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What Business Owners Should Know As Cannabis Lounges Prepare to Open In Nevada

Business owners should learn the legal landscape as recreational marijuana lounges prepare to open in Nevada. The Legislature passed a new law that takes effect on October 1, 2021, and the bill will change the way that cannabis is consumed in the state. Here is what business owners need to know. 

Social Lounges for Consumption Will Be Allowed

Under the new law, marijuana can be consumed legally in social lounges. These are similar to taverns where alcohol is served. People over the age of 21 will be able to visit the taverns and purchase and use marijuana there in limited/single use quantities. 

Initially, there will be 20 lounges permitted to open. Half of these will be reserved for social equity applicants, the qualifications for which will be determined and regulated by the Cannabis Compliance Board. There will be no limits on the total amount of lounges that will eventually be opened. The only cap is that owners of multiple dispensaries will be limited to opening only one lounge, and there are restrictions for persons or entities that have already sold marijuana establishments licenses in the state.

This New Law Helps Tourists

The new law solved a dilemma that Nevada businesses and cannabis users had. Tourists were not allowed to purchase and legally use cannabis in casinos. This removed a very large potential market from cannabis businesses. The lounges give these tourists a place to legally consume the marijuana that they purchase. This is expected to be a huge opportunity for business expansion for Nevada companies. 

Tourists will be allowed to purchase single-use cannabis products for use in these lounges. Additionally, these lounges may provide patrons with the means to use cannabis.  Business owners will likely conceive of even more imaginative ways to provide the public with cannabis and could pair it with a number of experiences. One could easily imagine what the glitz of Vegas could be like paired with legal cannabis experiences. The only limits would be the regulations and the business owner’s creativity. 

The law takes effect on October 1, 2021 and the Cannabis Compliance Board is still writing regulations to implement the law. Many legal conditions are still undecided. This could be the start of an entirely new experience for Las Vegas tourists, and a cannabis law attorney could help explain how prospective business owners could apply.

Are You in Compliance with Nevada’s Cannabis Testing Facility Regulations?

Nevada’s cannabis industry is highly regulated, and testing facilities have a number of legal requirements to follow. Each testing facility must always be prepared to show that they are complying with the regulations. 

Nevada Can Fine or Punish Testing Labs

The state has acted over the years to enforce its regulations. For example, one testing facility was fined $70,000 for inflating THC levels in its products. The facility was cited for several legal violations, including concealing evidence, and a failure to keep records.

When the state performs an audit or shows up in response to a complaint, they will ask for records and procedures. Nevada will perform a very close inspection of the business. If a testing facility is just starting to worry about an inspection when the auditors are at the door, chances are that there will be problems.

Testing Labs Should Have a Culture of Compliance

Compliance must be an everyday thing for a cannabis testing facility. A business should always be prepared for an inspection. The state may show up unannounced or could inform of an inspection on very short notice. Nevada wants to take testing labs by surprise because this is how they learn what is really happening at the facility. Some testing labs have had their licenses suspended based on the results of an inspection.

While customers are looking for high THC content, labs must be careful about the results that they report. They should resist any pressure from growers about their testing results. Oftentimes, testing labs find themselves stuck in the middle between growers and regulators. Nevada has real enforcement power, and testing labs should be aware of the state’s capability. The state will look very closely at the testing lab’s policies and procedures and whether they are following them. 

With that in mind, a testing lab should be working with a cannabis law attorney year-round and not just after they are inspected. The lawyer could make them aware of the regulations and inform them of any changes. The cannabis industry changes rapidly, and the state may change how it interprets its rules or could institute new regulations. It is up to testing labs to know about the changes. An attorney could help labs prepare for the inevitable notice that the state will be inspecting the facility. This way, businesses will not end up with a negative surprise. 

Crackdown on CBD Industry: Unsubstantiated Marketing Claims

The Food & Drug Administration (FDA), along with, the Federal Trade Commission (FTC) closely watches the CBD sector for making illegal and unproven medical claims.  In March 2021, FDA issued warning letters to several companies for marketing their CBD products as “unapproved drugs.”

Violations of FTC Regulations

On December 17, 2020, FTC imposed monetary sanctions against several companies for making unsubstantiated medical claims about their CBD products. Dubbed ‘Operation Deceit,’ the action was in response to marketing claims that FTC maintains are ‘unsubstantiated’ regarding the capability of CBD products to effectively treat medical conditions and diseases like cancer, glaucoma, chronic pain, Alzheimer’s disease, and more.

