Jay Dubow, left, and Jessica Southwick, right, with Pepper Hamilton.

On April 17, 2016, Gov. Tom Wolf signed into law Pennsylvania’s Medical Marijuana Program, which is administered by the Department of Health. In the two years following that legislation, the program has become fully operational. More than 30,000 patients have signed up for the program and are now receiving medical marijuana from 12 grower/processors at the 14 dispensaries that have been approved and have opened across the commonwealth. As of April 16, there are nearly 100 providers in Philadelphia County alone that have been approved by the Pennsylvania Department of Health to issue a patient certification for medical marijuana.

The process has not been smooth sailing for all involved, however. The commonwealth approved 27 dispensary permit applications in June 2017. PharmaCann Penn, LLC received one of those dispensary permits. PharmaCann also received a zoning permit from the city of Philadelphia for its proposed activity. But when PharmaCann sought to open its dispensary in Northeast Philadelphia, Simon Property Group, Inc., the owner of an adjacent shopping center, objected to the proposed dispensary, citing a deed restriction that prohibited the PharmaCann property from being used for any “unlawful purpose” or as a “drug store.” Simon Property Group argued that operating a medical marijuana dispensary violated both those restrictions, given that marijuana is still a Schedule I drug under the Controlled Substances Act.

PharmaCann filed suit against Simon Property Group and related entities, as well as the prior property owner, BV Development Superstition RR, LLC, in the Philadelphia Court of Common Pleas, seeking a declaratory judgment that the unlawful purpose language in the deed was inapplicable to using the property as medical marijuana dispensary in compliance with Pennsylvania’s medical marijuana regulations. PharmaCann also sought judgment that the “drug store” restriction did not apply, given that it planned to sell only cannabis oils, tinctures and lotions.

The defendants removed the case to the U.S. District Court for the Eastern District of Pennsylvania on the basis of diversity jurisdiction and federal question jurisdiction. PharmaCann filed a motion to remand the case back to state court, arguing that diversity jurisdiction did not exist, given that several defendants in the suit were citizens of Pennsylvania and the amount in controversy was zero, two of the defendants did not consent to removal, and federal question jurisdiction does not exist because the principle of abstention should guide the Eastern District to decline to hear the case.

The Eastern District was not persuaded by PharmaCann’s arguments. Instead, on March 14, the court denied the motion to remand, finding that the term unlawful in the deed restrictions “opens the door for federal question jurisdiction by teeing up a fundamental clash between state and federal law in this case,” see PharmaCann Penn v. BV Development Superstition RR, 2018 U.S. Dist. LEXIS 41671 (E.D. Pa. Mar. 14, 2018).

While noting that federal question jurisdiction exists when the cause of action arises under federal law, the court also explained that “in some cases, however, a court has federal question jurisdiction even when the cause of action comes from state law. As the U.S. Supreme Court has recognized, a federal court should hear state-law claims ‘that nonetheless turn on substantial questions of federal law, and thus justify resort to the experience, solicitude and hope of uniformity that a federal forum offers on federal issues,’ as in Grable & Sons Metal Products v. Darue Engineering & Manufacturing, 545 U.S. 308, 312, 125 S. Ct. 2363, 162 L. Ed. 2d 257 (2005). In those instances, ‘federal jurisdiction over a state law claim will lie if a federal issue is: necessarily raised, actually disputed, substantial, and capable of resolution in federal court without disrupting the federal-state balance approved by Congress,’ Gunn v. Minton, 568 U.S. 251, 258, 133 S. Ct. 1059 (2013).”

In the PharmaCann case, the Eastern District found that all four of those requirements were met because whether the operation of a medical marijuana dispensary was an “unlawful use” hinged on an interpretation of the federal Controlled Substances Act, the parties actually disputed whether such use was unlawful, and the rarity of the case meant that this decision would not upset the federal-state balance.

As to the potential impact of a substantive ruling in this area, the court itself acknowledged that, “on both points, the federal question in this case is substantial. First, the need to pursue certainty on the legal status of marijuana dispensaries looms large. By the court’s count, 29 states have authorized some form of medical marijuana and nine have authorized ‘recreational’ marijuana. The federal status of these state schemes could be clarified or brought into sharper focus by a ruling on whether PharmaCann’s proposed dispensary violates federal law.”

The court declined to address the drug store deed restriction, as it went to the merits of the case and was, therefore, not appropriate to resolve on a motion to remand.

The court’s ruling strongly signaled that it was going to apply federal law and find that using the property as a medical marijuana dispensary was an unlawful purpose due to marijuana’s status as a federal Schedule I drug under the Controlled Substances Act. PharmaCann voluntarily dismissed the case on March 27. PharmaCann is selling its Northeastern Philadelphia property and beginning the process of opening a dispensary in Bucks County, free from the challenge of deed restrictions.

Certainly, Pennsylvania and other states’ grower/processors and dispensaries are breathing a sigh of relief at PharmaCann’s decision to discontinue the lawsuit. While deed restrictions may not apply to each of their operations, all involved in the medical marijuana industry are well aware of the legal status of marijuana on the federal level. A federal court ruling that operation of a dispensary in compliance with a state medical marijuana program—and by extension, grower/processors and prescribers—is an unlawful purpose could have practical implications, as well as a major chilling effect.

The viability of state programs rests on a détente of sorts between the states and federal government. Since 2016, the Rohrabacher-Blumenauer Amendment to federal spending bills has prevented the Department of Justice from spending money to prevent states from implementing laws “authorizing the use, distribution, possession or cultivation of medical marijuana,” Vehicle for Consolidated Appropriations Act 2018, Pub. L. No. 115-141, Section 538 (2018).

Disruption of the delicate balancing act—lack of federal enforcement funds and a dearth of direct challenges to state medical marijuana programs—may force state and federal governments to directly deal with the status of the programs. Absent a clear resolution in favor of legalizing medical marijuana programs, the financial industry and banks, already hesitant to operate in the medical marijuana space, may back away even further. Local governments and property owners could run medical marijuana businesses out of town through local regulations and stringent enforcement of deed restrictions against “unlawful uses.”

Conversely, with medical marijuana programs enacted in 29 states and substantial public support for legalization of medical marijuana, a ruling that medical marijuana dispensaries violate federal law might also spur Congress to act to exempt such programs from the Controlled Substances Act.

With PharmaCann backing away from this fight, it will take another lawsuit to test judicial interpretation and congressional will with respect to the legality of state-endorsed medical marijuana programs.

Jay A. Dubow is a partner with Pepper Hamilton, resident in the Philadelphia office. He is a co-leader of the firm’s cannabis industry group, which counsels cannabis industry clients on corporate and regulatory issues, as well as the potential risks both for cannabis-focused companies and non-industry participants doing business with cannabis companies.

Jessica K. Southwick is an associate in the health sciences department of the firm, resident in the Philadelphia office. She is also a member of the firm’s cannabis industry group.