New Mexico’s largest medical marijuana company is suing the state over new MMJ regulations it calls “arbitrary and capricious.”
According to the Santa Fe New Mexican, Ultra Health, based in Bernalillo, is challenging the state health department over several new rules, including:
Strict testing requirements for pesticides, heavy metals and microbials.
Regulations concerning hemp cultivation and extracts.
Labeling requirements.
Criteria about license suspensions or revocations.
Ultra Health CEO and President Duke Rodriguez has been successful in several other lawsuits against the health department over other medical cannabis rules.
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Farm cash receipts in British Columbia hit a record high in 2019, boosted by an increase of nearly 300 million Canadian dollars ($221 million) in cannabis sales.
The annual growth in cannabis cash receipts in British Columbia far outpaced growth in other agricultural sectors such as dairy (CA$47 million), beef (CA$25 million) and field vegetables (CA$17.5 million), the provincial government reported Tuesday.
Total farm cash receipts for the province in 2019 reached CA$3.9 billion, an increase of CA$462 million over 2018.
The West Coast province is home to 99 of Canada’s 423 cannabis licenses for growing, processing or selling marijuana, according to Canada’s cannabis license registry.
On a national level, Canada’s total cash farm receipts grew by nearly 6% in 2019, rising to CA$66.1 billion. Crop receipts increased by 3.9% on an annual basis to reach CA$36.6 billion.
National cannabis crop receipts were CA$2.3 billion in 2019, an annual increase of more than 300% during the country’s first full year of recreational marijuana legalization.
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A court case that could open up stand-alone licensing opportunities in Florida’s vertically integrated medical marijuana market isn’t going to be decided anytime soon.
In a rare move, the Florida Supreme Court – which held oral arguments on the issue in early May – scheduled a second set of oral arguments for Oct. 7.
Industry officials had expected a ruling this summer.
The case, filed by Tampa-based Florigrown, has been dragging on since the summer of 2018, when Leon County Circuit Judge Charles Dodson declared that licensing limits imposed by a 2017 law violated the MMJ constitutional amendment approved by Florida voters in 2016.
At one point, Dodson told Florida regulators to quit stalling and issue additional licenses, but the state instead decided to fight his ruling.
Under the current vertically integrated structure and licensing caps, a handful of operators control a Florida medical cannabis market that Marijuana Business Factbook projects will reach $775 million to $950 million in sales this year.
Florida-based Trulieve by itself has a market share exceeding 50% and operates 51 of Florida’s 258 dispensaries, according to the state’s latest weekly update.
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To get around the enormous barriers to entry for California’s legal marijuana industry, a growing number of small farmers are increasingly turning to a practice mainstream agriculture has used for generations: so-called “contract farming.”
It’s a different business model from regular employment by a cultivation company, and the types of contracts can vary widely.
In short, landowners obtain local and state cultivation permits and then bring on experienced marijuana growers to do the actual farming, with the promise of splitting profits from the crop.
“It is common. We’ve done a ton of agreements of this type in the last two years,” said Heather Burke, an attorney in Nevada City who works mainly with legacy growers, many of whom were unable to get state cultivation permits on their own after 2018 because of various barriers to entry.
“It’s actually a wonderful way for a legacy farmer who didn’t get access to the market to get their foot in,” she added.
Though Burke said her clients have not had any issues with such arrangements, at least two lawsuits have been filed over such deals that have fallen through, with allegations that include fraud, breach of contract and labor law violations.
In one battle, the landowner-farmer deal was even referred to as “sharecropping,” which for some – like Burke – is objectionable because the term is connected to racial oppression of Blacks through agriculture.
Legal fights
San Francisco attorney Katy Young filed two lawsuits in December, both related to eerily similar situations.
Her clients claimed they were abused by landowners who held cultivation licenses and lured them into growing marijuana for them, only to leave the plaintiffs high and dry when it came time to collect on the crops.
That was the first Young had heard of contract farming as a business model for marijuana growers, since most California cannabis farms are traditionally run by a single company that keeps all the profits.
But since then, she’s realized how widespread the practice has become since 2018, when the state’s adult-use market kicked off.
“It’s all over,” Young said, noting that one of her clients is based in Northern California and the other in Southern California, hundreds of miles apart.
The first suit, filed in Sacramento County Superior Court by a company called Spooky Action and its officers, alleges that the defendants – a family that runs several cannabis companies – defrauded them out of $1.3 million through a “sharecropping agreement” that lasted from 2017 to 2019.
Then, the suit contends, the family cheated the plaintiffs out of their share of profits from a crop worth $700,000.
The second suit, filed in Los Angeles County Superior Court by a company called Right Brothers Management, alleges that a company in Lompoc run by a “wolf dressed in sheep’s clothing” cheated the plaintiffs out of $750,000 worth of cannabis grown and sold in 2018, along with nearly $500,000 that the Right Brothers paid to get the farm operational.
