Marijuana Cannabis and the DEA

The Drug Enforcement Administration (DEA) has made many a dubious claim about cannabis over the years. For this reason and countless others, our cannabis lawyers have consistently called to disband the DEA, believing it past the point where it can be redeemed. The good news it that the DEA took a hit last week for having posted false claims about cannabis.

In December 2016, the nonprofit medical marijuana advocacy group, Americans for Safe Access (ASA) formally requested the DEA either remove or correct misinformation regarding cannabis on the DEA’s website. ASA made its claims under the federal Information Quality Act, which ensures “the quality, objectivity, utility, and integrity of information (including statistical information) disseminated by Federal agencies.” ASA contends that the DEA failed to meet the Information Act’s and the ASA’s executive director explained why it was challenging the DEA on its inaccurate marijuana claims:

For years, the DEA has published scientifically inaccurate information about the health effects of medical cannabis, directly influencing the action —and inaction— of Congress. We are simply taking the DEA’s own statements, which confirm scientific facts about medical cannabis, and analysis that has long been accepted by a majority of the scientific community. Our request is simple: the DEA must change its public information to better comport with its own expressed views, so that Congress has access to the appropriate tools to make informed decisions about public health. Alternatively, ASA requests that the DEA simply remove the inaccurate statements or the documents in their entirety.

ASA’s take-down request focused on “The Dangers and Consequences of Marijuana Abuse,” an article available on the DEA’s website that contained 25 allegedly inaccurate statements, including the following:

  • “Marijuana use can worsen depression and lead to more serious mental illness such as schizophrenia, anxiety, and even suicide.”
  •  “Marijuana takes the risks of tobacco and raises them. Marijuana smoke contains more than 400 chemicals and increases the risk of serious health consequences, including lung damage.”
  • “Teens who experiment with marijuana may be making themselves more vulnerable to heroin addiction later in life, if the findings from experiments with rats are any indication.”

The ASA pointed out that the DEA itself had contradicted many of these 25 claims in a DEA report from August 2016 on its decision not to initiate proceedings to reschedule marijuana, including the following:

  • “At present, the available data do not suggest a causative link between marijuana use and the development of psychosis.”
  • “The HHS concluded that new evidence suggests that the effects of smoking marijuana on respiratory function and cancer are different from the effects of smoking tobacco.”
  • “The HHS cited several studies where marijuana use did not lead to other illicit drug use. Two separate longitudinal studies with adolescents using marijuana did not demonstrate an association with use of other illicit drugs.”

By using the DEA’s own research against it, ASA forced the DEA into a corner where it had to either disavow its August 2016 report or admit that its website was incorrect. By removing the offending page, the DEA chose the latter.

Count one for the good guys.

 

Cannabis regulatory lawyersOur cannabis regulatory lawyers are in the midst of a few different administrative cases right now dealing with violations of marijuana regulations. In Washington State, the Liquor and Cannabis Board treats its regulatory mandates as “strict liability” rules. This means the onus is on the cannabis business to comply, and a business that violates a regulatory mandate is liable even if it did absolutely everything it could have done to prevent the violation. This sort of strict liability for violating cannabis-focused regulations is fairly common across the country and is just another example of how cannabis businesses even in cannabis-legal states are treated differently from other businesses.

The theory behind strict liability for regulatory violations is that businesses are best positioned to make sure violations do not occur. Businesses need to pony up as many resources as it takes to prevent violations. This strict liability is opposed to a negligence standard, where if the business is found to have acted with reasonable care to comply with the rules, it would not be found liable.

The problem with strict liability, however, is that it can be unfair to businesses that try to have reasonable compliance programs but still slip up. There is no way to prevent employees from flouting the rules from time to time. It happens at every regulated business throughout the country. Employees often see compliance measures as a hindrance to getting their jobs done, and they look for workarounds. But in a strict liability system, a business whose employee violates a compliance program is treated the same as a business that didn’t have any compliance program at all. There is a certain unfairness to that.

The goal of any regulatory agency should be for businesses to have maximum compliance, and the best way to do that is to encourage self-policing. This is why most federal agencies have dedicated programs for regulatory compliance, self-policing, and self-reporting, where penalties against businesses are greatly reduced or even waived if the business follows certain compliance steps.

