Canna Law Blog ™

Canna Law Blog

LEGAL SUPPORT FOR THE CANNABIS BUSINESS COMMUNITY SINCE 2010

How to Sell A Marijuana Business With Uncertain Liabilities

Posted in Business Basics, Legal Issues

We have been working on a number of marijuana license acquisition deals for the past several weeks that have been held up by existing claims against the seller. Claims against a business are notoriously difficult to value as compared to other liabilities like contract debt, utilities, or employee commissions. This is particularly true of marijuana businesses where parties are reluctant to air their laundry in court and where there has been a dearth of court decisions relating to marijuana businesses.

Just by way of example, let’s say that you had a falling out with a business associate at the outset of starting your marijuana business two years ago. You didn’t think you owed anything to each other, and you are getting ready to sell the business that you built over the last two years after your business associate left. Now just suppose that you are about to sell your business and your old business associate comes out of the woodwork demanding “her share” of the purchase price. She claims that she was a fifty-fifty owner and should get half of any sale money. How do you value her claim in the deal?

Marijuana businesses are at special risk for these types of occurrences because so many of them have historically relied on oral contracts and self-help enforcement rather than on detailed written contracts and the court system. Since hardly anyone would have sued two years ago for ownership in a marijuana business, claims like that were worth very little back then. Now, however, with increasing legalization, these sorts of claims can be valuable enough so as to require a real valuation before concluding a business purchase and sale transaction.

The first step is the most difficult: assigning a dollar value to the claim. Though litigation outcomes are inherently unpredictable, it is easy to predict that almost all litigation is expensive. Just about everyone loves discounting the claims their former business associates have to partial ownership, but those claims are often viable. Even the Winklevii got $65 million out of a business deal that evaporated before anything materialized.

In theory, valuing litigation claims can be stated simply. It is the claimant’s sought value multiplied by the chances of the claimant getting that value awarded by a court. If I sue Facebook for $1 million, but I have a 0.00000001% chance of winning that claim, I have a case worth one cent. The problem is that nobody has enough information or predictive ability to be able to accurately value the amount of damages one will get from a judge or a jury or the likelihood of that person or company getting anything at all.

This is why in doing business deals, we transactional lawyers try to find ways to avoid having to calculate the value of outstanding claims. This is typically done either by fast-tracking a decision on the claim or clearly shifting the burden of paying on any claims so that there is no longer any need to value them.

To put a decision on the fast track, we sometimes file declaratory judgment actions. In a “dec action” a potential defendant brings a case that the claimant would otherwise bring, and asks the judge to rule that claimant has no real claim. It’s risky because losing a dec action puts the party against whom a claim is sought at a serious disadvantage. If that party wins the dec action, though, the claim evaporates and is no longer a concern. More importantly, dec actions are seldom allowed for most types of claims so usually some other option must be pursued.

The other, far more common option, is to shift the burden of the outstanding claims so clearly to the seller that the claim need not be calculated into the value of the deal. If the seller sufficiently indemnifies the buyer from any potential claims against the sold business or property, then the transaction can take just the value of the property into account and can ignore any risks of future unknowable claims. But this only works if the buyer believes the seller has the financial wherewithal (or the insurance) to be able to pay on any claims against which the seller has provided indemnification.

If you are looking to sell your marijuana business, be prepared for your potential buyers to conduct their due diligence and for your past to come back to haunt you. You should also be prepared to deal with that situation when it comes up.

Marijuana Delivery is Illegal in Washington

Posted in Legal Issues, Medical Cannabis, Recreational Marijuana, Washington

Unfortunately, it’s true. Delivering marijuana is clearly and unequivocally illegal in Washington. Initiative 502 provides for a tightly regulated recreational marijuana system and aside from retail locations licensed by the  Liquor Control Board (LCB), anyone else selling cannabis without a State license is operating illegally. This includes delivery services.

