Questions abound for alcohol beverage companies

Given the complexity of regulations, can they invest in cannabis?

Faced with expansive entrepreneurial opportunities in the marijuana and hemp industries, alcohol beverage suppliers within the United States are faced with an existential conundrum of sorts: Do they jump into the fray or lose loyal customers to novel products in the rapidly expanding cannabis marketplace?

Furthermore, given the complexities of federal and state regulation in the U.S., is a cannabis investment even possible for a federally permitted alcohol beverage supplier or wholesaler?

 

Background

As has been widely documented, the federal Controlled Substances Act broadly prohibits the manufacture, distribution or dispensation of cannabis, a controlled substance. Violation of the Controlled Substances Act may result in imprisonment and significant monetary fines. (Although investments by U.S.-based alcohol suppliers into the legal, adult-use cannabis markets within the U.S. may not necessarily subject the suppliers to a disciplinary action against their permits, this article is intended to provide an overview of lower-risk investment options.)

Generally speaking, and regardless of whether an alcohol beverage supplier (such as a brewery, winery, distillery or importer) intends to distribute its product in interstate commerce or exclusively within a single state, it is required to obtain a federal basic permit or approval to engage in alcohol beverage production and/or distribution within the U.S. A federal basic permit is subject to various conditions and may be revoked or suspended if the holder violates facets of federal law.

Among other conditions, a basic permit requires ongoing compliance “with the twenty-first amendment and laws relating to the enforcement thereof, and with all other Federal laws relating to distilled spirits, wine, and malt beverages, including taxes with respect thereto.” But there is little guidance as to the intended breadth of the phrase “all other Federal laws relating to distilled spirits, wine, and malt beverages, including taxes with respect thereto.” However, in a 1946 decision, Billik v. Berkshire, the U.S. Court of Appeals for the Second Circuit made it clear that it is definitely something less than all federal laws.

Billik involved a challenge to a 30-day suspension of wholesaler’s and importer’s basic permits. The permits were suspended on the basis that the permittees had violated price regulations under the Emergency Price Control Act of 1942 (the Price Act). The permittees sold 1,600 cases of whisky at $11 per case in excess of the legal maximum price under the Price Act. The question considered by the Second Circuit was whether a violation of the Price Act “was a failure to comply with a federal law embraced within the meaning of the phrase ‘and with all other Federal laws relating to distilled spirits, wine, and malt beverages, including taxes with respect thereto’ found in Sec. 204(d).”

The Second Circuit concluded that the violation of the Price Act was not a lawful basis for suspending the permits. It reasoned: “Had Congress intended … to make compliance with all federal laws which a basic permit holder might violate in conducting his business so licensed a condition upon that permit, it would have been so easy to have said that in so many words …”

This is good news for the holder of a federal basic permit. It means that a remote violation of federal law is unlikely to affect the federal basic permit and ability of an alcohol beverage supplier to produce and sell alcohol beverages.

 

Canadian Cannabis Market

Based upon experience to date, an investment in Canada’s adult-use or medical marijuana market is a potentially safer play for a U.S.-based alcohol beverage operator.

While U.S. attorneys have the authority to prosecute conspiracies or aiding and abetting violations of the Controlled Substances Act, including, hypothetically, offshore investments by a U.S. company in the Canadian cannabis market, there is virtually no precedence for this type of action. The vast majority of cases involving the extraterritorial application of the Controlled Substances Act involve maritime drug enforcement or international drug couriers, together with an overt act or an attempt to affect the distribution of controlled substances within the U.S. The applicability of extraterritorial jurisdiction in this circumstance also turns upon whether the exercise of jurisdiction is consistent with principles of international law.

An investment in a licensed Canadian cannabis business by a U.S. alcohol beverage supplier neither involves the actual manufacture or distribution of cannabis in the U.S. nor any attempt to distribute a controlled substance within the U.S. Put simply, it is an investment in Canadian cannabis for distribution within the Canadian market. The likelihood of this type of prosecution seems remote at this time.

 

Industrial Hemp Option

Another lower-risk option for a U.S.-based alcohol beverage supplier is the emerging industrial hemp marketplace since the 2018 Farm Bill removes industrial hemp from the Controlled Substances Act and establishes a framework for cooperative federal and state regulation, including an allowance for unimpeded transportation of hemp in interstate commerce to and from states with U.S. Department of Agriculture-approved regulatory plans as provided under the Farm Bill.

However, as discovered by a Colorado-based hemp company, there are still some uncertainties and growing pains under the new law. An Idaho federal court recently upheld the seizure of approximately 7,000 pounds of industrial hemp by the Idaho State Police because the possession of hemp is still illegal under state law. The business in that case, Big Sky Scientific, purchased hemp in Oregon and was attempting to transport it to Colorado for processing. Big Sky Scientific unsuccessfully argued that Idaho law was preempted by the Farm Bill. The U.S. District Court for the District of Idaho reasoned that the Farm Bill requires federal approval of a state-level plan for testing and regulating hemp before it can be shipped in interstate commerce without state law interfering. Accordingly, consideration should be made of each state’s regulatory framework before pursuing interstate activities relating to industrial hemp.

 

Takeaways and Considerations

While there are some options for lower-risk investments in the cannabis industry by alcohol beverage suppliers in the U.S., the cannabis industry remains in uncharted territory, with no guarantee that federal enforcement relating to either domestic or offshore cannabis investments will not occur in the future. Accordingly, before making any such investment, a U.S. alcohol beverage supplier should consult with its attorney.

 

Michael B. Newman is a partner in Holland & Knight’s San Francisco office (www.hklaw.com) and head of the firm’s Alcohol Beverage Team. He focuses on counseling alcohol beverage and hospitality industry clients on national and international regulatory, contract, legislative and licensing matters, advertising and promotional law, importation matters, trade practices and inter-tier relations. He works with international importers, suppliers, exporters, domestic manufacturers, regional and local distributors and retailers across the United States. He can be reached at michael.newman@hklaw.com.

Jason H. Barker is a Portland business attorney for Holland & Knight who practices in the areas of alcohol beverage regulation, corporate law and securities. He represents domestic and international clients, including breweries, distilleries, wineries, distributors, importers and retailers in all three tiers of the alcohol beverage industry. He can be reached at jason.barker@hklaw.com.

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