2018 Government Shutdown

Just as everyday Americans were preparing their lives for a second United States government shutdown since the turn of the New Year, President Donald J. Trump signed into law a bipartisan (well, as bipartisan as it gets with this Congress) budget deal, focusing on some of the core issues facing us today and, in particular, those directly impacting healthcare.

While pundits, analysts and deficit hawks will argue back and forth about the excessive spending and items that Congress and the administration missed on this deal, one issue that Congress finally started allocating resources to and which hits home for so many people is the opioid crisis—allocating $6 billion to help combat this tragic public health emergency.  Enough is enough when more than 110 babies have tragically died since 2010 due to either being born dependent on opioids or for lack of care from their parents.

Some other important items, among others, in the budget deal include:

  • Re-authorizing community health centers, which serve over 25 million people, for an additional 2 years with approximately $7 billion in funding;
  • Allocating $4 billion to help Veterans Administration hospitals provide the care that our veterans rightfully deserve; and
  • Extending the Children’s Health Insurance Program (CHIP) for 10 years.

Just after reaching the deal, House Speaker Paul Ryan said “[u]ltimately, neither side got everything it wanted in this agreement, but we reached a bipartisan compromise that puts the safety and well-being of the American people first.” Even though it took a second, but brief, government shutdown and many continuing resolutions to light a fire under Congress to pass a budget, the budget they passed is an important step forward for our Country, especially when it comes to improving our healthcare system.

As discussed in our January 5th blog post, the Cole Memorandum was rescinded by Attorney General Jeff Sessions on January 4th of this year.   The Cole Memorandum had served to formally announce the DOJ’s policy that it would not interfere with medicinal marijuana legalized under state law, despite marijuana’s continued illegality for all purposes under federal law. With the rescission of the Cole Memorandum, federal prosecutors are now free to determine to what extent they will enforce federal law against the state-legalized medical marijuana industry.

However, the effect of the change in policy reaches further than to just the cultivators, manufacturers and distributors of medicinal marijuana products. Pursuant to the Controlled Substances Act, not only is it illegal to manufacture, distribute or dispense marijuana for any purpose – but it is also illegal to aid someone in doing so. Therefore, the DOJ is now free to prosecute anyone “aiding” in a medical marijuana business, for example, giving legal advice.

Probably of greater practical concern to attorneys than criminal prosecution is the tremendous amount of uncertainty as to how the change in policy will impact the ethics surrounding the representation of medical marijuana clients. Most, if not all, states have ethical rules that specifically prohibit a lawyer from assisting a client in illegal conduct. These rules do not distinguish between conduct that is illegal under federal law but expressly permitted under state law.

New York Rule of Professional Conduct 1.2 provides that “[a] lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is illegal or fraudulent, except that the lawyer may discuss the legal consequences of any proposed course of conduct with a client.” While it is generally undisputed that an attorney may advise a client about what state law provides – for example, filing requirements – an attorney arguably would be violating the Rules of Professional Conduct by, for example, assisting a client in negotiating a marijuana distribution contract.

Ethics boards in some states, including New York, have used the Cole Memorandum as the decisive factor to conclude that providing legal advice related to legalized medical marijuana businesses does not violate ethics rules. To a lesser extent, some states, including New York, have also relied on the theory that state ethics rules are intended to promote state policy – and by approval of the state medicinal marijuana law, a state has expressed its state policy on the matter, yielding no ethical violation.

It remains to be seen what impact the rescission of the Cole Memorandum will have on the ethics opinions of various states that are based heavily upon the prior policy of federal non-enforcement. For now, we can still find comfort in the Rohrabacher-Blumenauer amendment to the federal budget, which currently continues in effect until February 8 and maintains that federal funds (including those allocated to the DOJ) cannot be used to prevent states from “implementing their own state laws that authorize the use, distribution, possession or cultivation of medical marijuana.”

It’s flu season again. Your PCP at WPMG is thinking of you!

So began the health care provider’s text message that prompted this month’s Second Circuit decision applying the Telephone Consumer Protection Act to a flu shot reminder, Latner v. Mount Sinai Health System, Inc.

Plaintiff had gone to defendant West Park Medical Group (WPMG) in 2003 for a routine health examination. While there, he provided contact information including his cell phone number, and signed, among other forms, a notification record that consented to defendants using his health information “for payment, treatment and hospital operations purposes.”