Washington State voters mandated the State implement this sort of favoritism for liquor merchants “that try” when it passed Initiative 1183, privatizing liquor sales. Under that program, Washington liquor sellers that implement specific best practices to avoid selling liquor to minors will face reduced and deferred penalties if they accidentally make such a sale. Regulatory partnerships like this benefit businesses by giving them guidelines on how to operate and they also benefit the public as a whole as they will lead to fewer overall sales to minors because businesses are so incentivized to implement effective programs.

For marijuana in Washington, the best that cannabis businesses can rely on are that the regulations allow the Liquor and Cannabis Board to reduce penalties if a cannabis business with violations can demonstrate that its business policies and/or practices will reduce the risk of future violations. And though mitigation like this is helpful, it is not the same as a standardized compliance program responsible companies can join to get across the board penalty mitigation.

Marijuana businesses should band together to demand such a “voluntary” compliance program. As everyone knows, regulatory costs for cannabis businesses are high, and even the most compliant cannabis company will have employee slip-ups or regulatory misunderstandings from time to time. The competitive aspect is also key; so long as cannabis compliance program guidelines are not set across the board, businesses will try to comply with the rules at the lowest cost, to the detriment of the compliance programs. Setting up minimum compliance guidelines will allow participating cannabis businesses to know their competitors are either on the same playing field as they are, or that they are risking harsher penalties for not being part of the voluntary compliance program. It’s a win-win for compliant cannabis businesses and for the state. Yet no matter what sort of state-law program to which your cannabis business is subject, it pays to constantly self-audit your company to work towards full compliance. See Understanding and Managing Cannabis Legal Compliance and Cannabis Compliance Audits.

What are you seeing out there? What are your thoughts on all of this?

Cannabis regulatory lawyersIn December 2016, the DEA issued a rule defining “Marihuana Extracts” to include extracts “containing one or more cannabinoids from any plant of the genus Cannabis.” This rule went into effect on January 13, 2017. That same day, The Hemp Industry Association, Centuria Natural Foods Inc., and RMH Holdings LLC filed a petition with the US Court of Appeals for the Ninth Circuit challenging that DEA rule.

The Controlled Substances Act is a federal law that determines what substances are illegal drugs. Congress authorized the Department of Justice to add and remove substances to the Controlled Substances Act (CSA), and the DOJ has delegated that authority to the DEA. The DEA promulgated the “Marihuana Extract” rule pursuant to that grant of authority, meaning that products the DEA defines as fitting the “Marihuana Extract” definition are illegal substances.

Rules can have a similar effect as laws but if a rule conflicts with a law, the law will prevail. In other words, Congressional laws that conflict with a DEA rule should outweigh the DEA rules. The Petitioners who are appealing the DEA rule are arguing that the “Marihuana Extract” rule outlaws parts of the cannabis plant that Congress specifically made legal in the CSA and in the 2014 Farm Bill.

Congress placed marijuana on Schedule I of the CSA and defined it to include all parts of the plant Cannabis sativa L., except the mature stalks of the plant and seeds incapable of germination. Stalks and products derived from those stalks are not illegal because they are not marijuana. This distinction allowed for legal production of hemp products even though marijuana remains federally illegal. The 2014 Farm Bill also allows states to implement programs to legally grow industrial hemp. “Industrial hemp” is defined to mean “the plant Cannabis sativa L. and any part of such plant, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.”

Prior to the “Marihuana Extract” rule, only one cannabinoid was explicitly named in Schedule I of the CSA: THC which is known for causing marijuana’s euphoric “high.” Other cannabinoids, like CBD, were not specifically prohibited. This meant products derived from mature stalks of cannabis that did not contain THC were arguably legal as no part of that product was prohibited by the CSA. Now those same products are illegal because they contain other cannabinoids that are now defined as controlled substances according to the “Marihuana Extract” definition. The definition also applies to industrial hemp grown pursuant to the Farm Bill. The Petitioners who are appealing to the Ninth Circuit argue that the DEA’s rule is inconsistent with the CSA and the Farm Bill and that the court should therefore find the rule invalid.

