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.

 

California cannabis Having begun my cannabis legal career in Washington State, which is a cannabis marketplace that started with a loose collective model and then morphed into the heavily regulated medicinal and adult use marketplace it is today, I know firsthand that it will be no small task to get right on cannabis regulation here in California now. As we all know by now, cannabis regulations are constantly changing and in California such changes seem already to be hitting us nearly every month. California seems hellbent on getting revising (and re-revising) its regulations so as to get a strong regulatory grip over what will soon be the most profitable and dynamic legal cannabis market in the world (by far).

Cue AB 133, which is the most significant and realistic technical fix bill to California’s cannabis marketplace since passage of SB 94 this summer. SB 94 represents a regulatory union between medical and adult use cannabis from the get-go. Most other states that have legalized recreational cannabis already had a robust (though unregulated) medical cannabis market that they let remain for a while to the detriment of regulated operators, but California has decided from the outset that the two cannabis industries (medical and recreational) would be combined under one regulatory regime. However, there are flaws in SB 94 and a lot of gaps and ostensible impossibilities when it comes to logistics and operational standards. Though regulating agencies (like California’s Bureau of Cannabis Control) might normally be expected to interpret and fill in the blanks on legislation via rule-making, California isn’t leaving anything to chance with its proposal of AB 133.

If passed, AB 133 would make SB 94 even more business-friendly for operators and consumers. AB 133 would do the following:

  • Cannabis deliveries would allowed by a retailer using any technology platform owned, leased, or controlled by the retailer. Currently, retailers can only use technology platforms they own and control to undertake deliveries.
  • Holders of multiple cannabis licenses would no longer be required to keep their licenses “separate and distinct.” This likely will mean you can combine your multiple licenses or your adult use and medical operations on a single “premises.”
  • AB 133 would repeal the requirement that licensed medicinal cannabis manufacturers only manufacture cannabis products for sale by a medicinal cannabis retailer.
  • Verification of local approval would change for applicants that voluntarily provide proof of such approval to the state during the licensing process. Essentially, if you provide this proof to the State of California, it will presume you’re in compliance with local laws unless otherwise notified by the city or the county.
  • If you’re a cultivator and your water source stems from diversion, you will have until October 31, 2017 to get that use authorized and to disclose that diversion to the state (rather than the July 31, 2017 deadline that’s already come and gone).
  • If you’re under 21, you can be on the premises of an A-licensee so long as the A-licensee also holds an M-license at the same location. And if you’re over 21, you can be on the premises of an M-licensee so long as that licensee also holds an A-license at the same location.
  • Caregivers would be allowed on premises to purchase medical cannabis for verifiable qualified patients, but the Bureau of Cannabis Control would set forth the specific rules around these purchases.
  • Cannabis cooperatives would be barred from undertaking contracts, etc. with other cooperatives in other states.
  • The unlawful possession of concentrated cannabis amounts would be increased from 4 grams to 8 grams.
  • The cannabis cultivation tax would apply only to harvested cannabis that “enters the commercial market” and cannabis that “enters the commercial market” would re redefined to be cannabis or cannabis product that completes and complies with a quality assurance review and testing, except immature cannabis plants and seeds,
  • You won’t pay your cannabis excise taxes directly to the Board of Equalization anymore; you will instead pay them to the California Department of Tax and Fee Administration.

Though passage of AB 133 is not a cure-all for all that ails us in SB 94, it is a good start toward ensuring that some of the wider gaps in California’s existing cannabis legislation are headed off at the pass of rule-making. Most importantly, California is still on track to be one of the most business-friendly regulatory states, but we’ll see what future rule-making (and local restrictions) do to that status as fall approaches.

We recently mentioned that the Oregon Health Authority would soon offer guidance on seed-to-sale tracking requirements for medical cannabis. Last week, the Oregon Health Authority (OHA) did exactly that, with its Medical Marijuana Information Bulletin 2017-07. The Bulletin comes pursuant to Senate Bill 1057, the most significant pot bill of the recent Oregon legislative session. In our recap of that bill, we ended with our oft-repeated observation that “the OHA regime will soon recede to strictly limited, patient-caregiver relationships. The money there is gone.” So, this is a public service post for anyone out there growing marijuana in the OHA system with the goal of helping patients and not getting rich.