FTC’s sanctions led to settlements, which required the affected companies to stop using unsubstantiated marketing claims. Financial penalties imposed on these companies were between $20,000 and $85,000.  

FTC, an independent organization responsible for enforcing the ban on the dissemination of deceptive claims for specific categories of products, calls for fact-based advertising. This means companies must use truthful and evidence-supported claims to promote or market their products. Advertisements that make safety or medical claims must be backed by reliable scientific evidence.

The several companies affected by the recent FTC crackdown were making claims about the health benefits of their CBD products that lacked scientific proof. Additionally, they also falsely implied that their claims were either U.S.-government-verified or scientific-evidence-backed.

FDA’s Warning Letters

FDA’s warning letters issued in March cite assertions associated with CBD products easing pain, inflammation, anxiety, and depression. The letters also term assertions related to the effectiveness of CBD products in addressing a variety of health conditions and diseases, including PTSD, ADHD, and rheumatoid arthritis, as unlawful and unsubstantiated. Other scientifically unsupported claims cited by FDA include the ability of CBDs to prevent tumors, convulsions, and bacterial and fungal infections.

Complying with Regulations

Companies dealing with CBD products must ensure their contracts, financing, marketing, and advertising take into consideration legal issues affecting the industry. That way, they will focus on building their businesses without worrying about lawsuits from consumers and organizations like FTC and FDA. A cannabis law attorney who knows the relationship between state law, federal law, FTC regulation, and FDA regulations can help a company navigate regulatory uncertainties and run a legal and compliant CBD business. The attorney can also help a company review claims it makes about its product to ensure they are truthful and properly substantiated.

CBD Industry Caught Between a Rock and a Hard Place

CBD companies in Nevada operate in a legal gray zone because of a lack of regulations from the federal Food and Drug Administration. While it is technically illegal to market ingestible CBD under the Food, Drug, & Cosmetic Act, the CBD industry has rapidly grown and offers many ingestible products. Regulatory uncertainty and problems with mislabeled products or unsubstantiated claims of therapeutic benefits continue to cause issues for CBD businesses.

The FDA governs hemp-derived CBD products. However, it has failed to issue regulations that could provide businesses with greater operational insight. At the same time, CBD businesses must contend with the potential of criminal liability under the federal Controlled Substances Act if the Department of Justice changes its stance and decides to pursue criminal actions against them.

Potential Regulatory Actions by the FDA

Before July 2020, the FDA took a few steps to regulate the marketing of CBD ingestibles. The only steps it had taken included holding a hearing, collecting data, reporting to Congress, and sending warning letters to companies that marketed products to treat certain conditions. Since July 2020, the FDA has taken several steps to provide greater regulatory certainty for the industry and to provide a legal pathway for marketing CBD products. 

The agency submitted a CBD testing report to Congress. It has also provided drafted guidance for clinical research into quality. A CBD enforcement policy was sent to the Office of Management and Budget for review and guidance. The National Institute of Standards and Technology announced a program for labs so that they can have greater reliability and accuracy in testing CBD products for different compounds, including THC and CBD. This program might help to differentiate between federally legal hemp products and federally illegal cannabis products.

In August, the Drug Enforcement Administration issued an interim final rule that it states is meant to align the DEA’s regulations with the Farm Bill. The Farm Bill legalized hemp crops. However, this interim rule could have a major detrimental impact on CBD companies. Under the interim rule, a derivative of hemp that contains a concentration of THC greater than 0.3% would be considered to be a Schedule I controlled substance under the Controlled Substances Act, potentially exposing many businesses to criminal liability. 

Navigating the landscape is difficult for CBD companies because of the regulatory uncertainties. A cannabis law attorney may offer guidance to help companies avoid potential problems.   

CBD Companies Under Fire

Nevada cannabis businesses have faced legal threats from consumer lawsuits, but recent federal court actions to halt several class-action lawsuits against cannabis companies might allow companies to breathe a sigh of relief. Consumers have filed numerous lawsuits against cannabis makers to allege that their products do not contain the amount of CBD claimed or that they contain a greater concentration of THC than described. These claims have primarily focused on the marketing practices of distributors and manufacturers of CBD products. However, several lawsuits have been stayed because of the lack of marketing regulations from the U.S. Food and Drug Administration.

