Providing software platforms which enable medical and recreational marijuana dispensaries owned by others to advertise and market pricing information for such goods, and which enable consumers to search for pricing and location information for such goods

• FARM TO FEELING: Medical cannabis resources; namely, providing information pertaining to the benefits of the medicinal use of cannabis


What can be Trademarked at theFederal Level? (cont.)Applications

• WHOOPI & MAYA: (1) Cacao powder; chocolate; beverages with a chocolate base; (2) Medicated herbal topical creams--Herbal tinctures for medical purposes;(3) Non-medicated personal care products . . . all of the aforementioned containing cannabis with a delta-9 THC concentration of not more than 0.3% on a dry weight basis; (4) providing information, news, and commentary pertaining to health, wellness, the medical benefits of cannabis . . . benefits of different medical cannabis strains . . . medical benefits of different sources and types of cannabis and CBD-based products, therapeutic uses of medical cannabis, health and wellness indications, effects of medical cannabis


What can be Trademarked at theFederal Level? (cont.)• Implied connection may require disclaimer

• Federal trademark application for MISS MARY JANE COCKTAIL COMPANY (1) non-alcoholic cocktail mixes

• rejected for unlawful use

• Add disclaimer in goods description: “not containing cannabis, CBD, or any other cannabis-related or hemp-derived substance”


What can be Trademarked at theFederal Level? (cont.)

Law360, Cannabis-Related Patent, TM Filings Increase After Farm Bill (July 8, 2019)


Patenting Cannabis-Related Inventions

• No requirement that invention in patent application be associated with legal activity

• Federal Circuit: “The principle that inventions are invalid if they are principally designed to serve immoral or illegal purposes has not been applied broadly in recent years.” Juicy Whip, Inc. v. Orange Bang, Inc., (Fed. Circ. 1999).


Patenting Cannabis-Related Inventions (cont.)

• Utility patents: Methods of treatment, methods of growing cannabis plants, extraction techniques, consumption methods and devices, cannabis-infused edible products

• Design patents: Vaporizers, grinders, storage containers, ancillary goods having cannabis imagery

• Plant patents: Covers a particular strain of asexually reproduced plant (clones)

• Majority of patents/applications directed to: (1) methods of extracting and purifying cannabis and derived compounds; (2) therapeutic uses of cannabis and related products; (3) methods of delivery (e.g., edibles, inhalers, patches, creams)



• U.S. Pat. No. 9,730,911 “Cannabis Extracts and Methods of Preparing and Using Same”

• U.S. Pat. No. 9,095,554 “Breeding, Production, Processing and Use of Specialty Cannabis”

• U.S. Pat. No. 9,050,631 “Apparatus and Related Method for Extracting Resins from Cannabis”

• U.S. Pat. No. 9,066,920 “Use of One or a Combination of Phytocannabinoids in the Treatment of Epilepsy”



• U.S. Pat. No. D474,378 “Herb Grinder”

• U.S. Pat. No. PP27475 “Cannabis Plant Named Ecuadorian Sativa”

• U.S. Pat. Pub. No. 2014/0259228 “Cannabis Plant Named Avidekel”

• U.S. Pat. Pub. No. 2014/0245494 “Cannabis Plant Named Erez”









• Increase in patent filings has led to the first patent lawsuits between companies in the cannabis industry

• United Cannabis v. Pure Hemp Collective, (Colo. Dist. Ct. 2018)

• Insys Development v. GW Pharma, (IPR 2017)


Questions?

Thank You!


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Employer Obligations Regarding Recreational and Medical Cannabis under Illinois and Federal Law

Shannon M. TooleAttorney in Reinhart’s Labor and Employment Practice and Cannabis Law Group


Reinhart Boerner Van Deuren s.c.1000 North Water Street · Milwaukee, WI 53202 · www.reinhartlaw.com


Employer Obligations Regarding Recreational Cannabis


Zero-Tolerance orDrug-Free Workplace Policies

Under the Illinois recreational cannabis law, an employer can still implement and enforce a reasonable zero-tolerance or drug-free workplace policy.


Cannabis in the Workplace

An employer is not obligated to allow employees to be under the influence of or use recreational cannabis: 1. in the employer’s workplace;2. while performing the employee’s duties; or3. while on-call.


Employee Discipline

An employer may discipline or terminate an employee for violating its zero-tolerance or drug-free workplace policy if one of the following conditions is met:1. The employer has a good-faith belief that an employee used

or possessed cannabis at work;2. The employer has a good-faith belief that an employee was

impaired or under the influence of cannabis while at work; or

3. The employee fails a drug test.


Employer Obligations RegardingMedical Cannabis


Employees who use Medical Cannabis

An employer may not penalize employees solely for their status as registered medical cannabis users or caregivers.


Employee Discipline

An employer can still implement and enforce a reasonable zero-tolerance or drug-free workplace policy against employees who are registered medical cannabis users or caregivers.


Employer Obligations under the Drug Free Workplace Act


Application

The Drug-Free Workplace Act (“DFWA”) applies to:• all federal grant recipients • federal contractors with a contract of $100,000 or more


Requirements• Establish a drug-free awareness program that informs employees

about: (1) the dangers of drug abuse in the workplace; (2) the employer’s drug-free workplace policy; (3) the availability of drug counseling, rehabilitation, and employee assistance programs; and (4) the penalties for drug abuse violation

• Publish a statement notifying employees that the unlawful manufacture, distribution, dispensation, possession, or use of a controlled substance is prohibited in the workplace and specifying the actions that will be taken against employees for violations (the Statement)

• Provide each employee with a copy of the Statement


Requirements (cont.)• Inform employees that, as a condition of their employment, they

must comply with the Statement and notify the employer of any criminal drug convictions that result from an occurrence in the workplace no later than five days after the conviction

• If an employee reports a workplace-related drug conviction or the employer discovers an employee has a workplace-related drug conviction, the employer must notify the grantor or contracting agency within 10 days after receiving such notice

• Sanction the convicted employee or require the convicted employee to participate in a drug abuse assistance or rehabilitation program


Common Misconceptions

The DFWA restricts employees’ drug use outside the workplace. The DFWA does not restrict employees’ drug use outside the workplace.