As a reminder, the goal with SB 1057 and tracking medical marijuana in Oregon is to limit diversion and black market activity. To accomplish this, SB 1057 gave the following parameters for tracking:

  • Required marijuana produced and transferred within OHA’s Oregon Medical Marijuana Program (OMMP) system to be tracked by the OLCC tracking system. (The OLCC oversees non-medical, adult use marijuana.)
  • Specified funding for the tracking system to be paid from the Oregon Marijuana Account prior to any other distribution.
  • Required OHA to impose an additional fee on marijuana grow sites, processing sites, and dispensaries to pay costs incurred by the tracking system.
  • Specified timelines for tracking system phase in.

As provided in last week’s OHA Bulletin, December 1, 2017, has been chosen as Oregon’s tracking system phase in date. On or before that date, OMMP registrants will be required to track the production, processing and transfer of all marijuana items in the OLCC’s Cannabis Tracking System (CTS), and pay an associated fee of $480. The alternative is to apply for an OLCC license prior to January 1, 2018, or to indicate that the registrant falls under an exemption. The exemption is narrow: it occurs only where a registrant is a patient growing for him- or herself, with a ceiling of 12 mature plants and 24 immature plants.

Did we mention it would be impossible to make any money in the OHA system going forward? It is. Going forward, the only marijuana sold at retail to medical cardholders will be at OLCC licensed dispensaries, tracked in CTS. In that sense, the December 1 deadline should come as a surprise to no one: SB 1057 has been on the books since May, and OHA licensed dispensaries had become vanishingly rare before that. If any OHA licensed dispensaries still exist after December, they will likely be vestigial to sparsely populated eastern Oregon counties, where bans on adult use sales continue.

Even with all of this context, we still get occasional clients coming to our office looking “to invest in an Oregon medical marijuana grow.” If the individual has been pitched on that, we tell them to run. As a business proposition, the medical marijuana program in Oregon had a good run from 2013 to 2016, but those days have passed. The recent OHA Bulletin regarding December 1 and CTS confirms it.

California cannabis
When it comes to cannabis, Cali is the lead penguin.

Cannabis legalization inevitably leads states and local governments to at least discuss the impact of cannabis tourism. In your standard legalization regime, adults 21 and older from anywhere in the world can (and absolutely do) come to certain U.S. states to buy and consume cannabis from regulated storefronts whose cannabis products come from regulated cultivators, manufacturers, and (sometimes) distributors. Most state governments have put at least some kibosh on cannabis tourism for fear of incurring the wrath of the federal government. This is why cannabis cups with product on site are on the decline and why we don’t see states rushing to legalize cannabis lounges or clubs. Washington State has pretty much outlawed any form of meaningful cannabis tourism and Colorado has effectively done the same, with a only a few individual cities there pushing for consumption sites/rights under local laws.

There is though a bright and shining light at the end of the tunnel when it comes to cannabis tourism — California. With California’s passage of SB 94 (a/k/a the Medicinal and Adult Use Cannabis Regulation and Safety Act) we may actually see cannabis tourism take off and sustain itself here in the Golden State. It certainly does not hurt that cannabis is an entrenched cultural phenomenon here,

In addition to its SB 94-sanctioned event permit, California immediately stands out for two reasons: its legalization of on-site consumption hosted by licensees in certain scenarios and its creation of microbusiness licensees.

SB 94 will allow for cannabis consumption at retail and microbusiness establishments:

a local jurisdiction may allow for the smoking, vaporizing, and ingesting of cannabis or cannabis products on the premises of a retailer or microbusiness licensed under this division if all of the following are met:
(1) Access to the area where cannabis consumption is allowed is restricted to persons 21 years of age and older.
(2) Cannabis consumption is not visible from any public place or nonage-restricted area.
(3) Sale or consumption of alcohol or tobacco is not allowed on the premises.

For a state to out and out permit on-site consumption at a licensed business is pretty novel at this point. Of course, the catch is that the local government must approve such a set up (which will be a tough sell in some places), but California has fully opened the door on the conversation. Being able to consume in a store or microbusiness will undoubtedly drive consumers (and tourists) to these locations, giving retailers and microbusinesses the chance to have that Amsterdam-style coffee house feel that has so far been mostly lacking in every other cannabis-legal state.