In 2011, defendants hired a third party to send mass messages, including flu shot reminder texts for WPMG. In 2014, plaintiff received the text message above, which also stated: Please call us at 212-247-8100 to schedule an appointment for a flu shot. Defendants had sent flu shot reminder texts to all active patients of WPMG who had visited the office within the prior three years. Plaintiff had visited the office in 2011, declining immunizations.

Plaintiff alleged a violation of the Telephone Consumer Protection Act (TCPA), which makes it unlawful to send texts or place calls to cell phones through automated telephone dialing systems, unless the recipient consents or an exemption applies.

The Second Circuit engaged in a two-step process to decide that the defendants did not violate the TCPA. First, the Court held that the flu shot reminder text message was within the scope of an FCC Telemarketing Rule providing that written consent was not needed for text messages that deliver a health care message made by, or on behalf of, a HIPAA covered agency.

The Court next determined that, although the FCC Telemarketing Rule exempts written consent, text messages within the healthcare exception are still covered by the TCPA’s general consent requirement. The Court held, however, that plaintiff had given his prior express consent by providing his cell phone number, acknowledging receipt of privacy notices, and agreeing that defendants could share his information for treatment purposes and to recommend possible treatment alternatives or health-related benefits and services.

The lesson of this case: the pile of forms you sign on the clipboard in the waiting room may lead to texted health care messages down the road.

Despite numerous states having legalized medical marijuana, and a handful of others having legalized marijuana for recreational use, it still remains impossible to obtain a U.S. federal trademark registration for marijuana products or related goods or services.

The U.S. Patent and Trademark Office (USPTO) is the federal agency charged with granting U.S. patents and registering trademarks. The USPTO registers trademarks based on the commerce clause of the Constitution (Article I, Section 8, Clause 3) and registration is governed under various rules of practice and federal statutes.

The USPTO Trademark Manual of Examining Procedure (TMEP) Section 907 explains that under Trademark Rule of Practice 2.69, “[u]se of a mark in commerce must be lawful use to be the basis for federal registration of the mark. . . . Generally, the USPTO presumes that an applicant’s use of the mark in commerce is lawful and does not inquire whether such use is lawful unless the record or other evidence shows a clear violation of law, such as the sale or transportation of a controlled substance.”

As we’ve discussed in previous blog posts, marijuana, whether used for medicinal or recreational purposes, is classified as a Schedule 1 drug under the Controlled Substances Act (CSA). The CSA prohibits the manufacturing, distributing, dispensing or possession of certain controlled substances, including marijuana and marijuana-based products and services. In addition, the CSA makes it unlawful to sell, offer for sale or use any facility of interstate commerce to transport illegal substances, including marijuana.

As a result of the CSA, U.S. trademark applications related to marijuana or marijuana related goods and services will be refused registration under TMEP Section 907. TMEP Section 907 further provides that “[r]egardless of state law, the federal law provides no exception to the above-referenced provisions for marijuana for ‘medical use.’” Recent decisions issued by the USPTO continue to deny the federal registration of trademarks relating to marijuana and related goods and services despite the legality of such products and services under state law.

Trademarks that reference marijuana but that are used in commerce on lawful products, such as clothing, may be registered with the USPTO. For example, the trademark “MARIJUANAMAN” was registered by the USPTO as the mark will be used in connection with books about cannabis. Similarly, the trademark THE MARIJUANA COMPANY was approved in connection with the mark’s use on clothing.

Since federal registration is not permitted for trademarks that cover the sale or transportation of marijuana, such trademark applicants must rely on state trademark filings for the registration of their trademarks. This has become an important issue since so many states have now enacted legislation legalizing the medical – and in some cases, recreational – use of marijuana.

State trademark registrations are more limited in scope than federal trademark registrations as they don’t offer national protection or afford a registrant a presumption of ownership and validity of the underlying trademark on a national level. They are relatively inexpensive to obtain, however, and can afford the registrant at least certain benefits under state law. States like Washington, Oregon, Nevada and Colorado already allow for the registration of cannabis-related marks.

