News Type: Blogs

The U.S. Department of Health and Human Services’ recent call to the Drug Enforcement Agency for the reclassification of marijuana to a Schedule III substance under the Controlled Substances Act has roused considerable attention across industries. For those in the burgeoning cannabis space, it represents a potential paradigm shift, though the potential move is not without its drawbacks. This analysis aims to dissect the prospective changes that reclassification could engender for marijuana-related businesses.

Corporate Governance and Compliance

The reclassification of marijuana to a Schedule III drug would necessitate an extensive review of existing compliance protocols for cannabis-related businesses. Regulatory frameworks would be expected to evolve, affecting licensing, distribution, and marketing strategies. Companies would be well-advised to anticipate such changes and adapt their compliance mechanisms accordingly. Moreover, the acknowledgment of marijuana’s medicinal benefits could open up avenues for more FDA-approved medical applications and pharmaceutical collaborations.

The Stock Market and Investment

Investors have already reacted positively to the news of the possible reclassification of marijuana, as evidenced by a spike in cannabis-related stocks. Reclassification could also pave the way for these cannabis companies to be listed on major stock exchanges, providing an infusion of investment capital that could catalyze further growth. Additionally, reclassification could open up the U.S. market for foreign cannabis companies, leading to a more globalized marketplace.

Taxation Ramifications

Currently, marijuana is classified as a Schedule I substance, rendering it subject to severe federal restrictions and penalties. Critically for corporate interests, Section 280E of the Internal Revenue Code prohibits businesses dealing with Schedule I substances from claiming standard tax deductions or credits. As a result, cannabis enterprises have been shouldering taxes on their total revenue without the ability to offset taxable income through standard business deductions. A transition to Schedule III would not only relieve this tax burden but also enable interstate commerce, adding a new dimension of business expansion opportunities.

Remaining Challenges and Criticisms

It is crucial to note, however, that mere reclassification of marijuana to a Schedule III substance would fall short of resolving some broader legal challenges, most notably the conflicts between state and federal law. While a Schedule III status would signify federal acquiescence to some extent, it would not end the disconnect between federal illegality and state legalization efforts. Nor would it necessarily mitigate ongoing social justice issues related to marijuana criminalization.

The prospective reclassification currently under the microscope is undoubtedly a watershed moment in federal drug policy and offers several benefits for marijuana-related enterprises. That being said, it is not an end-all solution and cannabis-related companies should remain agile, attentive to forthcoming regulatory changes, and prepared to navigate a landscape that remains fraught with legal intricacies and social implications. With the possibility of reclassification as early as 2024, ahead of the Presidential elections, companies should be prepared for rapid policy shifts and should adjust their corporate strategies accordingly.

No doubt about it, as we move closer to a potential reclassification, perhaps as early as 2024, proactive legal strategy will be paramount for corporate success in this complex and evolving sector.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

Effective April 1, 2023, the City of Los Angeles will impose a so-called “Mansion Tax” upon commercial and residential property sales exceeding $5 million (certain housing, non-profit, and public entities will be exempt).

The new tax rate of 4% will apply to qualifying properties sold for more than $5 million but less than $10 million. Commercial and residential real estate traded for $10 million or more will be subject to a 5.5% tax rate. The Mansion Tax will not replace or modify existing documentary transfer taxes in L.A. Instead, it is to be an additional documentary transfer tax calculated based on the gross sale amount of property-existing debt will not reduce the tax basis.

By way of example, after April 1, the seller of a $10 million multi-family property in L.A. will be hit with a Mansion Tax bill of $550,000 (5.5% of the sale price)-this in addition to ordinary city and county transfer taxes that can total ~$56,000. Proceeds generated by the Mansion Tax-estimated to be between approximately $600 million and $1.1 billion annually-are intended to address the city’s homeless problem by funding affordable housing and tenant assistance programs.

As the April 1 effective date fast approaches, those thinking about selling real property in L.A. may want to act now to avoid the imposition of the Mansion Tax. That being said, the real estate professionals at Michelman & Robinson, LLP stand ready to provide any counsel you may need.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

There is groundbreaking news to report in the fast-food industry, at least in California. This month, Governor Gavin Newsom signed into law a bill (AB 257, the Fast-Food Accountability and Standards (FAST) Recovery Act) that puts the power to set minimum wages and working conditions for fast-food workers into the hands of a new council of employees, employers and union activists.

Formerly the domain of state and federal lawmakers, governance of the fast-food employment landscape will now be tasked to a 10-member government-appointed council that will operate within the California Department of Industrial Relations. This group will set minimum standards on wages, maximum allowable hours of work, working conditions, and training for fast-food restaurant employees.