Petitioners also argue that the DEA failed to comply with the Administrative Procedure Act in creating this rule. In addition to complying with the CSA, the DEA must also follow the Administrative Procedure Act, which essentially sets forth the procedures governmental bodies must follow in enacting new rules. The Petitioners argue that under the APA the “Marihuana Extract” rule invalid as it:

  • Is arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with other law (such as the Farm Bill and the CSA);
  • Is unconstitutional;
  • Exceeds the DEA’s statutory authority; and
  • Was created without following necessary procedures.

This is not the first time the DEA has faced legal challenges for interfering with legal hemp. In 2001-2003 the DEA attempted to treat hemp food products as Schedule I substances because they contained trace amounts of THC. The Ninth Circuit Court of Appeals ruled that the presence of THC does not alone make a product a controlled substance. Petitioners plan to use this ruling to assert that cannabinoids that occur in legal portions of the cannabis plant are not controlled by the CSA and may not be regulated as marijuana by the DEA.

Since the DEA issued this rule my firm’s cannabis regulatory lawyers have received a daily stream of calls from businesses wanting to know whether the CBD products they are producing, selling or buying are now illegal. Specifically, most of these callers want to know whether products containing CBD that are derived from hemp and do not contain THC are still legal. At this point, the jury (or really the judge) is still out and we — like everyone else — will be waiting to see how the courts rule.

California CannabisOn January 18, 2017, California state regulators attended a cannabis event in Sacramento to discuss cannabis policy and what lies ahead for California. Though previous reports indicated that California cannabis licensing could be delayed for an additional year, state regulators at the event promised a licensing program would be operational by January 1, 2018.

Lori Ajax, the Chief of the California Bureau of Medical Cannabis Regulation (soon to be renamed again to the Bureau of Marijuana Control under Proposition 64), told the audience:

We will not fail. We will make this happen by Jan. 1, 2018, because we have to […] It may not be pretty. But we will get there.”

Since Prop 64 passed last November, California regulators are now in charge of crafting comprehensive regulations and issuing state licenses to not only medical marijuana businesses but to recreational cannabis businesses as well. This includes 17 license types for medical businesses and 19 licenses types for recreational businesses, covering cultivation, manufacturing, retail dispensaries, distribution, testing, and transportation. The authority to regulate and license these cannabis businesses is divided among ten California state agencies.

The California Department of Food and Agricultural will oversee cannabis cultivation activities, and it created a new division, the CalCannabis Cultivation Licensing program, to issue permits and develop regulations for cultivators, including setting up a track and trace system for all cannabis plants that enter the California market. Amber Morris, a branch chief for CalCannabis Cultivation Licensing, was also in attendance at the event in Sacramento and she said that California state departments are working with economists to create a tiered permit fee program that will assign fees to cannabis cultivators based on the size and scale of their businesses.

A big challenge faced by state regulators is the lack of banking available to cannabis businesses and affiliated companies. Ajax expressed her hope that there would be some clarity on the matter by the time state licenses are issued, stating that banking is “a challenge for us, too. As we set up our online permitting system, we would like to accept credit cards. We don’t want to have to accept wads of cash.”

The banking issue has been high on the mind of California lawmakers, as we get closer to statewide regulation. In December, California Treasurer John Chiang wrote a letter to President Donald Trump seeking guidance ahead of California’s licensing program. In his letter, Chiang wrote that the new program could “exacerbate” the banking problem because California’s cannabis economy will be so large.

Due to federal prohibition on marijuana and anti-money laundering regulations issued by the Financial Crimes Enforcement Network (FinCEN), banks are reluctant to work with cannabis businesses. The banking challenge is not unique to California and it affects businesses in legal marijuana states across the United States. Several U.S. senators sent a letter to FinCEN in December asking for more guidance and explaining how the dearth of cannabis banking promotes tax fraud and creates a public safety issue because cannabis businesses are forced to deal in large amounts of cash.

Under the new California cannabis licensing program, state agencies will need to collect fees from licensed cannabis businesses. Yet most of these agencies have only one office — in Sacramento — which means anyone paying their fees in cash will need to carry that cash with them all the way to the capitol. To address this issue, California legislators recently introduced new legislation to increase the number of government offices that can accept payments from cannabis businesses for state fees and taxes. The legislation, known as the Cannabis Safe Payment Act, is sponsored by the Board of Equalization (BOE), which has been collecting sales tax from California medical marijuana businesses since 1996.