Anyone delivering cannabis (or selling cannabis without a license) is committing a crime, not only at the federal level (where marijuana remains an illegal Schedule I Controlled Substance), but also at the State level, where selling marijuana without a license constitutes a felony. Though law enforcement has not made marijuana a top priority to date, once more retail locations are up and running in Washington, word is that the police will begin informing delivery services to shut down or face arrest. In the wake of recent media attention, one large Seattle marijuana delivery service announced that it would be changing its business model to stop providing recreational marijuana and to limit deliveries to just medical marijuana to those with patient cards. This sort of move might buy delivery services some time, but any deliveries are risky since medical marijuana is now illegal in the State and its sellers too will probably soon be facing police-enforced closures.

Many (including us) would like to see the Washington State Legislature legalize home deliveries in the upcoming session. This ought to happen because consumers demand it and allowing it will go a long way towards eliminated an entrenched black/gray market.

Allowing marijuana deliveries would solve the logistical problem of getting cannabis to consumers without compromising the safety or integrity of the business or its employees. With all the regulation the LCB has put together to date, surely it (or the legislature) can come up with a safe and sound plan for delivery of adult use marijuana, just as it has done for alcohol. If the legislature doesn’t solve the delivery issue soon, the black and gray markets will continue to thrive to the detriment of both marijuana entrepreneurs acting completely legally and to consumers.

It’s a head scratcher as to why delivery wasn’t included in I-502. Hopefully the legislature will act fast to fix this (growing) problem.

Our Nation’s Capital: Marijuana Microcosm

Posted in Federal law and policy, Medical Cannabis, Recreational Marijuana

A New York Times report on Washington, DC’s new measure decriminalizing marijuana (in amounts less than one ounce) got us thinking about how DC is a microcosm of cannabis legalization and the relaxation of marijuana penalties. And yet, the heart of DC is the federal government — an institution largely preoccupied with enforcing unworkable and irrational drug laws and policies. In other words, what is going on in DC perfectly illustrates the struggles going on around the country concerning cannabis.

 

Consider these facts:

  • The DC city counsel passed legislation legalizing medical marijuana in May 2010, before Connecticut, Massachusetts, Illinois, and New York, among others. Prior to that in 1998, two-thirds of DC voters had favored the Legalization of Marijuana for Medical Treatment Initiative, but that measure was never implemented due to federal obstruction. Passage of that initiative in 1998 put DC voters in line with those in early-adopting MMJ states California (Proposition 215 passed in 1996), Alaska (Ballot Measure 8 passed in 1998) and Oregon (where Measure 67 also passed in 1998).
  • As of July 17, if you are caught in the District with a small amount of pot for personal use, you will now be handed a $25 ticket. Decriminalization (that is, choosing a policy of ticketing or citation, rather than arrest and prosecution) is now the norm in states such as Minnesota, Maine, and Vermont, with some municipalities (Chicago, possibly Philadelphia) following suit.
  • In November, DC voters may get the opportunity to follow Washington and Colorado’s lead and legalize recreational marijuana. DC Cannabis Campaign’s proposed Initiative 71 would legalize the possession of 2 ounces of marijuana for personal use, and would allow individuals to grow up to six plants within his personal residence. Indications are that the DC city council will certify the measure for the November ballot, and DC voters will join those in Oregon and Alaska considering the recreational use and regulation of cannabis. For why legalization is so much better than decriminalization, check out Marijuana Decriminalization Versus Legalization: A Difference That Matters.
  • DC residents’ changing attitudes towards marijuana have followed, if not outpaced, the national trend. In January, WaPo reported that 63% of DC residents favored the legalization of marijuana for personal use. Around the same time, a joint WaPo-ABC News poll found Americans are roughly split 50-50 on the question of legal recreational use.