Nevada, for example, enacted legislation governing the use of names, logos, signs and advertisements by medical marijuana establishments. Pursuant to NAC 453A.402, any such names, logos, signs and advertisements must be approved by the Administrator of the Division of Public and Behavioral Health. In addition, Nevada has established guidelines which provide design guidelines for medical marijuana establishments. The guidelines specify, among other things, that the overall appearance of the mark or advertisement must not be appealing to minors; not contain cartoon-like figures or illustrations; not contain humor and must avoid script, decorative or gimmicky fonts. The use of of marijuana slang in the mark or advertisement, such as pot or weed, is also strictly prohibited.

Most recently, as of January 1st, 2018, customers may also register cannabis-related marks with the California Secretary of State. In order to register the mark California requires that (1) the mark be lawfully in use in commerce within California; and (2) the mark match the classification of goods and services adopted by the USPTO. To be lawfully using the mark in commerce within California requires that the registrant be licensed by California to provide the goods and services for which he or she is seeking protection and that such goods and services have already been sold to the public. Unlike registration of a trademark at a federal level, California does not have an intent-to-use trademark application. As such, the mark must be in use prior to registering the mark with the Secretary of State.

New York has not yet enacted any special legislation or guidelines relating to the registration of marijuana-related trademarks with the New York Secretary of State. That may soon change, however, as more and more states start to allow state registration of marks relating to marijuana and marijuana-related goods and services.

On January 5, 2018, the United States Department of Health and Human Services released for public comment a draft Trusted Exchange Framework, which seeks to accomplish interoperability with respect to patients’ Electronic Health Information (“EHI”) through the creation of Health Information Networks (“HINs”). The 21st Century Cures Act, which Congress enacted in 2016, has the goal of creating a trusted exchange focusing on streamlining patient EHI and establishing a network designed to “achieve a system where individuals are at the center of their care and where providers have the ability to securely access and use health information from different sources.” The Trusted Exchange Framework is the federal government’s attempt to achieve that goal.

The draft Trusted Exchange Framework is broken down into two parts:

Part A—Principles for Trusted Exchange

Part B—Minimum Required Terms and Conditions for Trusted Exchange

Part A sets forth and relies on six principles:

(1) Standardization (adherence to industry standards and best practices);

(2) Transparency (an open free flowing exchange);

(3) Cooperation and Non-Discrimination (collaboration from all stakeholders);

(4) Privacy, Security, and Patient Safety (data protection and integrity);

(5) Access (conveniently obtain EHI); and

(6) Data-driven Accountability (streamlined process for a cohort of patients to help lower cost of care).

These principles are guidelines qualified HINs need to follow to help build a trusting relationship between participants and patients and, without adherence to this foundation, a new modernized system cannot properly flourish.

Part B sets forth the minimum required terms and conditions participants must adopt and follow to ensure a trusted exchange of EHI. This is accomplished through a trusted exchange framework and common agreement (“TEFCA”). The TEFCA seeks to ensure, among other things, that there is “[c]ommon authentication processes of trusted health information network participants, [a] common set of rules for trusted exchange, and [a] minimum core of organizational and operational policies to enable the exchange of EHI among networks.” A sample TEFCA can be found in the draft Trusted Exchange Framework.

In sum, it is clear that the federal government is finally taking a serious look at how our healthcare system can become more efficient and modernized in our ever-changing society. Putting into place a final Trusted Exchange Framework, with input from all stakeholders, is a great step towards reaching that goal.

The deadline for public comment is February 18, 2018.

While marijuana is legal for medical and, in some instances recreational, use under the laws of 29 states plus the District of Columbia, under federal law it remains illegal. Yet, for the last several years, this lingering federal illegality has not seemed to chill entry into the industry – thanks in large part to the Cole Memorandum. On the heels of the January 4 rescission of the Cole Memorandum, as well as two additional memos related to marijuana enforcement policy, all of that might change.

A federal statute, the Controlled Substances Act (the “CSA”) makes it illegal to manufacture, distribute or dispense marijuana for any purpose. Under the CSA, marijuana is a Schedule 1 drug, meaning that under federal law marijuana is believed to have no currently accepted medical use and a high potential for abuse. Moreover, the Schedule 1 classification extends to all elements of the cannabis plant, including extracts and derivatives thereof. No exceptions exist in the CSA for medicinal use or use in states where marijuana has been legalized.

