cannabis business | Fraser Blog

Five Stories that Matter in Michigan This Week – December 16, 2022

Cabinet Changes Announced for Governor Whitmer’s Second-Term

Last week, Governor Whitmer announced changes in leadership for several state departments. Some of the changes include Dan Eichinger taking over as acting director of the Department of Environmental, Great Lakes and Energy, Shannon Lott will become the acting director of the Department of Natural Resources, Michelle Lange chosen as the acting director of the Department of Technology, Management and Budget, and Brian Hanna will become director of the Cannabis Regulatory Agency.

Why it Matters: Further changes may be in the future as the new directors in their respective departments take over and implement their policies. Fraser Trebilcock attorneys will monitor and report on any important situations.

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Michigan Slips Slightly in Economic Benchmarking Report

Michigan dropped two spots, to 31st nationally, in the Business Leaders for Michigan’s annual benchmarking report that ranks states’ economic performance. While Michigan improved over last year in some key metrics, other states did as well, leading to Michigan falling slightly in the rankings.

Why it Matters: As the national economy softens, it’s more important than ever for Michigan business and government leaders to focus on sound economic policy to help maintain—and improve—the state’s competitiveness. The report highlighted, for example, how Ohio jumped from 33rd in the rankings last year to 23rd this year.

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Tax Changes Incoming for Research & Experimental Expenditures

For tax years beginning in 2022, research and experimental (R&E) expenditures are no longer immediately expensed but rather must be amortized over five years (15 years for foreign expenditures). This change to the tax treatment of R&E expenditures was included as a revenue raiser for the federal government to help pay for other tax breaks in the Tax Cuts and Jobs Act passed at the end of 2017.

Why it Matters: Guidance is needed immediately for the 2022 tax year, especially for corporations that must prepare financial statements. The post-2021 tax treatment of R&E expenditures is inconsistent with financial accounting principles that requires most research and development costs to be expensed immediately. Learn more on the subject.

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Parties Ask Court to Decide on Paid Sick Leave / Minimum Wage Increase by February 1

Earlier this week, a 3-judge appellate panel heard arguments from both parties on whether to overturn the July 2022 ruling to adopt and amend two 2018 ballot initiatives that would increase the minimum wage to $12 per hour, increased tipped wages, and would significantly alter paid sick leave laws in the state forcing businesses to have to change their policies.

Why it Matters: Both parties have requested a decision by February 1 from the Court of Appeals, as the July 2022 ruling had a stay enforced until February 19. Depending on the court’s decision, businesses in the state may have to alter their paid sick leave policies and increase their minimum wage and tipped wage levels. We will continue to monitor the situation and report on any new developments.

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CRA Publishes New Monthly Data, Average Price Lowest Ever Been

According to recent monthly data published by the Cannabis Regulatory Agency, the average retail flower price of an ounce of cannabis is $95.12, an all-time low and a 50% decrease compared to last year.

Why it Matters: While the prices of cannabis and cannabis-related products continue to decrease and make consumers happy, growers on the other hand are seeing profits decrease resulting in them seeking ways to halt new licenses to be granted in an effort to steady prices. Contact our cannabis law attorneys if you have any questions.

Related Practice Groups and Professionals

Election Law | Garett Koger
Business & Tax | Paul McCord
Labor, Employment & Civil Rights | Aaron Davis
Cannabis Law | Sean Gallagher

City of Detroit Faces Lawsuits Over Adult-Use Recreational Licenses

Following the Detroit City Council’s vote on the revised ordinance to allow adult-use recreational cannabis sales, multiple medical marijuana companies have filed suit against the city over the licensing program.

JARS Cannabis and House of Dank, two companies that own medical marijuana dispensaries licensed in Detroit, are suing the City of Detroit over the revised ordinance claiming that the new law would signal the end for existing medical marijuana facilities already in the area. The two companies pointed to a provision in the revised ordinance that prevents existing medical facilities in the area from getting a recreational license until 2027.