The BOE currently accepts payments in cash from cannabis businesses at its 22 offices across the state. However, to reach these offices, many California cannabis cultivators have to travel great distances with “bags of cash” in their cars, which BOE Chairwoman Fiona Ma agrees “is not the safest method of paying your taxes.” Thus, Ma states that the BOE’s “priority has to be increasing safety—for the business owner, the public, law enforcement, and state employees by enabling cannabis businesses to pay their taxes and fees in as many a safe and secure locations as possible.” Under the Cannabis Safe Payment Act, California counties that receive approval by board of supervisors and tax collectors will be able to accept cash payments from local cannabis businesses on behalf of the BOE and other state agencies.

With promises from the Marijuana Bureau to begin issuing state licenses by January 1, 2018, collaboration from state agencies to develop regulations and set permit fees, and efforts from state lawmakers to alleviate banking challenge, California legislators are showing they are hard at work creating a viable state licensing program for cannabis businesses. For cannabis businesses planning to take advantage of California’s new cannabis program, a lot of work lies ahead and you should start preparing now.

Cannabis lawOn Tuesday, we wrote that Jeff Sessions’ confirmation hearing had begun, for the post of U.S. Attorney General. In that piece, we expressed our hope that one of the committee members would “drill down from civil rights to marijuana legalization, and specifically, to enforcement of the Federal Controlled Substances Act.” The hearing concluded yesterday and no one did exactly that. No one turned the screws.

Still, Sessions fielded questions from a few different Senators related to marijuana and the Controlled Substances Act (CSA). Below is a close reading on Sessions’ pot-related testimony, beginning with the opening question, when Senator Patrick Leahy (D-VT) asked if Sessions would use federal resources to prosecute sick people using marijuana in accordance with state law. Sessions responded: “I won’t commit to never enforcing federal law, Senator Leahy, but absolutely it is a problem of resources for the federal government….”

This comment is interesting in a few respects. First, and unfortunately, Sessions keeps all options on the table as to CSA enforcement. As we have mentioned, that could mean suing states to block implementation of state marijuana programs, or, more narrowly, wielding the CSA’s asset forfeiture provisions against specific cannabis businesses and related parties. That probably sounds ominous, but two years ago, current Attorney General Loretta Lynch said this (in response to a question by Sessions himself, at her own confirmation hearing): “I can tell you that not only do I not support the legalization of marijuana, it is not the position of the Department of Justice currently to support the legalization. Nor would it be the position should I become confirmed as attorney general.”

We all know that states have largely proceeded with impunity on cannabis during Lynch’s tenure, even though the country had far less state-sanctioned pot activity than it does today. Sessions’ reservation about “never enforc[ing] federal law” seems benign by comparison. Regarding the second part of Sessions’ quote, and the “problem of resources for the federal government,” he concedes a key point: even if it were the Trump administration’s number one goal to eradicate state level marijuana, there are likely too many people involved and too much money to revert to the past.

In the hearing on Tuesday, Sessions continued by discussing the Cole memo and the factors considered by the current administration regarding prosecution of state-level marijuana programs:

The Department of Justice under Lynch and Holder set forth some policies that they thought were appropriate to define what cases should be prosecuted in states that have legalized, at least in some fashion marijuana, some parts of marijuana…. But, fundamentally the criticism I think was legitimate is that [the policies] may not have been followed. Using good judgment about how to handle these cases will be a responsibility of mine. I know it won’t be an easy decision, but I will try to do my duty in a fair and just way.

Again, Sessions leaves open the possibility of enforcing federal cannabis prohibition. His talk of “using good judgment about how to handle these cases” is a euphemism for using prosecutorial discretion, something he misleadingly claimed he didn’t have in a subsequent response to Sen. Mike Lee (R-UT):

One obvious concern is the United States Congress has made the possession [of marijuana] in every state and distribution an illegal act. If that’s something that’s not desired any longer, Congress should pass a law to change the rule. It is not so much the attorney general’s job to decide what laws to enforce. We should do our job as effectively as we’re able.

Here Sessions appears to have forgotten his earlier reference to prosecutorial discretion. His disingenuous argument that “my hands would be tied” by Congress, compelling enforcement action, should not be taken seriously – especially because Congress has sheltered state level medical programs for the past few years, and is likely to do so again. Sessions’ point, however, that Congress should pass a law if it permanently wants to prohibit federal enforcement actions, is probably a fair one, and only reinforces the need for us to secure federal legalization of cannabis.