The new law is a big win for unions. Pursuant to the terms of the bill, the council can authorize an increase of the minimum wage earned by fast-food employees up to $22 an hour in 2023. For 2024, the council can raise the hourly minimum wage by another 3.5% or a figure pegged to the U.S. consumer price index. In addition, the law now provides employees with another direct pathway to sue employers. Specifically, it authorizes fast-food restaurant workers to bring causes of action for discharge, discrimination, or retaliation for exercising rights under the FAST Recovery Act.

While a boon for more than 550,000 fast-food workers operating in approximately 30,000 locations throughout the Golden State, franchise owners may be hit hard by the law giving workers a seat at the table in terms of compensation and workplace health and safety. Importantly, the bill’s requirements only apply to fast-food establishments consisting of 100 or more locations nationally-those that (1) share a common brand or are characterized by standardized options for decor, marketing, packaging, products, and services; and (2) provide food or beverage for immediate consumption on or off premises to customers who order and pay for food before eating, with items prepared in advance or with items prepared or heated quickly, and with limited or no table service.

Going forward, fast-food operators outside California may want to pay close attention to this development, as the law may well serve as a model in other jurisdictions throughout the country. Of course, if you have any questions about AB 257 or any other employment-related inquiries, the employment specialists at Michelman & Robinson, LLP are here with answers.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

Scan the headlines on any given day and you’re likely to come across stories about NIL rights and NFTs, both oftentimes selling for jaw-dropping amounts of money (at least before the cratering cryptocurrency market took a bite out of NFT valuations). Until recently, however, these two acronyms-which’ve become part of our daily vernacular-have rarely been uttered in the same breath. That’s no longer the case.

New laws creating previously unheard-of opportunities for student-athletes to sell the rights to their names, images and likenesses rights and cash in on their notoriety have proliferated in lockstep with companies looking to leverage non-fungible tokens as a marketing tool. The result: a slew of NFT deals between brands-which still see NFTs as promising for customer engagement despite the crypto downturn-and collegiate (and even high school) stars flexing their NIL muscles.

The University of Iowa’s Luka Garza and Gonzaga’s Jalen Suggs were pioneers when they minted NFTs just after finishing their final seasons in the NCAA back in March 2021. Since then, many student-athletes have taken their lead, including Ga’Quincy “Kool-Aid” McKinstry of the University of Alabama, who just about a year ago came to terms on a signing day NFT with Kraft Foods, Inc., makers of the Kool-Aid drink.

By some accounts, corporations have earmarked more cash toward NFTs than any other segment of the NIL market. But given the tenuous crypto landscape and relative nascency of NFT-based NIL deals, the burning question is whether brands will stay the course. All indications suggest the answer to be yes, in which case there are a variety of legal considerations for these companies to take into account.

The same is true for athletes and athletic departments given that NFTs are also a vehicle by which students can monetize their personal brands-even, in some cases, without the need for negotiating sponsorship deals. Toward that end, several major basketball programs-the University of Kansas and University of Kentucky, among them-have announced NFT deals; dozens of top collegians have signed with The Player’s Lounge, an NFT-backed community for college fans; and former NFL star Tim Tebow launched a company focused on creating NFTs through a partnership with the INFLCR+ Local Exchange.

Consequently, all participants in the NIL/NFT game would be wise to keep all of the following top of mind.

SEC Also Stands for Security and Exchange Commission

For many, NFTs are speculative assets, purchased as investments assuming their values will increase over time, in which case they can be sold at a profit. As such, despite their digital

characteristics, NFTs run the risk of being considered “securities” for purposes of their treatment under the law. Enter the SEC-no, not the Southeastern Conference.

Under the Securities Act of 1933, a security is essentially any type of negotiable instrument that represents some type of financial value. Some that immediately come to mind include fungible investments like stocks and bonds. But the definition of securities as set forth by the U.S. Supreme Court also includes “investment contracts,” meaning an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” This so-called Howey Test means that release of an NFT could implicate federal securities law.

For instance, should an NFT be purchased with the intent of licensing the underlying asset, or reselling copies for profit, then securities laws could potentially come into play. And if characterized as a security after satisfying the Howey analysis, any given NIL-related NFT would be subject to heavy duty scrutiny and regulation by the SEC, particularly when it comes time to sell the token. In that instance, the sale would require registration with the SEC, unless an exemption under federal securities law applied, and the NFT would fall under state “blue sky” laws. There is more. Platforms facilitating any NFT transaction-including the likes of the aforementioned universities and Player’s Lounge-might have to register as a securities exchange, alternative trading system, and/or as a broker-dealer.

