Cannabis Operator Challenges California State Statute and Regulations Requiring Labor Peace Agreements
On April 26, 2024, Ctrl Alt Destroy, Inc. (“CAD”), a California Corporation and cannabis licensee filed a lawsuit against Nicole Elliott in her official capacity as Director of the State of California’s Department of Cannabis Control (“DCC”) and Rob Bonta in his official capacity as Attorney General of the State of California, seeking declaratory and injunctive relief alleging that California’s Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”) is unconstitutional under the Fifth and Fourteenth Amendments to the US Constitution and is preempted by the National Labor Relations Act (“NLRA”).
As we previously outlined here, MAUCRSA requires commercial cannabis licensees to enter into Labor Peace Agreements (“LPAs”)[1] with bona fide labor organizations in order to receive and maintain licenses to cultivate, distribute, transport, store, manufacture, process, and sell cannabis in the state of California. See California Business and Professions Code §§ 26001, 26051.5(a)(5)(A)-(E); 4 CCR § 15002(c)(19), 4 CCR § 15023(b), and 4 CCR § 17801 (collectively the “LPA Sections”). The LPAs require commercial cannabis licensees and labor organizations to agree to not engage in conduct that would disrupt or interfere with the other’s dealings.
Background
Since its adoption into law in 2018 and its subsequent amendments, MAUCRSA has established a comprehensive system to control and regulate the cultivation, distribution, transport, storage, manufacturing, processing, and sale of both medicinal cannabis and medicinal cannabis products for patients with valid physician’s recommendations and adult-use cannabis products for adults 21 years of age and over.
Under MAUCRSA, every person who conducts commercial cannabis activity must obtain and maintain a valid license from the DCC in order to engage in such activity on the premises licensed for the commercial cannabis activity. As a condition for obtaining and/or renewing a license to operate a commercial cannabis business, applicants, depending on the number of employees, must submit either: (i) a notarized statement that the commercial cannabis business will enter into and abide by the terms of a labor peace agreement; or (ii) demonstrate that the commercial cannabis business has entered into a labor peace agreement by providing a copy of the signature page of the agreement.
In 2022, Governor Gavin Newsom signed AB 195 into law which altered the employee threshold requirements of MAUCRSA from 20 to 10 as follows:
- an applicant with 20 or more employees, or an applicant with 10 or more employees that submits an application on or after July 1, 2024, must provide a notarized statement that the applicant will enter into, or demonstrate that it has already entered into, and will abide by the terms of a labor peace agreement. On and after July 1, 2024, the department shall not renew a license for a licensee with 10 or more employees unless the licensee provides a statement that the licensee has already entered into and will abide by the terms of a labor peace agreement;
- an applicant with 10 or more employees but less than 20 employees that has not yet entered into a labor peace agreement, must provide a notarized statement as a part of its application indicating that the applicant will enter into and abide by the terms of a labor peace agreement within 60 days of employing its 20th employee, or on or before July 1, 2024, whichever is earlier; and
- an applicant with less than 10 employees that has not yet entered into a labor peace agreement, must provide a notarized statement as a part of its application indicating that the applicant will enter into and abide by the terms of a labor peace agreement within 60 days of employing its 10th employee or on or before July 1, 2024, whichever is later.
Cal. Bus. & Prof. Code §26051.5 (a)(5)(A)(i)-(iii).
CAD’s Lawsuit
In its complaint, CAD alleges that the LPA Sections are unconstitutional because the sections violate due process rights under the Fifth and Fourteenth Amendments to the US Constitution which protects the freedom of speech guarantee found in the First Amendment by: “(1) engaging in content based discrimination by forcing CAD to agree not to disrupt efforts by a bona fide labor organization to communicate with, and attempt to organize and represent, CAD’s employees, which results in repressing CAD’s expression concerning the merits of unionization; (2) requiring CAD to relinquish this right as a condition of state licensure; (3) being so vague as to chill the exercise of protected free speech rights; and (4) imposing a prior content based restraint on constitutionally protected expressions.”