In all, the hearing could have been better, could have been worse. Sessions was far less retrograde in his statements toward marijuana than he has been in the past. He played his cards closely, as nominees are wont to do, and — like it or not — he is going to be confirmed. This means cannabis operators will simply have to wait and see, which has been the name of the game for a while now.

 

 

 

Cannabis estate planningLike many business owners, those who find success in the cannabis industry often want to leave their assets to friends and family at death. Unlike many other business owners, however, successful cannabis business owners’ largest assets are likely to be tied to what the federal government considers an illegal criminal enterprise. Whether you wish to bequeath a large grow operation, an ownership interest in a dispensary, or even a small personal stash, transfers of cannabis-related assets at death present unique challenges for individuals and estate planning professionals. No matter the situation, the basic question remains the same: What happens to my weed when I die?

Law professor Gerry W. Beyer of Texas Tech and Brooke Dacus published a law review article last year that sought to answer this question. It is an essential read for anyone in the cannabis industry considering how to arrange their affairs and the distribution of cannabis-linked assets at death. As is the case with many issues surrounding state-legal cannabis, a critical issue is the differential treatment of marijuana under state and federal law. Even in the realm of state law, however, the use of cannabis – even as part of a state-legal medical marijuana program – can raise issues related to one’s capacity to execute a will or even receive distributions from certain trusts. Beyer and Dacus do an excellent job awill actually be seized, it is impossible to know if that will be the case when it is time for a will to be administered.

What is more, a beneficiary may be criminally liable for possessing illegal materials like cannabis by function of the administration of the will itself. Beyer and Dacus draw a poignant analogy to a case where a beneficiary was found guilty of illegally possessing a firearm by a felon after having been given his father’s antique war-era gun at his father’s death and then keeping that gun unloaded in a closet. The court held that the heir’s possession of the firearm in a space the heir controlled was enough to violate the law. Beyer and Dacus also ask whether and to what extent an executor can administer an estate without exposing themselves to criminal liability. At least one federal court case cited by Beyer and Dacus suggests courts will not permit an executor to administer a will that includes cannabis, leaving the door open to penalties or perhaps even prison for someone who does so. It is important to note that cannabis and cannabis-related assets are subject to estate tax regardless of their legality.

Still other issues cloud the presumptive validity of a will executed by a testator who frequently uses cannabis or is under the influence of cannabis at the time of will execution. Though past habitual “drug use” has been found to interfere with testamentary capacity in some instances, Beyer and Dacus suggest most wills will be valid when an individual who uses cannabis is in fact in a state of mind to make estate planning decisions. Nonetheless, cannabis users and business owners should at least consider taking extra steps to demonstrate their testamentary capacity, such as by using a video explaining their intent, for example.

The wave of cannabis reform in the United States has been a game changer in many arenas, including the seemingly mundane like estate planning. Yet law can often be slow to catch up. Cannabis is a multibillion dollar industry on the cusp of even greater expansion, and those who reap the spoils should consider how to best protect and share their success with future generations.

Who knows, maybe someday cannabis estate planning will be a legal speciality.

California cannabis

Proposition 64 (Prop 64 or the Adult Use of Marijuana Act), which passed last November and legalized recreational cannabis use throughout California, included stricter laws regarding driving while “high.” But California senators have proposed a new bill, Senate Bill 65 (SB 65), to close what they say is a loophole in the law that does not explicitly make it illegal to drive while consuming marijuana as long as you aren’t impaired.

One of the stated intents of Prop 64 was to maintain existing laws that make it illegal to operate a car (or other vehicle) while impaired by marijuana. Like driving under the influence of alcohol, it is illegal in California to drive or operate a vehicle under the influence of any drug. You are under the influence of a drug when your physical or mental abilities are impaired to the point where you can no longer drive with the caution of an ordinary, sober person under similar circumstances. However, there are no current state laws that address the legality of driving when not impaired but while still consuming marijuana or marijuana products.