However, in 2013, the U.S. Department of Justice (“DOJ”) issued the Cole Memorandum, which states that its general policy is not to interfere with the medicinal use of marijuana under state law. The Memorandum set forth certain principles underpinning DOJ enforcement of the CSA with respect to marijuana. Although the DOJ said it would continue to prosecute persons or organizations whose conduct interferes with any one or more of these principles, regardless of state law, the memorandum went on to declare that where state law effectively mitigates the concerns of the DOJ, the Department will refrain from prosecution.

Since the change in administration in 2017, there has been an increasing sensitivity to a shift in DOJ policy on enforcing the CSA against “legalized” marijuana businesses. Attorney General Jeff Sessions has publicly discussed his harsh stance on marijuana and the potential for increasing federal enforcement of the federal law regarding marijuana – despite what state law provides. In fact, in May 2017 he sent a letter to certain political leaders advising of his desire to do so.

Sessions has now gone a step further and rescinded the Cole Memorandum, leaving federal prosecutors free to determine to what extent they will enforce the CSA against state-legalized marijuana businesses. A copy of the release can be found here and a copy of the memorandum can be found here.

While likelihood of prosecution will vary from jurisdiction to jurisdiction based upon the position of the particular U.S. Attorney in charge of the district, it is clear that the rescission will have a broader impact than just the potential of prosecution of those involved in the industry. As discussed in our November 27, 2017 post, Cannabis Business? The Impact of Federal Law Might reach Further than You Think, the CSA and federal illegality of marijuana has a far-reaching impact on those setting up or running marijuana businesses that are legal under state law. It is anticipated that the rescission of the Cole Memorandum will, among other things, further impair the ability of those in the marijuana business to obtain leases, financing, and perhaps even legal assistance.

State and federal representatives of several states have already publicized their positions on the January 4 memorandum, with many being unfavorable. It would not be surprising if political leaders mobilized quickly to protect the cannabis industry, which has already injected over $20 billion into the U.S. economy and is expected to increase that number to about $70 billion by 2021. In the short term, those in the industry can continue to find some comfort in the Rohrabacher-Blumenauer amendment to the federal budget, which continues in effect until January 19 and maintains that federal funds cannot be used to prevent states from “implementing their own state laws that authorize the use, distribution, possession or cultivation of medical marijuana.” In the meantime, we will all be waiting with baited breath to see the responses of state and federal leaders.

Last week, in United States v. Scully, the Second Circuit vacated the conviction of a distributor of pharmaceutical products on misbranding charges due to evidentiary issues surrounding his advice-of-counsel defense at trial.

The Rise and Fall of Pharmalogical

William Scully and Rodi Lameh founded Pharmalogical, Inc,, planning to acquire pharmaceutical products from manufacturers and sell them to doctors, hospitals and clinics. Eventually, Scully set the company on the course of “parallel importing,” importing foreign versions of FDA-approved products into the United States from European distributors. The company purchased these drugs at reduced prices and sold them to customers in the United States at under-market prices. The product labels for the products did not contain a National Drug Code, so Scully and Lameh obtained an attorney opinion that Pharmalogical had no reason to believe it was in violation of any statute or regulation.  This initially satisfied purchasers that Pharmalogical was authorized to sell.  Later, when Pharmalogical was advised by the FDA that foreign-made versions of FDA-approved drugs were considered unapproved, it obtained a second legal opinion that the importation of the product would not violate United States criminal laws. After the FDA executed warrants to search Pharmalogical’s offices, Scully and Lameh each retained individual lawyers, and Pharmalogical ceased selling products.

Scully and Lameh were indicted for using Pharmalogical to import foreign versions of prescription drugs and medical devices for use in the United States. Lameh pleaded guilty to conspiracy to distribute misbranded drugs and cooperated with the government. Scully went to trial.

At trial, Scully introduced an advice-of-counsel defense, contending that he relied in good faith on the advice of attorneys concerning the legality of his conduct. Scully called the attorney who provided opinions to Pharmalogical on the legality of the sales.  After the government effectively undermined the defense based on that testimony, Scully sought to testify himself that his individual attorney advised him the business was legal, rather than calling the second attorney to testify.  EDNY Judge Arthur Spatt ruled that such testimony, while not hearsay as it went to state of mind, was inadmissible under the balancing inquiry of FRE 403, particularly where the second attorney was available to testify.  The jury ultimately found Scully guilty. On appeal, Scully challenged the exclusion of evidence of his attorney’s legal advice and the jury instructions on the advice-of-counsel defense.

