Canna Law Blog ™

Canna Law Blog

LEGAL SUPPORT FOR THE CANNABIS BUSINESS COMMUNITY SINCE 2010

Now That You Are A Real (Pot) Business: Employment Law Basics for Marijuana Businesses

Posted in Business Basics, Legal Issues

When we blog about employment law issues, it is usually on something like an unfortunate employee who lost his job for testing positive for cannabis in the workplace — despite marijuana being legal in his state. Not all employment law issues have to do with draconian employers and anti-pot employment laws. In fact, as a licensed or permitted cannabis business, it is critical that you learn how to deal with your employees and the legal issues surrounding the employer-employee relationship.

As an employer (cannabis or otherwise) you need to ensure that you comply with all applicable employment laws, including those that touch on employment contracts, workers’ compensation and mandatory hour and wage laws.

To assist you with that compliance, here is a basic list of the common issues you are likely to face as a marijuana business with employees:

1. Hiring. You must, must, must get your hiring process straight. This is both the first step to complying with state and local employment laws and the foundation for the personality and reputation of your business as you are only as good as your staff. When hiring, make sure that your application forms set forth the criteria you want in your employees without triggering any anti-discrimination employment laws in your jurisdiction. You should also compile an interview checklist to maximize your interview time with potential employees, and to make sure that you do not ask any questions that can lead to a lawsuit against you.

2. Making the employment decision. After sifting through applications and undertaking multiple interviews, you’ve finally found your star budtender or master grower. So, how do you navigate the hiring decision and what do you do with unsuccessful candidates? For the chosen applicant, you need to decide whether to ask them to sign a non-disclosure agreement (NDA) to protect your business trade secrets. Right before you hire someone as your employee is typically the best time to get them to sign an NDA. If you wait, the NDA might be deemed unenforceable. You should send out rejection notices to those you chose not to hire to ensure that there’s no confusion about the employment relationship.

3. Relationship with the employee.  To have an employment contract or not, that is the question. Regarding your successful hire, you need to decide whether to offer that employee an employment contract or to keep the employment at-will (again, hiring an employment lawyer to walk you through your options is invaluable even if most states are at-will concerning employment). In an at-will state like Washington, should you offer the employee a contract with specific terms and conditions of employment, you’ve just created contract rights for that employee and the “at-will” status of the relationship is forever changed and/or altogether gone.

You will also want to consider whether you want your employees to sign non-compete agreements or any contracts to better protect your business’s intellectual property. Careful with that non-compete though as courts usually reject those that fail to comply with state law.

4. Workplace policy manual. It virtually always makes sense to have a well-drafted workplace policy manual that complies with state and local employment laws. Some states even require such manuals for marijuana business licensing.

A well written policy manual can instill in your employees the sort of workplace conduct that will help you maintain a sterling business reputation. This manual should, among other thing, set forth your company’s policies for holidays, training, insurance, payroll procedures, absences, dress code, anti-harassment and anti-discrimination mechanisms, employee evaluations, and how to deal with employee and customer complaints. Again though, be careful, as courts sometimes deem poorly crafted employee policy manuals to create a contract relationship with your employees that makes terminations and workplace discipline costly or impossible.

Employee policy manuals usually also cover drug policies in the workplace. Make the decision now, will you be a zero-tolerance drug policy employer? If so, be clear in the employee policy manual and be mindful that most cannabis legal states forbid anyone from consuming marijuana at a licensed facility.

5. Termination and lay-offs. Terminating an employee with whom you have a contract should adhere to that employment contract. That’s fairly cut and dry.

By contrast, at-will employers in most states have the right to terminate employees for any reason or for no reason at all, but not for an unlawful reason. Wrongful termination claims against at-will employers typically arise because of the employer’s:

  • discrimination against recognized protected classes into which the employee falls (race, religion, gender, marital status, disability, age, sexual preference, etc.). Note that these classes can vary by state and even sometimes by city.
  • retaliation against the employee
  • having created a hostile working environment that caused the employee to quit

Employment law is no joke and it is absolutely relevant to any marijuana business that hires anyone. If you are now an employer or will be one soon, get educated and get vigilant. Now.

