Tribal CannabisOver the past couple of years, we have written about tribal cannabis and the efforts by various tribes in Oregon, Washington and elsewhere to roll out marijuana programs. Last week, at the Cannabis Law & Policy course I teach, we had the great pleasure of hosting Pi-Ta Pitt from the Confederated Tribes of Warm Springs here in Oregon. Mr. Pitt is the tribe’s Cannabis Program Coordinator, and he offered some valuable insights for tribes rolling out cannabis programs. Based on that discussion, here are some key takeaways for tribes.

  1. The Wilkinson Memo is still in effect, and confusing as ever.

Way back in October of 2014, the federal Department of Justice issued its “Policy Statement Regarding Marijuana Issues in Indian Policy.” Like the Cole Memo before it, the Wilkinson memo provides that eight enumerated federal priorities “will guide United States Attorneys’ marijuana enforcement efforts in Indian County,” including where “sovereign Indian Nations seek to legalize the cultivation or use of marijuana in Indian Country.” It all comes back to prosecutorial discretion, and the current administration has yet to comment on the Wilkinson Memo specifically.

In the past few years, federal attorneys have watched warily as Warm Springs and other tribes have explored the cannabis space. While these attorneys have seemed tolerant, to an extent, of the tribal initiatives, the take on cannabis events on tribal lands seems to have touched a federal nerve. Because events are disfavored, tribes looking to legalize cannabis production and sale may wish to steer the focus away from festivities.

  1. Tribes subject to Public Law 280 have a tougher go.

Public Law 280 is a federal statute allowing states to “assume jurisdiction over reservation Indians.” The Act mandated a transfer of federal law enforcement authority within tribal nations to state governments in six states: California, Minnesota (except the Red Lake Nation), Nebraska, Oregon, except the Warm Springs Reservation), Wisconsin (except the Menominee Indian Reservation), and, upon its statehood, Alaska. Other states were allowed to elect similar transfers of power if the affected Indian tribes consented. Since 1953, Nevada, South Dakota, Washington, Florida, Idaho, Montana, North Dakota, Arizona, Iowa and Utah all have assumed some jurisdiction over crimes committed by tribal members on tribal lands.

Tribes not subject to Public Law 280 don’t have to worry about states attempting to shutter their cannabis programs. Although it may behoove those tribes to have good relationships with their neighboring states, local enforcement is not a possibility – even if the adjacent states are anti-cannabis. Tribes subject to Public Law 280, however, may face immediate local barriers, in the form of law enforcement.

  1. Conversations are key.

Even where Public Law 280 is not at play, it is critical for tribes to dialogue with the states, along with federal officials. The Warm Springs Tribe and the Suquamish Tribe, for example, each have entered into an inter-governmental compact with Washington and Oregon, respectively, regarding their cannabis efforts. This is critical for any distribution of pot off of the reservation, which is where the tribes stand to reap significant economic benefit, but also where states regulate cannabis commerce extensively.

Federal conversations may be even more important. Most tribes already are very familiar with local U.S. attorneys, but conversations around the topic of legalizing cannabis are unique. Any tribe considering a cannabis program would be wise to dialogue with the relevant U.S. attorneys, and to get a read on how that office may respond. To this point, U.S. attorneys may view a tribal program as more “legitimate” if the program is borne of a referendum taken within the tribe itself. And that’s yet another, local conversation.

  1. This could go any number of ways.

Twists and turns are inevitable during the design and implementation of a sovereign’s cannabis program. It happens with states; it happens with tribes. Like states, tribes need to maintain flexibility and build coalitions as they attempt to launch a pot venture. Tribes also need to be realistic about timelines and the roles of current collaborators. For example, what will the tribe’s current bank or credit union think of the effort? What about its other stakeholders?

In all, cannabis can be incredibly attractive to tribes as a revenue source and job creator – especially to those tribes on resource-poor land, and to tribes far from interstate highway corridors, which are unable to contemplate casinos or tourism. In all, cannabis may present a unique opportunity for certain tribes, given the right approach.