From the perspective of law enforcement and federal conflict DC also resembles the rest of the country. The District has the added unfortunate distinction of living under the thumb of the federal government — most activity of the DC city council is subject to review by Congress. Because of this special distinction, not only can members of Congress express outrage over DC marijuana reform and attempt to block its implementation, they can also cast votes to deprive DC of funding to coerce more draconian marijuana policies (read here and here). Though the states are free to legislate contrary to federal law (and have clearly done so), the conflict between state and federal law still is a major thorn in the side of marijuana reform advocates, cannabis businesspeople, and libertarians everywhere. As we’ve written, the conflict creates hurdles in banking, taxes, and access to resources such as water. Still, Congress doesn’t have the same direct power and influence over the states as it enjoys over the District of Columbia.

Like everywhere else, we suspect the tide will turn towards legalization in DC too. The decriminalization measure was subject to a 60 day review period, during which Congress failed to act against it (as far as DC is concerned, the do-nothing Congress currently in residence on the Hill might be a blessing). As constituents across the country continue to organize and support better marijuana laws, it will become harder and harder for Congress to insist on different treatment of the drug in DC.

They Said It On Marijuana, Quotable Saturday, Part XXI

Posted in General

I enjoy it once in a while. There is nothing wrong with that. Everything in moderation. I wouldn’t call myself a pot-head.

We wouldn’t call her a pot-head either, just as we don’t call someone who enjoys a daily glass of wine or bottle of beer an alcoholic. And more and more of the country is starting to agree with Ms. Aniston and with us on this point.

Do you?

Oregon Needs A New Approach To Marijuana, So Too Our Country

Posted in Alaska, Federal law and policy, Legal Issues, Oregon, Recreational Marijuana

Our nation needs a new nationwide approach to marijuana. Though Washington and Colorado have legalized marijuana for recreational use there are still plenty of states where getting caught with a joint can mean jail time. We expect Oregon and Alaska to soon vote for full legalization and we have been working with groups in both states to try to bring this about. This post talks about what is happening in Oregon — we will do a similar post about Alaska shortly.

New Approach Oregon is the Oregon initiative that will be on the ballot in November. New Approach Oregon has been running a smart campaign and we have been particularly impressed with its rational and fact-based arguments for legalizing recreational marijuana in Oregon. One of the things New Approach Oregon has done is seek to debunk common myths about marijuana in Oregon. Below are our favorite debunkings because these same myths are pervasive across the United States and no doubt similar facts can be used to debunk them.

Myth: Oregon doesn’t arrest people for marijuana use.  Police bust people for marijuana use in Oregon all the time. The Oregon State Police arrested 12,808 people for marijuana in 2012 – approximately one person every 41 minutes. These arrest numbers have risen by 45 percent in recent years. An analysis by the Oregon ACLU of Oregon State Police data found that 90 percent of marijuana possession incidents in 2010 involved less than one ounce. Think of all the time law enforcement could devote to catching real criminals if marijuana were to be legalized.

Myth: Most marijuana crimes are only citations. More than half of the drug-related arrests made in Oregon are for marijuana. In 2012, 21,856 people were arrested for drug crimes and 12,808 of them were for marijuana. Every marijuana arrest and citation takes time that a police officer could have used to patrol a neighborhood, prevent an assault, or solve a violent crime. Treating adult marijuana use as a crime drains limits resources.

Myth: Treating marijuana use as a crime doesn’t lead to violence. Wrong. The Oregonian investigated this thoroughly in a six-part series of stories that “revealed how lethal Mexican drug cartels infiltrated Oregon and other regions of the country.” The Oregonian reported “police suspect unpaid drug debts are behind unsolved homicides across Oregon.” Why let the cartels benefit from selling drugs when that money could pay for addiction prevention or education?

Myth: Current Oregon marijuana laws do not unfairly target people of color. People of color in Oregon are more than twice as likely to be arrested for marijuana even though there is no difference in frequency of use between the races, according to the ACLU’s analysis.

Legalization, regulation, and taxation of marijuana will help end disparate racial treatment of marijuana users, save taxpayers money, and allow law enforcement to prioritize violent crimes. And those things are no myth at all.