CAD alleges the LPA Sections also violate the Equal Protection Clause of the Fourteenth Amendment because the LPA Sections essentially favor unions desiring to advance their cause with employees while requiring CAD not to interfere with the organizing and to remain silent and forego free speech if questioning unionization, thus treating CAD differently from other employers with respect to their Constitutional and NLRA rights.
CAD alleges that the LPA Sections are preempted by the NLRA due to the requirement as a condition of cannabis licensure that CAD enter into a LPA with a bona fide labor organization, but there is no requirement that the labor organization be one that has been certified as CAD’s employees bargaining representative through the NLRA’s processes and requirements. Thus, the LPA Sections are preempted under Garmon preemption because the NLRA and the NLRB have the exclusive jurisdiction to certify a labor organization as the bargaining representative of employees who can enter into agreements with employers.[2] CAD also alleges that the LPA Sections impermissibly regulate the labor relations of the cannabis industry which is preempted under Machinists preemption.[3]
CAD also points to the lack of obligations on the part of labor organizations, and the fact that the LPA Sections give labor organizations dealing with CAD or other commercial cannabis businesses more leverage to negotiate a favorable LPA, while CAD and other commercial cannabis businesses have little to no leverage as they must enter a LPA or risk losing licensure and the right to do business altogether.
Further, CAD points out that the LPA Sections are subject to broad and unreasonable interpretations with respect to terms such as “bona fide labor organization.” When CAD had reached 20 employees in October 2022, it entered a LPA with a labor organization named Professional Technical Union Local 33 (“Pro-Tech 33”). In 2023, the DCC sent an email to all licensees and applicants stating that the Agricultural Labor Relations Board (“ALRB”) determined that Pro-Tech 33 was not a “bona fide labor organization” and that any LPAs entered into with Pro-Tech 33 were null and void and could not be used to satisfy the requirements for licensees to enter into a LPA.[4] Thus, CAD risks losing its license and right to do business in California because its LPA is now null and void, and it must therefore enter into another LPA with a different labor organization that somehow satisfies the undefined definition of a “bona fide labor organization” as used in the LPA Sections.
NLRA Preemption
This lawsuit provides federal courts with the opportunity to answer the questions as to whether the LPA Sections and other similar requirements in other states are preempted under Garmon and/or Machinists preemption.
Garmon preemption is a labor preemption based on Sections 7 and 8 of the NLRA, protecting concerted activities in collective bargaining and prohibiting unfair labor practices, respectively, and prohibiting states from regulating conduct that the NLRA protects and prohibits. See San Diego Building Trades Council Local 2620 v. Garmon, 359 U.S. 236 (1959). Here, the question is raised whether the requirements of the LPA Sections violate cannabis employees Section 7 rights of being able to choose or refrain from choosing a bargaining representative as the LPA Sections require licensees and applicants for licensure to enter into agreements with bona fide labor organizations, but does not require those labor organizations to be one of the employees’ choosing or to be certified through the National Labor Relations Board’s (“NLRB”) processes. It also raises questions as to whether the LPA Sections violate section 8(c) of the NLRA which protects speech by both unions and employers from regulation by the NLRB because employers must enter into these LPAs and refrain from interfering with organizing, which would include an employer’s ability to speak out against union organization.
Under the Machinists preemption, both the NLRB and state actors are forbidden from regulating conduct that Congress intended to remain unregulated, which includes the right to use economic weapons during collective bargaining as afforded under the NLRA. Machinists v. Wisconsin Employment Relations Comm’n, 427 U.S. 132 (1976). Here, DCC’s ability, as a state agency, to withhold, suspend, and revoke licensure for businesses to engage in commercial cannabis activity is arguably an economic weapon that could fall under the Machinists preemption because if a cannabis business refuses to negotiate a labor peace agreement with a labor organization, it effectively loses the right to do business in California.