California Cannabis laws: Yuba CountyCalifornia has 58 counties and 482 incorporated cities across the state, each with the option to create its own rules or ban marijuana altogether. In this California Cannabis Countdown series, we plan to cover who is banning, who is waiting, and who is embracing California’s change to legalize marijuana — permits, regulations, taxes and all. For each city and county, we’ll discuss its location, history with cannabis, current law, and proposed law to give you a clearer picture of where to locate your cannabis business, how to keep it legal, and what you will and won’t be allowed to do.

Our last California Cannabis Countdown post was on Marin County, and before that, Nevada County, the City of Lynwood, the City of Coachella, Los Angeles County, the City of Los Angeles, the City of Desert Hot SpringsSonoma County, the City of Sacramento, the City of BerkeleyCalaveras CountyMonterey County and the City of Emeryville.

Welcome to the California Cannabis Countdown.

Yuba County has a very strict cannabis ordinance and a very active Sheriff’s department. Though at one point the County allowed up to 99 cannabis plants, after an influx of large-scale grows and complaints from locals about the “negative” impacts of cultivation on the community, their current regulations allow a maximum plant count of 12, regardless of acreage, and cultivation is limited to indoor, accessory structures. Attempts to change the ordinance through lawsuits and ballot measures have all failed so far.

LocationYuba County is located in California’s Central Valley along the Feather River. It was one of the original counties of California formed when California became a state. It borders Nevada, Placer, and Butte Counties, which are all popular cannabis cultivation areas. The County lies along the western slope of the Sierra Nevada and a lot of agriculture businesses are located west of the mountains and include fruit orchards, rice fields, and cattle grazing.

History with CannabisOn May 1, 2012, Yuba County adopted its first marijuana regulations under Ordinance No. 1518, which was later amended on December 18, 2012 by Ordinance No. 1522. The County’s first Marijuana Cultivation Ordinance allowed for both indoor and outdoor cultivation with maximum a plant count based on parcel size. No more than 18 plants were allowed on parcels less than one acre with up to 99 plants allowed on parcels 20 acres or more.

In 2014, following concerns from local citizens regarding the effects of marijuana cultivation and other factors, the Yuba County Board of Supervisors initiated a full review of its Marijuana Cultivation Ordinance.

On April 28, 2015, the Board passed Urgency Ordinance No. 1542, which repealed and reenacted the County’s Marijuana Cultivation Ordinance, establishing a complete ban on outdoor cultivation and allowing only limited indoor cultivation.

On June 7, 2016, voters in Yuba County voted to defeat two marijuana ballot measures. Measure A would have increased the number of medical marijuana plants that could be cultivated on parcels of land greater than one acre and allowed for cultivation of medical marijuana outdoors and within residences. Measure B would have established regulations for medical marijuana dispensaries and authorized the licensing of at least one dispensary per 20,000 residents to operate within the County, allowing four or five dispensaries based on the County’s 2015 population.

On November 8, 2016, voters in Yuba County voted to defeat Measure E, which would have allowed for commercial medical cannabis activity and established regulations for cultivation, manufacturing, distribution, and transportation of medical cannabis within the County.

Current Cannabis Laws.

 Under Section 7.40.300 of the Yuba County Ordinance Code:

  1. Outdoor cultivation on any parcel is prohibited.
  2. Cultivation within a dwelling or any other structure used or intended for human habitation is prohibited.
  3. Cultivation of more than twelve (12) marijuana plants on any parcel is prohibited. This plant limitation applies regardless of the number of qualified patients or primary caregivers residing on the parcel or participating directly or indirectly in the cultivation. Further, this limitation applies notwithstanding any assertion that the person(s) cultivating marijuana are the primary caregiver(s) for qualified patients or that such person(s) are collectively or cooperatively cultivating marijuana.

Section 7.40.310 of the Code states that cannabis cultivation in unincorporated areas of the County may only occur on parcels with an occupied, legally established dwelling and shall be contained within the defined area of cultivation in one, single residential accessory structure affixed to the real property that: (1) meets the definition of “indoor;” (2) is located on the same parcel as the dwelling of a qualified patient or primary caregiver; and (3) complies with all provisions of the County code relating to accessory structures.