Prop 64 provides that it does not permit any person to, among other things:

  • possess an open container or package of marijuana while driving, operating, or riding in the passenger seat of a vehicle
  • smoke or ingest marijuana or marijuana products while driving or operating a vehicle
  • smoke or ingest marijuana or marijuana products while riding in the passenger seat or compartment of a vehicle, except as permitted by a local jurisdiction

Note that even though Prop 64 does not permit these activities, it also does not prohibit them. However, it provides that any person with an open container of marijuana in a vehicle may be cited for an infraction and have to pay a fine of up to $250. For persons under the age of 18, drug education and community services will instead by required. In contrast, no penalties are included for smoking or ingesting marijuana while driving or riding in a vehicle, an oversight that the authors of Prop 64 simply forgot to include.

SB 65 would “remedy” this by making it illegal for a person to smoke or consume marijuana in any form while operating a vehicle, vessel, or an aircraft; and any violations could result in either an infraction or a misdemeanor. However, SB 65 would also prohibit consumption of CBD-only marijuana products while driving a vehicle, which could be a problem for many medical marijuana patients.

Though SB 65 would clearly allow police to ticket anyone caught smoking or ingesting marijuana red-handed, a challenge for the bill is how to test whether a driver who is pulled over for driving erratically recently consumed marijuana. There is currently no THC threshold for impairment established in California as well as no standard test for impairment (e.g. blood, saliva, breath). A separate bill, Assembly Bill 6, was recently proposed to allow law enforcement to perform saliva tests on drivers they suspect are impaired by marijuana use. But a similar proposal was rejected in 2016 because legislators were concerned about the dependability of field testing marijuana-induced drivers.

To address this problem, Prop 64 allocates some of the tax revenues that will be raised from recreational marijuana sales to the Department of California Highway Patrol to create protocols for determining whether a driver is impaired by use of marijuana. The state is currently exploring ways to test driver impairment, including the use of marijuana breathalyzers that have already been road-tested on California highways.

Finally, for those that are still unclear on California’s stance on using cannabis while driving, the state recently launched a $1 million anti-drugged driving campaign that uses television and digital ads to show the dangers of driving under the influence of marijuana. For California cannabis consumers, the state wants you to know “DUI doesn’t just mean booze” anymore. (You can watch the video here.)

Cannabis litigation lawyerThough we are hoping 2017 will bring you nothing but prosperity when it comes to your cannabis business. But if you are headed to court in 2017 or even if you are just just sensing a company dispute stirring, the following five tips will help you avoid or mitigate the negative impact of a business dispute.

  1. Make your business relationships crystal clear from the start. The days of handshake deals regarding ownership in a cannabis business are over. You should do no deals of any real size without first getting everything in writing. Operating agreements, bylaws, and shareholder agreements exist to ensure that your company structure and the relationship between its owners is abundantly clear. When starting a company together, you and your fellow owners should have at least some understanding on how your company will be operated and on how such things like equity versus debt, voting rights, sweat equity, preferred returns, owner employment will be navigated. Most of the ownership disputes our cannabis litigation lawyers have handled have been because of badly done initial company contracts and filings.
  2. Perform due diligence on your partners. If you want to increase your odds of avoiding a dispute with your cannabis business partners, the most important thing you can do is to choose your partners wisely. What never ceases to surprise us is how often we are told by a party locked in a life or death ownership dispute regarding a cannabis business is that they barely knew their business partner before they started the business with them. If you are going to start a cannabis business (or any business for that matter), the first thing you should do is find out as much as you can about your putative partner’s financial and business history. You should do this before you sign away your soul and money to joining with this person on a business project. It’s neither rude nor unexpected to ask your potential partners for documentation showing their financial and criminal history–the state licensing regulators will ask for this information anyway. It is even more important to conduct thorough due diligence if you are buying into an existing cannabis business. At minimum, this due diligence should include investigating and analyzing the assets and liabilities of the company and its current owners. Your due diligence should also include confirming the appropriate standing of the company with state and local government regulators, and determining that the company and its principals understand how to comply with state and local laws as well as the Cole Memo. This is routine in every other industry and it must become routine in the cannabis industry as well.
  3. Get your own attorney from the start to protect yourself. More often than not, the company has an attorney looking out for the company’s interests. But it is important to realize that the company attorney is not your personal lawyer and that lawyer will almost certainly be conflicted out of any dispute between you and your business partners and/or investors. For this reason (and many others) you need your own lawyer providing you with your own counsel and protection regarding your role in the company and your ownership rights. This lawyer should also make sure that the written agreements work for you and not against you. This lawyer will also be an asset for you personally if any dispute arises. For more on how to avoid a dispute relating to your cannabis business, check out Five Tips on How to Avoid Cannabis Litigation and How to Avoid Costly Marijuana Business Disputes. For more on how to choose the right lawyer for your cannabis business check out How To Choose Your Cannabis Business Lawyer.
  4. Know your dispute resolution options. Well drafted corporate documents and contracts should cover most possible breakdowns in the business or the relationship and set out the options for handling internal strife. If there is a fight or a tie on a vote, what happens? How are problems resolved and when? Who makes what decisions and how? What about liquidating the business? What about selling an ownership interest and for how much? Can you sell just your membership interest or shares without going through a vote of the members? Can you keep running the business free of your partners if there’s a fight? What about dissolving the company and winding down? What happens if there is a contract breach? All of these things can and usually should be covered in your corporate governing documents or in any other contract you sign, and by doing so, you greatly minimize your likelihood of destructive problems down the road. Your company documents and contracts should also make clear exactly how disputes are going to be handled. Are you going to want your dispute made public in a court, or kept quiet in an arbitration or mediation? It is a lot easier to reach agreement on such things when you are starting your business or your relationship than when you are already in the midst of a hard fought dispute with costly lawyers.
  5. Make sure your lawyer knows what he or she is doing. When hiring a lawyer to help protect you when getting into a cannabis business, you should be sure to hire a law firm with lawyers who know both business law and cannabis law. And when confronted with a dispute involving your cannabis business, you need to be sure to hire a law firm with lawyers experienced in civil litigation (criminal litigation experience does not count here) and cannabis law, if possible. For more on choosing your cannabis lawyer, check out How To Choose Your Cannabis Business Lawyer.