Copyrights Matter

Intellectual property interests, namely copyrights, should always be a topic flashing brightly on the radar screens of anyone dabbling in the NFT marketplace. Indeed, parties to an NFT transaction must understand the importance of obtaining appropriate IP rights prior to consummating an exchange.

To be clear, NFT creators have to tread lightly when leveraging the work of others. More specifically, permission must be obtained from the owner of a copyright before a third-party creation is incorporated into an NFT, especially one positioned for sale. The failure to do so could subject the originator of an NFT-be it a brand, university or student-athlete-to legal action and financial exposure in the form of copyright infringement litigation. By way of example, this could happen where an NFT incorporates the logo or other IP of a school or athletic conference.

The IRS

Student-athletes and their advisors must remember that tax implications follow most every transaction, and that includes the exchange of NFTs. When selling these digital tokens, tax laws apply and need to be followed to avoid any discrepancies with the IRS.

NFT deals are typically considered to be barter transactions for tax purposes, as tokens are generally characterized as property, as opposed to currency, by the Internal Revenue Service.

This means that the fair market value of these assets must be reported on tax returns as income, and sales are to be set forth as capital gains.

For creators, tax repercussions may be ongoing. Another extraordinary aspect of NFTs is a feature that allows digital artists and other originators to be paid a percentage whenever the tokens they created are resold. Thus, NFTs can function as an annuity for their creators, who may participate in financial gains over time, thus triggering the potential of future taxation.

NIL Compliance +

With the advent of NIL laws have come compliance obligations and other miscellaneous concerns to be contemplated by those ready to ink an NFT deal.

Agreements between NFT creators, student-athletes, brands and/or exchanges must comply with all applicable state laws, not to mention SEC regulations and Federal Trade Commission (FTC) rules governing the advertising of products and services. Likewise, NFT transactions should not conflict with university contracts, policies or procedures, including any restrictions related to the use of a school’s IP.

Given the growing popularity, intricacies and nuances of NFTs, university compliance departments would be wise to train their employees on the ins and outs of these digital assets, the federal and state laws that apply to them, athletic conference rules and regulations, and the value and place of NFTs within a student-athlete’s portfolio of NIL activity.

To be sure, the market for NIL rights and NFTs is still in its infancy and it remains to be seen the extent to which the two together will be leveraged by brands, athletes, colleges and universities and related NFT platforms. That being said, no matter how these relatively new marketing vehicles continue to evolve, the legal obligations they trigger should never be ignored.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

Last night (June 30), with the deadline to apply for a loan pursuant to the Paycheck Protection Program set to expire-and with that nearly $130B in allocated funds being left untapped and on the table-the U.S. Senate passed an extension of the program to August 8. Whether the extension passes in the U.S. House of Representatives and is then signed into law is likely but remains to be seen; a House vote is pending as of this writing. In the meantime, attention continues to turn to the loan forgiveness process.

Toward that end, Michelman and Robinson reported on the streamlined loan forgiveness applications recently released by the Small Business Administration. Since then, the SBA in association with the U.S. Department of Treasury posted new Interim Final Rules (IFRs), including one relating to loan forgiveness and loan review procedures, and another concerning additional eligibility revisions. By way of this alert, M&R takes a look at the important provisions found in these IFRs which, unlike certain guidance and FAQs issued by the SBA in consultation with Treasury, have the force of law and must be followed unless and until they are overturned, struck down, or rescinded.

Q. What changes do the latest IFRs make with respect to loan forgiveness and loan review procedures?

A. The IFR found at 85 F.R. 38304 contemplates the changes made to the CARES Act and the PPP by the Paycheck Protection Program Flexibility Act (explained here), as well as the EZ and updated long-form loan forgiveness applications. Among various other things, the IFR clarifies that:

• A borrower may submit a loan forgiveness application any time on or before the maturity date of the loan-including before the end of the covered period-once the borrower has used up all of its loan proceeds
• If a borrower does not apply for loan forgiveness within 10 months after the last day of the covered period, or if the SBA determines that the loan is not eligible for forgiveness (in whole or in part), PPP loan payments will no longer be deferred and the borrower must begin paying principal and interest
• In general, payroll costs paid or incurred during the covered period are eligible for forgiveness. A borrower can elect one of two available covered periods-either 24-weeks from the date the lender disbursed the PPP loan, or 8-weeks for PPP loans received before June 5, 2020
• There are caps on the amount of loan forgiveness for payroll costs associated with compensation paid to business owners and self-employed individuals
• Non-payroll costs are eligible for forgiveness if they were (1) paid during the covered period, or (2) incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period
• The PPP Flexibility Act specifically requires certain reductions in a borrower’s loan forgiveness amount based on cuts made to the workforce (read: full-time equivalent employees) or employee salary and wages; however, this is subject to an important statutory exemption for borrowers that have eliminated these reductions on or before December 31, 2020