Lawsuits Against Cannabis Companies

Plaintiffs’ lawyers across the U.S. have turned their attention to cannabis companies. Over the past year, an increasing number of consumer lawsuits have been filed against cannabis companies because of their marketing practices. The claims in these lawsuits focus on claims that CBD-infused products do not contain the amount of CBD they advertise, do not provide the claimed therapeutic benefits, or contain more THC than advertised. The FDA regulates manufacturers and distributors of CBD-infused products. However, the agency has not issued any regulations about how these companies market their products. Because of the lack of regulations, several federal courts have halted lawsuits against cannabis companies until guidance is provided by the FDA.

What Does the Halting of the Lawsuits Mean?

Since multiple courts have stayed actions against cannabis companies based on their marketing practices, the plaintiffs’ bar may be more hesitant to file these types of lawsuits. This might mean that cannabis companies may see a reduction in the number of lawsuits. However, once the FDA completes its rulemaking process and issues marketing regulations for how cannabis companies advertise their products, lawsuits will likely increase again, depending on what regulations are passed and how they will be enforced.

Cannabis companies should carefully review their marketing practices to protect themselves from litigation in the future. Companies may want to implement sound testing processes to correctly identify the concentrations of CBD and THC in the products they sell. They should also be careful of touting therapeutic benefits for their products that are unsupported by research. A cannabis law attorney might review the marketing efforts of a cannabis company to ensure that they will not expose the business to lawsuits in the future. When the regulations are issued, companies should ensure that their marketing practices strictly adhere to them.

Legal Considerations for the Cannabis Industry

Entrepreneurs in Nevada who want to open cannabis businesses must take account of the legal issues that apply to the industry in their contracts, financing, and other matters. Paying attention to the legal considerations of the cannabis industry can help keep businesses from running afoul of the regulations and laws that govern this highly regulated industry. Businesses will need to do some of the same things that other types of businesses do, including choosing a legal entity structure, securing funding, and drafting contracts for their suppliers. However, they will also need to take a few extra steps because of the nature of the cannabis industry.

Preliminary Steps For a Cannabis Business

Before people engage in a cannabis business, they need to familiarize themselves with the laws and regulations that govern the industry in Nevada. People should recognize that cannabis is still illegal under federal law and ensure that they set up their companies in a way that stringently follows Nevada’s requirements to be protected. Entrepreneurs should choose a legal entity structure under which their companies will operate for liability protection. They will also need to secure all of the licenses that are required to operate the business and secure funding. Entrepreneurs will need to find banks that will agree to enter into banking relationships with them.  Many banks refuse to work with cannabis businesses, so this may take some research.

Cannabis Contracts

Contracts for cannabis businesses should include language stating that both parties understand that cannabis is illegal under federal law. The parties should agree that they will operate strictly in compliance with state regulations and laws. The contracts should also include indemnification and dispute resolution clauses and provide that the jurisdiction to handle disputes lies with the state courts to avoid the federal courts from deciding cannabis contract disputes. Contracts will need to be drafted with the company’s suppliers and distributors, with a careful review by a cannabis law attorney to ensure the business is protected.  

Real Estate and Zoning Issues

If the business will acquire real estate, the owner will need to research zoning issues to ensure that the proposed location will allow a cannabis business to operate. The owner will also want to ensure that the lease term will last for the entire licensing period so that business operations will not be disrupted because of the expiration of the lease.  This process also necessitates approval from local municipalities. 

How COVID-19 Is Impacting the Cannabis Industry in Nevada

As the COVID-19 pandemic has spread across Nevada, the cannabis industry has been impacted in several ways. The stay-at-home order that was issued by Gov. Sisolak caused slumping sales even though marijuana businesses were declared to be essential and allowed to remain open. While the pandemic has driven cannabis sales in other states that have legalized marijuana for recreational and medical use, Nevada’s unique position as a center for tourism has meant that cannabis businesses have fared differently. 

Plummeting Sales

While some states have seen increases in marijuana sales during the pandemic, cannabis businesses, Nevada has had different experiences. When the stay-at-home order was issued in March, business fell sharply. One of the reasons for the drop in sales was a general fear of being exposed to COVID-19. Another was the drop in the number of tourists as many recreational marijuana businesses in Las Vegas and Reno depend on tourists for a large slice of their profits. Some cannabis businesses have turned to deliveries as a way to make up for their losses. However, many continue to struggle because of significantly reduced foot-traffic from tourists and locals alike.