I Say Cannabis Language You Say The Language Of Marijuana. Let’s Call The Whole Thing Off.

Posted in Business Basics

 

Since starting this blog, we have heard countless complaints about the language that we use to describe marijuana and various aspects of the cannabis business. People complain that our use of the word “pot” is a bad idea because it does not convey “seriousness.”  People complain when we use the word “marijuana” because that word was created to stigmatize the drug and its effects. And some have even complained of our using the word cannabis, though we cannot even remember why. And when we use the word canna-business, we get complaints about how it takes marijuana away from “its roots.”

Our policy is not to worry about semantics, and we plan to keep using all of these words as often as we can. We believe that using these words without compunction will eventually strip them of any negative connotations and reveal them for what they are: words that actually neutrally describe what is going on with ever changing public policy, politics, and laws.

With the goal of increasing clarity and commonality of language, below are some more words that have come into the canna-business vernacular (there we go again) that are starting to become of common usage:

Budtender.  The person who helps customers choose their marijuana product and provides it to them. This person is generally to marijuana what a bartender is to alcohol (though budtender is also commonly used in the medical marijuana industry with the same purpose).

Cannabinoid. “Cannabinoids are a class of diverse chemical compounds that act on cannabinoid receptors on cells that repress neurotransmitter release in the brain.” We got this definition from Wikipedia.

Marijuana/Pot/Weed/Cannabis/Reefer/Grass.  Probably the most commonly used terms for cannabis.

For more on marijuana language, check out the following:

What do you think? Cannabis, marijuana, pot, or what? What cannabis related words do you like or not like?

Illinois Medical Marijuana: Clarity Will Have To Wait

Posted in Illinois, Medical Cannabis

As we gear up for Illinois’ legalization of medical marijuana we are confronting ambiguities and uncertainties about what Illinois’ medical marijuana regime will look like once it actually starts. Even what will constitute legal medical marijuana is not yet entirely clear.

Illinois’ new medical marijuana laws will require medical marijuana patients (1) have a bona-fide physician-patient relationship and (2) suffer from an approved debilitating medical condition. Both of these requirements will likely pose interpretation and enforcement problems.

Illinois rules prohibit the physician-patient relationship from consisting solely of a medical cannabis certification or a consultation solely to provide a patient with cannabis. In Illinois Medical Cannabis Laws. Expect Strict Enforcement we wrote of how the Illinois Department of Financial and Professional Regulation had filed a formal complaint against a physician for allegedly offering prospective patients pre-approval for medical marijuana. We saw this complaint as highlighting how Illinois is dead serious about enforcing its  ”bona-fide physician-patient relationship” requirement. Illinois is not going to let its doctors be little more than marijuana supply conduits. That much is clear.

But what exactly will “bona-fide physician-patient relationship” really mean? What about a patient whose doctor refuses to authorize marijuana to anyone? If that patient seeks out a new doctor who immediately authorizes marijuana, will the state deem that new physician-patient relationship to be a bona fide one?

Illinois’ list of approved debilitating medical conditions is also ripe for interpretation and enforcement problems. Just by way of one example, the list sets forth “spinal cord disease” as a medical condition for which patients can receive and use marijuana. Will “spinal cord disease” include any sort of back pain? Speaking from our own experience in representing medical marijuana businesses in various other states, we can tell you that back pain is the condition big enough to drive a truck through simply because it can be difficult if not impossible to objectively measure.  Crains’ Chicago Business recently highlighted this issue and quoted a physician, Dr. William McDade, who notes (correctly we believe) that this condition will be the one most vulnerable to abuse. How does Illinois plan to handle it?

