Affidavit: Pennsylvania Medical Marijuana Act: Key Components and Potential Risks

Contributors: Lisa Clark, JD'89 and Seth Goldberg, Esquire
To learn more about Lisa and Seth, click here.

 

Affadavit.jpgOn April 17, 2016, Pennsylvania became the 24th state to legalize the use of marijuana for medicinal purposes when Pennsylvania Governor Tom Wolf signed into law Senate Bill 3, known as the “Medical Marijuana Act” (the “Act”). The medical marijuana market is huge: in a report published by ArcView Market Research and New Frontier, titled The State of Legal Marijuana Markets, 4th Ed., the authors estimate sales in the U.S. legal marijuana market grew to $5.4 billion in 2015, and they project sales in this market to grow to $21.8 billion by 2020.

While the Act became effective on May 17, 2016, the Department of Health (the “DOH”), which administers the Act, must develop a regulatory structure and issue regulations prior to implementation. The DOH is actively engaged in these activities, with a goal of issuing comprehensive draft regulations in the next several months. On April 4, 2016, the Governor appointed John J. Collins the Director of the newly established Office of Medical Marijuana. Because the market will be highly regulated, understanding the Act’s requirements and following regulatory developments are critical to defining any business opportunity.

The Act limits the use of medical marijuana to patients suffering from one of the 17 “Serious Medical Conditions” identified in the Act, which are: cancer; HIV/AIDS; amyotrophic lateral sclerosis; Parkinson’s disease; multiple sclerosis; epilepsy; inflammatory bowel disease; damage to the nervous tissue of the spinal cord with objective neurological indication of intractable spasticity; neuropathies; Huntington’s disease; Crohn’s disease; post-traumatic stress disorder; intractable seizures; glaucoma; sickle cell anemia; severe chronic or intractable pain of neuropathic origin or severe or intractable pain in which conventional therapeutic intervention and opiate therapy is contraindicated or ineffective; and autism.

The Act also restricts the forms in which medical marijuana may be cultivated and dispensed to patients and caregivers as a pill, oil, topical cream/ointment, vaporization, nebulization, tincture or liquid, and it makes smoking and incorporating into edible form unlawful. The Act creates two categories of entities that may be permitted under the Act - “grower/processors” and “dispensaries” - and restricts the number of permits that may be issued to up to 25 grower/processor permits and up to 50 dispensary permits. Each dispensary may operate up to three locations, no person may be issued more than five individual dispensary permits or more than one individual grower/processor permit, and no more than five grower/processors may be issued dispensary permits. The Act also provides for academic clinical research of medical marijuana.

Not only will this market include the core cultivation, processing, and dispensing businesses, but also, as seen in other states that have legalized cannabis use, the industry may generate a proliferation of “ancillary” businesses in Pennsylvania. Cannabis-focused start-ups in other states have included medical-technical, LED lighting, design and build, software and electronic tracking, security, apps, scientific research and marketing firms, among others.

As a result, the medical cannabis industry in Pennsylvania will likely involve multiple market sectors, such as healthcare, construction, real estate, information and technology, security, private equity and venture capital, and insurance, to name just a few.

Among the key components of the Act are:

  1. the requirements and restrictions applicable to medical practitioners interested in prescribing medical marijuana;
  2. the process by which patients and caregivers may obtain identification cards permitting them to acquire and possess medical cannabis;
  3. the information a “Medical Marijuana Organization” must supply to obtain a permit as either a “grower/processor” or “dispensary,” including criminal background, financial wherewithal and security, electronic inventory tracking, and taxation compliance measures;
  4. the establishment of a 15-member Medical Marijuana Advisory Board that will examine and analyze the industry and make recommendations to the Department regarding the implementation of and changes to the Act; and
  5. criminal and civil penalties for violations of the Act.

Notwithstanding the Act, the cultivation, processing, distribution, possession, and use of medical marijuana in Pennsylvania remains a federal crime because marijuana continues to be listed as a Schedule 1 controlled substance under the Controlled Substances Act (“CSA”), 21 U.S.C. § 812(c). However, for now, the potential for federal criminal prosecution for conducting activities pursuant to the Act is attenuated because the U.S. Department of Justice has been adhering to policy statements and guidance directed to federal prosecutors — first issued in 2009 and reiterated in 2011, 2013, and 2014 — suggesting that they not devote resources to prosecuting activities conducted pursuant to and seemingly in accordance with state cannabis legislation, and to defer to the state’s enforcement with respect to such activities.

It is important to note that, due to the federal ban on marijuana, individuals and businesses conducting activities pursuant to state cannabis legislation face obstacles in other areas. For example, access to federally insured banks may be restricted, bankruptcy may not be an available out, and business-related tax deductions may not be permissible. In addition, the insurance industry has not yet developed a range of cannabis industry-specific lines of insurance, and carriers may be reluctant to write policies for participants in the space.

Individuals and businesses considering whether to get into the Pennsylvania medical marijuana industry should be aware of the following:

  • Comprehensive, draft DOH regulations are expected to be issued in the next several months on their website at http://www.health.pa.gov/My%20Health/Diseases%20and%20Conditions/M-P/MedicalMarijuana/Pages/default.aspx#.V5ts3tjD9Hg. The Department has already developed safe harbors for children and their caregivers who wish to purchase medical marijuana across state lines.
  • The scheduling of marijuana under the CSA - as long as it remains a Schedule 1 drug - creates the possibility of prosecution for federal crimes, including for aiding and abetting, and limited protection under other federal laws.
  • There may be significant capital and cash requirements for applying for, obtaining, and maintaining grower/processor and dispensary permits.
  • The locale of operating as a grower/processor or dispensary and applicable zoning restrictions will be strictly regulated.
  • Obtaining the know-how to develop the space for cultivation, the methods for processing and the systems for dispensing is critical.
  • The measures that need to be developed and implemented for complying with the security, electronic tracking, and taxation requirements are complex.

While the potential returns from the medical marijuana business may be enticing, participation in the industry is not without risk, especially given the federal prohibition of marijuana. Those risks, combined with the start-up costs and complex regulatory scheme the Act establishes, indicate that individuals and business who are considering entering the market should carefully consider their options and obtain the advice of experienced legal counsel and consultants to ensure business success.

Contact Seth at: SAGoldberg@duanemorris.com
Contact Lisa at: LWClark@duanemorris.com