An “accessory structure” is defined under the County code as a separate and permitted building located on the same parcel as the residence and must meet several criteria listed under Section 7.40.320. Certain accessory structures may also be required to be surrounded by a solid fence that complies with Section 7.40.330 of the County code.

Marijuana cultivators in Yuba County must also register with the County. The cultivation of marijuana in any quantity upon any premises in unincorporated areas of Yuba County without first registering the cultivation and paying the required fee is declared unlawful and a public nuisance under Section 7.40.340.

In addition, under Section 7.40.140, it is the duty of every real property owner, whether or not he or she is in actual possession of the property, to prevent a public nuisance from arising on, or existing upon, his or her real property.

Proposed Cannabis Laws.

There are currently no proposed laws to change the cannabis ordinance in Yuba County. Attempts last year to repeal the County’s Marijuana Cultivation Ordinance through ballot measures were all defeated by the voters.

Current Cannabis Enforcement.

Efforts to fight against the Marijuana Cultivation Ordinance in Yuba County have so far been unsuccessful. In 2016, the Yuba Patient Coalition filed a lawsuit against the County arguing the County’s ordinance is unconstitutional and discriminatory, however the judge ruled in favor the County.

Though there is a ban on all outdoor cultivation and a 12 plant cap for indoor cultivation in accessory structures, cannabis cultivation still occurs in unincorporated areas of the County in violation of current laws. In response, the County has taken enforcement actions against marijuana cultivators and their landlords. On March 16, 2017, the Yuba County Sheriff’s Department raided several indoor marijuana grows seizing over 3,600 marijuana plants. Property owners who lease property to marijuana growers in Yuba County also face penalties of $100 per plant per day until the plant is removed, which in some cases has resulted in fines of over $200,000, as well as the risk of felony convictions.

Unless and until Yuba County changes its cannabis regulations, it is not a good place for a cannabis business.

Cannabis usageTwo years ago we did a post, Top Ten Dubious Claims About Marijuana, listing “legalization will lead to more marijuana in the hands of children and unfettered access for all” as the first dubious claim. A new survey from the Washington Department of Health shows we were right to doubt the legitimacy of that claim as teen marijuana use has not increased after legalization.

The survey collected data from roughly 230,000 Washington students and showed 26% of 12th graders, 17% of 10th graders, and 6% of 8th graders reported using marijuana in the last 30 days. The graph below from Vox shows that marijuana use among Washington State teens has not increased since cannabis became legal in 2012.

screenshot-3602167700-79-lg

The teen numbers in Washington are consistent with what has happened in Colorado as well, where a study showed teen use in that state remained steady after Colorado legalized marijuana, also in 2012.

Prohibitionists love claiming that legalizing cannabis will increase adolescent use, but really, why should it? States that have legalized recreational marijuana track the plant from seed to sale. Sales require the purchaser show ID and a retail store that sells to minors can lose its license. A well-functioning legal market should and does reduce unlawful diversions to kids. We predict that as legalization spreads, it will become increasingly difficult for adolescents to get access to cannabis. We also predict that as cannabis becomes normalized, its “coolness” factor will decrease and that too will lead to a decline in teen usage.

When Washington legalization advocates argued for Initiative 502 to legalize marijuana they touted a regulatory regime that would lead to responsible cannabis use. This study on teen use supports the notion that Washington is achieving its goal of providing a forum where adults can enjoy cannabis recreationally without giving increased access to teens. A well-regulated cannabis market does not harm society the way legalization opponents would have you believe. If you care about facts and if you want your state’s policies to be based on facts and not politics or myth, you should take heart from the above statistics.

 

 

colbert

Should we laugh or cry?

Comedian Stephen Colbert’s analogy hits the mark on the absurdity of Jeff Session’s cannabis views. Colbert was responding to the following Sessions comment about combatting violent crime:

I realize this may be an unfashionable belief in a time of growing tolerance of drug use.  But too many lives are at stake to worry about being fashionable.  I reject the idea that America will be a better place if marijuana is sold in every corner store.  And I am astonished to hear people suggest that we can solve our heroin crisis by legalizing marijuana – so people can trade one life-wrecking dependency for another that’s only slightly less awful.  Our nation needs to say clearly once again that using drugs will destroy your life.

