CURRENT MONTH (May 2024)
Cannabis Law
DEA Proposes Rule to Reschedule Marijuana: Key Definitions
By Daniel Shortt, McGlinchey Stafford PLLC
On May 16, 2024, the Drug Enforcement Administration (DEA) released the proposed rule (Proposed Rule) to reschedule marijuana from Schedule I to Schedule III under the Controlled Substances Act (CSA). The rule was published in the Federal Register on May 21, 2024, kicking off the notice and comment period. Comments must be submitted by July 22.
“Marijuana” under the CSA is defined as “all parts of the plant Cannabis sativa L., whether growing or not,” in addition to seeds, resin, and other derivatives of the plant. However, the definition exempts hemp (cannabis with less than 0.3 percent delta-9 tetrahydrocannabinol (delta-9 THC)) and seeds incapable of germination or the stalks of the plant. The Proposed Rule will move marijuana from Schedule I to Schedule III but will not change the definition in the CSA.
Both marijuana and hemp are different forms of cannabis. The delineating factor is the presence of delta-9 THC at the time of cultivation. The 2018 Farm Bill legalized hemp by removing it from the definition of marijuana under the CSA. The Farm Bill defined hemp to include all derivatives from hemp, including cannabinoids from hemp.
The term “tetrahydrocannabinols” is defined in DEA regulation, and the Proposed Rule tweaks the definition to mean all tetrahydrocannabinols natural or synthetic, but not those occurring in marijuana or hemp. Interestingly, under the Proposed Rule, tetrahydrocannabinols would remain in Schedule I, although these compounds derived from marijuana would be Schedule III and those from hemp would continue to remain outside the Schedules of the CSA.
The Proposed Rule would create a new term, “naturally derived delta-9-tetrahydrocannabinols,” meaning all delta-9 THC that is occurring in the plant naturally, other than those from hemp or the seeds and stalks of the plant. These items would be placed in Schedule III.
The term “marijuana extract” is not defined in the CSA but is defined in DEA regulation and currently listed in Schedule I. It is defined as “an extract containing one or more cannabinoids that has been derived from any plant of the genus Cannabis, containing greater than 0.3 percent [delta-9 THC] on a dry weight basis[.]” This definition does not create a carve-out for extracts from hemp. The DEA rule defining marijuana extracts was finalized in 2016, prior to the passage of the 2018 Farm Bill. The definition was opposed by the burgeoning hemp industry, and the DEA clarified that the term marijuana extract did not encompass hemp, despite there being no distinction in actual regulation. Unlike the amended definition of tetrahydrocannabinols and the new “naturally derived delta-9 tetrahydrocannabinols,” the Proposed Rules does not exempt hemp from the definition of marijuana extract.
The Proposed Rule may be amended during the notice and comment period. Time will tell whether the DEA changes the current definition of marijuana extract, and this will likely be a point of emphasis during this process.
Marijuana Rescheduling Could Open the Door to the Development of Botanical Drugs
By Daniel Shortt, McGlinchey Stafford PLLC
As the Drug Enforcement Administration (DEA) moves marijuana from Schedule I to Schedule III, a new pathway for the development of marijuana-based prescription drugs opens. Schedule I drugs are deemed to have no medical use, which has hampered the development of marijuana drugs. Schedule III drugs do have a medical use and can be legally marketed and sold in compliance with federal law.
Marijuana is a unique substance and has been used by humans for thousands of years for medical and recreational purposes. According to the DEA, the ancient Chinese, Greeks, and Romans used cannabis, and its use spread through the Islamic Empire from the Middle East and North Africa.
The Food and Drug Administration (FDA) allows for the development of botanical drugs and provides some incentives specific to botanical drugs. As marijuana is a plant with well documented use, it’s possible that botanical drugs containing marijuana will be developed in the coming years.
Neither the Food, Drug and Cosmetic Act (FDCA) or FDA regulation specifically defines botanical drugs. However, the FDA has issued guidance on botanical drugs and describes them as products derived from plant materials, algae, macroscopic fungi, or a combination thereof. According to the FDA, two botanical prescription drugs have been approved in the US: sinecatechins, Veregen® and crofelemer, Mystei™. The definition of botanical drugs excludes highly purified substances, even if the substance is plant derived.
Botanical drugs have unique features compared to more traditional drugs. For example, unlike chemically synthesized and purified drugs, botanical drugs may have batch-to-batch variations. Additionally, the FDA considers the entire botanical mixture as the active ingredient in a drug as opposed to a specific constituent.