Unavailability of Financing

While cannabis is legal for recreational and medical use in Nevada, it is still a Schedule I controlled substance under federal law. Because of its designation under federal law, cannabis businesses already struggle to obtain bank financing. Like other industries, the cannabis industry experienced a large drop in profits because of the pandemic. However, cannabis businesses in Nevada were not eligible for funds under the federal CARES Act, which provided help to many other types of businesses. This has led to a quandary for cannabis business owners who need to find financing to continue operating. Cannabis businesses are also heavily regulated and highly taxed, presenting them with additional financial hurdles.

Pressure From the Black Market

The heavy regulation and taxation combined with a lack of access to financing mean that the legal cannabis industry is susceptible to pressure from the black market. People who sell cannabis illegally do not have the same financial pressures and can sell their products to buyers in their homes without adding taxes. However, the increase in black market sales also places buyers at risk of contracting the virus and purchasing untested and unregulated products, while also harming legitimate businesses and Nevada’s economy. 

Championing A Cause

Catching up with Senator Tick Segerblom on Nevada’s marijuana progress.

Click here to read more.

Championing a Cause magazine feature

Group Sues State, Washoe County Over Medical Marijuana Licensing Process

A local business group has filed a lawsuit against the State of Nevada and Washoe County for allegedly failing to comply with state law concerning medical marijuana dispensaries.

Washoe Dispensary LLC filed the complaint in the Second Judicial Court of Washoe County. The group says it was ranked 6th out of 11 applicants for a license to operate a dispensary in unincorporated Washoe County.

Washoe County is allowed 10 dispensaries: three in Reno, two in Sparks and five in unincorporated Washoe County. The law also provides that no entity shall have more than 10% of the total dispensary licenses for any jurisdiction.

Washoe Dispensary is challenging the state’s rankings based upon the alleged failure to follow the 10% rule as well as the failure to follow the intent of the law in allow local governments the ultimate decision on licensing.

“The intent of the legislation was to have the state grant provisional licenses to qualified applicants and to allow the local governments the flexibility to make the final determination whether to accept those applicants chosen by the state or to request further applicants from the State’s ranked list,” said Ardea Canepa, attorney for Washoe Dispensary. “The state tied the hands of local governments by not allowing the local government to request further provisional licenses from the State for the next highest rank applicant, effectively removing local government from the process.”

Earlier in the application process, the lawsuit says the state had responded to questions that stated if an applicant met the minimum requirements of the State, it would be ranked and then sent to the appropriate local jurisdiction for final approval. This allowed for each local jurisdiction better control of geographic disbursement to meet the needs of its community

“By not following this practice, Washoe County is slated to have three dispensaries in Incline Village/Crystal Bay, one near Galena High School, and one in Sun Valley. That definitely goes against the idea of geographic disbursement and allowing patients all across Washoe County easy access to this medication,” Canepa said.

“Setting up three dispensaries in Incline Village/Crystal Bay is ridiculous,” said Shane Smith, one of the partners in Washoe Dispensary. “The purpose of this legislation was to allow Nevadans access to medical marijuana, a drug proven to help ease the side effects of chemotherapy, assist in the treatment of PTSD, as well as a host of other medical issues. Having three dispensaries in such close proximity to each other, and to the California state line, seems to indicate the state was either oblivious or catering to the idea of building a medical tourism industry at Tahoe centered around medical marijuana.”

The lawsuit says the Washoe County Commission met and voted last month to move ahead with issuing licenses to the five applicants who received provisional licenses from the State, despite concerns commissioners voiced at the meeting about having more than one dispensary in Incline Village.

“Most of us have, in good faith, invested thousands of dollars to fulfill the state application process and also the County’s special use permit process,” said Smith. “We complied with the process laid out in the law, we expected them to do the same.”

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Suit Challenges Medical Pot Dispensaries in Washoe County

RENO, Nev. (AP) – A legal battle is brewing over the licensing of medical marijuana dispensaries in Washoe County.

One of the license applicants has filed a lawsuit against the state that says the state ranking system undermines a part of the law intended to guard against monopolies.

Lawyers for Washoe Dispensary LLC told the Reno Gazette-Journal that Tryke Companies Reno LLC should not be awarded two licenses – one in Sparks and one in unincorporated Washoe County.

They also challenge plans to issue three of the total five licenses allowed in the unincorporated county at north Lake Tahoe – in Incline Village and neighboring Crystal Bay.

The suit says the state failed to follow the law requiring that local governments have the final say about where the dispensaries should be located.

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