And the microbusinesses themselves will be able to operate in a sort of winery type setup where you have smaller, more craft vertically integrated operators making everything (or nearly everything) in-house. If California can create winery like experiences for cannabis it will absolutely change the way cannabis is admired and enjoyed, which will assuredly capture the interest of locals and tourists alike. This opening up for public consumption will also go a long way in reducing the cannabis stigma.

Then there’s the question of whether we can expect California to embrace things like canna-crawls, bud and breakfasts, etc. In our experience, most state departments of transportation will not sanction licensing or permitting anything related to a canna-crawl and cities and counties are mostly turned off by the concept of cannabis-friendly hotels. Again, though, because cannabis is such a big part of California’s existing economy, such ideas hold less of a taboo here. Indeed, for just a few examples, Humboldt County just proposed an ordinance to allow for cannabis farm stays (i.e., bud and breakfasts), the City of Nipton will apparently (allegedly) turn into a “pot paradise” hospitality destination, and Coachella will have at least one cannabis cultivation-adjacent hotel in its future.

California cannabis is going to be huge — by many accounts, more than ten times bigger than Washington State, Oregon, and Colorado combined. If California successfully provides for public consumption and benefits from cannabis tourism (even if only in select cities and towns) the reverberations from this will be felt nationwide.

Over the weekend, I attended CanEx Jamaica in Montego Bay. The event focused on the business and policy of cannabis in Jamaica and abroad. Jamaica decriminalized cannabis in 2015, imposing a fine for possession of less than two ounces of cannabis rather than possible jail time. Jamaica also has legalized cannabis for medical use, but is still in the process of implementing a regulated program.

Jamaica is facing challenges in regulating a plant that has long been celebrated in Jamaican culture despite legal prohibition. Ganja, as it is known on the Island, has deep cultural and religious significance. It is a sacred herb in the Rastafarian religion. Its religious and recreational use on the island has been widespread for years. As a result, many Jamaicans are not excited about it being regulated. I went to this event for two reasons. One, because Hilary Bricken, our lead cannabis lawyer out of our Los Angeles office would be speaking there. And two, because our cannabis practice has always been an international one, and that has been accelerating in the last few months as Barcelona, Spain, (where we have an office) continues to liberalize.

Dr. Jalani Adwin Niaah, a professor at the University of the West Indies at Mona and Rastafarian, gave a presentation on Rastafarian Dispensing and Advocacy. He noted an increased interest in ganja from local business leaders after it was decriminalized. He fears though that commercialization of Jamaica’s medical cannabis will leave Rastafarians behind and cannabis as a sacrament will become marginalized. Dr. Niaah suggested Rastafarian’s hosting “herb camps” where they could grow and dispense ganja for religious purposes while also providing guidance to Jamaicans and visitors who want to use ganja for healing and wellness. Dr. Niaah proposed these camps would give Rastafarians a place in Jamaica’s regulated cannabis market. Jamaican law allows cannabis for religious purposes, but it is not clear these sorts of camps would qualify under this exemption.

Hilary Bricken hosts a panel on Cannabis Policy in Jamaica.

Hilary Bricken from our office moderated a panel on cannabis policy that included Florida attorney Michael Minardi, entrepreneur Sidney Himmel, Dr. Lorenzo Gordon of Jamaica’s Ministry of Health, and Greg Douglas, CEO of Jamaica’s Cannabis Licensing Authority.

Dr. Gordon and Mr. Douglas provided insight into the challenges Jamaica faces as two of its regulatory bodies work together to establish Jamaica’s medical cannabis scheme. The Ministry of Health regulates cannabis processing, strains, and products. It looks at the scientific side of cannabis, studying the percentage of CBD and THC in each strain. This Ministry also requires a microbiological analysis of each product and provides training for physicians who wish to recommend cannabis. The Cannabis Licensing Authority focuses on location, security, and cultivation. As the title suggests, it also will eventually provide licenses to cultivators and dispensaries.

Mr. Douglas expressed the need for the two agencies to work together to send a unified message and provide a consistent process for applicants hoping to obtain a cannabis license. He also acknowledged the importance of cannabis in Jamaica saying “in Jamaica, ganja is cultural, not just a matter of money.” Mr. Douglas maintains that the emotional impact of ganja in Jamaica must be taken into account in creating a regulated industry.

