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October Updates: Legal and Regulatory Developments Impacting the Michigan Cannabis Industry

In a burgeoning industry such as legal cannabis in Michigan, one of the things you can count on is a frequently changing legal and regulatory landscape. There were several noteworthy developments in October that those competing in the industry should be aware of.

Michigan House Committee Advances Bills that Would Impose More Stringent Regulations on Medical Marijuana Caregivers

On October 26, 2021, the Michigan House of Representatives Regulatory Reform Committee approved a package of bills that would limit the amount of marijuana that caregivers could grow, store and distribute.

In a previous article, we outlined the key changes the new legislation would impose on caregivers, including the creation of a new specialty medical grower license that includes a variety of regulations, if signed into law. One change that was added to the bills before passage in the committee was adding language that allows unlicensed caregivers to serve up to five patients from their primary residence, but only allow them to grow 24 marijuana plants at their home. Beyond that, a specialty medical grower license would be required.

We will continue to keep you updated on this legislation as it moves to the full House for a vote.

Movements to Decriminalize Psychedelics Gain Momentum on a Local Level

Efforts to decriminalize the possession and use of naturally occurring psychedelics are gaining steam in Michigan.

Proposal E, which would decriminalize personal possession and therapeutic use of entheogenic plants by adults, is on the November 2nd ballot in Detroit.

In Grand Rapids, city commissioners recently voted to affirm a resolution that declares “support for state and federal legislative efforts that would decriminalize entheogenic plants and fungi.”

In Ann Arbor, the city council passed a resolution to make enforcement of laws prohibiting certain psychedelics a low priority.

There are also efforts to decriminalize psychedelics taking place at the state level. Senate Bill 631 has been introduced which would decriminalize entheogenic plants and fungi across Michigan.

Key Congressional House Committee Approved Bill to Federally Legalize Marijuana

While it happened in September (September 30), it’s worth noting in this October update that the U.S. House of Representatives Judiciary Committee approved the Marijuana Opportunity, Reinvestment and Expungement Act, which would federally legalize marijuana and promote social equity.

The bill would:

Remove marijuana from the Controlled Substances Act (CSA),
Enable people with cannabis convictions to have their records expunged
Create a federal tax on marijuana to support community reinvestment and other programs

The passage of the bill came one week after the full House of Representatives voted in favor of a defense spending bill that includes an amendment that would protect banks that serve cannabis businesses in states where they legally operate from being penalized by federal regulators.

We will continue to keep you apprised of further legal and regulatory developments. In the meantime, if you have any questions or require assistance, please contact Paul Mallon or your Fraser Trebilcock attorney.

Paul C. Mallon, Jr. is Shareholder and Chair of Fraser Trebilcock’s cannabis law practice. You can reach him at pmallon@fraserlawfirm.com or (313) 965-9043.

Lawmakers Introduce the Michigan Cannabis Safety Act Which Would Impose More Stringent Regulations on Medical Marijuana Caregivers

An ongoing debate between medical marijuana caregivers and large commercial marijuana producers in Michigan over the role and rights of caregivers is now the subject of legislation introduced September 14 by Michigan legislators.

Introduced as the Michigan Cannabis Safety Act, and reflected in Michigan House Bills 5300-5302, the legislation would limit the amount of marijuana that caregivers could grow and distribute.

The legislation would reduce the number of patients allowed per caregiver from five to one, beginning March 21, 2022. This would limit the amount of plants a caregiver could grow at one time from 60 to 12 plants, with an additional 12 plants allowed for personal use.
The amount of harvested marijuana that a caregiver could keep on hand would be reduced from 15 ounces to 5 ounces.
Caregivers would have to register for a Specialty Medical Grower license, pursuant to which growers would be required to pay $500 application fees and have marijuana undergo safety testing.
Marijuana plants would also have to be grown in an indoor, secure facility.

As we addressed in a recent post, proponents of the bill argue that having unlicensed caregivers leads to public health and safety risks, and contributes greatly to billions in black market sales of marijuana in Michigan.

