When can cannabis businesses challenge compliance standards? 

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Cannabis businesses developing new products face a significant challenge: navigating evolving state regulatory compliance standards.

For a cannabis business, one potential risk of new product development is that state regulators will determine the new product does not comply with existing standards.

Even if a business develops a product that satisfies current standards, there is always a possibility the regulator will change those standards.

Marijuana businesses pursuing product development have the option to challenge regulatory requirements and enforcement actions that undermine innovation.

Enforcing regulations

State regulators’ authority to set standards for licensees comes from their legislatures.

In emerging industries such as cannabis, where there’s a high degree of uncertainty and potential risk to the public, regulators often have broad authority to establish and enforce rules.

For instance, state regulators might have extensive regulatory powers – including the ability to issue licenses, promulgate regulations, conduct inspections and enforce compliance.

While this broad authority is necessary to protect public health and safety, it also can hinder marijuana businesses’ ability to innovate in an increasingly competitive industry.

Because of the limits on their authority, regulators cannot arbitrarily set or enforce compliance standards.

To ensure transparency and fairness, regulatory agencies must follow rulemaking procedures when issuing new regulations.

For instance, they often are required to publish proposed regulations in advance, provide opportunities for public comment and hold hearings before finalizing rules.

Even when there is a need for an emergency regulation, the regulator likely needs to provide a notice and comment period soon after the regulations are issued.

In some states, officials also must hold a public hearing.

Process in action

One recent example took place in September, when California Gov. Gavin Newsom issued emergency regulations to ban the sale of intoxicating hemp products.

As required by state law, Newsom declared an emergency and provided notice to the public.

While the emergency regulations went into effect almost immediately, the public had an opportunity to submit written comment before the regulations became permanent.

Although some petitioners brought a court challenge, the trial court denied their request for a temporary restraining order.

Officials have not always fared as well in other states.

By following these procedural safeguards, regulators can minimize the risk of arbitrary or capricious actions that could harm businesses.

If the regulator does not follow required rulemaking procedures, the courts may enjoin or stop the regulator from enforcing their regulatory requirements against a licensed business.

Petitioners sought court intervention in the early days of Massachusetts standing up its legal marijuana market.

They challenged public health officials and then-Gov. Charlie Baker over emergency regulations banning vapor devices used by medical marijuana patients.

The petitioners argued that the governor and state officials had exceeded their authority and failed to comply with the rules for emergency regulations.

The trial court judge agreed and issued a preliminary injunction, which eventually forced state officials to rescind the emergency regulations.

Developing regulations

As states were establishing new marijuana markets, many state regulators were given broad authority to develop laboratory testing standards for the industry.

Some regulators were hesitant to set specific standards because of a lack of knowledge and experience testing cannabis, including a need to develop standardized testing methodologies and the unavailability of laboratories capable or willing to do it.

As a result, some regulators took advantage of their broad authority to create regulations that incorporated a separate guidance document, which could be changed without public notice or comment.

As they became more knowledgeable and experienced, some state legislators and agencies incorporated more permanent standards in their statutory and regulatory schemes.

While cannabis markets have matured, several state agencies still rely on guidance documents to set testing standards.

In those states, marijuana businesses need to consider the risk that new products might not comply with current compliance standards.

Defying regulatory guidance

Even after a cannabis business launches a new product, regulators could change testing standards – especially those in guidance documents.

If the product does not satisfy the new standards, the business might be forced to stop the sale of the product or be threatened with an enforcement action, which can include a regulator ordering the business not to sell the product or threatening the suspension or revocation of their license.

Cannabis businesses facing unlawful or burdensome requirements by regulators can and should consider judicial remedies.

Some recent reports suggest courts are willing to intervene when regulators’ enforcement actions implicate the destruction of property or the disruption of the business.

Courts might be receptive to arguments that regulators cannot require marijuana businesses to comply with standards without following proper rulemaking procedures, such as issuing permanent regulations.

This is especially true when other state regulators have made the effort to incorporate standards into statutes or regulations.

While litigation can be complex and costly, it might be the best option for businesses seeking to bring new products to market and maintain a competitive edge.

Christine Baily provides personalized legal advice to businesses and individuals at Massachusetts-based C Baily Law, where she helps clients navigate the complex legal requirements and risks of operating in state-regulated markets. She can be reached at christine@cbailylaw.com.

Disclaimer: This story is for informational purposes only and does not constitute legal advice. The information provided is not intended to replace professional legal counsel. Please consult with an attorney to discuss your specific legal needs and circumstances.