Developing drugs takes time and substantial cost. In order to develop a new drug, a party must submit a New Drug Application (NDA) and an Investigational New Drug Application (IND) in support of the NDA. The FDA has provided incentives to encourage clinical trials of botanical drugs by modifying the requirements for an IND and adopting a more flexible evidence standard. The FDA has reduced the amount of required chemistry, manufacturing, and control information and emphasized prior human experience as a substitute for animal toxicology studies. In addition, for early phase clinical trials, the FDA states that neither purification nor identification of the ingredient is required. Despite these incentives, the overall clinical efficacy and safety requirements must meet the same standards as other drugs. Drug development is highly regulated and complex, and although the FDA provides some incentives with regards to botanical drugs, the path to approval is still challenging.
Once marijuana is rescheduled, currently operating state-legal programs will remain unlawful under federal law. On the other hand, marijuana drugs developed in compliance with the FDCA and approved by the FDA would be completely legal under federal law. Developing a botanical drug may still be cost prohibitive for state-legal operators, but as the industry grows, that may change. It’s also possible that larger pharmaceutical companies will explore the botanical drug pathway after rescheduling.
Consumer Finance Law
SCOTUS Reverses Appropriations Clause Invalidation of CFPB Funding
Recently, the Bureau of Consumer Financial Protection (the “CFPB”) survived an appropriations-based challenge to its funding mechanism. In a challenge brought by Consumer Financial Services of America based on the appropriations clause of the Constitution, the Fifth Circuit in 2022 had invalidated that mechanism, but the U.S. Supreme Court reversed. Cmty. Fin. Servs. Ass’n of Am. v. CFPB, 51 F.4th 616 (5th Cir. 2022), rev’d, 2024 U.S. LEXIS 2169 (May 16, 2024). Authored by Justice Thomas, the majority opinion concluded that “the Constitution’s text, the history against which that text was enacted, and congressional practice immediately following ratification” demonstrate that “appropriations need only identify a source of public funds and authorize the expenditure of those funds for designated purposes to satisfy the Appropriations Clause.”
Please see Business Law Today’s upcoming article on this topic for further information.
11th Circuit Analyzes ‘Actionable Inaccuracy’ under FCRA
By Gregg Stevens and Aimee Szygenda, Hinshaw & Culbertson
In Holden v. Holiday Inn Club Vacations Inc., No. 22-11014 (11th Cir. Apr. 24, 2024), the 11th Circuit analyzed what amounts to an “actionable inaccuracy” under the Fair Credit Reporting Act (“FCRA”). The appeal was a consolidated appeal. The trial courts granted Holiday Inn Club Vacations Inc. (“Holiday”) summary judgments as to both Plaintiffs, and Plaintiffs appealed.
Each Plaintiff purchased a time share through Holiday. Each Plaintiff entered into a contract to purchase a time share. Both contracts had a provision that stated upon the purchaser’s default, all sums paid shall be retained by Holiday as liquidated damages, and the parties shall be relieved from all obligations thereunder. Each plaintiff eventually defaulted, and Holiday reported the delinquency to Experian.
Both Plaintiffs disputed the reporting with the credit reporting agencies and sued Holiday alleging that Holiday violated 15 U.S.C. § 1681s-2(b) of the FCRA, with both claiming Holiday failed to properly investigate their disputes. The trial courts, in granting Holiday summary judgment, found that Plaintiffs’ FCRA claims were based on legal disputes, and as such were not actionable.
While the 11th Circuit agreed with Holiday that Plaintiffs’ claims were not actionable, it held that these cases do not hinge on whether the disputes are factual versus legal. Instead, the Court of Appeals held that the “alleged inaccurate information [was] not objectively and readily verifiable because it stem[med] from a contractual dispute without a straightforward answer.” It appears in responding to an Automated Credit Dispute Verification (“ACDV”), an investigation needs to be conducted until the furnisher gets to the point where it cannot reach a conclusion.
Arizona Appellate Court Upholds Arizona ‘Predatory Debt Collection Act’ Savings Clause
By Margaret Hayes, Pilgrim Christakis
On April 30, 2024, the Arizona Court of Appeals affirmed that the Savings Clause of Arizona Proposition 209 (the Predatory Debt Collection Act) (the “Act”) was constitutional in response to a challenge from a group of businesses involved in debt enforcement (the “Debt Collectors”). Arizona Creditors Bar Ass’n, Inc. v. Arizona, No. 1 CA-CV 22-0765, 2024 WL 1876307 (Ariz. Ct. App. Apr. 30, 2024).
In relevant part, the Savings Clause increased the amount of exempt earnings in garnishment action. It expressly provides for its application to apply prospectively only. However, the Savings Clause also states that the Act does not affect (i) “rights and duties that matured before [its] effective date,” (ii) “contracts entered into before the effective date,” or (iii) “the interest rate on judgments that are based on a written agreement entered into before the effective date.” Id. at *5.