The elephant in the room was the impact United States Government policy has had and will continue to have on Jamaica’s cannabis regime, especially considering the Trump administration has been hostile to cannabis. Both Jamaica and the US have entered into treaties prohibiting the manufacture and distribution of cannabis and other drugs. The US wields significant influence over international trade and could force its will on a small nation like Jamaica. At one point in the panel discussions, Hilary asked whether Jamaican government officials see the US as a bully. Both Jamaican officials gave diplomatic answers, acknowledging they are aware of the United State’s position on the subject and how it is necessary to “consider” the international environment when implementing Jamaica’s regulatory regime.

Though over half the states in the US have legalized medical cannabis and eights states (plus Washington DC) allow cannabis for recreational use, the United States is still viewed internationally as somewhat of a drug law dinosaur with sharp teeth. Many of the speakers and attendees talked of how Canada and Israel (and to a lesser extent Uruguay and Spain) are model nations for cannabis research and policy. Dr. Gordon stated he hoped Jamaica could be an international leader in cannabis as well. See Marijuana Legalization: The International Edition

 In addition to Hilary’s panel, CanEx hosted Montel Williams for a keynote address, held a job fair for individuals interested in working in cannabis and hosted a number of other panel discussions on topics like “Women in Cannabis”, “Finance and Trade”, and “Arts and Entertainment.” The event was well attended and very informative. If you regret missing it this year, I highly recommend attending in 2018.
Great locale and great speakers. What more could you want?
Daniel Shortt and Hilary Bricken at CanEx Jamaica.
Get your marijuana product recall plan in place. Now.
Get your cannabis product recall plan in place. Now.

Time and again I have warned cannabis industry participants that federal prohibition means nothing when it comes to liability created by defective products. Colorado is a prime example of the threat and the power of cannabis product recalls. And though for years now we’ve seen various cannabis businesses in Colorado pull their products from the shelves for illegal pesticides and/or manufacturing under unsanitary conditions, we have yet to see an official product recall for cannabis in the State of California. And why would we? The state hasn’t had any legitimate, enforceable, or uniform regulations to corral cannabis operators into worrying about consumer safety (other than self-imposed best practices). Though it’s pretty clear recalls should already be happening in California based on some of the available product in the state’s medical market, they haven’t yet, but they will.

With the passage of the Medicinal and Adult Use Cannabis Regulation and Safety Act (“MAUCRSA” aka SB 94), medical and adult use cannabis in California will soon be under one regulatory regime. Outside of MAUCRSA’s mandatory quality testing and packaging and labeling thresholds, what will California’s ultimate quality assurance and consumer protection operational standards look like? MAUCRSA regulations will fill in the baseline blanks and that will happen this fall, according to the state.

I’ve practiced law in enough regulated cannabis states to know that quality assurance, testing, and protecting the public through total product perfection isn’t going to be easy or cheap and it’s going to be mandatory if you want to keep your cannabis license. Still, even with your best quality assurance game face, you may not (more like never) escape the toe catch that is products liability. And with California being such a litigious state, as the Wall Street Journal editorial board recently pointed out, it’s only a matter of time before even more plaintiffs start suing cannabis operators alleging defective, dangerous, or mislabeled products and Prop. 65 violations.

If you’re not familiar with product liability, the most important thing you need to know is that the cannabis industry is not immune from it just because cannabis remains federally illegal. And now that you know that, I suggest you read at least some of the following to better grasp how product liability laws can impact or even derail your cannabis business:

Just the mere fact that my firm’s cannabis attorneys have written so many blog posts and articles on cannabis safety and cannabis product liability ought to tell you how truly important this issue will be in California once things truly get rolling here.

What then should you as a California cannabis business owner do to protect yourself from product related lawsuits and government actions? Again, the MAUCRSA regulations will no doubt create a baseline of what operators need to do if their products are defective, but you’ll need to go above and beyond that to ensure you’re ready to take on a recall situation or to defend yourself in the event of a product liability lawsuit.

Oftentimes, one of the best ways to mitigate against product liability claims is by instituting a product recall. In most industries, recall standards are dictated by either federal or state law or both. But since cannabis is federally illegal, neither the Food and Drug Administration (FDA) nor any other federal agency has rules or guidelines on how to undertake a cannabis recall.