Activists who oppose the new licensing proposal argue that the Michigan Cannabis Safety Act would make Michigan marijuana users more dependent on large cannabis companies, which in turn would result in higher prices. Around 100 people rallied in support of individual caregivers at the State Capitol on September 15, a day after the new legislation was introduced.

We will continue to keep you apprised of further developments in this debate. In the meantime, if you have any questions or require assistance, please contact Paul Mallon or your Fraser Trebilcock attorney.

Paul C. Mallon, Jr. is Shareholder and Chair of Fraser Trebilcock’s cannabis law practice. You can reach him at pmallon@fraserlawfirm.com or (313) 965-9043.

Video Surveillance Rules for Marijuana Licensees in Michigan

Marijuana licensees in Michigan must adhere to statutory mandates established by the Michigan Regulation and Taxation of Marihuana Act and regulations promulgated by the Michigan Marijuana Regulatory Agency (“MRA”). One such requirement, as discussed in a recent MRA bulletin, is having a properly functioning surveillance system in place 24 hours a day, seven days a week, at all licensee locations.

Surveillance systems must be able to record the following areas:

Where marijuana products are weighed, packed, stored, loaded, and unloaded for transportation, prepared, or moved.
Entrances and exits.
Point of sale or retail areas.
Security and back offices including rooms where the surveillance system itself is stored.
Anywhere marijuana or marijuana products are destroyed.

Failure to comply with the following requirements may result in disciplinary action.

Immediate response with recording is required

According to the MRA, a functioning, compliant surveillance allows for proper oversight of regulated products and businesses, and helps to ensure the safety of licensees, the licensee’s employees, and the general public. The MRA may request that a licensee provide a video surveillance recording, and if it does the licensee must provide it immediately, or at a later time approved by the agency.

Video surveillance must be maintained and stored for designated periods of time

Licensees must maintain surveillance recordings for 30 days, but the MRA may request that licensees maintain them for a longer period of time. Licensees should have the proper storage devices to provide to the agency on hand and should maintain backup copies of requested surveillance footage. Failure to comply with requests for video recordings may subject licensees to disciplinary proceedings.

Equipment must be working properly and staff training is advisable

Video surveillance equipment must be working properly at all times with a minimum resolution of 720p. In addition, surveillance logs must be updated and accurate. The name of the employee or business owner responsible for monitoring the system must also be made available. The MRA recommends that a licensee designate at least one employee to be trained in using the video surveillance system so that licensees can comply with all requests for the preservation and production of video surveillance.

Suspending operations if surveillance system isn’t working

The MRA recommends that a licensee discontinue operations if its surveillance system isn’t working due to a power loss or otherwise. Any surveillance system must be equipped with a failure notification system that provides notification to the licensee of any interruption or failure of the video surveillance system or video surveillance system storage device. Again, operating without the required video surveillance coverage in place may subject the licensee to disciplinary action.

Final thoughts for licensees

Obtaining and maintaining a license to legally operate a business under the Michigan Regulation and Taxation of Marihuana Act requires a clear understanding of the rules and regulations, and continual operational vigilance by entrepreneurs and their employees. The detailed rules concerning video surveillance are just one example of the types of issues that must be addressed and adhered to. If you have any questions or require assistance as a licensee in Michigan, please contact Paul Mallon or your Fraser Trebilcock attorney.

Paul C. Mallon, Jr. is Shareholder and Chair of Fraser Trebilcock’s cannabis law practice. You can reach him at pmallon@fraserlawfirm.com or (313) 965-9043.

Michigan Attorney General Argues that Legal Marijuana Use Shouldn’t be Grounds to Deny Unemployment Benefits

In 2018, Michigan legalized the recreational use of marijuana. Marijuana use remains unlawful under federal law. Despite the legality under state law of use, some Michigan workers who have lost jobs have had state unemployment benefits denied on the basis that they failed an employer’s drug test due to marijuana use.

