Photo of Will Patterson

Will works out of our Portland office, advising clients on business law, intellectual property, civil litigation, and cannabis law matters.

Will the (former) Senator yield?

The Oregonian, Willamette Week, and KGW, to name a few, are reporting that US Attorney General Jeffrey Sessions is visiting Portland today to meet with federal and local law enforcement. These reports suggest Mr. Sessions is in town primarily to discuss immigration, sanctuary cities, and his unconscionable position on the Deferred Action for Childhood Arrivals program (“DACA”).

Given the recent exchange of letters between Oregon Governor Brown and the Attorney General, it seems likely Mr. Sessions has also come to Oregon to discuss and criticize Oregon’s medical and recreational cannabis programs. We’ve recently discussed how this exchange of letters demonstrates how Oregon sits uncomfortably within Mr. Sessions’ crosshairs. Governor Brown eviscerated Mr. Sessions’ reliance on a leaked, incomplete, and misleading draft of a report prepared by the Oregon State Police on cannabis in Oregon. Our money says Mr. Sessions is also here on a fact-finding mission, to see if he can drum up some better (or any?) sources for his claims that Oregon has so far failed to comply with Cole Memorandum guidelines.

Anyone in the cannabis industry here in Oregon knows Oregon treats these guidelines with the utmost respect and importance. Heck, if they didn’t, our Oregon cannabis business lawyers would not all be putting in 12 hour days! The Governor, the legislature, and Oregon’s relevant regulatory agencies, including the Oregon Liquor Control Commission and Oregon Health Authority, have been working tirelessly to improve their policies and procedures to ensure that Oregon’s recreational and medical cannabis programs protect public safety and prevent illegal activity.

Hopefully, Mr. Sessions’ visit will change his heart, but I wouldn’t count on it.

At the beginning of this month, Oregon implemented a critical change to its cannabis pesticide testing regulations: As of August 30, 2017, every batch of cannabis produced in Oregon must be tested for pesticides prior to transfer or sale. This simply wasn’t possible a year ago, when the Oregon Liquor Control Commission (“OLCC”) issued a finding that there were not enough accredited labs available to allow for universal pesticide testing. As a stop-gap measure, the OLCC limited testing to one-third of all batches from each harvest. According to the OLCC, the situation on the ground has changed substantially. There are now twice as many accredited labs and the Oregon Health Authority (“OHA”) has recently increased testing batch sizes. The net result is that the OLCC believes there is now capacity to ensure universal pesticide testing.

We’ve written quite a bit about how Oregon is slowly shifting responsibility for medical cannabis from the OHA to the OLCC, but product testing remains an outlier. The OHA retains responsibility for issuing cannabis testing rules for both the medical and recreational program, and has issued some of the strictest pesticide testing requirements in the nation. With this recent change, all Oregon cannabis, recreational and medical, will be tested for pesticide contamination prior to transfer to retailers and processors, and ultimately to the consumers.

 

Oregon Cannabis
Oregon Governor Kate Brown fights for cannabis

As we have discussed elsewhere, US Attorney General Jeff Sessions has been sending out intimidating letters to the Governors of cannabis-friendly states. In his letter to Oregon Governor Kate Brown, Mr. Sessions focused significant attention on a recent draft report created by the Oregon State Police that raised concerns about Oregon’s success in complying with the Cole Memorandum guidelines. Fortunately, Governor Brown is having none of it. In her August 22, 2017 response, Governor Brown meets Mr. Sessions head on with a simple message: “It is important to understand that this draft report does not (and frankly does not purport to), reflect the ‘on the ground’ reality in Oregon in 2017. This document was originally meant to provide a baseline understanding of the state of things related to marijuana in Oregon prior to legalization. Of course, such a baseline provides little insight into the effectiveness of Oregon’s post-legalization regulatory measures aimed at Cole Memorandum compliance.”

Governor Brown then notes that the leaked draft report was not ready for primetime and “required significant additional work and revision, because the data was inaccurate and the heavily extrapolated conclusions were incorrect.” In particular Governor Brown notes that the draft report relies on “an assortment of random blog and newspaper articles that should hardly form the basis of informed policy discussion.” (you wound me Governor!) In other words, Mr. Sessions, your sourcing is bad and you should feel bad.

