Book:Past, Present, and Future of Cannabis Laboratory Testing and Regulation in the United States/Overview of the cannabis industry in the United States/Other areas of concern

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1.5 Other areas of concern

When examining the current state of the U.S. cannabis industry, it's important to note a few additional areas of concern that impact it, again tightly linked to federal regulations (which are discussed extensively in the next section): banking, advertising, and data management. Issues related to these topics continue to limit how state-based grow-ops, dispensaries, and testing laboratories are funded and operated.

1.5.1 Banking

Since the U.S. federal government still considers marijuana to be illegal, by extension banks and credit unions—which are regulated by a patchwork collection of federal (and state) laws—put themselves into potentially dangerous territory by accepting money from depositors engaging in federally illegal activities; the bank can be punished by federal institutions such as the Federal Deposit Insurance Corporation (FDIC).[1] In an attempt to ease the concerns of industry players as well as banks in states that had implemented legalization efforts, the Treasury Department's Financial Crimes Enforcement Network (FinCEN) released a guidance document in February 2014 that "does not grant immunity from prosecution or civil penalties to banks that serve legal marijuana businesses" but rather "directs prosecutors and regulators to give priority to cases only where financial institutions have failed to adhere to the guidance."[2][3] However, the guidance has remained just that: guidance; it doesn't prevent federal law enforcement or regulating agencies from taking action. An August 2016 attempt to reclassify marijuana into a lower classification than Schedule I failed[4][5], keeping the FinCEN guidance in place as a recommendation for how federal authorities should enforce existing law.

According to an Associated Press report in April 2016, the guidance has had some sort of impact, with banks and credit unions willing to handle any money associated with marijuana, increasing from 51 in March 2014 to 301 in March 2016[6], and up again to 411 in March 2018[7] and 706 in March 2021.[8] However, this hasn't prevented those in states with newly minted medical and recreational marijuana legalization laws from being worried about how cannabis money will be handled, particularly with wavering stances across multiple Federal government branches. California, which in November 2016 legalized recreational use of marijuana beginning in 2018, petitioned the administration to clarify its policy early on. "We have a year to develop a system that works in California and which addresses the many issues that exist as a result of the federal-state legal conflict," wrote California Treasurer John Chiang to Trump. "Uncertainty about the position of your administration creates even more of a challenge."[9] An attempt by the state in the summer of 2018 (Senate Bill 930) to "license privately financed banks that would issue checks to [cannabis-related] businesses to pay rent and state and local taxes and fees" was rejected, complicating the matter further.[10] However, California's Department of Business Oversight offered some minor respite in the fall of 2019 in the form of its Cannabis Banking Guidance, which "offers a comprehensive compliance framework for [California's] financial institutions and demonstrates that there is momentum around finding a workable solution to effectively provide banking services to cannabis-related businesses."[11]

Similar legalization changes in Massachusetts prompted its senator, Elizabeth Warren, along with nine other senators, to write to FinCEN in early 2017 requesting even clearer, more friendly guidance for marijuana vendors.[12] Yet it remains to be seen if entities outside of grow-ops and dispensaries will see banking relief. In particular, testing laboratories continue to struggle with managing cash flow and acquiring bank lending for their operations[13][14][15], causing some to believe consolidation of such labs will occur before the industry can really even take off.[13][16] In early 2018, one of three testing laboratories in Alaska was forced to suspend its operations after Wells Fargo said it would foreclose on their space if they did not move out, demonstrating the continued difficulties and tensions laboratories are facing with banks.[17]

In September 2019, what was thought to the be the best chance to update cannabis banking regulation—in the form of the Secure and Fair Enforcement (SAFE) Banking Act—saw overwhelming approval in the U.S. House of Representatives. The SAFE Banking Act would prevent federal banking regulators from cancelling deposit insurance, penalizing banking institutions, and incentivizing a bank to not do business with cannabis businesses, among other actions. This would mean banks wouldn't see federal retaliation for complying with state-mandated cannabis law. However, the proposed legislation was inevitably held up in the Senate in early 2020, primarily due to the efforts of Senate Banking Committee Chair Mike Crapo[18][19], and the support of 12 other lawmakers.[20] However, in February 2020, Senators noted they were "close to finding common ground to getting everyone signed off to move this forward."[21] Ultimately, the SAFE provisions made their way into the HEROES Act COVID-19 relief bill, which passed in the U.S. House in May 2020[22], as well as another proposed bill in October.[23][24] Those attempts failed within the Senate, and an additional push to include the SAFE Banking Act provisions in the 2020 end-of-year COVID-19 stimulus failed.[25] Additional attempts have been made to reintroduce SAFE in both 2021 and 2022, having passed the House a total of six times as of July 2022. The latest attempt to pass SAFE has been through including it with the Harnessing Opportunities by Pursuing Expungement (HOPE) Act "to give SAFE the social equity component it needs to make it to the Senate floor."[26]