Sessions’ comment about marijuana being sold in every corner store is fallacious, though cannabis being legalized and normalized enough to be sold in corner stores would not be such a bad thing anyway, so long as those sales are confined to adults. Further, any “suggestions” about marijuana’s ability to ease heroin addiction are based on scientific evidence. But what’s truly ridiculous about Sessions’ comments, and what Colbert is responding to in the above, is the notion that cannabis is only “slightly” less awful than heroin. Nobody has ever died of a cannabis overdose compared to the estimated 91 deaths per day from opioid overdoses. Cannabis is not chemically addictive. Cannabis can be used as medicine. Neither of those things can be said for heroin. Equating the two of them is a flat out lie and a harmful one at that as it minimizes our country’s massive heroin problem.

Comparing cannabis to heroin is like comparing a paper cut to a gunshot wound or a rain cloud to a monsoon. Not only are they not the same. Colbert gets it, but our country’s top attorney apparently does not.

 

Remember when the DEA adopted a “Final Rule” criminalizing “marihuana extract,” presumably including hemp extracts? Well, the DEA recently clarified that Final Rule, and based on the DEA’s own explanation and interpretation, marijuana extracts derived from hemp that contain no THC are not illegal under the federal Controlled Substances Act (CSA).

The DEA’s highlights of its clarification are that:

  • The “marihuana extract” definition does not include materials or products excluded from the definition of marijuana set forth in the CSA.
  • The rule includes only those extracts that fall within the CSA definition of marijuana.
  • If a product consists solely of parts of the cannabis plant excluded from the CSA definition of marijuana, such product is not considered “marihuana” or a “marihuana extract.”

This is a significant departure from a plain reading of the Final Rule, which creates a new “Controlled Substances Code Number” for marijuana extracts “containing one or more cannabinoids from any plant of the genus Cannabis.” When the DEA adopted this Final Rule in December of last year, our opinion was that it formally outlawed all CBD products, including those derived from hemp, because CBD is a cannabinoid and hemp is a plant of the genus Cannabis.

Marijuana is prohibited by the CSA and any CBD product derived from marijuana is therefore prohibited. However, the CSA exempts from the definition of “marijuana” the plant’s “mature stalks” which are also known as hemp. The logical conclusion is that CBD products derived from hemp containing no THC were not illegal (though the FDA would disagree). Prior to adoption of the Final Rule, CBD products derived from hemp that did not contain THC existed in a legal “gray” area; not specifically exempted by the CSA but the DEA kept stating it considered CBD of all kinds to be illegal.

Under the DEA’s Final Rule clarification, CBD products derived solely from hemp containing no THC are not prohibited under the “marihuana extract” rule. However, this clarification is not an official ruling by the DEA as it does not have the same authority as a formal rule. Instead, this clarification provides guidance as to how the DEA will enforce the “marihuana extract” Final Rule. In addition, the marihuana extract Final Rule is currently subject to a lawsuit filed in the Ninth Circuit Court of Appeals by members of the hemp industry, and this clarification may cause that court to rule that the clarification limits the Final Rule.

The bottom line is that this clarification should be taken with a grain of salt as the Final Rule itself carries more legal authority and this clarification is not an official ruling by the DEA — it’s just the agency’s interpretation of its own rule, which can change as the DEA so desires. So, if you’re selling hemp-based CBD products with little to no THC, keep your head on a swivel as the DEA develops and implements this Final Rule.

Oakland cannabis regulationsTuesday night, in a continuation of more than ten months of contentious debate and revisions, the Oakland City Council revisited and reargued the terms of its yet-to-be-implemented Equity Permit program for cannabis businesses. The program aims to address inequity in the local cannabis industry by prioritizing permit issuance to those with roots in certain identified Oakland neighborhoods that have been historically impacted by disproportionate drug law enforcement, and to members of the Oakland community that have been arrested and convicted of cannabis crimes in Oakland in the last 20 years. The law moves qualifying Equity Applicants to the front of the cannabis permitting line, and it also creates access to approximately $3.4 million in earmarked interest-free business loans and other assistance.