In its lawsuit, JARS Cannabis argues that Detroit’s revised ordinance violates a state law providing that municipalities cannot adopt ordinances that are “unreasonably impracticable.” Rather than provide a competitive application process, the city utilizes a scoring system for choosing which companies receive a license.

Detroit has faced lawsuits over its cannabis licensing ordinances before. In 2021, a federal district judge found that the city’s first recreational marijuana ordinance, which gave licensing preference to “legacy” Detroit residents, was “likely unconstitutional.”

JARS Cannabis and House of Dank, in their respective lawsuits, both argue that the revised ordinance still shows too much preference to certain potential applicants—namely, Detroit residents and newcomers to the cannabis business.

While these lawsuits are actively pending, we are monitoring the situation and will provide updates. At Fraser Trebilcock, we have handled multiple lawsuits in the cannabis field and are able to assist you. Please contact Klint Kesto, Matthew Meyerhuber, or your Fraser Trebilcock attorney.

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.

Matthew J. Meyerhuber is an attorney at Fraser Trebilcock focusing on general litigation, cannabis law, environmental law, and real estate. Matthew can be reached at mmeyerhuber@fraserlawfirm.com or 517.377.0885.

U.S. House of Representatives Passes MORE Act to Decriminalize Cannabis

On Friday, April 1, 2022, the U.S. House of Representatives voted to decriminalize cannabis on the federal level, allow for the expungement of certain marijuana convictions, and offer loan opportunities to cannabis businesses. The House passed The Marijuana Opportunity Reinvestment and Expungement (“MORE”) Act by a vote of 220-204, and would have the following changes:

Remove marijuana from the list of scheduled substances so that growing, selling, or possessing the drug would no longer carry criminal penalties;
Allow the federal government to offer loans to cannabis businesses and impose a tax on cannabis products, which the revenue would be used for grant programs focused on helping disadvantaged small businesses get into the marijuana industry; and
Create an expungement process for non-violent cannabis convictions and review criminal sentences for offenders.

While the MORE Act was passed by the House, the bill must still be passed by the U.S. Senate, and signed by President Biden. If you have any questions, 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 Law Imposes New Product Liability Insurance Requirements on Legal Cannabis Licensees

At the end of 2021, the Michigan legislature passed and Governor Whitmer signed into law a new cannabis liability insurance law that mandates proof of product liability insurance coverage for licensed cannabis businesses and new applicants. The new rules take effect March 30, 2022.

Michigan Senate Bill 461 (Public Act 160 of 2021) requires every licensee or applicant to file with the Michigan Marijuana Regulatory Authority (MRA): “[P]roof of financial responsibility for liability for bodily injury to lawful users resulting from the manufacture, distribution, transportation, or sale of adulterated marihuana or adulterated marihuana-infused product in an amount not less than $100,000.00 for each license.”

The statute defines “adulterated marihuana” as “a product sold as marihuana that contains any unintended substance or chemical or biological matter other than marihuana that causes adverse reaction after ingestion or consumption.”

Additional requirements include:

The insurance policy is issued by a licensed insurance company or licensed captive insurance company in Michigan.
The insurance policy does not include a provision relieving an insurer from liability for payment of any claim for which the insured may be held liable under the act.
Covers bodily injuries to a qualifying patient, including injuries that are caused by the intentional conduct of the licensee (but not if the licensee acted with the intent to harm).

In addition, a licensee must file an “attestation of compliance” with the requirements of the statute with the MRA, on a form approved by the MRA, which is signed by the officer of the licensed insurance company or licensed captive insurance company that issues the policy.

To the extent a licensee fails to maintain proof of financial responsibility as required under statute, the MRA will immediately suspend the licensee’s license until such proof is provided. A licensee also cannot cancel required liability insurance unless the licensee gives the MRA 30 days’ prior written notice and procures new proof of financial responsibility and delivers that proof to the MRA within 30 days after giving notice.

Given that this law takes effect on March 30, 2022, it is important for existing licensees and applicants to move fast in order to meet its requirements. For questions or 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.

