Can Cannabis Businesses Sue the Feds for COVID Relief?

By Hilary Corrigan
Jun 13, 2020

As the COVID-19 pandemic shut down the economy, the federal government scrambled to support businesses in virtually every U.S. industry except cannabis.

This year’s CARES Act included hundreds of billions of dollars in forgivable business loans — the Paycheck Protection Program (PPP) — administered by the Small Business Administration(SBA). It enabled businesses with under 500 employees to receive funds to make payroll and other key costs.

However, SBA’s rules block the federally-illegal marijuana industry from taking part. They also blocked ancillary cannabis businesses from receiving the benefit. The SBA’s decision emerged as almost all legal states recognized cannabis as an “essential” industry, which could operate throughout the pandemic.

“If this happened in any other industry, there would be an outcry,” said Shane Pennington, an associate at Houston-based law firm Yetter Coleman LLP. In response, he drafted a legal challenge to who’s eligible for federal relief—even if it goes nowhere. (He declined to share it.)

No parties have signed on to sue the feds, but Pennington says he has received some positive feedback.

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“Mocking Everybody”

The current rules bar eligibility for businesses deriving revenue from illegal activities. But in defining illegal activities, Pennington says, the SBA relied on its own guidance on whether ancillary businesses were eligible for relief. 

Pennington thinks a court could overrule the agency’s interpretation of its own regulation. Essentially, the SBA defined not just direct marijuana businesses but all that serve them as unworthy of federal benefits. That definition is now in the books, “mocking everybody,” he said.

He compared the agency’s rules to how other federal agencies frequently offer guidance with huge financial implications—involving fuel standards, for instance, or pipeline locations. Such regulations routinely face challenges from corporations and environmental organizations.

Calls for relief

Various organizations have complained about the exclusion of marijuana-related businesses from federal funding relief.

The National Cannabis Industry Association this week said the rules have prevented many firms from seeking loans. The situation also creates uncertainty for firms that have done work for cannabis clients, and received the loans, about whether the loans will be revoked. 

Yetter Coleman LLP leads a coalition of law firms seeking to raise money for a legal defense fund and strike down the SBA rule, according to NCIA. Pennington said attorneys have various ideas about strategy. NCIA notes that the lead plaintiff will likely be a law firm whose loan application was denied over the rule.

In a recent letter, the American Bar Association asked SBA to clarify PPP eligibility rules. The group also wants federal law to protect lawyers who represent cannabis companies from criminal prosecution.  “Lawyers should also not be penalized for providing legal services to cannabis-related businesses that comply with state laws,” NCIA quoted in a blog post.

Despite interest in the case, it’s not yet clear there will be one.