Evidence of Legal Advice

The Second Circuit held that the district court erred in balancing the probative value and prejudicial effect of the evidence of Scully’s testimony as to his individual attorney’s legal advice under FRE 403. The statement was not hearsay as it was offered to prove the defendant’s state of mind and not for its truth. Moreover, the Second Circuit held that it was not appropriate to require Scully to call his attorney as a witness, as the government had ample means to challenge Scully’s testimony, including by cross-examining Scully or by calling the attorney as a rebuttal witness. The Court determined that Scully was not legally required to call his attorney, but was competent to testify about his own state of mind, and the question of his credibility should have been up to the jury. Scully was therefore entitled to a new trial.

Advice-Of-Counsel Jury Instruction

While Scully waived arguments concerning the jury instruction on advice-of-counsel, the Second Circuit provided guidance on the jury instruction as the case was being remanded for a new trial.

The Circuit noted that, in a fraud case, the advice-of-counsel defense is not an affirmative defense, but is instead evidence that, if believed, can raise a reasonable doubt on whether the government has proved the required element of the offense that the defendant had an “unlawful intent.” The jury instruction must therefore advise the jury that the government at all times bears the burden of proving beyond a reasonable doubt that the defendant had the state of mind required for conviction. The district court should therefore not instruct the jury that the defendant “has the burden” of establishing the defense or must “satisfy” the elements of the defense. Instead, the Court referenced model jury instructions from Judge Leonard Sand and the Seventh Circuit, demonstrating that the defendant need not establish good faith, but that the government must carry its burden of proof to establish the intent element of the crime.

As we previously discussed in Medical Marijuana 103: Patient and Practitioner Regulations in New York State, practitioners in New York must be registered with the New York State Department of Health (“DOH”) in order to certify patients for medical marijuana use. The DOH maintains a list of registered practitioners on its website, however such list is woefully incomplete. As of the date of this writing there are over 1,360 providers statewide that are registered to certify patients for medical marijuana, but only 32 percent are included on the public list maintained by the DOH.

On Wednesday, November 28, 2017, Governor Andrew Cuomo signed a bill which requires the the DOH to list on its website all practitioners who are certified to recommend medical marijuana to patients.

Sen. Diane Savino (D-Staten Island), the primary sponsor of the bill, stated that one of the biggest complaints from patients in the medical marijuana program was finding a registered doctor.

“People complained that it was difficult to find a doctor near them so they could  be certified as a patient. Because the Department of Health kept the list proprietary, it made it that much harder for patients,” said Senator Savino.

A vote on the bill was held in June 2017, with 62 senators voting in favor of the bill and only 1 senator opposing it. The bill requires that the name, contact information, and other information relating to practitioners registered with the DOH to certify patients for medical marijuana be public information and that the information be maintained on the DOH’s website in searchable form. There is an exception, however – practitioners may still opt-out if they do not wish for their information to be public by informing the DOH in writing. The new requirements will be implemented sixty (60) days after the bill was signed into law by Governor Cuomo.

Sen. Savino was also the main proponent of the bill signed on November 11, 2017 by the Governor which adds post traumatic stress disorder to the list of qualifying conditions treatable with medical marijuana in New York State. The date on which the bill was signed into law is no coincidence, as veterans groups in particular had urged Governor Cuomo to allow those with PTSD to use medical marijuana. According to the Department of Veterans Affairs, about eight million adults suffer from PTSD in any given year, including tens of thousands of Afghanistan and Iraq veterans. Somewhere between 11% and 20% of those vets will suffer from it each year.

Stemming from the recent drinking water crisis in Flint, Michigan, which has had life-lasting effects for many of its residents, including children, due to unsafe lead-related toxicity levels in the drinking water, New York State Governor, Andrew M. Cuomo, announced that various New York municipalities were awarded $20 million dollars in the aggregate to replace lead service lines as part of the New York Clean Water Infrastructure Act of 2017 (the “Act”). The Lead Service Line Replacement Program (the “LSLRP”), a critical part of the Act, provides $2,445,452 to Long Island, including $611,363 to the City of Glen Cove and $611,363 to the Town of Hempstead. Other awardees include New York City ($5,323,904), Buffalo ($567,492), as well as many other cities, towns and counties throughout the state.  In his press release, Governor Cuomo stated “[t]hese critical improvements to New York’s drinking water infrastructure are vital to protecting public health and to laying the foundation for future growth and economic prosperity in these communities”.