January Update: Legal, Legislative and Regulatory Developments Impacting the Michigan Cannabis Industry

Despite some bumps in the road—which are to be expected for any nascent industry—the year 2021 was a remarkable and record-breaking one for the legal cannabis industry in Michigan. As we gear up for what’s ahead in 2022, here are a few recent, noteworthy developments that those competing in the industry should be aware of.

Governor Signs Legislation Easing Financial Reporting Requirements for Medical Marijuana Growers

Medical marijuana growers in Michigan previously were required to submit financial statements to the Michigan Regulatory Agency (“MRA”) and the municipality in which they operate every state fiscal year. That requirement was eased with Governor Whitmer’s signing of Michigan House Bill 4921, which amends the Michigan Medical Marijuana Licensing Act to allow medical marijuana growers to submit financial statements every three years. A copy of the bill, which became effective as of December 7, 2021, can be viewed here.

The MRA issued a bulletin on January 3, 2022, explaining that, based on the legislation, the MRA will revise the AFS report forms and combine the AFS requirements for medical and adult-use licensees into a consolidated report.

The MRA also explained that in the interim, the requirements for annual financial statements are as follows:

An annual financial statement will not be required for fiscal year 2022, unless a licensee is required to file a fiscal year 2022 report as a condition of a final order.
Licensees must file an annual financial statement for fiscal year 2020 and fiscal year 2021.

Most Recent Sales Numbers Show that Industry is Strong

The MRA’s most recent financial numbers for Michigan’s adult-use marijuana market show strong sales in November of 2021 (the most recent data available from the MRA at the time this was published). Combined medical and recreational sales were approximately $153 million in November. In addition, a recent report by the Marijuana Policy Project estimates that Michigan will collect nearly $350 million in taxes related to recreational marijuana sales in 2021, which includes $80 million in sales tax and $270 million in excise tax.

Massive Marijuana Recall Cut in Half, MRA Asks Judge to Reconsider

In mid-November, the MRA issued a massive recall affecting more than $200 million in marijuana products tested by Viridis Laboratories and Viridis North over a three-month period. Viridis filed a lawsuit, and the Michigan Court of Claims, on December 3, partially granted Viridis’ request for a preliminary injunction that halted the recall for Viridis North but not Viridis Laboratories.

On December 15, the MRA requested that the judge reconsider his decision that limited the scope of the recall to just Viridis Laboratories. The MRA asserted that it had gathered more testing data since the judge’s initial decision and found 26 percent of Viridis North recalled and retested source packages failed microbial retesting for total yeast and mold.

On December 20, 2021, the Court of Claims denied the MRA’s motion for reconsideration.

We will continue to keep you apprised of these and other important developments in the Michigan legal cannabis industry. If you have any questions, 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 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

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.”

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.

Medical Marijuana: State of Michigan Outlines New Procedures and Requirements for Medical Marijuana Facility Licensing

In less than a week, the state of Michigan will start accepting medical marijuana license applications. The Department of Licensing and Regulatory Affairs (LARA) released emergency rules on Monday, December 4, 2017, outlining procedures and requirements for potential licensees. The emergency rules are effective for at least the next six months, and could be extended for another six months as LARA continues the promulgation process for permanent rules.

Many of the items addressed in the rules have already been discussed by the Bureau of Medical Marihuana Regulation (BMMR) during licensing board meetings occurring earlier this year. Nevertheless, and by way of background, last year the state enacted its Medical Marijuana Facilities Licensing Act (MMFLA) to regulate dispensaries and clarify the legality of edible products in Michigan. The law allows licensed dispensaries to operate in communities that choose to allow them. Growers, processers, testing facilities, and transporters are also subject licensure and regulation under the act.

While the MMFLA took effect last year – December 20, 2016 — it included a built-in delay in implementation of 360 days to enable the state to establish the licensing system required by the Act. A person cannot apply to the state for a license of any kind under the MMFLA until Friday, December 15, 2017. And, no one can apply to the state for a license of any kind under the MMFLA unless the municipality where the person is located adopts an ordinance authorizing that type of facility.