Other States’ Cannabis/Labor Peace Agreement Requirements
California is not the only state that has imposed such requirements on cannabis businesses in order to obtain licensure to engage in commercial cannabis activity, as New York, New Jersey, Rhode Island, Connecticut, and Delaware, all have similar requirements. Additionally, states including Illinois and Pennsylvania grant preferential treatment to businesses with LPAs when applying for licensure. Other states including Massachusetts and Oregon are considering similar requirements.
Also, in 2023, Greenleaf Compassionate Care Center, Inc., a cannabis operator in Rhode Island sued the Deputy Director of the Rhode Island Department of Business Regulation, the Chief of the Office of Cannabis Regulation, the Chair of the Rhode Island Cannabis Control Commission, the Commissioner of the Rhode Island Cannabis Control Commission, and Local 328 of the United Food and Commercial Workers Union in the United States District Court in Rhode Island, challenging the Rhode Island Cannabis Act under similar grounds to CAD’s challenge to the California requirements. On March 21, 2024, Greenleaf filed a notice of appeal in the United States Court of Appeals for the First Circuit in order to challenge the District Court’s March 5, 2024 Order staying the case.
Given the number of similar requirements in other states statutes and regulations for cannabis licensure and that at least one other has been challenged on similar grounds in federal court, increases the stakes for this challenge to the California requirements. Further, courts may look to one another for guidance should other challenges arise.
Key Takeaways
Effective July 1, 2024 the employee threshold for the LPA requirements in California is reduced from 20 to 10, thus more applicants will be required to enter into these LPAs or risk losing their license and right to conduct business in the state.
Employers who are attempting to comply with MAUCRSA’s requirements and enter into labor peace agreements should conduct due diligence on the labor organizations with whom they are considering entering into negotiations with. As demonstrated by CAD’s suit, the State of California has declared that certain labor organizations were not bona fide labor organizations and thus any labor peace agreements with those groups were null and void, requiring employers to enter into another labor peace agreement with another labor organization. Thus, employers should speak with experienced labor counsel before negotiating labor peace agreements with any group purporting to be a “bona fide labor organization” and understand the constitutional challenges associated with these LPA requirements. Employers seeking to also challenge the MAUCRSA’s condition of entering a LPA in exchange for licensure are encouraged to speak with experienced labor counsel to discuss their options. We will be monitoring this suit as it develops and provide additional updates.
FOOTNOTES
[1] Under MAUCRSA, a LPA is defined as “an agreement between a licensee and any bona fide labor organization that, at a minimum, protects the state’s proprietary interests by prohibiting labor organizations and members from engaging in picketing, work stoppages, boycotts, and any other economic interference with the applicant’s business. This agreement means that the applicant has agreed not to disrupt efforts by the bona fide labor organization to communicate with, and attempt to organize and represent, the applicant’s employees. The agreement shall provide a bona fide labor organization access at reasonable times to areas in which the applicant’s employees work, for the purpose of meeting with employees to discuss their right to representation, employment rights under state law, and terms and conditions of employment. This type of agreement shall not mandate a particular method of election or certification of the bona fide labor organization.” Cal. Bus. & Prof. § 26001(ab).
[2] See San Diego Bldg. Trades Council v. Garmon, 359 U.S. 236 (1959).
[3] See Aerospace Workers v. Wisconsin Employment Relations Comm’n, 427 U.S. 132 (1976).
[4] The ALRB has issued two decisions in 2023 related to peace agreements, both involving sham labor organizations. The ALRB found that the Pro-Tech 33 and the National Agricultural Workers Union (“NAWU”) were not “bona fide labor organizations.” Both had signed over 20 peace agreements with cannabis companies in the state. Both organizations were found to be sham when each had failed to respond to basic inquiries about agreements they had entered into and failed to provide any information regarding members and officers within the State of California. After the ALRB’s determination, the DCC informed the cannabis businesses who had LPAs with either organization that they would have to sign a LPA with a “bona fide” union or risk losing their license. The DCC currently has 679 LPAs on file.