The LSLRP was introduced in 2017 and is intended to provide funding to municipalities to replace residential lead service lines, especially those that have corroded, from the public water system. The program empowers the New York State Department of Health to award funds to certain municipalities determined by the “percentage of children with elevated blood levels, median household income, and the number of homes built before 1939”. In fact, homes built before 1930 are more likely to contain lead in its pipes because at that time the government neither regulated this area nor the applicable construction practices.

In addition to the Act, New York has increased its attention to this cause, especially focused on children, who are most at risk for lead-related negative health effects, by requiring health providers to test every child for lead in his or her blood when reaching 1 and 2 years old. Further, in 2016, Governor Cuomo took a bold step by requiring all public schools to test their water for lead as well as mandating those results be made public.

It appears that Governor Cuomo and the New York State legislature have learned the very valuable lessons their counterparts in Michigan have taught us, and the important steps our government has since taken will help ensure the better health and quality of life for all of us that live in the Empire State.

Everyone involved, or thinking about becoming involved, in the cannabis business is aware of the conflict between the laws of those states legalizing marijuana and the Controlled Substance Act (the “CSA”).  The CSA is a federal law making it illegal to manufacture, distribute or dispense a controlled substance.  For purposes of the CSA, marijuana is classified as a Schedule 1 controlled substance – making it illegal under federal law to be engaged in the marijuana business regardless of what state law provides.

The obvious consequence of this conflict of laws is the potential for federal prosecution for engaging in the marijuana business.  However, the not-so-obvious practical consequences reach further than you might think.  For example,

  • Taxes. Section 280E of the Internal Revenue Code, originally targeted for illegal drug dealers, prohibits cannabis businesses from deducting typical business expenses, such as advertising and rent.
  • Leases.  Most leases have covenants against “illegal activity,” which enables landlords to evict marijuana business tenants.  Moreover, many landlords are unwilling to rent to marijuana businesses, despite their legality under state law, for fear of losing their property in a federal civil asset forfeiture action.
  • Banking. In 2014 the Department of Treasury issued guidance for financial institutions that want to do business with the marijuana industry.  Up until that time, banks were reluctant to deal with the marijuana business due to the Financial Crimes Enforcement Network (FinCEN), which requires banks to investigate their customers and to refrain from negligently or knowingly doing business with bad actors.  Today, banks are safe if they follow some pretty onerous rules.  Many banks choose not do business with the industry rather than comply with the diligence and monitoring requirements set forth by the Department of Treasury.
  • Commercial loans. Commercial loans are difficult to obtain without providing collateral; however, in a marijuana business, banks are not allowed to seize or possess the primary asset of a marijuana business – the marijuana – under federal law. Often a marijuana business will not have many other assets that are valuable enough to act as security for financing.
  • Trademarks. Because marijuana is illegal under the CSA, and because the United States Patent and Trademark Office will not register a mark if the applicant cannot show lawful use of the mark in commerce, it is nearly impossible to secure federal registration of a marijuana-related mark (although marks for ancillary products might be obtained).
  • Federal Water. Many areas in the western United States are served by the Federal Bureau of Reclamation, which manages water and power to farmers.  The Bureau has advised that it will report to the Department of Justice any marijuana farmers who use federal water to irrigate their crops.
  • Bankruptcy. At least two courts have held that marijuana businesses cannot take advantage of federal bankruptcy laws.  The rationale is that, because marijuana is illegal under federal law, granting relief under another provision of federal law for the same activity would be “administering the fruits and instrumentalities of Federal criminal activity.”
  • Access to Federal Courts. If you enter into a contract with a marijuana business and need to sue in federal court, will you be able to?  This question has yet to be answered; however, if the prohibition against bankruptcy relief serves as guidance, the outcome is likely not favorable to marijuana businesses.

It is clear that federal law creates many obstacles to establishing and effectively managing a marijuana business.  Those in the industry should plan carefully and seek legal advice as to how to best mitigate the risks arising from the conflict between state and federal laws.