Be careful out there, and have a happy 2017.

California Cannabis LawyersOur California cannabis attorneys are constantly receiving inquiries from individuals interested in starting cannabis companies in the City of Los Angeles. But for many reasons, Los Angeles is not the best place to set up shop.

First, you will not be able to operate a legally compliant business (except under a very small exception). Los Angeles does not permit any cannabis businesses but allows a select 135 businesses to operate under immunity from prohibition under Proposition D. These businesses must meet certain criteria, the first of which is that they have been registered to operate in the city since 2007 (also known as “pre-ICO” businesses). This means your only options for starting a cannabis business in Los Angeles are to either purchase an existing pre-ICO business or find yourself a working time machine. (Note: Los Angeles County is even more restrictive with a nearly complete ban on all marijuana activities.)

Second, if you decide to move forward anyway and operate an illegal cannabis business in Los Angeles, you risk severe fines and possible jail time. The Los Angeles City Attorney has been busy cracking down on illegal cannabis businesses and claimed to have shut down over 500 illegal businesses as of early last year. More recently, the City began targeting illegal cannabis delivery companies through court-enforced injunctions and landlords renting to illegal businesses through criminal complaints. Here again is a list of over 400 criminal cases filed against illegal medical marijuana businesses by the Los Angeles City Attorney as of July 7, 2016.

Finally, if you are at all interested in obtaining a state license in 2018, then you would be wise not to locate your business in Los Angeles. Both the MCRSA and Proposition 64 require applicants to demonstrate compliance with local laws in order to apply for and receive a state-issued cannabis license. For Los Angeles-based businesses, that means showing compliance with Proposition D through confirmation to the state from the City itself. Again, this option will be limited to those select businesses that have been operating since 2007.

Yet even with all these factors against setting up a cannabis business in Los Angeles, there continues to be a lot of interest in the area. One explanation could be the dispensaries on every corner that lead some to falsely assume cannabis businesses are not only legal in Los Angeles, but very easy to start. Another cause of confusion is the fact the Los Angeles has continued to issue tax certificates to illegal cannabis businesses. But it is an “urban legend” that receiving a tax certificate means a business is legal. In fact, earlier this year, the Los Angeles City Council voted to stop issuing new tax certificates to medical marijuana collectives while emphasizing that an issued tax certificate does not indicate a business is legal.