Applying for a Medical Marijuana Facilities License

First and foremost under the newly released emergency rules, those seeking a license under the MMFLA will be able to submit applications on December 15, 2017. Applicants will have to pay a $6,000 fee per license application and undergo extensive background checks for anyone who has ownership interest. The background checks will include submitting fingerprints and a handwriting exemplar to the state.

The rules require licensee to meet certain capitalization requirements. The requirements range from $150,000 to $500,000. A retail operation — called a provisioning center – carries a $300,000 capitalization requirement, which must be proven through attested financial statements.

Only 25 percent of the capital required needs to be in liquid assets, cash or cash equivalents – easily converted to cash. Up to 15 ounces of usable marijuana or 72 marijuana plants may be used toward the capitalization requirements.

LARA has broad authority to deny a license. A licensee can be denied if an applicant fails to comply with the rules or if the applicant is operating a facility after December 15 without a license. That said, facilities that are operating in a municipality that has licensed them can operate after December 15, may be permitted to continue operations, but must submit documentation showing the local municipality allowed them to operate. The rules provide no mechanism to appeal an adverse licensing decision, or to contest the imposition of fines and penalties.

Currently operating facilities with municipal licensure must apply for a state license no later than February 15, 2018. If those facilities do not have a state license by June 15, 2018, their operation will be considered unlicensed activity and could be referred to law enforcement. Although the rules do not address the situation were licensure is not met by June 15 due to government delay.

Details on Licensing

Licenses will be up for renewal annually. Applicants and licensees will be required to report a variety of information to LARA, including changes of location, contact information, members, managers and adverse reactions to a medical marijuana product. Theft or other criminal activity on the premises will have to be reported to the department within 24 hours of occurrence.

LARA has sweeping authority to inspect, examine and audit records of the licensee and enter the facility without notice to inspect. The department is allowed to charge civil fines of up to $5,000 for an individual and $10,000 or an amount equal to daily gross receipts against a licensee for violations. Given the number and various requirements regarding inventory control and the specifications for the physical facility itself, the risk of fines and penalties is no insubstantial.

During the first 30 days a state-operating license is issued to a licensee, marijuana products will need be entered into a statewide monitoring system and inventory will need to be tagged and packaged.

Class C grower licenses, which would allow 1,500 plants, for example, may be stacked under the rules. And licensed growers, processors and provisioning centers will be permitted to operate at the same location.

Security Requirements for Marijuana Facilities

Applicants will be required to submit security plans. Facilities will be required to maintain an alarm system and a 24-hour video surveillance system. Licensed-facilities will also have to maintain visitor logs.

Advertising Stipulations for Marijuana Facilities

Licensees will not be permitted to advertise any marijuana products in a way that is visible to the general public. However, that does not apply to advertisements that are not about a specific product.

Products also will be prohibited from being marketed toward minors, and edible products cannot be associated with cartoons or other things that would appeal to minors. Edible products also cannot be easily confused with commercially sold candy.

Federal Regulation of Marijuana Facilities

Of course, while specified medical use of marijuana is permitted under state law, its use is still illegal under federal law, and we don’t know for sure what the federal government will do in the future with regard to these specified uses. The status quo is that federal attention is diverted away from uses that are “authorized” by and operated in compliance with state laws. Attorney General Jeff Sessions, however, has made his view clear: “Good people don’t smoke marijuana.” On the other hand, the industry seems to be growing at a pace that exceeds the federal government’s ability (time and resources) to do much about it.

Fraser Trebilcock understands the regulatory aspects of the marijuana industry along with the legal risks. Our attorneys are available to advise you on issues related to state law and compliance.

Fraser Trebilcock attorney Michael P. Donnelly has years of experience handling matters ranging from major insurance fraud to intellectual property disputes. He formerly served three years as the President of Fraser Trebilcock and is currently the Managing Partner of the Detroit office. He can be contacted at 313.965.4968 or mdonnelly@fraserlawfirm.com.

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.