The Debt Collectors argued that the Savings Clause was facially invalid because it was impermissibly vague—particularly with respect to its application to wage garnishment proceedings initiated after the Act’s effective date for judgments obtained before the Act’s effective date—and put them at risk for liability under the Fair Debt Collection Practices Act (“FDCPA”) (e.g., attempting to collect a debt in an amount not authorized by law). The Debt Collectors asked for the entire Act to be enjoined. Alternatively, the Debt Collectors sought a declaratory judgment explaining the Act’s application to post-Act garnishment proceedings.
The court disagreed with the Debt Collectors, upheld the constitutionality of the Savings Clause, and declined to issue an advisory opinion because the Debt Collectors only presented hypothetical (not actual) scenarios of concern regarding the Savings Clause.
The appellate court’s opinion leaves open the possibility of future challenges to the Act, but in the meantime, Arizona debt collectors are left to their own devices to decide when and how the Savings Clause applies. And, if they guess incorrectly, they may face liability under the FDCPA. Thus, Arizona debt collectors may be forced to choose between foregoing their (potential) rights to collect on certain judgments or charge higher interest rates, or facing FDCPA litigation and liability.
A Unanimous Supreme Court Confirms That “Stay Means Stay” under the Federal Arbitration Act
By Olivia (Liv) Lawless, Pilgrim Christakis LLP
In a May 2024 unanimous Supreme Court decision authored by Justice Sotomayor, the Court sought to clarify conflicting circuit precedent “[i]n this statutory interpretation case” (Smith v. Spizzirri) by analyzing Section 3 of the Federal Arbitration Act, 9 U.S.C. § 3. Relying on the plain language of the statute, the Court held that “text, structure, and purpose all point to the same conclusion”—district courts are compelled to stay, not dismiss, proceedings when a stay is requested and all matters are subject to arbitration. The Court’s textualist holding that “‘shall’ means ‘shall,’ [and] ‘stay’ means ‘stay’” points out that “‘shall” “creates an obligation impervious to judicial discretion,” and the term “stay” denotes a “‘temporary suspension’ of legal proceedings, not the conclusive termination of such proceedings.” The obvious result is that when a party requests a stay, district courts are left with no option but to stay the matter pending arbitration.
As a practical result, a party seeking to contest arbitration is unable to immediately appeal a court’s decision that a matter is arbitrable when that matter is stayed. Instead, because a stay following an order compelling arbitration is not a final decision, the contesting party will be forced to proceed to arbitration without the option to seek an appellate court’s judicial insight.
Environmental Law
New EPA Ban of Chrysotile Asbestos Prompts Petitions for Review
By José R. Cot, McGlinchey Stafford, PLLC
In March 2024, the U.S. Environmental Protection Agency (EPA) announced a ban on the ongoing use of chrysotile asbestos in connection with health problems associated with asbestos exposure. The rule is entitled Asbestos Part 1; Chrysotile Asbestos: Regulation of Certain Conditions of Use Under the Toxic Substances Control Act and was published at 89 Federal Register 21970 (March 28, 2024).
The new rule will impact the processing and industrial use of chrysotile asbestos diaphragms in the chlor-alkali industry, asbestos-containing sheet gaskets in chemical production, the use and disposal of asbestos-containing brake blocks in the oil industry, and the commercial use and disposal of asbestos-containing brake blocks and gaskets, brakes and linings, and other friction products. The EPA has set different compliance deadlines to transition away from the use of chrysotile asbestos while also providing a reasonable transition period, as required by law.
The EPA’s announcement has prompted the filing of petitions seeking review of the final rule by several organizations, including the Asbestos Disease Awareness Organization; the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union; AFL-CIO; the Texas Chemistry Council; the American Chemistry Counsel; and the Georgia Chemistry Council. The petitions were filed in multiple jurisdictions and, pursuant to the criteria set forth in 28 U.S.C. §2112(a) for random selection by the United States Panel on Multidistrict Litigation, have been transferred to the United States Court of Appeals for the Fifth Circuit in New Orleans for further proceedings.
Gaming Law
Thoroughbred Racing’s Triple Crown Coincides with Briefing to U.S. Supreme Court on Constitutionality of Federal Horseracing Act
By Amanda Z. Weaver, PhD, attorney at Snell & Wilmer, LLP
The public turns its eyes to horseracing with the Kentucky Derby in early May and then the second and third jewels of the Triple Crown, the Preakness and Belmont Stakes, later in May and in early June. This year, these races correspond with the deadlines for briefs to the United States Supreme Court seeking a writ of certiorari to resolve a circuit split on recent federal legislation affecting much of the thoroughbred racing industry—at least those races broadcasting their simulcast wagering signals across state lines.