The law was first introduced in May 2016, but in response to community concern about how it might affect the local economy, the City Council commissioned an extensive race and equity analysis of medical cannabis regulations and scheduled another vote for early 2017. Among the most jarring of the City Council’s findings was that over the past 20 years, African Americans, particularly those living within certain Oakland police beats, have been dramatically and consistently overrepresented in cannabis-related arrests, reaching as high as 90% of all cannabis arrests in the late nineties.

Two weeks ago, the Oakland City Council approved a last-minute amendment to the program mandating that any general (non-Equity) applicant must have lived in Oakland for at least three years to get a cannabis business permit. Because Equity Applicants must already demonstrate residency and a past connection with Oakland, this amendment would have effectively placed a residency restriction on all new or existing cannabis businesses. After a motion passed 6-2 Tuesday night removing the residency requirement for general applicants, the current version (which still requires another Council vote to become law) provides that, when issuing permits for any kind of cannabis business, the City must give half (i.e. maintain a 1-to-1 ratio) of all permits issued in its initial issuance phase to “Equity Applicants,” defined as Oakland residents with an annual income at or less than 80% of the City average and who either lived in certain defined Oakland police beats for 10 of the last 20 years, or who have been convicted of a cannabis crime committed in Oakland within the last 20 years. Tuesday night’s motion also requires dispensary staff be at least 50% Oakland residents with at least half of those residents from areas identified as having high unemployment or low household incomes.

Though Oakland’s Equity Permit program has garnered praise for its stated policies and goals, it also has generated controversy—as illustrated by the lively hearing Tuesday night—particularly due to its now-withdrawn general residency requirement. Some questioned its efficacy in achieving the City’s goals, while others argued that it would benefit the City by requiring that Oakland cannabis business permits go only to those living in Oakland. The proposed residency requirement would have jeopardized any existing cannabis businesses that could not meet the residency requirement, regardless of how many jobs or how much tax revenue those entities were contributing to the local economy.

Though it is unclear what the ordinance will look like in its final form, and though the residency requirements were relaxed by Tuesday night’s revision, a residency requirement remains for Equity Applicants and dispensary staff. Because the City of Oakland intends to issue only eight cannabis dispensary licenses per year (excluding delivery-only operations), an aggrieved party may challenge the ordinance for favoring longtime residents of certain Oakland neighborhoods at the expense of newer Oakland residents and those living in other neighborhoods, or even for favoring Oaklanders over out-of-towners. Some who spoke at Tuesday night’s meeting explained how, despite having lived all of their lives in Oakland, but not in one of the identified neighborhoods or having lived in a historically disadvantaged neighborhood but not for long enough or having been forced to move out of Oakland after many years because of gentrification, they would not qualify as Equity Applicants. It is these sorts of presumably unintended consequences of the residency requirements that could lead to the program getting bogged down in legal challenges.

The Equity Permit Program’s express preference for Oakland residents over out-of-towners, as an element of its greater approach to addressing longstanding systemic racial disparity in cannabis enforcement, raises some important legal issues. We have previously touched on the constitutionality of residency requirements and the potential difficulties presented by California’s own residency requirement in Proposition 64, such as access to funding from out-of-state investors—a challenge that has been somewhat ameliorated by Oakland withdrawing its requirement that majority ownership and control of cannabis permittees must be strictly City residents.

The Privileges and Immunities Clause of the U.S. Constitution and the Dormant Commerce Clause generally prevent states from discriminating against residents of other states. When a state or local government enacts legislation that facially discriminates against nonresidents, reviewing courts will ask whether the government has a “substantial reason” for the difference in treatment, and whether the law is “closely related” to that rationale. But because cannabis is federally illegal, constitutional claims would likely be a stretch.

As California rolls out its new regulations under the Adult Use of Marijuana Act (AUMA), it will be important to watch how those laws address a state licensee’s right to do business within the state, and how local regulations interact with state law. Though the Medical Cannabis Regulation and Safety Act (MCRSA) requires local government approval before a state license can issue, the AUMA does not, but the AUMA does allow localities to enact their own regulations so long as they do not conflict with state law. It remains uncertain how the AUMA will apply to a state-licensed cannabis entity seeking to conduct business in Oakland if that entity is unable to obtain a business license from Oakland because of its residency requirements. We will be tracking the rollout of California’s new regulations and how the interplay between the state and localities like Oakland will affect cannabis businesses and the state’s soon-to-be massive regulated cannabis economy.

