Cannabis Related Businesses Must Still Follow Federal Laws

Many states have begun legalizing marijuana and other cannabis-related products, nevertheless they remain illegal under the federal Controlled Substances Act (CSA). As cannabis-related businesses expand, courts are still working out how various laws apply in this legal grey area.

A recent Tenth Circuit decision, Kenney v. Helix TCS, Inc. (10th Cir. 2019), held that the Federal Labor Standards Act (FLSA), which provides for mandatory overtime, applies to a cannabis − related business. It rejected arguments that because the business arguably violated the CSA it was exempt from this federal law. Although such arguments have been adopted in the context of trademarks, they were rejected in the employment law context.

Counsel advising cannabis businesses should assume that, as a general matter, most federal laws will apply to it, and only a few narrow areas, like trademark law, might be exempt.

In 2014, Colorado legalized recreational marijuana use, and since then the industry has taken off in that state.

Helix TCS is a services company that supplies security, inventory control, and compliance services to the industry. Robert Kenney worked as a security guard for Helix; he alleged that although he and other security guards were required to work in excess of 40 hours per week, they were not paid overtime as required by the Fair Labor Standards Act (FLSA). When Kenney brought suit, Helix defended on the grounds that FLSA does not apply to the marijuana industry, because the industry is in violation of the Controlled Substances Act (CSA).

The Tenth Circuit affirmed the district court’s rejection of this argument. FLSA covers all employees, other than certain enumerated statutory exceptions, none of which applied to Kenney. Helix argued, however, that by outlawing the sale of marijuana, Congress impliedly repealed part of the FLSA – it would otherwise in effect be both outlawing and condoning the same activity.

The Tenth Circuit rejected those arguments because (a) nothing in the FLSA statute even hints at an exemption for illegal activity, and in fact many courts have held it does apply even where the business’s activities are illegal, and (b) FLSA has purposes that do not conflict with the CSA, including promoting “the health, efficiency and general well-being of workers.”

The Tenth Circuit noted that trademark law is one area where the fact that the CSA outlaws marijuana does mean that one cannot gain trademark rights. But that is distinguishable, because the Trademark Act secures to businesses the right to use words and symbols to protect their business reputation and goodwill in the market. Where the market itself is illegal, the law will not protect the business owner. FLSA, in contrast, is meant to protect workers, so there is no similar conflict.

The Kenney decision teaches that for the cannabis industry, even though its product remains illegal under federal law, one should presume that other federal laws will apply, unless there is a direct conflict between the CSA and other laws, as is the case with trademarks. This would likely extend not only to employment laws, but other areas, such as environmental protection laws, securities law, and so on.