 

Nevada Gaming Commission Gets Serious Against Marijuana, Again

Posted in Legal Issues, Licensing, Medical Cannabis, Nevada

When the Nevada Gaming Control Board (the “Board”) warned gaming licensees (and anyone who’s ever even applied for a gaming license) not to participate in Nevada’s rapidly emerging medical marijuana industry, they meant what they said.

Just last week, the Board sanctioned its first gaming licensee, Nevada Gaming Partners, after it sought to provide slot machines to Crab Corner, a Las Vegas restaurant. Crab Corner applied to the Board for a limited gaming license to have Nevada Gaming Partners manage its five slot machines, but the Board unanimously rejected Crab Corner’s application with a strong directive to find another slot operator.

Why?

Because the wife of one of the owners of Nevada Gaming Partners owns a small percentage of a medical marijuana business recently awarded one of Clark County’s eighteen dispensary licenses.

Nevada Gaming Control Board Chairman A.G. Burnett said that splitting the two business interests between husband and wife was not enough separation to forestall the Board’s ruling essentially banning Nevada Gaming Partners from participating in the gaming industry. Burnett also said that the Board’s ruling was intended to “send a message” to the state’s casino industry.

The Board bases its “separation” memo and this recent decision on the fact that cannabis, medicinal or not, is still a federal crime. Specifically, that memo states that:

… unless the federal law is changed, the board does not believe investment or other involvement in a medical marijuana facility or establishment by a person who has received a gaming approval or applied for a gaming approval is consistent with the effective regulation of gaming. Further, the Board believes that any such investment or involvement by gaming licensees or applicants would tend to reflect discredit upon gaming in the State of Nevada.

The Board apparently believes that co-mingling gaming and cannabis has the potential not only to cause a legal melee with the Federal government, but that it also could reflect poorly on the morality of the gaming industry as a whole.

So, what’s the takeaway here? If you’re in the gaming business in Nevada, you’re playing with fire if you are participating in owning, managing, or even renting to a medical marijuana establishment, either directly or indirectly.  In virtually all of the states in which we have been involved on licensing matters (including now, Nevada), our cannabis lawyers have seen regulators take strong stands against anyone who is perceived as trying to get around the rules by seeking to do indirectly what is prohibited directly. For that reason our general advice to our Nevada clients is that mixing gambling and cannabis is too big a gamble.

 

Illinois Medical Marijuana Rules Finalized, Applications Begin in September

Posted in Illinois, Licensing, Medical Cannabis

We’re pleased to announce that Illinois made great progress this week in moving forward with its medical marijuana regime. Yesterday the Joint Committee on Administrative Rules (JCAR) of the Illinois legislature gave final approval to the regulations for medical marijuana cultivation centers, dispensaries, and patients.

State agencies will begin taking applications for 21 state approved  cultivation centers and 60 dispensaries in September. In the next 30 days, a point system will be established for judging applicants based on their proposed security plans, their expertise in growing marijuana, and their plans for patient education. Cultivation centers will be required to pay $200,000 for an initial license and have $500,000 in liquid assets. Dispensaries will be required to pay $30,000 for a license and have $400,000 in liquid assets.

Patients will also begin registering in September for their medical marijuana license. State Representative Lou Lang explained that “you can’t be a patient unless you have 1 of 39 diseases. You also have to have a bonafide relationship with a doctor.”

Though the cannabis business application process begins in September, medical marijuana will probably not be sold in Illinois until early 2015. State regulators must review applicants and choose which businesses receive licenses to grow and sell marijuana. The state must also set up a lab and procedures to test marijuana products. The Illinois Department of Agriculture is currently converting one of its labs into a testing center. Finally, the state must establish how the cultivation centers will be able to acquire their seeds as the rules currently mandate that medical marijuana must be grown in state.