Editor’s Note: Daniel recently joined our firm as an attorney in our San Francisco office, where he will be focusing on mostly California cannabis real estate and dispute resolution issues.

Oregon cannabis lawyersOregon lawmakers are considering legislation to protect Oregon cannabis consumers and patients against potential federal government enforcement actions. Proposed legislation, Senate Bill 863, would require marijuana retailers to purge patients’ personally identifiable information and would prohibit dispensaries from “record[ing] and retain[ing]” such information. This bill seeks to shield individual cannabis patients and consumers from federal authorities by eliminating a potentially damning piece of evidence. Oregon dispensaries currently keep much of this information, in contrast to other states where purges are commonplace by law or custom.

SB 863 defines “information that may be used to identify a consumer” to include information found on a consumer’s passport, driver’s license, or other identification document.” The information is protected whether it is on a physical copy of the identifying document or stored otherwise, such as in a customer database. Though dispensaries may collect aggregate non-identifying information, the bill would make it unlawful for dispensaries to “record or “retain” individual customer data. The legislation would further limit the spread of personally identifiable information by prohibiting dispensaries from requiring customers to produce any other form of identification.

In addition to preventing the recording of personally identifying information, the bill would also prohibit transferring any personally identifying information in the dispensary’s possession. On its face, this would appear to prevent dispensaries from cooperating with federal enforcement against customers, though it remains to be seen whether a state law requiring something like this would hold up in a federal court.

What personally identifying information does the bill not cover? The bill does not cover other forms of record-keeping that could contain personally identifying information. For instance, the bill would not prevent dispensaries from retaining recorded security footage that could include recognizable images of its customers or from capturing license plate numbers of cars coming and going from the parking lot. The bill also would not cover information received incident to credit and debit card-based transactions.

What about data retained for marketing purposes? A dispensary may record and retain the name and contact information of a consumer for the purpose of notifying them of products, services, discounts, etc. if the consumers gives informed consent. Even then, however, the dispensary may not transfer the information to another person — good news for those wary of their personal data being sold to third party marketers.

Will the bill pass? It seems likely some form of the bill will succeed and our Oregon cannabis lawyers are predicting passage. SB 863 enjoys bipartisan support and lawmakers are moving quickly to consider the proposal. Of course, the bill may change significantly as it gets through committee.

The next action on the bill should come this week of March 20, so keep an eye on this fast-moving issue.

Marijuana leasing

Everyone who grows cannabis needs real estate. Some growers start with a small piece of land, but others require acreage to accomplish their goals. New growers, in particular, tend to over-reach on the land piece. As business operations proceed, and harvest dates are pushed back for any number of reasons, the grower may wish it had held back some cash for operations, rather than dropped so much on the land. That’s where the sale-and-leaseback comes in.

Leaseback deals are a time-honored way for companies to access capital. In short, a leaseback is just a financial transaction where an entity sells a piece of property and immediately becomes a tenant, leasing that property “back” for a significant term. The selling entity is often cash-strapped but wishes to continue in its line of business, and at its present locale. The seller therefore finds a buyer, and works with that buyer to negotiate a long-term sale and lease. On paper things look different; but on the ground, everything stays the same.

We have worked on a series of leasebacks in cannabis of late, and we expect more of these transactions going forward. The leaseback model is in many ways ideal for an industry where traditional financing is unavailable. For example, if a marijuana business has stretched its budget by buying real estate, making improvements, and preparing the land for its cannabis operations, that parcel may be sucking up cash. That said, it may also have real liquidation value. With limited options for fundraising, companies can look to the land.

Leasebacks are not only attractive to cash-strapped enterprises. We have handled leasebacks for producer clients that are profitable but wish to free up cash to start operations at a second location, with an eye toward increasing their market share. In jurisdictions like Oregon, where a single entity can hold multiple cannabis licenses, aggressive operators see the leaseback as a unique leverage option. In the eyes of these operators, freeing up cash for a second or third site is a crucial head start in a burgeoning industry.