We want to remind everyone operating or interested in starting a cannabis business in the City of Los Angles, that registering to pay taxes as a cannabis business gives you zero rights to operate in Los Angeles and provides zero defense if the City later shuts you down for operating illegally. To put it bluntly, unless you are one of the aforementioned 135 businesses granted immunity under Proposition D, you are operating an illegal drug business in violation of local, state, and federal law.

Cannabis business lawyersWe’re in that time of year when at least some of the licensed cannabis producers in Washington tend struggle. A short-term glut of marijuana on the market makes it harder to stand out and make sales, and businesses that aren’t competitive on price or quality get left behind. I bring this up because it is also the time of year when financiers come to my firm’s cannabis business lawyers looking for a way out of deals they fear will never pay off.

“Financiers” in the Washington marijuana system generally refers to debt investors that get a set interest rate of return rather than a profit-interest in a business. Mark Cuban once said that only a moron would start a business on a loan, but the limitations on out-of-state equity ownership leave many newish cannabis businesses cash-strapped, so they turn to debt. We have also seen that many of the creditors involved in the local marijuana industry are not seasoned small-business investors. They are people looking to take advantage of an industry that seems to be printing money. Debt feels less risky than equity, so they throw some money into a cannabis business or two, believing they will be able to get 10%-20% interest annually.

Because so many of these investors are new to small business investing, many don’t protect themselves. Lenders have a lot of tools to make sure they get paid. Security interests in real, personal, and intangible property provide avenues for seizing assets. Marijuana inventory is complicated to secure, but most marijuana businesses have at least some high dollar capital equipment. Personal guarantees from major players put personal assets on the hook as well, and signed confessions of judgment make the process of obtaining a judgment on the debt significantly easier. Most loans do not involve all of these protections, but most smart lenders are not willing to provide completely unsecured capital to brand new businesses without any way to get a return if the business folds.

If you are one of those unsecured investors and the cannabis company to whom you loaned money defaults on your loan, what can you do? If you want any chance of recouping your investment, you really only have two options. First, you can renegotiate the debt. In most well-drafted promissory notes, an uncured event of default causes the debt to accelerate and mature. This means that if your cannabis borrower misses a payment and doesn’t make a late payment by the cure date, its entire debt becomes due. Once this happens, it is just a matter of negotiating an extension on the note. During that extension, you as the creditor have significant leverage to extract concessions from your cannabis borrower, such as personal guarantees, security interests, or even pledges of ownership interest in the cannabis company. The reason you as the creditor have leverage is because your only other viable option would be to obtain a judgment against the borrowing company and that judgment will likely be a nightmare for your borrower. If you are wiling to brave the legal fees and get a judgment against your borrower, you can then use that judgment to begin levying on the cannabis business’s assets as though you had a security interest in the property to begin with. In most states, once you get the judgment, at least some of what you spend collecting on it, including your attorneys’ fees, will be collectable as well.

Companies that owe debts to third parties and realize that they are about to go under sometimes look for ways to avoid paying the debt. This is a good time to bring up fraudulent transfers. As defined in most states, a fraudulent transfer occurs in a few different ways, the most common of which is when an insolvent debtor transfers property without receiving a reasonably equivalent value in the exchange. If an “insider” — someone connected to the company like a director or a director’s spouse — is involved in the transaction, showing fraudulent transfers becomes far easier. For example, if a debtor  company has a bunch of equipment and transfers it to the company owner’s brother, that is potentially a fraudulent transfer, and the property can be clawed back for creditors.

The stickiest situations come when there are multiple debts. A company is not necessarily breaking any laws if it chooses to pay one creditor before it pays other creditors. Unless the creditor is an “insider,” the company can generally choose which of its debts to pay unless it is in a formal bankruptcy (probably not available to marijuana businesses) or a state receivership proceeding. In certain circumstances, multiple debt investors have signed promissory notes in which the company promises not to pay the notes proportionally and not to provide any payment preference. If the debtor company does pay one holder disproportionately to the others in that circumstance, the creditor left-behind may be entitled to a clawback of the payment.

These collections matters don’t usually end with either side truly happy. Attorneys make some money, and investors can often recoup a portion of their investments, but debt litigation against a business is an unpleasant affair. If you are looking to lend to a cannabis company, make sure you know what your plan is if things turn south. It’s better to have a security interest up front than it is to fight the company and other creditors in court to get the right to levy.