Michigan Attorney General Dana Nessel (the “AG”) has waded into the fray to argue that an apparent conflict in state laws related to marijuana use and unemployment benefits should be resolved in favor of terminated workers seeking benefits.

In three cases currently before the Michigan Unemployment Insurance Commission (the “Commission”), the AG filed an amicus curiae brief (a brief filed by a non-party with a strong interest in a matter) arguing that engaging in a “legal” activity (i.e., using marijuana within the permissive scope of Michigan law) that does not affect an individual’s work should not be a valid basis for denying benefits.

The AG’s Position on Conflicting Statutes

Michigan’s Employment Security Act (“MESA”) entitles workers to apply for and receive unemployment benefits. Workers can be denied benefits, however, under specific circumstances. Two of those circumstances include (1) situations where the employee tests positive for illegal drugs or (2) commits misconduct related to work. These were the statutory “disqualifications” applied to deny benefits.

AG Nessel sets forth three arguments in support of her position:

First, that an employer cannot deem off-site and off-hours private activity that does not affect job performance, to constitute “misconduct” under the MESA;
Second, § 29(1)(m) of the MESA defines a drug test as a “test designed to detect the illegal use of a controlled substance.” The AG argues that the tests administered to the claimants did not detect and could not have detected the “illegal” use of marijuana because such use is legal, subject to certain exceptions not applicable in these cases; and,
That the denial of unemployment benefits for the private legal use of marijuana conflicts with the plain language of the law making marijuana use legal. That law provides the use of marijuana cannot be “grounds to deny any . . . right or privilege,” and provides in § 4 that “[a]ll other laws inconsistent with th[e] act do not apply to conduct that is permitted by th[e] act.”

The AG’s briefing attempts to clarify that her position is not meant to question or diminish an employer’s rights to enforce a workplace drug policy. Nor, according to the briefing, does her position address other questions including possessing or using marijuana while on the employer’s property or while working, or an employee being under the influence of marijuana while at work.

What it Means for Employers

It is important to note that the outcome of these cases will not impact an employer’s right to discipline or terminate an employee based on marijuana use outside of work. Questions related to Michigan’s status as an “at-will” employment state are not before the Commission.

The outcome may, however, limit an employer’s ability to challenge the grant of unemployment benefits to a worker terminated for off-premises, off-hours marijuana use. The issues involved almost certainly will be resolved ultimately at the Michigan Court of Appeals.

We will continue to keep you apprised of any further developments in these matters. In the meantime, if you have any questions about these issues, please contact please contact Dave Houston or your Fraser Trebilcock attorney.

This alert serves as a general summary, and does not constitute legal guidance. All statements made in this article should be verified by counsel retained specifically for that purpose. Please contact us with any specific questions.

Fraser Trebilcock Shareholder Dave Houston has over 40 years of experience representing employers in planning, counseling, and litigating virtually all employment claims and disputes including labor relations (NLRB and MERC), wage and overtime, and employment discrimination, and negotiation of union contracts. He has authored numerous publications regarding employment issues. You can reach him at 517.377.0855 or dhouston@fraserlawfirm.com.

Judge Issues Preliminary Injunction Blocking Detroit from Issuing Recreational Marijuana Business Licenses; Says Licensing Program “Likely Unconstitutional”

Last November, the City of Detroit announced its rules for allowing licensed adult-use recreational marijuana sales, which included controversial provisions meant to give “social equity applicants” a competitive opportunity. Applicants are entitled to preferential treatment if they have lived in Detroit for:

15 of the last 30 years
13 of the last 30 years and are low-income
10 of the last 30 years and have a past marijuana-related criminal conviction, or
Have parents who have a prior controlled substance record and still live in the city

These rules gave rise to a lawsuit filed on March 2, 2021, in Wayne County Circuit Court, by a plaintiff who has been a Detroit resident for 11 of the past 30 years who intends to apply for an adult-use retail establishment license.