Though new laws are virtually always less than perfectly clear before real world testing, we can and should expect eventual clarity. In the meantime, the lawyers will benefit, but probably nobody else. Sorry.

They Said It On Marijuana, Quotable Saturday, Part XXII

Posted in General

For around fifty years, James Garner was a leading actor in television and film. Turns out he was also smoking marijuana during that entire time and he had this to say about that in his memoir:

I started smoking marijuana in my late teens. I drank to get drunk but ultimately didn’t like the effect. Not so with grass. Grass is smooth. It had the opposite effect from alcohol: it made me more tolerant and forgiving. …

I smoked marijuana for 50 years. I don’t know where I’d be without it. It opened my mind to a lot of things, and now it’s active ingredient, THC, relaxes me and eases my arthritis pain. I’ve concluded that marijuana should be legal and alcohol should be illegal. But, good luck with that.

The immensely popular Garner died this past week at 86. May he rest in peace.

Marijuana Tourism 102

Posted in Business Basics, Colorado, Federal law and policy, Washington

Between the Colorado Department of Revenue’s recent “Market Size and Demand for Marijuana in Colorado” report and Washington’s new recreational marijuana marketplace, much attention is being paid to “marijuana tourism.” We previously wrote about how marijuana tourism can impact the legalization movement, along with marijuana businesses and consumers in Marijuana Tourism 101.

Opinions vary on whether marijuana tourism will have a positive or negative impact. The Colorado report estimates “purchases by out-of-state visitors currently represent about 44 percent of metro area retail sales and about 90 percent of retail sales in heavily visited mountain communities.” Slate Magazine considers the data point that tourists may be responsible for 90 percent of retail marijuana sales in resort towns as a bad omen for legalized marijuana. FiveThirtyEight views the same data as a “promising sign for the success of legalization.”

We, on the other hand, are neither the least bit alarmed nor surprised by tourists making most of the purchases in resort towns.

Marijuana tourism is good for legalization. The main argument for marijuana tourism eventually hurting legalization is that other states made jealous by the tax revenues collected by states that have legalized marijuana will then legalize it themselves. This will eventually lead to recreational marijuana sales drying up in states like Colorado since tourists account for such a large portion of their sales.

This argument makes little sense. First, if marijuana tourism leads to other states legalizing marijuana, that is itself a good thing. Second, Colorado no doubt realizes and expects its marijuana sales to decline at least somewhat as legalization continues spreading across the United States. Third, there will always be marijuana tourism in that once an area becomes the center of tourism for a given activity, it often stays that way even if other areas offer the activity later. There are casinos all over the United States, but that fact has not lessened the tourist demand in Las Vegas. And once a city like Las Vegas legalizes recreational marijuana (and we see that happening relatively soon), there is no way that its marijuana sales to tourists will not be absolutely huge. Alcohol sales to tourists are huge in Las Vegas not because tourists to Las Vegas cannot buy alcohol elsewhere and not because tourists choose to go to Las Vegas to drink. No, alcohol sales are huge to tourists in Las Vegas for the simple reason that so many tourists go there. The same will be true for marijuana.

Marijuana tourism is good for business. Both marijuana-focused businesses and businesses that focus generally on tourists benefit from a strong marijuana tourism ecosystem. Some of the more obvious examples include tour companies and marijuana-friendly bed-and-breakfasts.

Marijuana tourism is good for consumers. Adults who live in states with less-friendly marijuana regimes have the option to travel to Colorado or Washington and take part in the recreational marijuana market. This infrastructure of marijuana tourism gives people choices and opens them up to new experiences. These tourists will get to see marijuana legalization first hand, which can only make them better equipped to vote one way or the other on legalization in their home states. Marijuana tourism is a classic example of our Federalist system at work.

We see no cause for concern.