Q. What changes do the recent IFRs make concerning PPP eligibility?

A. Whether or not the window to procure PPP loans is extended, changes regarding eligibility remain relevant, particularly to borrowers that have already received loan proceeds. As such, the IFR found at Docket No. SBA-2020-0039 is of interest. It echoes the following eligibility revisions made to the CARES Act and the PPP by the PPP Flexibility Act and other amendments:

• To the extent an applicant is ineligible for a PPP loan if that would-be borrower owns 20% or more of the equity of the applicant and is presently subject to an indictment, arraignment, or formal criminal charge in any jurisdiction, that restriction is limited to pending felony offenses only
• To the extent an applicant is ineligible for a PPP loan if that would-be borrower owns 20% or more of the equity of the applicant and is on probation or parole, that restriction is limited to individuals whose probation or parole commenced within the last five years for any felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance, and within the last one year for other felonies

For those interested, a list of IFRs, guidance, and FAQs related to the SBA’s PPP and Economic Injury Disaster Loans (EIDLs) can be found here. Of course, if you have any questions about the SBA’s updated IFRs, or would like to participate in M&R’s “PPP Loan Analysis Program,” do not hesitate to contact us at your convenience.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

On June 15, the U.S. Supreme Court issued its much-anticipated decision in Viking River Cruises Inc. v. Moriana. The high court ruled that representative actions brought pursuant to the California Private Attorneys General Act (PAGA) may be compelled to individual arbitration-a break from the position previously taken by the California Supreme Court in Iskanian v. CLS Transp. Los Angeles LLC that PAGA representative claims are not subject to arbitration agreements.

The ruling in Viking is a major development that impacts every California employer. Indeed, in the wake of the decision, employers in the Golden State may need to revise their employee arbitration provisions.

PAGA Claims

PAGA allows employees to file actions and pursue civil penalties on behalf of the state for violations of California’s Labor Code. California views PAGA as an important mechanism to ensure that labor laws are being followed and that employees are adequately protected.

For years and pursuant to Iskanian, an employee initiating a representative PAGA claim was permitted to seek redress in court, even in the event an arbitration agreement was signed. It was the finding of the California Supreme Court that a contract that waived an employee’s right to bring a PAGA action in court was invalid as a matter of public policy. As otherwise stated, the enforcement of wage-and-hour laws on behalf of the state by way of a PAGA action was not preempted by the Federal Arbitration Act (FAA)-this because such a case was not between two contracting private parties, but between the state and an employer. The bombshell opinion in Viking changes all that.

The Viking Decision

In Viking, a former sales representative named Angie Moriana initiated a PAGA action alleging wage-and-hour law violations against the river cruise company. Of note, Moriana’s employment contract with Viking contained a mandatory arbitration agreement.

In an 8-1 ruling, the U.S. Supreme Court decided that the FAA-which instructs courts to enforce arbitration agreements and preempts state rules that undermine them-serves to block the Iskanian rule, at least partially. The vast majority of justices found that Viking could push Moriana’s individual claims into arbitration pursuant to the FAA. And because of that, it was determined that California law would not permit her to continue in court with her “non-individual” claims (those brought on behalf of other workers).

According to Justice Samuel Alito, “PAGA provides no mechanism to enable a court to adjudicate non-individual PAGA claims once an individual claim has been committed to a separate proceeding.” He went on to state, “Moriana lacks statutory standing to continue to maintain her non-individual claims in court, and the correct course is to dismiss her remaining claims.

Justice Sonia Sotomayor concurred, reasoning that PAGA does not permit a plaintiff to proceed in court with non-individual claims if her individual claims are sent to arbitration, though she opined that California’s courts and legislature are the best authorities to address questions that may arise about a PAGA plaintiff’s standing to litigate “non-individual” claims. Nonetheless, and at least for the time being, the high court’s opinion is one worthy of celebration by California businesses.

The Takeaway for California Employers

The Viking opinion provides some long-awaited relief for California employers whose employees have executed arbitration agreements that waive the right to bring a representative PAGA action. These employers should now take the opportunity to confer with counsel and review their arbitration provisions to determine whether any revisions are necessary to ensure they receive the protections afforded by Viking. Toward that end, the employment attorneys at Michelman & Robinson, LLP stand ready to assist.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.