The lawsuit alleges that the “licensing scheme favors certain Detroit residents over other Michiganders based on the duration of their residency.” The plaintiff argues that the ordinance violates the U.S. Constitution’s commerce clause because it “discriminates against out-of-state residents and punishes people for moving between states.”

In April, U.S. District Judge Bernard Friedman issued a temporary restraining barring Detroit officials from receiving any more marijuana business applications.

On June 17, Judge Friedman again ruled in favor of the plaintiff by issuing a preliminary injunction halting Detroit’s recreational marijuana licensing program indefinitely.

The issuance of a preliminary injunction in the case is significant because the U.S. Supreme Court has set a high burden of proof for a plaintiff seeking an injunction. The Court identified a four-part balancing test in Winter v. Natural Resources Defense Council, 555 U.S. 7 (2008), which requires plaintiff to demonstrate:

Likelihood of success on the merits
Likelihood of irreparable harm
The balance of both equities and hardships is in their favor; and
That a preliminary injunction would be in the public interest

In his order, Judge Friedman stated that Detroit’s licensing program is “likely unconstitutional.”

To learn more about the Detroit lawsuit, as well as other challenges to municipal licensing schemes related to recreational marijuana in Michigan, click here.

At Fraser Trebilcock we have a strong litigation department that has handled multiple lawsuits in the cannabis field and are able to assist you if you believe you are entitled to relief. If you have any questions or require assistance, please contact Paul Mallon or your Fraser Trebilcock attorney.

Paul C. Mallon, Jr. is Shareholder and Chair of Fraser Trebilcock’s cannabis law practice. You can reach him at pmallon@fraserlawfirm.com or (313) 965-9043.

Fraser Trebilcock attorney and former Michigan State Legislator Klint Kesto has nearly two decades of experience working in both the public and private sectors, including serving as Co-Chair of the CARES Task Force. You can reach him at kkesto@fraserlawfirm.com or 517.377.0868.

Michigan House Committee Advances Bill to Regulate delta-8 THC

On May 18, 2021, the Michigan House Regulatory Reform Committee unanimously approved a package of bills, including House Bill 4517, requiring hemp-derived delta-8 tetrahydrocannabinol (“THC”) to be regulated by the Michigan Marijuana Regulatory Agency (“MMRA”).

Delta-8 THC is a cannabis compound that has gained in popularity because of its similarity to delta-9 THC prevalent in marijuana plants. Delta-8 is produced by extracting CBD from industrial hemp and then using acetic acid to turn it into THC.

Producers of delta-8 THC argue that the product is legal under the federal 2018 Farm Bill, which legalized hemp extracts and other hemp products. However, the U.S. Drug Enforcement Administration (“DEA”) issued an interim final rule in 2020 declaring: “All synthetically derived (THC) remain Schedule I controlled substances.” The Hemp Industries Association and a South Carolina CBD manufacturer initiated a lawsuit against the DEA challenging the rule.

Currently, delta-8 THC is unregulated in Michigan. The new bills, which have been sent to the full House of Representatives for consideration, would bring the delta-8 THC within the MMRA’s regulatory framework.

The move to regulate delta-8 THC has the support of the Michigan Cannabis Manufacturer’s Association (“MCMA”). In a statement, MCMA executive director Stephen Linder said: “Any product considered medicine should adhere to the same health and safety standards as medicines dispensed in pharmacies. Currently these products are available to anyone and can be found in gas stations, party stores and smoke and vape shops.”

Michigan is not the only state to take action to crack down on access to delta-8 THC. According to Hemp Industry Daily at least 12 states have imposed bans on the product.

We will continue to keep you updated about developments with respect to the delta-8 THC legislation. In the interim, if you have questions, please contact Fraser Trebilcock shareholder Paul Mallon.

Paul C. Mallon, Jr. is Shareholder and Chair of Fraser Trebilcock’s cannabis law practice. You can reach him at pmallon@fraserlawfirm.com or (313) 965-9043.