After thoroughly dismantling the Attorney General’s assumptions, Governor Brown outlines Oregon’s recent legislative efforts to ensure Oregon is at the forefront of common-sense cannabis regulation:

  • Oregon has already implemented seed to sale tracking for all recreational cannabis, and on May 30, 2017 Oregon Senate Bill 1057 expanded the seed to sale tracking to the medical regime as well.
  • On August 21, 2017 Oregon Senate Bill 302 expanded criminal penalties for cannabis crimes, and “makes it easier to prosecute the unlawful imports and export of marijuana products, a provision specifically aimed at stopping diversion of marijuana across Oregon’s borders.”
  • Oregon already has the “most robust resting regime of any state to legalize marijuana.”

Governor Brown finishes her letter to Sessions by explaining that she is “confident that Oregon’s regulated marketplace, coupled with our enforcement work, will serve to ensure compliance with the Cole Memorandum” and by inviting further dialogue with the Attorney General and the Department of Justice.

Your move Mr. Sessions.

Our Oregon cannabis lawyers are often asked to include noncompetition provisions in employment agreements to ensure our cannabis clients don’t lose top talent to their competition. In many states, such as California, noncompetition provisions are flat out prohibited. Though Oregon allows noncompetes in principle, the reality is they are still strongly disfavored by the courts and the legislature. An Oregon cannabis employer must jump through a number of hoops to get an enforceable noncompete, but even that looks likely to change.

In Oregon, noncompete provisions are governed by ORS 653.295, which provides some severe restrictions:

  • At least two weeks before the first day of employment, a prospective employee must receive a written employment offer explaining that a noncompete will be required. Alternatively, a new noncompetition provision can be created when an employee receives a legitimate advancement, such as a promotion that expands job responsibilities to include protectable company information along with a raise.
  • The employee must:
    • have access to trade secrets; or
    • have access to other competitively sensitive confidential business or professional information, such as product development plans, product launch plans, marketing strategy, and sales plans.
  • Unless the employer is willing to pay 50% of the employee’s previous compensation during the noncompetition period then:
    • The employee must be paid at least $62,000 annually (this is tied to US Census Bureau data, so will sometimes fluctuate).
    • The employee must be engaged in administrative, executive, or professional work and
      • perform predominantly intellectual, managerial, or creative tasks;
      • exercise discretion and independent judgment; and
      • earn a salary and be paid on a salary basis.
  • The noncompete can only last 18 months after the termination of employment.
  • The geographical area for noncompetition must be reasonable (“Southern Oregon” might be reasonable, “the Continental United States” is probably not).

The first take away is that noncompetes in Oregon can’t currently bind your rank and file employees unless you want to continue paying 50% of their previous wages after they leave. If you want to prevent your trimmers and budtenders from seeking greener grass next door, it is going to cost you. The second take away is that your employment agreements should include nondisclosure provisions to prohibit your employees from sharing trade secrets, such as processes and procedures, with their new employers when they do jump ship.

As we said above, it looks like the Oregon legislature intends to clamp down even more severely on noncompetes. As initially introduced this session, Oregon SB 977 would follow California’s example and effectively void all noncompetition provisions. SB 977 was referred to the Oregon Senate Committee on Judiciary, where certain amendments are being considered. Once it gets back into session, the Judiciary Committee will consider amendment SB 977-2, which would require an employer to keep paying a terminated employee their full salary during the restricted period.

If SB 977, as introduced or as amended, is ultimately adopted, then noncompetes as we know them in Oregon will be gone. They will either be voided outright, or become so expensive to maintain as to be effectively useless. Either way, this will make nondisclosure provisions even more critical in the future. You may not be able to stop your key employee from heading next door, but you should still try to stop the flow of critical information to your competitors.

The paths for Oregon cannabis are narrowing

Two roads diverged in a yellow wood,
And sorry I could not travel both
And be one traveler, long I stood
And looked down one as far as I could
To where it bent in the undergrowth.

