Legalization of the Recreational Use of Cannabis in New York

Aug 23, 2021 | Blog
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In March, Governor Andrew Cuomo signed the Marijuana Regulation and Taxation Act (“MRTA”) into law, officially making New York the 16th State to legalize marijuana on a recreational use basis for all adults 21 and older. Since our prior update on cannabis legalization, those legalization efforts across the country have gained significant ground. As of today, 36 states plus the District of Columbia have now legalized medical marijuana for medical/therapeutic use. Of those states, 18 plus the District of Columbia also have legalized adult recreational use of marijuana. While there have been some efforts to slow the legalization train down, South Dakota being a notable example, the decriminalization and legalization of recreational use has shown little signs of losing steam. Recent polling indicates that more than 90 percent of Americans support legalization of medical marijuana with around 60 percent additionally supporting legalization of recreational marijuana.

For the last few years, the push to legalize the recreational use of marijuana in New York has been in full swing, albeit in fits and starts politically. In 2018, the New York State Health Department recommended its legalization after a study was ordered by Governor Cuomo of neighboring states’ legalization efforts, and various other boards, including the New York State Bar Association, also showed their support.

With the passage of the Marijuana Regulation and Taxation Act or MRTA this year, New York not only legalized recreational use of marijuana, it passed what is arguably one of the most progressive and far-reaching marijuana legalization laws in the United States. Under the MRTA, former convictions and criminal records for actions deemed legal under the new law will be expunged. While issues remain on the implementation of large-scale expungement of cannabis convictions, New York has attempted to take the high road by instituting equity programs to promote participation in the marijuana industry by the communities most disproportionately impacted by its former prohibition.

Additionally, the MRTA also allows for the delivery of marijuana around the state as well as for “consumption sites” where it can be legally consumed. Municipalities throughout New York have until this year’s end to “opt out” of having retail dispensaries, or consumption sites, within their locales, or be deemed to have opted in.

Economic Impact

The state believes the cannabis industry is likely poised to create a much-needed economic boom, which given the current slump caused by the ongoing COVID-19 pandemic, may be just what the doctor ordered. Estimates show that legalization could lead to approximately 60,000 new jobs in the state and over $350 million in additional annual state tax revenue.

With recreational use now legal throughout the tri-state area composed of Connecticut, New Jersey, and New York, the eastern seaboard may be poised to become an even larger green market than the west coast. According to a study conducted under the auspices of the New York Medical Cannabis Industry Association, it has been estimated that the total potential market value of New York’s cannabis industry alone could be as much as $4.6 billion as of 2023, with growth expected to increase to nearly $6 billion by 2027, assuming prevailing trends hold.

New York’s Framework

The MRTA establishes the Office of Cannabis Management (“OCM”) which will be governed by the Cannabis Control Board (“CCB”) composed of 5 board members, 3 appointed by the governor and 1 appointed by each state legislative house. The CCB will have final say in approving licensing applications for potential green entrepreneurs and will also oversee regulation of almost all of the industry including packaging, advertisement, and general messaging. Moreover, under the MRTA, the CCB’s mandate goes beyond marijuana. The CCB is also tasked with generating and implementing rules and regulations for “cannabinoid hemp.” It is anticipated that this will be administered ultimately through the OCM. How that will eventually align with previously granted authority to the New York State Department of Health to develop New York’s “Cannabinoid Hemp Program” still has yet to be determined.

An executive director, appointed by the Governor, with the advice and consent of the Senate, will be responsible for managing the day-to-day administration of the OCM and will perform any duties that are delegated to them by the CCB. Additionally, the chairperson of the CCB will also likely have significant influence on setting the ground rules and regulatory controls and, thereby, the cannabis industry in general in New York.

Appointment of the chairperson, and getting the CCB up and running, is a critical first step for establishing the market for legalized recreational use of marijuana in New York. It was expected that Governor Cuomo would have a chairperson in place before the most recent legislative session ended in early June; however, that failed to transpire. At present, there appears to be cautious optimism that upon Governor Cuomo’s announced departure from office, that his replacement, Lt. Governor Kathy Hochul, will be more receptive to filling the CCB’s chairperson position and making sure that the CCB, its commissioners, and the OCM will finally be up and running and able to move forward in their critical regulatory and oversight roles.