Michigan Marijuana Regulatory Agency Expands Eligibility for Adult-Use Licenses

Effective March 1, 2021, applicants for multiple classes of adult-use marijuana (i.e., recreational marijuana) licenses are no longer required to hold an active medical marijuana permit to be eligible.

The Michigan Marijuana Regulatory Agency announced that the eligibility requirement has been removed for five license types:

Marijuana retailer
Marijuana processor
Class B marijuana grower
Class C marijuana grower
Marijuana secure transporter

In short, as of March 1, 2021, more opportunities to become eligible for licenses became available to more competitors in Michigan fast-growing adult-use marijuana industry.

A Brief Summary of the Two-Step Application Process

The application process involves two steps. Step one is prequalification. The main applicant and any supplemental applicants must submit prequalification applications. Thereafter, background checks are conducted on the main applicant and all supplemental applicants.

The “main applicant” is the entity (e.g., limited liability company, corporation, partnership) or individual (sole proprietor) seeking to hold the marijuana establishment license. A $6,000 nonrefundable application fee is due during step one.

Once prequalification is obtained, a main applicant can move to step two and submit applications for all adult-use marijuana establishment state licenses it seeks to hold. At this time, the MRA will vet the proposed marijuana establishment.

The MRA’s vetting process includes business specifications, proof of financial responsibility, municipality information, and general employee information. Among other requirements, the establishment to be used for marijuana operations must pass an inspection by the MRA within 60 days of submission of a complete application.

In addition to comply with the MRA’s process, applicants will need to concurrently ensure compliance with any and all local regulations and permitting requirements relating to the operation of businesses within the unit of local government in which they seek to operate.

If you have any questions about the application processes—at the state and/or local level in Michigan—for either medical or adult-use marijuana, please contact Paul Mallon, Jr.

Paul C. Mallon, Jr. is Shareholder and Chair of Fraser Trebilcock’s cannabis law practice. You can reach him at pmallon@fraserlawfirm.com or (313) 965-9043.

Michigan Municipal Adult-Use Marijuana Licensing Processes Give Rise to Lawsuits

In December, 2019, Michigan authorized the sale of adult-use marijuana (i.e., recreational marijuana). Michigan municipalities are thus automatically deemed to permit adult-use businesses without restriction unless they pass ordinances restricting or prohibiting them within their jurisdictions.

The legalization of adult-use marijuana has resulted in the establishment of procedures for businesses to become licensed to sell in accordance with local regulations and restrictions on the number and types of businesses that qualify. These procedures and restrictions apply in addition to the Michigan Marihuana Facilities Licensing Act (MMFLA) and Michigan Regulation and Taxation of Marihuana Act (MRTMA).

Under MRTMA, a municipality is authorized to limit the number of marijuana establishment licenses. If a municipality does impose limitations, and the limit prevents the state from issuing a state license to all applicants, then “the municipality shall decide among competing applications by a competitive process intended to select applicants who are best suited to operate in compliance with [MRTMA] within the municipality.” MRTMA permits restrictions that go beyond limiting the number of licenses allowed within an area as long as such restrictions are not “unreasonably impracticable.” To avoid being unreasonably impracticable restrictions must not “subject licensees to unreasonable risk or require such a high investment of money, time, or any other resource or asset that a reasonably prudent businessperson would not operate the marihuana establishment.”

The process of establishing criteria for businesses seeking marijuana licenses, and reviewing business applications for licenses, is complex. There is a lot of money at stake. And unsurprisingly, in many municipalities across Michigan, the licensing process has led to significant and costly litigation.

In November, 2020, the City of Detroit announced its rules for allowing licensed adult-use marijuana sales, which included controversial provisions meant to give “social equity applicants” a competitive opportunity. Applicants are entitled to preferential treatment if they have lived in Detroit for:

15 of the last 30 years
13 of the last 30 years and are low-income
10 of the last 30 years and have a past marijuana-related criminal conviction, or
Have parents who have a prior controlled substance record and still live in the city

Detroit is not the first (and almost certainly won’t be the last) municipality to have its licensing process challenged.