Robert Frost, The Road Not Taken

 

At the end of this month, the Oregon Health Authority (“OHA”) will issue a notice to all Oregon medical cannabusinesses about the new medical seed-to-sale tracking requirements that will come online no later than July 1, 2018. As we previously mentioned, in passing SB 1057 earlier this year, Oregon decided that expanding the current recreational seed-to-sale tracking program (METRC) to the medical program will help cut down on cannabis being diverted to illegal markets. This move comes not a moment too soon in light of the Attorney General’s recent letter to Oregon Governor Kate Brown that is highly critical of Oregon’s success in meeting the Cole Memorandum enforcement guidelines. It appears the Department of Justice (think Jeff Sessions) has come to believe the Oregon Medical Marijuana Program is a major source of illegal cannabis exporting. The tracking requirement is a new financial burden on Oregon’s medical cannabis industry and it will eliminate one of the few remaining economic advantages legitimate medical businesses had over recreational businesses.

All signs point to the conclusion that Oregon ultimately wants to eliminate its medical cannabis program and convert all legal marijuana production to the recreational system. So, it isn’t surprising that the State is using this new tracking requirement as an opportunity to implicitly encourage medical cannabis businesses to convert over to recreational. As will be explained in the forthcoming notice, each medical cannabis business will have until December 1, 2017 to make an election on whether to continue under Oregon’s medical regime (with the new tracking requirements), or to convert to the recreational regime. Critically, even if you intend to continue as a medical operation you can’t just sit on your hands: If you don’t make an election either way by January 1, 2018 you will be at risk of losing your business.

The process for converting from a medical cannabis business to a recreational cannabis business does not appear to be too arduous. After timely submitting your election, you must submit an Oregon Liquor Control Commission (OLCC) license application by January 1, 2018. You will then be allowed to continue your medical cannabis operation until you get your recreational license, or as the OLCC explains it: “Once approved for an OLCC retail license you must cease all medical business practices and no medical marijuana products may be located on the licensed premises. The investigator reviewing your application will keep you informed of the status of your application, you will know when it is the appropriate time to possibly sell down all medical products to prepare for OLCC licensure.”

If you run an Oregon medical cannabis business, you’ve probably already seen your competitors flocking to the recreational system. Many of our clients that produce medical cannabis have informed us that it is becoming more and more difficult to find medical dispensaries willing and able to take on their product. At this point, it would seem you should all be taking the recreational road.

Move over Humboldt, there’s a new contender for pot paradise: Nipton, California?

Late last week, cannabis company American Green, Inc. announced it had purchased the entire town of Nipton, California, for $5 million, with plans to “modernize it into the country’s first energy-independent, cannabis-friendly hospitality destination — all while retaining its historic look and value.” American Green purchased the 120 acre swath of land on the Nevada-California border in the hopes that the idea of a fully supportive municipality will attract other entrepreneurs to Cannabis City, CA and will create one of the country’s top cannabis tourist destinations.

American Green will begin by bottling CBD infused water, but “[u]ltimately, the company would like to offer a variety of commercial and recreational attractions including: CBD and mineral baths, cannabis-product retail outposts, artists-in-residence programs, culinary events, and Bed-and-Breakfast lodging to complete the charming small town experience.” If successful, Nipton just might become a must-stop on the trail from Los Angeles to Las Vegas and beyond.

Strange as it may seem, there is some precedent for a municipality operating a cannabusiness. In 2015, North Bonneville, WA, a small town of about 1,000 residents, opened a government owned cannabis dispensary to help defray rising costs. The Cannabis Corner is still going strong, and is serving as a model for small towns throughout the country. As cannabis legalization continues to spread and as so many small towns continue to suffer economically, our cannabis attorneys have lately been fielding an increasing number of calls from municipalities looking into setting up their own cannabis businesses to stimulate their economies.

Speaking of what is happening with cannabis in California, our law firm will tomorrow be putting on a free webinar intended to help you better understand what is happening with California cannabis (both statewide and in California’s counties, cities and towns). This webinar will be on Tuesday August 8, 2017, from 12 pm to 1 pm PT. and it will focus on what MAUCRSA means for your California cannabis business. Hilary Bricken from our Los Angeles office will moderate two of our San Francisco-based attorneys (Alison Malsbury and Habib Bentelab) in a discussion on the major changes between the MCRSA and MAUCRSA. These three California cannabis lawyers will, among other things, discuss vertical integration and ownership of multiple cannabis licenses, revised distributorship standards, and what California cannabis license applicants can expect more generally from California’s Bureau of Cannabis Control as rule-making continues through the remainder of this year. They will also address questions from the audience both during and at the end of the webinar.