We have also handled leasebacks for companies built for the sole purpose of entering these transactions. Formally, these companies may be structured as partnerships, LLCS, or even real estate investment trusts (REITs). Once a leaseback partner is identified, a typical approach is to structure the transaction as a sale and triple-net lease, which targets investor preferred returns upwards of ten percent based on those rents, and increasing property values. These companies prefer to invest in highly regulated states, like Oregon, Washington, Colorado and, hopefully soon, California.

We predict leasebacks will continue to be more prevalent for grow sites than for retail or other uses, because of the size and value of the properties at issue. We also predict that as industry competition intensifies, operators will increasingly turn to leasebacks as a way to move money from real estate holdings to core business– namely, growing and selling pot.

Cannabis business insuranceA client asked me earlier this week whether I thought his company should purchase insurance for their directors and officers. His accountant had advised them to do so, and he was looking for a second opinion. This issue has come up often over the years, so here’s a quick primer on D&O insurance and whether it makes sense for marijuana businesses.

At its core, D&O insurance is a way to protect a business’s directors and officers from being on the hook personally for their actions in their roles as directors and officers. Sometimes those suits can come from third parties, like creditors if the company is insolvent, or competitors for tortious interference with contracts, or customers for deceptive business practices. A large chunk of claims also can come from that same business’s shareholders.

Directors and officers owe multiple duties to their own companies. The big two are the duty of care and the duty of loyalty. The duty of loyalty mandates that the director or officer act in good faith in the best interests of the company, rather than for their own personal gain. The duty of care requires officers and directors act with reasonable care in exercising their company duties. You can violate the duty of loyalty by funneling company money toward your family members and you can violate the duty of care by making business decisions no reasonable person would make. Over the years, courts have tended to read the duty of care as an extremely limited duty — as long as there is a conceivable way to argue for what you did having been a business decision, it likely won’t violate the duty of care. If a director or officer violates one of these duties, one or more shareholders can sue those directors on behalf of the company, referred to as a “derivative suit.”

Company officers and directors don’t generally go into their jobs planning to violate their fiduciary duties to their companies, but they also don’t like the idea of being sued by shareholders for their management decisions. So companies make sure to sweeten the pot by offering protections against shareholder actions. One of them is indemnification, where the company agrees to indemnify an officer or director when sued in their role as officer or director. But indemnification is often limited by state law, where companies are not allowed to fully indemnify their officers and directors, especially for duty of loyalty violations.

The next layer of protection is D&O insurance. In a standard D&O policy, the individual officers or directors are covered when the company does not indemnify them. If the company does indemnify them, the company is covered for those costs. Finally, the company can be covered for additional claims against it, including potential securities claims.

For cannabis companies, the decision of whether to get D&O insurance is really no different than it is for other companies, except the premiums and coverage limitations may be different. Cannabis business is still pretty young in the actuarial world, and determining the exposure of directors and officers who are running companies that openly violate federal law is an interesting task. Like a lot of other services in the marijuana space, insurance underwriters tend to quote higher than ordinary rates for D&O insurance because of that uncertainty. For small marijuana businesses still run by their founders, D&O insurance plays the role of providing some liability coverage, but it isn’t necessary to attract outside talent.

Other than cost, one additional reason some companies choose to avoid D&O coverage is perception. If a director or officer wants a company to provide her with D&O insurance, that director or officer is saying she doesn’t want any of her personal assets to be on the hook for her company decisions. But if you look at it from the shareholder perspective, they already have significant personal assets on the hook. Many people have their life savings tied up in cannabis businesses, and there’s no such thing as shareholder insurance for bad decisions by management.

The vast majority of large public companies have some type of D&O insurance, and it is rare for really small companies. For those companies in the great middle, D&O insurance can make sense as a way to retain directors and officers, especially if the company is engaged in activities that invite lawsuits against directors and officers in their individual capacities. On the other hand, it is an expense, and shareholders like to see it when their directors and officers also have some skin in the game.