1.5.2 Advertising

Advertising of marijuana products is another area of concern, though the regulations and laws regarding it are less clear. When it comes to television and radio broadcasting and its associated advertising, a federally granted broadcasting license stands to be lost, care of the Federal Communications Commission (FCC). The trouble is, it's not clear if the FCC would act against broadcasters; the FCC hasn't issued guidance in the same way FinCEN has. "I don’t think anybody knows, and that’s the problem," said California Broadcasters Association President Joe Berry in an August 2016 report published by the The Sacramento Bee. "Without a clear indication [from the FCC on marijuana advertising], the vast majority of broadcasters are going to stay away from this issue."[27] California, of course, made recreational marijuana legal, and its proposed law sought to address the issue of advertising, including "a provision restricting TV and radio ads so they are not targeted to minors," while also addressing the authority of the FCC to enforce regardless.[28] Additional changes occurred in California in the form of Assembly Bill 2899, updating how licensees can and can not advertise cannabis and cannabis products.[29]

Other forms of advertising also remain problematic. In late November 2015, the United States Postal Service (USPS) out of Portland, Oregon published its interpretation of federal law regarding "mailpieces containing advertisements about marijuana," regarding it illegal to distribute certain forms of marijuana advertisement while citing 21 U.S. Code § 843(c).[30] The U.S. Patent and Trademark Office (PTO) has, controversially, also gotten involved, stating that trademarking of a "brand controlled substances or related paraphernalia that are illegal to possess or sell" legally doesn't fit within a trademark's commercial viability because at the federal level marijuana is not legal for commerce.[31] (Legal experts such as Dariush Adli suggest "creative ways" of getting around this, from registering trademarks in multiple states to registering "non-cannabis merchandise in order to generate some federal protection for their mark."[32]) Even billboards have at times been an issue, with California's state lawmakers proposing new regulations on billboard-based marijuana advertising weeks after the state passed its recreational legalization laws.[33] And state laws, such as those found in Alaska, can create their own set of challenges in staying legal with marijuana advertising.[34] Even Canada, which legalized recreational use of marijuana in the fall of 2018, has strict advertising rules laid out by Health Canada, with harsh penalties for violators.[35] This has resulted in some cannabis businesses seeking advertising loopholes; one such example can be found in the U.S. state of Colorado, where cannabis companies have taken to sponsoring highways through the state's Clean Colorado program.[36]

Despite all this, some financial consultants have believed marijuana marketing will become more prevalent. In 2017, GreenWave Advisors' Matthew Karnes estimated cannabis marketing spending would jump to $75 million by 2021.[37] Karnes may have been off on that prediction, but as of July 2022, new attempts to allow greater permissiveness of cannabis advertising continue to appear. For example, in June 2022, language was added to a proposed FCC-involved appropriations bill that would prevent "any of the funds appropriated to the agency for the fiscal year that starts Oct. 1 to deny broadcasters a license renewal or station sale application, or require an early license renewal application to be filed."[38][39] It remains to be seen if this language will remain in the final approved appropriations bill, however.

1.5.3 Insurance

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Insurance needs for cannabis businesses are being discussed more as the legalization effort continues to expand across the U.S. and other countries. In the U.S. at least, a number of factors has slowed these discussions given the plant's illegal federal status, including limited data on its health impacts, the losses associated with running such businesses, and a lack of understanding the appropriate claims milestones to use. This lack of data and initial hesitance has resulted in overall caution by the insurance industry, issuing mostly basic policies with insufficient coverage.[40] These fears—including the fear of prosecution for providing services to cannabis businesses—aren't limited to the U.S. either, with, for example, concerns that the Proceeds of Crime Act (POCA) in the U.K. will expose financial and insurance businesses to prosecution.[41] Other issues and risks viewed by the industry include[40][41][42][43]:

  • With health risks not fully understood, extensive litigation, including class action lawsuits, may ensue should cannabis users become unexpectedly ill or disabled due to unstated risks by the vendor.
  • Transportation of cannabis and related equipment across various borders where it's legal in some places but not others may result in the risk of seizures and losses.
  • Uncertainty remains about intellectual property law and banking, making it more difficult to produce relevant policies that help protect against theft and loss of proprietary information, product, and cash.
  • Hemp-derived CBD and its legality is still a gray area, at least in the U.S., though hemp is legal, making it more difficult to separate out related risks in cannabis insurance policies.
  • Vape pens and e-cigarettes used for cannabis consumption have so far carried some health hazards and risks with them, forcing many insurance carriers to exclude coverage for such products.
  • Outdoor crop coverage is scarce, and multi-state distribution coverage policies don't exist.
  • Professional liability insurance for testing laboratories and dispensaries is still a growing area that requires more data and risk consideration, with some specific coverage such as "slip and fall" protection not able to be honored due to Schedule I substance exclusions in general liability policies.
  • Cannabis "lounges" serving up legal cannabis products to patrons could be sued for overserving product and enabling third-party bodily injury by the patron.

1.5.4 Data management

In the fall of 2018, Canada legalized the purchase, growth, and consumption of marijuana in small amounts across the country.[44] Ahead of and after the official date of legalization, concerns were being raised about the protection of Canadian cannabis consumers' personally identifiable information (PII)[45], particularly in regards to data processed and stored in the United States.[46][47][48] In truth, comparisons of Canada's privacy laws with those of the United States existed well before the vote, with resources such as FindLaw detailing risks to any Canadian data transferred to the United States.[49] However, concerns grew that Ontario's mandated use of the e-commerce platform Shopify (until private retail outlets opened in April 2019) would put Canadian cannabis consumers' data at risk.[46][50] In particular, Canadian consumers remain worried that if their purchase history becomes available to United States government officials, who function in an environment of criminalization of cannabis use, they will not be allowed entry into the U.S. at minimum, or be treated as criminals upon attempting entry at worst. As such, some developers of cannabis data management software—such as Cova Software—have publicly acknowledged that any cannabis retail data for Canadian customers will remain in Canada "over and above the current legal requirements."[48] Yet even with data providers' intentions to follow Canadian privacy rules and recommendations, data breaches still occur, as happened with the Canada Post in November 2018.[45][51], further emphasizing the need for strict protocols and protections for cannabis consumer data.

In the United States, despite cannabis' federal prohibition, many states have been taking on various levels of legalization of cannabis. As Rachel Hutchinson of Foley Hoag LLP noted in March 2017, much like Canada, "[l]egalization has led to increased oversight and monitoring, as well as to the collection and storage of personally identifiable information ... [and the] threat of a federal crackdown leaves most customers resistant to creating any sort of paper trail."[52] In this sort of environment, where federal threats still exist, a patchwork collection of state-based laws have sprung up, including Oregon's Senate Bill 863, which prevents retailers of recreational cannabis from collecting and sharing customers' PII.[53] California has also implemented a variation of this type of protection for both recreational and medical cannabis consumers.[54] Of note is California's classification of medical marijuana identification cards as "medical information," which lends additional credence to the idea that medical marijuana consumers' PII held in dispensaries should be protected by U.S. Health Insurance Portability and Accountability Act (HIPAA) regulations.[55] However, without a unified policy and legal framework for cannabis use and its associated data, its difficult to foresee what future data collection and privacy regulations will look like in the United States. Despite this, some software development companies are betting on further demand for privacy of PII with the development of "personal privacy and HIPAA complaint cannabis consumer transaction solution[s]."[56]

Additionally, like Canada, concerns still abound concerning data privacy in the United States. Companies such as THSuite, LLC have already been found to inadvertently expose sensitive personal data—and possibly even protected health information (PHI)—from multiple U.S. cannabis dispensaries, potentially violating HIPAA regulations.[57][58] As the anonymous author of the original report concerning THSuite points out, "most legal experts agree that dispensaries must follow HIPAA regulations just like any other health care provider," and even in a realm without legal risk, exposed data could mean "individuals may suffer backlash if their families, friends, and colleagues find out that they use cannabis."[57] Again, these issues firmly fall at the feet of the main problem of not having unified cannabis legislation, let alone not having a federally recognized legalized status of cannabis. With the unclear and mismatched state of law regarding cannabis user data protection, the onus still remain firmly with software developers and business' data managers in regards to thoroughly testing software and implementing (as well as enforcing) stricter controls such as encryption, intrusion detection, and authentication mechanisms.[58]


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Citation information for this chapter

Chapter: 1. Overview of the cannabis industry in the United States

Edition: Fourth edition

Title: Past, Present, and Future of Cannabis Laboratory Testing and Regulation in the United States

Author for citation: Shawn E. Douglas

License for content: Creative Commons Attribution-ShareAlike 4.0 International

Publication date: August 2022