To register for this free webinar, please click here. We look forward to your joining us.

Oregon cannabis Filing this in the odd news section: The Portland Tribune has reported that an Oregon dispensary owner has been fined $3,000 by Wood Village, Oregon for the mannequins he sets up on the sidewalk to advertise his cannabis. These blonde cannequins mannequins are animated and brandish “Got Chronic” signs at potential clients.

The town recently revised its sign code to prohibit Portable Signs, defined as “signs not permanently affixed to a building structure or the ground and designed to move from place to place except garage sale signs, special event signs, political signs, real estate signs or as otherwise provided in this Code . . .”

The owner sees the long list of exceptions as a clear sign that this ban is specifically targeted at his mannequins. After all, his dispensary is the only cannabusiness in town. He has also been fined under the new code for having a sign on the roof of his neighboring cupcake business.

Even if the ordinance isn’t specifically targeted at the mannequins, the ordinance is likely unconstitutional. Under first amendment jurisprudence, content-based regulation of speech is subject to “strict scrutiny,” that is, to survive, content-based regulations must 1) be passed to further a compelling government interest, and 2) be narrowly tailored to achieve that interest. In practice, strict scrutiny is a difficult hurdle to overcome.

In a recent case, the US Supreme Court struck down a similar city code governing outdoor signs. The offending ordinance identified various categories of signs “based on the type of information they convey, then subjects each category to different restrictions.” Sound familiar? The Supreme Court continues: “[A] municipal government vested with state authority, ‘has no power to restrict expression because of its message, its ideas, its subject matter, or its content . . . Content-based laws–those that target speech based on its communicative content–are presumptively unconstitutional and may be justified only if the government proves that they are narrowly tailored to serve compelling state interests.”

In one passage, the Supreme Court states “The restrictions in the Sign Code that apply to any given sign thus depend entirely on the communicative content of the sign. If a sign informs its reader of the time and place a book club will discuss John Locke’s Two Treatises of Government, that sign will be treated differently from a sign expressing the view that one should vote for one of Locke’s followers in an upcoming election . . . On its face, the Sign Code is a content-based regulation of speech.”

Let’s rewrite that passage with the facts at issue here: “The restrictions in the [Wood Village sign code] that apply to any given sign thus depend entirely on the communicative content of the sign. If a [portable] sign informs its reader [that a mannequin has “got chronic”], that sign will be treated differently from a sign [advertising a nearby garage sale] . . . On its face, the [Wood Village sign code] is a content-based regulation of speech.”

In this light, it is easy to see that the Wood Village ordinance will likely be struck down if the owner decides to take it up with the courts. We will have to see if the owner decides it is worth it.

Setting aside the specter of unconstitutionality, it is worth looking at whether state law prohibits the mannequins. The state is subject to the same restrictions on content-based regulations, so the Oregon Liquor Control Commission (“OLCC”) has issued loose cannabis advertising restrictions that seem designed to survive strict scrutiny. The OLCC’s stated goal is to prevent cannabis advertising that is attractive to minors, promotes excessive use, promotes illegal activity, or presents a significant risk to public health and safety. More specifically, cannabusinesses cannot advertise cannabis in any way.

  • That contains deceptive, false, or misleading statements;
  • That contains any content that targets minors, such as images of minors, cartoons, toys, etc.;
  • That encourages the transportation of cannabis across state lines;
  • That asserts that cannabis items are safe because they are regulated by the OLCC and have been tested by a lab;
  • That claims recreational cannabis has curative or therapeutic effects;
  • That displays the consumption of marijuana items;
  • That contains material that encourages excessive or rapid consumption; or
  • That contains material that encourages the use of marijuana because of its intoxicating effect.

These blonde got-chronic-bots don’t seem to fit neatly into any of these categories, so the mannequins are likely legal under state law. Accordingly, the owner may very well decide it is worth taking this dispute to the courtroom.

New York CannabisFormer NFL player Marvin Washington is one of five plaintiffs that have filed suit against Attorney General Jeff Sessions, the DOJ and the DEA. The lawsuit alleges that classifying cannabis as a schedule 1 controlled substance under the 1970 Controlled Substances Act (CSA) is so absurd as to be unconstitutional.