Legal Considerations

As with any major piece of legislation, legal considerations will always be an important factor, and given that the MRTA is establishing a major new market, understanding the law will inevitably play a major role in which businesses thrive and which fail.

Litigation

As with any market, cannabis is rife for potential litigation. Given that cannabis legalization in New York is still in its infancy, potential areas in which we expect to see a growth in litigation include: breach of contract, employment disputes, shareholder litigation, securities litigation, real estate, government investigation, and even patent and trademark disputes. Understanding New York’s framework for legalization and its licensing scheme is important, but having experienced representation could prove to be an invaluable asset to business success in this new market as the MRTA comes into full effect.

Transactional

In additional to litigation, entrepreneurs in this new space will need to consider things such as entity formation, financing, compliance with regulatory schemes, mergers and acquisitions, and corporate restructurings. As with any business, laying the proper groundwork will lead to a thriving business and will curb the risk of potential litigation down the road.

Licensing

Under the MRTA, there will be multiple different license types and several sub-types that can be granted to green entrepreneurs. The MRTA anticipates there will be licenses for cultivators, processors, distributors, retailers, onsite consumption, micro businesses, cooperatives, and nurseries. Then there are also various ancillary licenses for such things as testing and delivery. Additionally, the MRTA contemplates separate licenses relevant to the processing as well as retail sales of hemp and hemp cannabinoids. From a social equity and anti-monopolistic standpoint, the law generally also seeks to prohibit vertical integration by restricting a single license to a single unrelated entity, thereby significantly broadening the number of potential licensees and spreading the wealth, so to speak, amongst many businesses both large and small. This has similarities to the “tide house laws” which have been common practice in the alcohol beverage industry.

Unlike California, which released different types of licenses in a staggered manner over the course of a number of years, New York contemplates launching all license types simultaneously. Each license will have a lifetime of two years and then will be required to be renewed. Additionally, for local control purposes, six of the licenses (including retail dispensary, registered organization adult-use cultivator, processor, distributor, and on-site consumption) will require applicants to notify the applicable municipality, city, town, or village of their anticipated location site prior to filing their license application. There is also a significant social inequity economic equity plan (“Plan”) component tied into future licensing as mandated by the MRTA. This Plan is likely to have far-reaching impact on the issuance of licenses to operate within the cannabis industry in New York.

Thoroughly understanding New York’s licensing framework and its corresponding rules and regulations as they are promulgated and adopted, will obviously be a prerequisite for any entrepreneurs looking to effectively throw their hat into this new market.

Intellectual Property

As legalization continues to blossom across the country, intellectual property (“IP”) disputes surrounding the cannabis industry continue to play an increasingly important role. Despite marijuana’s continued illegality under federal law, cannabis patents are legal, and many entrepreneurs have moved to protect their trade secrets, unique products, and processes for production. Protecting your cannabis IP is an extremely important step in ensuring a thriving business. Ultimately though there is also a fine line that entrepreneurs must walk in ensuring their IP is sufficiently protected, yet flexible enough under differing state regimes.

Employment

As a by-product of New York’s legalization of recreational use of marijuana, employers will have to revisit their current drug policies. The MRTA prevents employers from discriminating based on drug testing, essentially preventing employers from making adverse hiring decisions based off a drug screen for THC. That being said, employers will still be able to have policies related to THC in place and will be able to terminate employees that show signs of intoxication while on the job.

Barton attorneys have a wide range of experience in entity formation, corporate governance, venture capital, and broad commercial litigation including breach of contract, employment disputes, corporate restructuring and reorganizations, and intellectual property disputes. As a top boutique New York firm, Barton’s approach is to provide our clients with tailor-made legal strategies through an interpersonal and client-based model. Should you have questions or require additional information about any of the above or generally with respect to the laws and regulations concerning cannabis legalization, please contact Eric W.Sleeper and Christopher J. McNamara.