Cannabis has become big business in this country. In 2022, U.S. medical and recreational cannabis sales reached $30 billion. In fact, last year, Americans spent more money on marijuana than chocolate and craft beer combined. By 2027, sales are projected to reach more than $53 billion.
Like any other enterprise, those in the cannabis industry experience typical business disputes, ranging from vendor under/lack of performance, to issues with governmental regulatory bodies. Sometimes those disputes require cannabis businesses to resort to the courts to resolve those issues, including by seeking injunctive relief. But where those cannabis businesses seek that relief may prove to be critical.
While numerous states have decriminalized the possession and sale of marijuana to varying degrees, marijuana remains a Schedule I drug under the Federal Controlled Substances Act. In other words, under federal law, selling marijuana remains a crime. Since seeking an injunction appeals to a court’s equitable jurisdiction, an applicant must demonstrate that it has “clean hands” to be granted such relief. Consequently, a party engaged in a business that is currently considered a federal crime could face serious headwinds when seeking an injunction in federal court.
In Original Investments, LLC v. Oklahoma, the U.S. District Court for the Western District of Oklahoma dealt with just such a scenario. In that case, a medical marijuana business, organized as a limited liability company wholly owned by Washington residents, sought to challenge an Oklahoma statutory framework that prohibits non-residents of Oklahoma from receiving an Oklahoma medical marijuana business license and from owning more than 25 percent of any Oklahoma entity that has an Oklahoma medical marijuana business. Plaintiff asked the court to declare that the statute and rules were unconstitutional and enjoin the relevant state officials from enforcing them.
The Court declined to entertain the Constitutional question. Instead, it noted at the outset that the relief plaintiff was seeking was equitable in nature, and, significantly, it is well settled that a court will not utilize its equitable powers to facilitate “illegal conduct”. As the Court recognized:
Selling marijuana is a criminal offense, punishable by imprisonment, everywhere in the United States. The dispositive question in the matter before the court is whether the court should facilitate the plainly criminal activity in which plaintiff proposes to engage in the State of Oklahoma.The court declines to do so.
That was the end of the matter for Original Investments. But what can a cannabis business do when faced with a similar situation? For one thing, filing instead in state court could be a better option. Since the marijuana business is not considered criminal under the laws of a host of states, that could remove from the mix the question of whether a court is “facilitating [a] plainly criminal activity”. That is, of course, unless your venue is the state court of Idaho, Nebraska, or Kansas, which have no “public cannabis access” programs.
Filing in state court is not without peril, however. If there is a peg to federal jurisdiction, whether it be through diversity jurisdiction or a federal question, a state court plaintiff could be faced with a notice of removal. To guard against such an eventuality, a plaintiff could file in the home state of the defendant, thereby invoking protection against removal under the forum defendant rule, or alternatively, by simply not invoking a federal question, or pleading an amount in controversy below the federal diversity jurisdictional threshold, provided there is a good faith basis for doing so.
Another recent development could also clarify this issue; namely, the U.S. Department of Health and Human Services’ (“HHS”) recent recommendation that the U.S. Drug Enforcement Agency (“DEA”) reclassify cannabis from a Schedule I drug to a Schedule III drug under the Federal Controlled Substances Act (“CSA”). Our colleagues recently blogged in detail about the implications of such a development here. However, from a high-level perspective, without this reclassification, marijuana is still considered a drug with “no currently acceptable medical use and a high potential for abuse”.
Some of the practical repercussions of reclassification could include enabling cannabis businesses’ ability to bank like other heretofore “legitimate” businesses, the elimination of the IRS bar on certain cannabis business deductions, and potentially leading to health insurance coverage for certain medical marijuana usage. These considerations might also lead a federal court to view the sale of marijuana not as a federal crime, but as part of a highly regulated, yet legitimate industry. And if that is the outcome, cannabis businesses may no longer have to face the same issues Original Investments did in the Western District of Oklahoma.
- Member of the Firm