For more on cannabis in Illinois, check out the following:

Yes, You Can Get Fired For LEGALLY Smoking Marijuana

Posted in Legal Issues, Medical Cannabis, Recreational Marijuana, Washington

We’ve seen this before, and we’ll see it again. Employees losing their job over marijuana use, even when that use is legal under state law. In Fired For Using Marijuana? It May Be Too Damn Bad, we warned that in many states with some form of legalized cannabis, employers are still permitted to enforce a drug-free work policy. In other words, that your weekend wind-down may involve a joint may no longer be cause for concern with (state) law enforcement, but it can still be a source of contention, or even grounds for firing, with your employer.

Mere hours into final implementation of I-502 in Washington state, as consumers were getting their first taste of legal, recreational marijuana, the first casualty of a drug-free workplace occurred. Mike Boyer, reportedly the first buyer of legal pot in Spokane, claims the publicity he received in connection with that status, led two of his three part-time employers to ask him to submit to a drug test. Boyer apparently does not dispute his employers’ right to make such a demand, but says “I was really unaware that this might be a big deal.”

In fact, pot use remains a big deal in Washington (and most other states with legalized marijuana and a drug-free workplace law), so long as your employer wants to make it a big deal. Court decisions in Washington, Oregon, Montana, California and others have upheld an employer’s right to decline to hire, discipline, or terminate an employee for marijuana use, even if the employee is a valid medical marijuana patient. If your employer cares enough to institute a written zero-tolerance policy, you had better abstain, or cross your fingers you don’t get tested.

Valid reasons exist for such policies — some lines of work are simply too dangerous, too sensitive, or expose the employer to liability, such that drug use can and should be “a big deal.” Mr. Boyer was employed by a security firm, whose HR manager did not shy away from reiterating its zero-tolerance position, saying “Our employees can’t be under the influence on the job.” But therein lies the rub — being “under the influence” versus simply testing positive. As we explained in a past post on DUID, a simple test for THC levels will not reveal whether a person has used marijuana very recently, and is likely impaired, or simply has residual THC in his system from the pot brownie he ate 10 days ago. Right now, most companies are only testing for the presence of THC, and are not distinguishing between workers who are truly impaired on the job, and those who partake responsibly on their own time.

Clearly, employer drug policies and drug testing have a long way to go. In the meantime, employers should be revising their policies to reflect the changing legality of marijuana (and making them known to their employees), and employees will either have to deal with the risk (or at least perhaps avoid the publicity that doomed Boyer), or seek out mellow employers.

For further reading, check out this superb Seattle Times piece, published in the wake of I-502 passage. You’ll notice that not much has changed on this issue in the intervening 20 months.

Oregon Marijuana Law FAQs

Posted in Business Basics, Oregon

Given the likelihood that Oregon will in November become the next state to legalize recreational marijuana (we also expect legalization to pass in Alaska), we figured it would be helpful to answer the ten most common questions our cannabis business lawyers receive regarding marijuana law in Oregon. Over the next few weeks we will do similar posts for all of the states in which we have licensed attorneys and in which there are things to report (Alaska, California, District of Columbia, Florida, Illinois, Nevada, and New York).

1.  What should I be doing now to prepare for the impending legalization of recreational marijuana in Oregon?

Without knowing how Oregon will allocate recreational marijuana licenses, how many licenses will be issued, or whether current medical marijuana license holders will be given priority for recreational licenses, this is a tough question to answer. Oregon’s legalization bill leaves these sort of things up to its state Liquor Control Commission.

Gaining a foothold in Oregon’s existing medical marijuana market may be a smart move. However, it can be quite difficult to acquire a physical location for a medical marijuana dispensary that complies with state MMJ facility and zoning requirements, and that has not already been snapped up by another dispensary owner. With scarcity of compliant spaces to lease, many have opted to purchase real estate in an acceptable location. One way to prepare for impending legalization is to nail down a location that meets MMJ facility zoning requirements, and is more than 1000 feet from any school or other MMJ retail location. The thinking is that those locations will work for recreational marijuana as well, and that those already in the business will receive favorable treatment when it comes time to hand out recreational marijuana licenses.