The DFWA requires an employer to implement a specific drug testing plan.The DFWA does not require an employer to implement a specific drug testing plan.


How Illinois’ Cannabis Law AffectsMulti-State Employers


Questions?

Thank You!




Banking and Finance Issues in the Cannabis Industry

Sara McNamaraAttorney in Reinhart’s Banking and Finance, Business Reorganization and Bankruptcy practices and Cannabis Law Group


Reinhart Boerner Van Deuren s.c.1000 North Water Street · Milwaukee, WI 53202 · www.reinhartlaw.com


Banking a CBD Business

• CBD derived from hemp is legal at a federal level and in Wisconsin Must contain less than 0.3% THC

• Potential Concerns: Regulation of product Treatment as a “marijuana-related business” Green Rush


Banking a Marijuana Business

• Possession, purchase and distribution of cannabis are illegal under federal law but legal under Illinois laws, subject to certain regulations

• Federal rules and regulations are confusing and constantly changing

• Conflicting advice from government and regulatory authorities• Potential opportunities


The Cole Memo

• Issued August 29, 2013• Limited enforcement of marijuana-related activities to certain

federal priorities: Preventing distribution to minors Preventing sales revenue from going to criminal enterprises Preventing diversion of marijuana from one state where it is legal to

another state where it is illegal Preventing violence and use of firearms Preventing legal activity from being used as a cover for illegal activity


Additional Guidance by James Cole

• The Cole Memo did not address impact on certain financial crimes (e.g., Bank Secrecy Act, money laundering statutes and unlicensed money remitter statute)

• Cole issued an additional memo on February 14, 2014 to provide guidance on these issues

• Guidance essentially ties back to the Cole Memo• Most important thing to consider is due diligence


FinCEN Guidance

• FinCEN = Financial Crimes Enforcement Network• Clarified Bank Secrecy Act expectations for financial institutions• Factors for financial institutions to consider:

Verify business is duly licensed and registered Review license application and related documents Request information from state licensing department Develop understanding of the business Ongoing monitoring of publicly available information and

suspicious activity


Suspicious Activity Reports (“SARs”)

• Financial institution is required to file a SAR if it “knows, suspects, or has reason to suspect that a transaction conducted or attempted by, at or through the financial institution” Involves funds derived from illegal activity; Is designed to evade Bank Secrecy Act regulations; or Lacks a business or apparent lawful purpose


Three Types of SARs

• Marijuana Limited Customer’s business does not implicate one of the Cole Memo

priorities or violate state law Must file continuing activity reports

• Marijuana Priority Customer’s business implicates one of the Cole Memo priorities

or violates state law• Marijuana Termination

Financial institution terminates relationship with customer to maintain anti-money laundering compliance program


How to Distinguish Priority SARs

• Business receives substantially more revenue than may be reasonably expected

• Business is depositing more cash than is commensurate with its reported revenue

• Deposits are structured so as to avoid Currency Transaction Report requirements

• Rapid movement of funds• Financial statements are inconsistent with actual account activity


Rescission of the Cole Memo

• Required U.S. attorneys to weigh all relevant considerations when deciding which cases to prosecute

• Resulted in widespread uncertainty and heavy criticism from various state officials and representatives

• Left many financial institutions in a regulatory limbo, as FinCEN guidance remained in effect


SAFE Banking Act of 2019

• Introduced in July 2019• Legislation would prohibit federal regulators from penalizing a

financial institution for providing banking services to a legitimate marijuana-related business

• Passed (321 to 103) in the House of Representatives in September 2019

• Currently being considered in the Senate, but unlikely to pass in 2020

• Over $3.5 million spent on lobbying through Q3 of 2019


Recent Illinois Developments

• Illinois State Treasurer “Today, we have a banking crisis because rules built decades ago have not

kept up with changes in law and acceptable behavior. Working together, we can use common sense to bring safety and security to this legal industry and everyone who lives in Illinois.”

• Bills pending in Illinois legislature Prohibit Secretary of Financial and Professional Regulation from issuing an

order for unsafe or unsound banking practices against a financial institution solely because the institution provides financial services to a legitimate marijuana-related business (MRB) (HB2980 and SB2023)

• Gives licensed institutions ability to accept and issue “special purpose checks” specifically for MRBs (HB3953)


Recent Illinois Developments (cont.)

• Community Invest – Cannabis Banking Services Program• Provides support to financial institutions providing banking services to MRBs • Provides financial institutions a 2-year term deposit with variable monthly

rates based on Federal Overnight Excess Funds• Gives MRBs ability to (1) write checks, (2) make direct deposits for payroll, and

(3) make electronic payments for licenses, fees and taxes

• Treasurer’s letters to President Trump, the Attorney General and the U.S. Treasury outlining necessity for federal policymakers to provide protection for financial institutions

• National Association of State Treasurers’ bipartisan cannabis banking resolution


What Do I Do With This Information?

• Discuss risks and rewards with your Board of Directors• Develop a clear approach to MRBs

Never provide products or services to MRBs Provide products or services to MRBs on a limited exception

basis Actively seek out MRBs

• Create a written policy and review and revise it as the legal landscape changes


Questions?

Thank You!



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