The plaintiffs have a point. Currently, cannabis is listed alongside heroin, ecstasy, and LSD as Schedule I drugs, which are defined as “drugs with no currently accepted medical use and a high potential for abuse.” When it comes to cannabis, no part of this definition is supported by the evidence. Currently, 29 states and the District of Columbia have legalized some form of medical cannabis use, and recent studies suggest cannabis actually helps get people off dangerous drugs, like cocaine, meth, and opioids (which are listed as less dangerous than cannabis).

Jeff Sessions and his drug zealot friends may honestly believe it when they say things like “[heroin is] only slightly less awful [than cannabis]” but believing in a fantasy doesn’t make it true. In any event, though it will be interesting to watch this lawsuit proceed, it seems unlikely it will be the vehicle that finally ends federal prohibition. Cannabis will eventually be legalized nationwide (we see that happening within five years), but it is a lot more likely to occur in voting booths than in a court.

Our Oregon lawyers have been fielding many questions regarding a recent civil RICO complaint filed in the federal court in Portland, Oregon styled as McCart v. Beddow et al. This case was filed on the heels of the Safe Streets decision out of Colorado that we discussed recently, and was clearly heavily influenced by that decision. You will recall that in Safe Streets, the Tenth Circuit allowed a private civil RICO action by a neighbor of a cannabis grow operation to survive a motion to dismiss.

As a reminder, RICO is a federal statute that provides for a civil cause of action for acts performed as part of an ongoing criminal organization (in addition to criminal penalties). It has become fashionable for meddlesome neighbors to bring these lawsuits against cannabis operators and their business affiliates. Because RICO complaints sound in federal law and implicate supply chain defendants, these cases differ from your ordinary nuisance-and-tresspass actions, which pursue only the marijuana grower itself, and also have been recently brought against Oregon marijuana growers.

Though McCart shares many similarities to the facts in Safe Streets, it is the differences that make things interesting. These differences let us tease out a couple of lessons for other cannabis companies seeking to avoid a similar lawsuit.

Oregon Cannabis First the similarities: Plaintiffs in both suits are bringing RICO claims against neighboring cannabis grow operations and alleging direct injuries to plaintiffs’ properties in the form of noxious odors that allegedly reduce property values. They also allege the mere presence of a “criminal enterprise” next door decreases property values.

But McCart is not Safe Streets. Taking the McCart complaint on its face, the direct operators of the neighboring grow operation are alleged to have gone out of their way to intentionally provoke the Plaintiffs at every turn. This isn’t just a case about noxious odors and neighboring criminal enterprises (although it is that); rather, the Plaintiffs are asserting this case is the culmination of a bitter dispute between neighbors in which cannabis is more of an extra than a star.

Specifically, the McCart Plaintiffs allege that:

  • The defendant cannabis growers menaced Plaintiffs and “made obscene gestures” and “screamed obscenities” at Plaintiffs;
  • The grow operation increased traffic on a shared driveway by an excessive amount;
  • The Defendants caused direct injuries to the property by leaving tire tracks on Plaintiffs’ property;
  • The Defendants revved their car engines when they saw Plaintiffs outside;
  • The Defendants “discharge firearms for extended periods”;
  • The Defendants frequently “blast the air horn of their dump truck”;
  • The Defendants damaged the shared driveway and at times blocked it; and
  • The Defendants littered on Plaintiffs’ property.

Whether these allegations are true will be Plaintiffs’ burden to prove. However, two immediate lessons come to mind:

Lesson 1: To paraphrase Wil Wheaton: don’t be a jerk. Be a good neighbor. If the McCart allegations are true, the behavior of these growers reflects poorly on the entire industry. If you want to be treated like a serious business, act like one. Recognize the precarious legal situation afforded by inane prohibition policies, and strive to be ideal neighbors.

Lesson 2: Control the odors. The Safe Street court found that the cannabis smell released by the Colorado grow op was enough to assert a claim for RICO damages. You should do everything you can to minimize odors on your businesses.

But what about the other McCart defendants?

Like in Safe Streets, the McCart plaintiffs seem to have sued everyone even tangentially related to their hated neighbors, including cannabis dispensaries that just happened to stock the neighbors’ products. These “Dispensary Defendants” are probably in much better shape than the growers.

