United States: Recent Legal Developments Demonstrate Increasing Accommodation Of State Marijuana Regimes

Two recent federal court cases will have an effect on the U.S. marijuana industry. One case focused on the validity of the Colorado regime legalizing the sale of marijuana, while the other focused on insurance for a marijuana business. In both cases, the federal court decision had a positive resolution for state marijuana regimes, which is significant because previous federal court decisions – relating to, for example, bankruptcy and employment – came out unfavorably for the industry.

Supreme Court Dismissal

On March 21, 2016, the Supreme Court declined to consider a lawsuit challenging Colorado's legalization of recreational marijuana. The plaintiffs, Nebraska and Oklahoma, filed their complaint in December 2014 directly in the Supreme Court. While the Supreme Court usually considers only cases on appeal from lower courts, it has "original jurisdiction" to hear disputes between states, as here, where Nebraska and Oklahoma claimed harm to their sovereign interests. The plaintiffs alleged: "Marijuana flows from [Colorado] into neighboring states, undermining Plaintiff States' own marijuana bans, draining their treasuries, and placing stress on their criminal justice systems." The plaintiffs sought a declaratory judgment that Colorado's regulation of marijuana is pre-empted by federal law and also sought an injunction against the implementation of Colorado's laws.

In its reply brief, Colorado argued against the idea that federal law pre-empted its regulation of recreational marijuana, particularly in light of the federal government's nonenforcement of federal law in states that have legalized and regulated marijuana. Colorado noted that after the Department of Justice issued the Ogden memorandum in 2009 that de-prioritized use of federal resources in policing marijuana in states like Colorado, enrollment in Colorado's medical marijuana program increased eightfold in two years, from just over 5,000 patients to over 41,000. The Colorado congress thereafter implemented new regulations to track all marijuana grown and sold throughout the state, which were further expanded after Coloradans voted to legalize recreational marijuana in 2012. Then the Department of Justice issued the Cole memorandum of 2013 that, similar to the Ogden memorandum, de-prioritized enforcement of federal marijuana laws in states with robust enforcement of recreational marijuana regulations. Colorado also cited the federal Congress' December 2014 legislation that precluded federal funds from being used to prevent states from implementing medical marijuana regulations. Under this historical backdrop, Colorado argued against pre-emption on the basis that there was growing harmony between state and federal laws. Colorado also made several procedural arguments asking the Supreme Court not to exercise original jurisdiction.

After the Supreme Court invited the Solicitor General to express the views of the U.S. federal government, the Solicitor General filed a brief in December 2015 asking the Supreme Court to deny hearing the case, expanding on these procedural points. The brief argued: "Entertaining the type of dispute at issue here – essentially that one State's laws make it more likely that third parties will violate federal and state law[s] in another State – would represent a substantial and unwarranted expansion of [the Supreme Court's] original jurisdiction." Further, the Solicitor General reasoned that even if the Court had original jurisdiction, it would be prudent, given the intricate factual questions involved, to deny hearing this case.

The Supreme Court ultimately decided against hearing the case, though it issued no opinion to explain its denial. The dismissal of the lawsuit comes in a year when additional states may join Colorado, Oregon, Alaska, Washington state and Washington, D.C., in legalizing recreational marijuana depending on the outcome of voter referendums (and potentially legislative action) later this year.

Federal Colorado Court Upholds Enforceability of Insurance Policy

In January, a federal district court in the District of Colorado issued an opinion in Green Earth Wellness Center LLC v. Atain Specialty Insurance Co. that upheld the enforceability of an insurance contract covering marijuana. The court rejected a request by the insurer for judicial guidance on the legality of making an insurance payment in respect of marijuana. Explaining that courts do not give "advisory opinions," the court ruled that an insurance policy covering marijuana could not be void as against public policy simply by virtue of the property covered. The court also ruled that an insurer could not invoke a policy exclusion for "contraband" where the parties contemplated coverage of marijuana.

The decision is the second federal case that we are aware of to consider whether an insurance claim could be denied on the basis of the federal illegality of marijuana. In Tracy v. USAA Cas. Ins. Co., the District of Hawaii previously considered the enforceability of an insurance policy for marijuana, concluding that to "require Defendant to pay insurance proceeds for the replacement of medical marijuana plants would be contrary to federal law and public policy." The court relied on the federal Controlled Substances Act that criminalizes marijuana and the Supreme Court decision Gonzales v. Raich that upheld the Controlled Substances Act in California, notwithstanding that state's medical marijuana regime. In Green Earth v. Atain, the court acknowledged but declined to follow the District of Hawaii decision, citing "several additional years evidencing a continued erosion of any clear and consistent federal public policy in this area." The court therefore rejected the defendant's motion for summary judgment and ordered the case to proceed to trial.

In addition to potentially increasing the confidence of industry participants and insurers that marijuana is an insurable product, this decision demonstrates an additional area of increased flexibility at the federal level to allow states to create regimes for the sale of marijuana. 

Even bigger news on the federal front may be on the horizon, as the DEA recently announced it will be considering whether to reschedule marijuana, aiming to reach a decision in the first half of 2016. It remains to be seen what decision the DEA will make and how such decision will affect markets for medical and recreational marijuana in state-legal regimes such as Colorado's. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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