The common thread between the two situations, Young said, was the landowners had most of the capital they needed, along with the requisite permits, but lacked the know-how to grow marijuana profitably.
“The thread that pulls them together is the huge potential for abuse,” Young said. “This speaks to the regulatory setup.
“It’s so expensive to become a cannabis cultivator that this type of arrangement is the cheapest and easiest way for legacy growers to get into the market. It happens everywhere.”
Both lawsuits are ongoing.
‘Sharecropping’ in California cannabis
The practice itself – of landowners entering into contracts with farmers to grow marijuana – is nothing new, said Hezekiah Allen, board chair of California cannabis farmer cooperative Emerald Grown.
Allen, who grew up in Humboldt County, the heart of California’s Emerald Triangle, said he took part in such a deal himself from 2006 to 2008.
“I was a sharecropper for a few years. It was kind of how you got established in the business,” Allen said.
In that sense, he said, it was akin to “an apprenticeship, where you manage someone else’s farm for less than you were worth before you got your own farm.”
These days, Allen said, it’s more a question of precisely how such agreements and contracts are structured, which he noted can often get “messy.”
He recalled some friends from the Triangle even getting into fistfights over who owed whom and how much.
“These things are rife with miscommunication,” Allen said, adding that an obvious problem could be if a farm runs at a loss instead of a profit. If there aren’t any profits to split, that’s a situation ripe for a dispute between the partners.
Burke agreed, saying the specifics in written contracts with such deals are crucial.
In short, everyone involved should know exactly where they stand, particularly because the legal market is still evolving from the old-school way of doing business with a handshake.
“In the new world,” Burke said, “you have to parse out, ‘What is this? Is this an equity type of analysis that’s going to vest in ownership? Is this a joint venture between the two of you? Or is this a straight-up management agreement? Are you paying someone to come in and manage the grow?’
“It could be any number of relationships,” she added. “And because of the volatility of the market, it could be any number of contractual relationships that could be characterized as contract farming.”
The bottom line for Burke and others is that contract farming will probably become more common as time goes on.
“It’s pretty beneficial. It allows a lot of flexibility in a very rigid marketplace,” Burke said.
John Schroyer can be reached at [email protected]
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Law 360 are saying that GM Tax Partner, James B Mann, has left the firm and taken the Harborside case with him.. we can’t tell you anymore than that as it’s all behind a paywall .
So have a look at https://www.law360.com/articles/1292048/tax-partner-exits-greenspoon-marder-with-landmark-pot-suit
Or you can have a word with the man himself at his Linked In – where you can see he’s already dumped GM
About
My current areas of focus are the taxation of cannabis enterprises and general tax accounting issues. I have over 25 years of experience serving as a trusted advisor to a broad range of stakeholders in the energy, financial services, and now cannabis industries.
I have advised financial institutions regarding international tax, structuring renewable energy asset-based bank loans and securitizations, cross-border tax-advantaged partnerships and securitizations, project finance, and renewable energy deals.
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A high-profile medical cannabis producer filed a petition in a state district court last week, asking a judge to invalidate rules recently put in place by the New Mexico Department of Health.
In the petition, lawyers for cannabis producer Ultra Health argued that many of the recently adopted rules regarding plant and product testing, product labels and facility safety standards are “arbitrary and capricious.”
Last year, the state’s Medical Cannabis Program, which is part of the DOH, started the rule change process with a series of public meetings, which carried over to early this year. The rules, which range from pesticide and chemical testing to reciprocity for already approved cannabis patients from other states, went into effect earlier this month. But Ultra Health’s petition focuses on the new standards for producers, some of which the petition says would increase the financial burdens for patients.
“Producers, who already pay well over $100,000 per year for their license and are precluded by federal law from taking any income tax deductions, will have to pay for the increased testing burden and will pass along the costs to patients,” the petition reads.
A DOH spokesman wouldn’t say if or when the department would respond to the request to annul the new rules.
“The Department of Health does not comment on pending litigation,” DOH spokesman David Morgan said.
Arguably a perennial thorn in the side of the department, Ultra Health and its CEO Duke Rodriguez have filed numerous legal actions against the state over issues like the legality of displaying a cannabis plant at the state fair and increasing the number of plants producers can grow. Brian Egolf, who also serves as the state’s speaker of the House, is one of two lawyers who filed the petition.
Testing and labels
The new rules from the DOH spell out specific standards for testing plants for fungus, pesticides and heavy metals. But in the petition, Ultra Health’s lawyers argued that the department failed to show evidence that the safe level of contaminants is based on studies or science.