2.  Will Oregon’s recreational marijuana laws be similar to those in Washington and Colorado?

As we discussed in our previous post, Oregon Recreational Cannabis Down to One Initiative, New Approach Oregon’s Initiative 53 is fairly similar to Initiative 502, which passed last year in Washington State. Oregon’s initiative puts the Oregon Liquor Control Commission in charge of adopting rules and regulations for implementing and administering Oregon’s recreational system. Therefore, although the OLCC will no doubt look to Washington and Colorado for input in developing its own recreational regulations, the precise nature of Oregon’s future recreational system cannot yet be known.

3.  Can I still apply for a license to operate a dispensary under Oregon’s medical marijuana laws?

Yes. Applications have been accepted on a rolling basis since March 3, 2013. There is no defined application window, and there is no limit to the number of dispensaries, so long as they comply with MMJ facility zoning regulations.

4.  How many dispensaries has Oregon approved under its revised medical marijuana rules?

To date, the Oregon Medical Marijuana Dispensary Program has approved 155 dispensary applications.

5.  Once Oregon legalizes recreational marijuana, how long will it be until the first retail locations are up and running?

After passage of the initiative, Oregon’s Liquor Control Commission will have until January 1, 2016 to develop rules and regulations for implementing and administering the State’s recreational system. The latest the OLCC will be authorized to begin accepting applications is January 4, 2016. Of course, this is only the beginning of the application process. If Oregon proves to be anything like Washington, it will be several months later before any retail locations are up and running. If we were forced to predict when the first recreational marijuana is legally sold in Oregon, we would say early 2016.

6.  Can Oregon cities and counties ban medical marijuana dispensaries?

Yes. At last count, 146 of Oregon’s 242 incorporated cities and 26 of 36 counties had enacted moratoria on medical marijuana dispensaries. It is important to remember that recreational marijuana is not yet legal anywhere in Oregon. Though it remains to be seen how cities and counties will react to the legalization of recreational marijuana, the current list of moratoria on the Oregon Medical Marijuana Dispensary Program website is a good indicator of which cities and counties are more or less marijuana friendly, and where moratoria may be enacted on recreational dispensaries (and producers and processors) in 2016.

7.  Can I open a dispensary in Oregon if I am an out of state resident?

The Person Responsible for the Facility (PRF), meaning the person who owns, operates or otherwise has legal responsibility for the facility, must be an Oregon resident. This person must provide proof of residency during the application process. Other investors, however, need not be Oregon residents.

8.  What’s going to happen with medical marijuana in Oregon once recreational marijuana is legalized?

The New Approach Oregon Initiative provides that it shall “not amend or affect in any way the function, duties and powers of the Oregon Health Authority under the Oregon Medical Marijuana Act.” However, given that Washington’s new recreational regime has supplanted its former medical system, there is no guarantee that Oregon’s medical system will not also be absorbed into a new, tightly regulated recreational system. Since Oregon taxes on recreational marijuana are going to be considerably lower than the rates in Washington, the need for a separate medical system will be less in Oregon than in Washington.

9.  What are the labeling requirements for marijuana products in Oregon?

Broadly speaking, labels must include the amount of THC and CBD in any usable marijuana product. If prepackaged, the label must include the weight or volume of usable marijuana in each unit, in metric units. The label must also include potency information and a warning label for children. As cannabis lawyers, we cannot urge you strongly enough to make sure that what you sell in Oregon (or in any other state) is labelled clearly and packaged safely. For more on why we feel so strongly on this, check out the following:

10. Can I procure product for my dispensary from out of state?

No. Possessing, using, distributing and selling marijuana are all federal crimes and transporting marijuana across state lines constitutes drug trafficking and could land you in jail. This is true of all states; you must get your product from within your own state.