A civil RICO claim under 18 U.S.C. Section 1962(c) (at issue in both Safe Streets and McCart) requires a plaintiff prove:

  • The existence of an enterprise affecting interstate or foreign commerce;
  • The specific defendant was employed by or associated with the enterprise;
  • The specific defendant conducted or participated in the conduct of the enterprise’s affairs;
  • The specific defendant’s participation was through a pattern of racketeering activity; and
  • Plaintiff’s business or property was injured by reason of defendant’s conducting or participating in the conduct of the enterprise’s affairs.

In Reves v. Ernst & Young, the US Supreme Court held that the language of 1962(c) requires the defendant have “participated in the operation or management of the enterprise itself.” (page 183). There are a few out of jurisdiction cases that have held that mere business relationships and supplier-purchaser relationships are insufficient to establish RICO liability, even with knowledge of the illegal activity. If you are curious, take a look at In re Mastercard Intl. Inc., (page 487) and Arenson v. Whitehall Convalescent & Nursing Home, Inc. It seems unlikely the Dispensary Defendants in this case had anything to do with operating or managing the enterprise. They appear to have merely been customers, in which case they shouldn’t have liability here.

Though there is a dispensary defendant in Safe Streets, the Tenth Circuit appears to have found the conduct requirement was met because the Safe Streets defendants admitted they all “‘agreed to grow marijuana for sale’ at the facility adjacent to the [plaintiffs’] property.” The Safe Streets dispensary defendant was directly involved in operating the specific grow operation at issue. This is not the same thing as an innocent dispensary accepting product from a third-party farm.

We will be watching this case and reporting back if anything of importance breaks, but in the meantime, it never hurts to be a good neighbor, and to take steps to minimize odors.

The Darth Vader of CannabisRoger Stone, the infamous conservative strategist and provocateur, seems to want to emerge as an angel on Trump’s shoulder to balance out Attorney General Jeff Sessions when it comes to federal cannabis prohibition. As readers may be aware, Mr. Stone recently announced the launch of his United States Cannabis Coalition, which bills itself as a bipartisan non-profit organization dedicated to protecting the states’ right to choose sensible cannabis policies. Though the goal is noble, Mr. Stone’s involvement will likely attract attention like a lightning rod.

It is understandable that a man with a back tattoo of President Nixon’s face is no stranger to controversy (warning: NSFL). Stone helped re-elect Nixon in 1972 and then served the Nixon administration in the Office of Economic Opportunity. After Nixon’s downfall, Mr. Stone remained with Nixon as an advisor, respecting Nixon’s willingness to go to any lengths to win. So it is unsurprising that Mr. Stone kindled a life-long friendship with President Trump, urging Trump to run for President decades ago and arguably masterminding Trump’s recent rise to power. After a lifetime of toxicity, Stone now wants to leverage his relationship with Trump for good. It can all seem a bit too much like an attempt at Darth Vader’s redemption over Endor, and at least some cannabis activists think Stone should sit this one out.

Cannabis LawAt the start of a video on the United States Cannabis Coalition’s website, Stone says “Richard Nixon is my mentor. Among the biggest mistakes that President Nixon made was the War on Drugs. The War on Drugs has proved to be an expensive, ignominious and racist failure.” Though this is a nice sentiment a half century later, the problem is that Nixon’s administration knew exactly what it was doing. Harper’s Magazine published the highly disturbing details of a decades old interview with Nixon’s domestic policy chief, John Ehrlichman, who made an appalling admission that deserves to be repeated in its entirety:

You want to know what [the drug war] was really all about? The Nixon campaign in 1968, and the Nixon White House after that, had two enemies: the antiwar left and black people. You understand what I’m saying? We knew we couldn’t make it illegal to be either against the war or black, but by getting the public to associate the hippies with marijuana and blacks with heroin, and then criminalizing both heavily, we could disrupt those communities. We could arrest their leaders, raid their homes, break up their meetings, and vilify them night after night on the evening news. Did we know we were lying about the drugs? Of course we did.

So though it is certainly tempting to dismiss Stone’s current efforts as more grandstanding, at the same time, any insider ally against Trump’s parade of drug zealots might be critical while we ride this administration out. Despite Stone’s past, I’m tempted to rest a little bit easier knowing at least someone in Trump’s inner orbit is pushing for an end to the cannabis war madness.