In November, 2020, Traverse City was ordered by a judge to refuse to accept applications for adult-use marijuana retail and microbusiness establishments in light of pending lawsuits. One of the primary issues being litigated in the Traverse City lawsuits is whether existing medical marijuana retailers have the automatic right to sell recreational marijuana as well.

In December, 2020, the Oakland County Circuit Court issued a preliminary injunction in a case brought against the City of Berkley, enjoining Berkley from issuing licenses to marijuana establishments pursuant to the MMFLA or MRTMA. The court enjoined Berkley based on the likelihood that its process for scoring and awarding licenses violates the requirements of MRTMA.

The process of establishing rules and reviewing license applications for adult-use marijuana will remain a contentious one. Given that adult-use sales in Michigan totaled nearly $440 million in the first full year of the program, there is a lot to be won (or lost) in the process.

For assistance in the application process, or any other issues related to operating a marijuana business in Michigan, please contact your Fraser Trebilcock attorney.

Up in Smoke – Section 280E’s Buzz not Harsh by Excessive Fines Clause: Northern California Small Business Assistants, Inc. v Commissioner

A tax provision that blocks marijuana companies from claiming federal business tax deductions is constitutional ruled the U.S. Tax Court on October 23^rd. Northerner California Small Business Assistants, Inc. v Commissioner, 153 TC No. 4 (No. 26889-16, October 23, 2019).

Northern California Small Business Assistants, Inc., a California medical marijuana business, claimed $1.5 million in ordinary and necessary business expenses for its 2012 tax year. The IRS disallowed the company’s tax deductions under Section 280E of the Internal Revenue Code. That provision blocks companies that are involved in drug trafficking from claiming business deductions and credit that are available to businesses not engaged in trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act).

Cannabis companies that are organized and operated legally under state law, face what amounts to a federal income tax on their gross receipts – with effective tax rates as high as 70% because for federal purposes, those companies are considered to be trafficking in the illegal drug trade. Some types of marijuana businesses are able to reduce the amount of their income subject to tax based on their inventory costs.

The Company claimed that Section 280E violated the prohibition on excessive fines contained in the Eighth Amendment. The Excessive Fines Clause guards against abuses of the government’s ability to punish civil or criminal infractions. Specifically the company argued that:

The Eighth Amendment applied to corporations,
That Section 280E operates as a penalty through the tax laws on the company’s gross receipts, and
That this “penalty” is excessive.

The Tax Court held, however, that Section 280E does not violate the Constitution because it is not a penalty provision. “Despite efforts by several States to legalize marijuana use to varying degrees, it remains a Schedule 1 controlled substance within the meaning of the Controlled Substance Act,” wrote Judge Joseph Goeke. “Unlike in other context where the Supreme Court has found a financial burden to be a penalty, disallowing a deduction from gross income is not a punishment,” said the Court. The court noted its holding was consistent with the only Circuit Court of Appeals decision on this point.

The company also argued that, assuming Section 280E is constitutional, that it should be applied more narrowly than as interpreted by the IRS. According to the taxpayer, while Section 280E may be appropriately applied to limit ordinary and necessary business expenses, other provisions, such as depreciation deductions, and the deductions for state and local taxes should be excluded from Section 280E’s reach. The Tax Court declined this invitation, stating, “Congress could not have been clearer in drafting this section [280E] of the Code.”

Perhaps most interesting, is that there were two dissenting opinions. Judge Gustason, dissenting in part, wrote that he believed Section 280E unconstitutionally exceeded Congress’ power to impose an income tax under the Sixteenth Amendment. “I would hold that this wholesale disallowance of all deductions transforms the ostensible income tax into something that is not an income tax at all, but rather a tax on an amount greater than the taxpayer’s ‘income’.”

Judge Copeland, agreeing with Judge Gustafson’s dissent, also wrote a partial dissent of her own, insisting that Section 280E is a penalty and urging further analysis of whether it violates the Eighth Amendment.

Read full opinion here.

Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or pmccord@fraserlawfirm.com.