“While Petitioner Ultra Health agrees that some testing is necessary to protect the safety of cannabis patients, DOH’s rules do not draw the necessary connection between the arbitrarily chosen testing parameters and specific measurements of patient safety,” the petition states.
The petition also asserts that the DOH simply copied regulations from other states like Colorado and Oregon, where both medical and recreational-use cannabis are legal. Therefore, the petition reasons, standards for places with different climates should not be applied to New Mexico.
“All of the biological and environmental differences between New Mexico and other regions guarantee that cannabis grown in New Mexico will have a very different potential for various kinds of contaminants than cannabis grown in Colorado or Oregon, but DOH never considered these basic environmental factors that make New Mexico unique,” the lawyers wrote.
The petition also takes issue with a rule that allows the DOH to randomly test products that are already packaged and ready to sell. That could, the petition argues, put a financial strain on producers if they are not compensated for the finished products pulled from shelves for testing.
The rule changes also included one that requires producers to both label products with product information and provide a “drug information sheet” with details about each product.
The petition called the rule requiring both labels and fact sheets that include overlapping information a “belt-and-suspenders rule” with “unnecessary redundancies.”
The petition also calls for the removal of a rule that specifies requirements for state approved testing laboratories. The state does not have its own testing laboratories. The two laboratories approved for testing will physically and financially be overburdened by the updated rule, the petition argues.
“Indeed, New Mexico has only two cannabis testing laboratories, and if one of them cannot meet DOH’s requirements, testing would slow to a crawl and a program that serves 92,000 medically fragile New Mexicans would be severely disabled,” the petition reads. “If both laboratories cannot meet DOH’s requirements, the Medical Cannabis Program would cease to function.”
No mixing of plants
One of the rules recently promulgated by the Medical Cannabis Program and the DOH states that hemp plants cannot be grown on the same property as medical cannabis.
In New Mexico, hemp growing operations are regulated by the state’s Department of Agriculture, which Ultra Health’s petition argues puts the issue out of the purview of the DOH.
“The Department of Health, on the other hand, has never been given any kind of regulatory authority over hemp,” the petition reads.
Hemp and cannabis are in the same plant family but hemp is defined as having less than 0.3 percent of THC, the substance that is responsible for the psychoactive properties of cannabis.
The petition argues that medical cannabis and hemp are already segregated in practice in order to avoid cross contamination and avoid lower THC levels in medical cannabis plants or increased levels in hemp plants.
The petition also takes aim at a rule requiring hemp extracts, such as CBD, and hemp products not be combined with medical cannabis products.
“Again, this rule is outside the scope of DOH’s authority, since the responsibility to regulate how hemp is used resides with the Department of Agriculture,” Ultra Health’s lawyer wrote. “There is no indication from the rulemaking record that DOH cooperated with, consulted with, or engaged in any dialogue with the Department of Agriculture on development of this rule.”
Zoning, hygiene and repairs
The new rules state that medical cannabis production sites comply with local zoning laws, which Ultra Health argued in the petition puts an unnecessary burden on producers who rent space and have no control over the physical space. Further, Ultra Health’s lawyers wrote, any repairs or updates to production facilities face an unnecessary level of bureaucracy. Under the new rules, “any” physical modification to production facilities would require an approved amendment to the respective producer’s license. According to the petition, Ultra Health and its lawyers interpret that to include “changing a lightbulb, installing an air conditioner, or adding an additional greenhouse.”
“It is arbitrary and capricious to require licensees to constantly submit applications for amended licenses whenever they change a lightbulb,” the petition reads.
The petition argues that a rule requiring floors in production facilities be washable, wipeable, and non-absorbent is too broad and should not apply to grow facilities.
“Washable floors may make sense for an area where edibles are assembled or where cannabis is dried and cured,” the petition reads. “However, as the public comments from licensees indicated, washable floors do not make sense for cultivation and harvesting areas.”
Marijuana track-and-trace company Metrc continues its legal tangle with Missouri state officials over the right to charge “tag fees” to medical cannabis dispensaries.
In the latest development, Metrc wants a Missouri appellate court to overturn a lower court’s decision that would prevent the Florida-based company from charging fees for radio-frequency identification (RFID) tags, Law360 reported.
The dispute dates to 2019, shortly after Metrc was awarded a $5 million contract by the state after a competitive bidding process.
Almost immediately, a rival protested to the state that Missouri’s deal with Metrc could contain hidden costs.
State regulators rejected the notion, saying Metrc’s contract did not allow the company to charge tag fees to MMJ licensees.
Metrc later sued in court, claiming that Missouri’s medical marijuana program rules do allow such fees.
The track-and-trace dispute is one of several controversies dogging a Missouri medical marijuana program that has been delayed by the coronavirus pandemic.
In addition, Missouri faces hundreds of licensing appeals and investigations into possible misconduct by state regulators.
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