Marijuana And Bankruptcy: Not A Good Mix

Posted in Federal law and policy, Legal Issues

Readers know all too well by now that generally speaking, the feds and state-legal marijuana businesses do not play nicely together. (For those who need a refresher, check out Medical Marijuana Raids: A Thing of the Past? and The Federal Government’s Ongoing War Against Cannabis.) But we are constantly encountering new ways in which federal prohibition makes life challenging for those engaged in a cannabis business (see Cash Payments to the IRS? Prepare to Pay the Penalty). As Floridians become familiar with these issues, a recent piece in the New Times Broward Palm Beach, aptly titled, “When Your Medical Marijuana Business Fails, You’re Screwed,” highlights yet another way federal law and policy continues to frustrate marijuana entrepreneurs. The source of this frustration? United States bankruptcy courts.

Bankruptcy courts are a creature of federal law, created under the authority delegated by the United States Constitution to Congress. Individuals and businesses alike may seek bankruptcy protection. Bankruptcy affords debtors the opportunity to discharge some or all of their current debts, or create a plan to repay creditors over time. This is generally viewed as a compromise that helps debtors get back on their feet and ensures that priority creditors recoup some (if only a little) of the value of their claims. But the doors of the bankruptcy courts are not open to everyone, as those in the state-legal marijuana business (and even those benefitting even indirectly from such businesses) are finding out.

The New Times piece mentions three bankruptcy cases: one each from Oregon, Colorado, and California.

In the Oregon bankruptcy proceeding, the debtor proposed making plan payments with three different income sources, including his own MMJ business and rental income received from a MMJ grow tenant. The court would not approve the plan because it determined the plan itself must comply with bankruptcy rules and procedures AND any other applicable state and federal law. Thus, the federal prohibition of marijuana precluded the debtor from bankruptcy protection.

Similarly, the Colorado case involved a debtor who indirectly received 25% of his income from marijuana through his tenant’s growing activities. The debtor freely admitted to leasing the warehouse to an MMJ business, but argued he had never been accused or convicted of violating federal law. The court nonetheless found him to be in continuing violation of the CSA. On that basis, the court held that the debtor came to court with “unclean hands” (an equitable doctrine where a plaintiff’s own bad acts preclude a right to a remedy), and that cause existed to dismiss the case.

In California, Mother Earth’s Alternative Healing Cooperative sought bankruptcy protection when it found itself overextended on obligations to creditors, with most of its assets tied up in marijuana inventory. Noting that bankruptcy proceedings would preserve an illegal business, the court held that the Cooperative’s assets were subject to forfeiture, rendering a payment plan or reorganization impossible.

So it seems that bankruptcy is not a viable option for troubled businesses, whether they are directly involved with cannabis, or operate an ancillary business. The Colorado case (and, to the extent the Oregon case was based upon the rental income) is particularly disturbing because of the indirect nature of the debtor’s relationship to federally-prohibited marijuana. The rationale could theoretically be applied to a whole host of other kinds of businesses: software companies providing inventory programs to canna businesses, laboratories performing testing on marijuana products, even companies supplying innocuous paper and packaging for state-legal marijuana. Ganjapreneurs often seek out vendors who specialize in cannabis clients, but these decisions make it clear that such vendors are especially exposed in bankruptcy court, because most (if not all) of their income comes from marijuana.

As an arm of the federal government, it makes sense that bankruptcy courts are uncomfortable extending the privilege of bankruptcy liquidation or reorganization to an industry that is still federally illegal or of questionable legality. Still, as marijuana businesses becoming increasingly legitimate and integrated into the business environment generally, there will be an increasing need to protect debtors and creditors (for, when a business goes under without the orderly claims process of a bankruptcy proceeding, no one wins). Just one more area of federal law overdue for an overhaul.

In discussing the lack of bankruptcy protection, the New Times also correctly points out the need for cannabis entrepreneurs to insulate their other enterprises and their personal assets from their cannabis ventures. Watch here for our take on that soon.

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.