At the end of 2020, the Horseracing Integrity and Safety Act (“the Act”) was passed. Part of the Act created a “private, independent, self-regulatory, nonprofit corporation,” the Horseracing Integrity and Safety Authority (“HISA”). HISA was empowered to develop and implement medication control and racetrack safety for “covered” horses, persons, and horseraces, with Federal Trade Commission oversight. 15 U.S.C. § 3052; see also 15 U.S.C. § 3053. “Covered” horseraces include thoroughbred horseraces that are the subject of interstate wagering. 15 U.S.C. § 3051(5).
HISA explains that its Racetrack Safety and Anti-Doping and Medication Control Standing Committees are “designed to enhance the safety and wellbeing of both horse and rider while ensuring” the sport’s integrity.
Shortly after Congress enacted the Act, parties sued in federal district courts in Texas and Kentucky, alleging that HISA is “an unconstitutional delegation of legislative power” to a private organization and violates the Due Process Clause. Oklahoma v. United States, 5:21-CV-104-JMH, at *3 (E.D. Ky. June 3, 2022); see also Nat’l Horsemen’s Benevolent & Protective Ass’n v. Black, No. 5:21-CV-071-H, at 704 (N.D. Tex. Mar. 31, 2022).
On appeal, the Fifth Circuit reversed the district court by concluding that the Act was on its face unconstitutional. Nat’l Horsemen’s Benevolent & Protective Ass’n v. Black, No. 22-10387, at 2 (5th Cir., Nov. 18, 2022). By contrast, the Sixth Circuit concluded that subsequent amendments to the Act resulted in its being constitutional in the face of the legal challenges before it. Oklahoma v. United States, No. 22-5487, at 3 (6th Cir., Mar. 3, 2023). On October 13, 2023, the Oklahoma Horse Racing Commission, along with several other plaintiffs/appellants and amici, filed a petition for writ of certiorari to the Supreme Court, on the issues as to whether the Act violates the private nondelegation doctrine, and whether the Act violates the anticommandeering doctrine “by coercing States into funding a federal regulatory program.” Oklahoma v. United States, No. 23-402, at i, on petition for a writ of certiorari. Respondents replied on May 17, 2024. See docket for U.S. Sup. Ct. No. 23-402.
Intellectual Property Law
BIG Photo Finish: Estates of Notorious B.I.G. and Chi Modu Settle Right of Publicity Suit
By Emily Poler, Poler Legal, LLC
Earlier this year, Notorious B.I.G. LLC (“BIG”), which owns and controls the intellectual property rights of the late rapper The Notorious B.I.G. (a.k.a. Biggie Smalls, legal name Christopher Wallace), and the estate of photographer Chi Modu settled a long-running case. The dispute centered on a 1996 photograph taken by Modu of the rapper standing in front of the World Trade Center (the “Photo”), which BIG claimed Modu had illegally licensed for use on commercial products including snowboards, skateboards, and shower curtains.
BIG controls rights including the right of publicity in and to Biggie’s image, which BIG has licensed to third parties. In 2019, BIG brought suit against Modu (who passed away in 2021) and manufacturers of some of the products bearing Biggie’s image, asserting claims for federal unfair competition and false advertising, trademark infringement, violation of state unfair competition law, and violation of the right of publicity. BIG also sought an injunction prohibiting defendants, including Modu, from continuing to sell products featuring Biggie’s image.
In a countersuit, Modu asserted his copyright in the Photo of Biggie preempted all of BIG’s claims. Modu argued that BIG’s claims were nothing more than an attempt to interfere with his right to reproduce and distribute the Photo, as permitted under Section 301 of the Copyright Act.
In December 2021, BIG sought a preliminary injunction barring Modu from selling merchandise incorporating the Photo, claiming these uses violated its exclusive control of Biggie’s right of publicity. In June 2022, the court granted the injunction in part, concluding that the sale of skateboards and shower curtains was not preempted by the Copyright Act as they did not involve the sale of the Photo itself but rather items featuring the Photo. In its order, it prohibited Modu’s estate from selling merchandise featuring the Photo, or licensing the Photo for such use. However, the court permitted Modu’s estate to continue selling reproductions of Modu’s photo as “posters, prints and Non-Fungible Tokens (‘NFTs’).” The court found that the posters, prints, and NFTs were “within the subject matter of the Copyright Act [as t]hey relate to the display and distribution of the copyrighted works themselves, without a connection to other merchandise or advertising.”
This decision follows a line of cases that distinguish between the exploitation of a copyright and the sale of products “offered for sale as more than simply a reproduction of the image.” In the former situation, a copyrighted work will take precedence over a right of publicity claim. In the latter, where the products feature something more than just the copyrighted work, a right of publicity claim is likely to prevail.
Not surprisingly, given the risks for both sides, the case settled just prior to the start of the trial. Although the contours of the settlement were not made public, presumably it allowed Modu’s estate to continue selling the Photo, as posters of it remain available for purchase on the photographer’s website.
