Criminal and Civil Forfeiture

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.

In our July 10, 2017 post, Concierge Medicine – Is it for you?, we cautioned that Medicare compliance concerns do not fall away when moving to a concierge or direct-pay model.  HHS has determined that concierge-style agreements are permitted as long as Medicare requirements are not violated.  Unless a physician has opted out of Medicare, the predominant requirement is that an access or membership fee cannot be charged to a Medicare patient for services that are already covered by Medicare.  But how does a concierge physician know where to draw the line?  The relevant authorities have issued very limited guidance in this area.

In March 2004, an OIG Alert was issued reminding Medicare participating providers that they may not charge Medicare patients fees for services already covered by Medicare.  OIG used, as an example, a case involving physician’s charge of $600 for a “Personal Health Care Medical Care Contract” that covered, among other things, coordination of care with other providers, a comprehensive assessment and plan for optimum health, and extra time spent on patient care.  Because some of these services were already reimbursable by Medicare, the physician was found to be in violation of his assignment agreement and was subjected to civil money penalties.  The physician entered into a settlement with OIG and was required to stop offering these contracts.

In 2007, OIG settled another case involving a physician engaged in a concierge-style practice.  There, the physician, who also had not opted out of Medicare, asked his patients to enter into a contract under which the patients paid an annual fee. Under the contract, the patient was to be provided with an annual comprehensive physical examination, coordination of referrals and expedited referrals, if medically necessary, and other service amenities.  The physician was similarly found to have violated the Civil Monetary Penalties Law by receiving additional payment for Medicare-covered services and agreed to pay $106,600 to resolve his liability.

As demonstrated by these settlements, violations of a physician’s assignment agreement results in substantial penalties and exclusion from Medicare and other Federal health care programs.  It would behoove a concierge physician to tailor contracts offered to Medicare patients.  Fees charged under such contracts should relate only to noncovered services and amenities.  For example, fees could relate to additional screenings by the concierge physician that are not covered by Medicare or amenities such as private waiting rooms.

According to the GAO’s 2005 Report on Concierge Care Characteristics and Considerations for Medicare, HHS OIG has not issued more detailed guidance on concierge care because its role is to carry out enforcement, not to make policy.  However, physicians with specific concerns regarding the structure of their concierge care agreements or practices may request an advisory opinion from HHS addressing their concerns.  Advisory opinions are legally binding on HHS and the party so long as the arrangement is consistent with the facts provided when seeking the opinion.

Next week, look for the release of Medical Marijuana 105, the fifth post in a series of posts discussing the current state of law in New York regarding medical marijuana.  To read the latest post in the series, Medical Marijuana 104:  Responsibilities of Health Insurers, click here.

Health care fraud prosecutions in the Second Circuit and throughout the country have typically sought forfeiture money judgments against all defendants for the proceeds of the fraud obtained by all members of a health care fraud conspiracy.  The Supreme Court recently curtailed these efforts in Honeycutt v. United States.  In Honeycutt, the Court held that the forfeiture statute only permits a forfeiture money judgment for property a defendant actually acquired as part of the crime, not all proceeds of the conspiracy.

In Honeycutt, defendant Terry Honeycutt managed sales and inventory at his brother’s hardware store.  The brothers were prosecuted for conspiring to sell iodine with the knowledge that it was being used to manufacture methamphetamine.  The government sought a forfeiture money judgment of $269,751.98, constituting the hardware store’s profits.  The defendant’s brother pled guilty and agreed to forfeit $200,000.  The government sought and obtained a forfeiture money judgment against defendant Terry Honeycutt for $69,751.98, even though he did not personally benefit from the hardware store’s profits.  The Sixth Circuit held that the conspiring brothers were “jointly and severally liable for any proceeds of the conspiracy,” joining several circuits, including the Second Circuit, in an expansive view of criminal forfeiture.

Justice Sotomayor’s decision in Honeycutt strictly followed the language of the statute, 21 U.S.C. § 853, which mandates forfeiture of “any property constituting, or derived from, any proceeds the person obtained, directly or indirectly, as the result of” certain crimes.  The Court concluded that the provisions of the statute limit forfeiture to property the defendant himself actually acquired, not property obtained by other conspirators.  The Court held that the plain text of the statute and the limitation of forfeiture to property acquired or used by the defendant “foreclose joint and several liability for co-conspirators.”

Prosecutors have routinely sought to forfeit all proceeds of health care fraud and other conspiracies from all co-conspirators.  Thus, minor players in a conspiracy with significant assets could find themselves liable for a forfeiture money judgment well in excess of the proceeds they actually received from their crime.  In Honeycutt, the Supreme Court refused to apply the tort concept of joint and several liability to the forfeiture statutes, and has taken a sweeping tool away from the government.