Cannabis in Court

Beyond the dispensary counters and the budtenders, some of the state's largest cannabis producers are teaming up with high-powered law firms to push the limits of regulatory law and defend proprietary turf.

The pending litigation mostly concerns producers and other ancillary businesses that hold large market shares in New Mexico's cannabis trade. The cases are a cross-sample of an emerging area of law as the state and industry professionals wade into new territory, though one lawyer argues that their outcomes will likely not make it any easier for new players who aren't already well-capitalized to enter or thrive in the industry.

The latest salvo was initiated by Erik Briones of Minerva Canna Group, which has dispensaries in Santa Fe, Albuquerque, Bernalillo and Los Lunas. According to a complaint filed in First Judicial District Court on May 23, a man named Sean Gabaldon allegedly tried to usurp control of the company from Briones, Minerva's president, in what reads like a failed coup d'etat.

It started when Gabaldon bought enough shares in Aspen Management, the for-profit company that manages operations for Minerva, to make him the only member of Minerva's executive board alongside Briones. The complaint says Gabaldon was also supposed to receive dividends from Minerva's cannabis sales each quarter.

But in February 2016, the state Tax and Revenue Department informed Briones that it intended to impose a gross receipts tax on all funds passed from Minerva to Aspen. Briones continues to contest this tax burden, according to his legal team, and he informed Gabaldon two years ago Aspen wouldn't receive dividends for much of 2018 because of the potential tax liability.

Instead of accepting these terms, the complaint says, Gabaldon formed a shadow board with six other named defendants "for the stated purpose of removing" Briones as president from Minerva's executive board of directors. He tried to take funds out of Minerva's creditor, Kirtland Federal Credit Union, but instead Kirtland froze Minerva's account.

"There was no promise [of dividends], it was just an investment—you take a risk, sometimes you get paid dividends and sometimes you don't," says Thomas Hnasko, the lawyer representing Briones.

A preliminary hearing on the injunction to stop Gabaldon and others from representing themselves as Minerva's leadership is scheduled for June 11 in front of Judge Raymond Ortiz.

Hnasko says it's not clear when the separate but related matter of whether dividends passed from Minerva to Aspen are subject to gross receipts tax could be resolved, but it echoes a similar dispute between producer Sacred Garden and the Tax and Revenue Department over the Santa Fe nonprofit's losing efforts to win a $530,000 tax refund for the sale of cannabis products.

Sacred Garden likens products regulated by the state's Medical Cannabis Program to prescription medicine, and argues they are therefore not subject to a gross receipts tax. That case went to the New Mexico Court of Appeals in March.

Another case wending its way through the court could set new limits for how competing cannabis-testing businesses access each other's trade secrets.

On April 2, the company Steep Hill Labs, which has a testing facility in Albuquerque, filed a complaint against the New Mexico Department of Health and competitor Scepter Labs in Santa Fe, alleging that the DOH illegally handed over copies of Steep Hill's standard operating procedure for cannabis testing to Scepter owner and director Kathleen O'Dea in response to her request under the state Inspection of Public Records Act.

Steep Hill compared O'Dea's successful request to "a student [obtaining] the answer key for a major exam," and asked the court to compel return of the SOPs, which Steep Hill characterizes as trade secrets that shouldn't have been disclosed.

O'Dea's lawyer Jason Marks says Scepter had no intention of imitating Steep Hill's testing methods, as the latter alleges.

"We have basically denied everything, and we believe that it's completely improper to haul someone in for misappropriation of trade secrets because of filing a lawful IPRA," Marks tells SFR.

Lawyers from the Santa Fe law firm Bardacke Allison representing Steep Hill did not respond to SFR's inquiry before publication time.

Meanwhile, the largest producer in the state by revenue, Ultra Health, also has a lawsuit pending against the DOH over its limit on the number of cannabis plants producers can grow. The nonprofit's owner and CEO Duke Rodriguez tells SFR a ruling could be be announced "possibly in days" after a bench trial last year.

Ultra Health and a patient filed a joint complaint in District Court in August 2016 alleging the DOH is creating an artificial shortage by limiting producers to 450 plants per growth cycle. DOH increased the plant cap from 150 in 2015 after it found the original kept production so low that some patients were reportedly buying cannabis on the streets.

Cannabis programs in other states have had challenges maintaining appropriate supplies of the plant. US attorneys claim there is currently a glut of pot in Oregon, while Nevada ran out of pot only three months after it legalized a recreational market last July.

Later this year, in a separate federal case, a jury is slated to decide whether three officials from the New Mexico State Fair violated free speech when they prohibited Ultra Health from displaying certain diagrams and other cannabis-related information at last year's fair. The producer is represented by Egolf + Ferlic + Harwood, and New Mexico House Speaker Rep. Brian Egolf is on the producer's legal team in the matter as well as in the plant cap dispute.

For Jason Flores-Williams, a criminal defense and civil rights lawyer who handled cannabis litigation in Santa Fe before moving to Denver several years ago, examples of big-name businesses hiring big-name lawyers do not bode well for creating an industry with an even playing field.

"It was my misplaced hope that the cannabis business in New Mexico might be a more fair type of business," Flores tells SFR. "But it's just like every other type of business in America, benefiting the rich and white and well-connected."