Marin County CannabisCalifornia has 58 counties and 482 incorporated cities across the state, each with the option to create its own rules or ban marijuana altogether. In this California Cannabis Countdown series, we plan to cover who is banning, who is waiting, and who is embracing California’s change to legalize marijuana — permits, regulations, taxes and all. For each city and county, we’ll discuss its location, history with cannabis, current law, and proposed law to give you a clearer picture of where to locate your cannabis business, how to keep it legal, and what you will and won’t be allowed to do.

Our last California Cannabis Countdown post was on Nevada County, and before that, the City of Lynwood, the City of Coachella, Los Angeles County, the City of Los Angeles, the City of Desert Hot SpringsSonoma County, the City of Sacramento, the City of BerkeleyCalaveras CountyMonterey County and the City of Emeryville.

Welcome to the California Cannabis Countdown.

I’d bet most Californians would be surprised that Marin County, known for its affluence and laid back lifestyle, does not have a single licensed medical marijuana dispensary collective (though there are some delivery services). It’s been twenty years since the enactment of the Compassionate Use Act – which 73% of Marin residents approved – and Marin is still figuring out how to convert the will of its voters into practice. This resistance by Marin County elected officials to move forward on cannabis is even harder to grasp after the more recent results of the Adult Use of Marijuana Act (AUMA) vote where nearly 70% of Marin residents voted for marijuana legalization. Prior to the AUMA, the California State legislature passed the Medical Cannabis Regulation and Safety Act (MCRSA). The MCRSA covers the comprehensive licensing and regulatory framework for medical cannabis while also granting local jurisdictions the authority to enact their own licensing requirements. Under the MCRSA, a license applicant must demonstrate local approval to secure state licensure. And under the AUMA — though licensees do not need local approval to receive a California state cannabis license, they must be in compliance with all local laws to be able to open the doors of their cannabis business. In turn, the MCRSA and the AUMA are motivating jurisdictions to act, and with the intent of its voters so clear, Marin is slowly taking steps towards local marijuana business licensing.

Medical marijuana is still banned in Marin County’s cities but some, like San Rafael and Larkspur, are gradually adopting local marijuana regulations. The Marin County Board of Supervisors – which has jurisdiction over the unincorporated areas of Marin County – has taken the lead in licensing medical marijuana entities, but not recreational marijuana businesses yet. Under its current medical marijuana ordinance, the Board has authority to issue up to four medical cannabis licenses in Marin County’s unincorporated areas. Over the past couple of months, the County held three public hearings for ten applicants vying for those four licenses.

I attended those hearings and it was clear to me that many of the applicants had not done their homework and therefore had essentially disqualified themselves from getting one of the four medical cannabis licenses. Many disqualified themselves by submitting incomplete or misleading forms. Worse yet, some disqualified themselves by having questionable business partners, which in turn incited the community’s ire — which is not something you want to do in Marin County!

These hearings also call to mind something our cannabis business lawyers are always telling our clients: be careful what you share on social media because your posts can come back to haunt you. At one of the hearings I attended, one license application faced a barrage of attacks because the applicant had partnered with someone whose social media posts glorified essentially the worst stereotypes of marijuana. This individual had Facebook and Instagram accounts glorifying guns, drugs and money, perfectly feeding into the sort of cannabis fears pot prohibitionists love to peddle. Printouts of this person’s social media posts were passed out to everyone at the hearing, both attendees like me and representatives of the Marin County Board.

As California cities and counties continue to put local regulations in place for medical and recreational marijuana operators, marijuana business applicants must start now in developing the first (and second) impressions they will be conveying on their communities, especially if you are looking to open a cannabis business in an county like Marin that is really just getting started with legal cannabis businesses.

What I saw at these Marin County hearings reinforced how critical it is for potential cannabis licensees to do their due diligence regarding the pressure points of the community in which the cannabis business will be located. For example, are you seeking to enter a community where you are likely to run into aggressive NIMBYs or one with such restrictive cannabis business regulations that it is nearly impossible to operate? See High Dive: How To Fail In The Marijuana Industry. With California’s “new” legalization comes new opportunities to find the best possible and permissible location for your new or renewed cannabis business and new opportunities to engage and educate the relevant community to alleviate concerns and misbeliefs.

Editor’s Note: Habib recently joined our firm as an attorney in our San Francisco office, where he will be focusing on mostly California cannabis regulatory and dispute resolution issues.