However, since the federal government “tolerates’ only the cannabis regimes of states with robust marijuana regulations, it is not surprising that most states with commercial marijuana laws require their licensed marijuana businesses have a recall plan in place as a condition for receiving state licensing — and California will probably be no different. But few states have much in the way of specifics on what should go into a cannabis business’s recall plan. When our cannabis attorneys draft marijuana licensing applications for our clients, we are careful to make sure the recall steps we map out in the licensing application recall plan can actually be fairly easily accomplished. A gold-plated grandstanding recall plan may sound great when you are working to secure your cannabis license, but if you can’t execute on or afford that plan, you are only creating trouble for your cannabis business down the road.

In crafting a realistic cannabis product recall plan, you should, at minimum, consider or do the following:

1. Create an overall recall strategy.

2. As part of your recall plan, create definitions and standards for classes of recall and the depth and scope of any given recall. If your state or local laws do not provide basic recall standards for cannabis businesses, check out the FDA’s website under Guidance for Industry: Product Recalls, Including Removals and Corrections.

3. Appoint a recall committee within your company, to be led by experienced personnel capable of evaluating and investigating product complaints to determine if a recall is warranted. This also entails your developing a product complaint form that will be utilized by customers. It is better to learn about product problems early.

4. Develop a complaint receipt and evaluation method to ensure your product complaint processing and investigations are logical, efficient, and comprehensive. There are few things worse than receiving product safety complaints and then ignoring them until the situation is out of control.

5. Truly ponder what your product complaint investigation will entail. What facts should your recall committee be gathering when seeking to determine if a product complaint is valid or if a recall is warranted? What should your recall look like, as based on the facts and circumstances and the threat your product may pose to consumers and vendors?

6. Create a distribution list so your product recall committee can quickly and easily identify all affected products and product lots for disposition and potential destruction. The distribution list should — at minimum — include the names of all affected consumers and vendors, their contact information, and the dates on which the products were sold to them or consumed by them, and it should also include any side effects, injuries, or illnesses resulting from product use. Time is of the essence here. My law firm had a regional food client that inadvertently failed to issue a recall notice to one of many supermarket chains to which it sold its food. This supermarket chain was so angry about having been kept out of the loop that it refused ever to purchase our client’s product again. Then other supermarket chains learned of our client’s failure to notify this one supermarket company and they too ceased all of their purchasing. Needless to say, our client company no longer exists. Don’t let this sort of thing happen to you.

7. Institute a method of stock recovery so all tainted product in inventory is effectively quarantined from sale and distribution.

8. Generate your recall notice and be very careful with your wording in how you alert vendors and consumers to the recall. You want to effectively communicate that a product has been affected and how to deal with that, but you also want to minimize whatever liability your product problems may create for the company. On a case by case basis, consideration should also be given to drafting a press release to help the company’s PR. For this you absolutely need attorney help.

9. Make sure to as quickly as possible (preferably in advance) alert your outside advisors (your lawyers, your insurance broker, etc.) regarding your recall.

10. Set out in your recall plan your options for product disposition. Will you destroy a product? Cleanse and then repurpose it? Lay out your options in your plan now so you are not scrambling to try to figure out your possible options later, when you have no time to do so.

11. Record everything you do. Document every effort you make and record all your communications with consumers and vendors. If there is a legal action later, you will want to be able to show the court that you took all reasonable steps to ensure consumer safety.

In addition to formulating a solid and reliable recall plan, you also might want to consider conducting a mock recall to ensure your recall systems will work when the real deal occurs. Compliance audits can also be a big help in shoring up loose ends on a recall.

Cannabis product recalls are only going to increase in California as robust regulations under MAUCRSA hit all cannabis operators, so get your cannabis product recall plan in place now.

 

Don’t use online legal forms for your cannabis business. Just don’t.

These days, you can find a free legal form or template online for just about any type of contract. It takes discernment, of course, to choose the best template for your purposes: the form should cover the substantive areas, to start, but it should also square with your jurisdiction, track any recent statutory amendments and apply the correct legal concepts to your situation. At the end of the day, though, there is a form for almost everything online. If you subscribe to a legal contracts vendor, like LegalZoom or Rocket Lawyer, the forms may even come with back end support.

Lawyers like to debate whether legal documents sourced online are helpful or dangerous. It is a fun debate and most of us fall on the “buyer beware” side of the spectrum, if only because we have all been called in to clean up messes created by ill-fitting forms. Still, plenty of small businesses get by with generic forms, for better or worse. They work well in some industries, less so in others, and in some, not at all. The cannabis industry fits squarely in the “not at all” category. In fact, if we can give one piece of advice we know to be true, it is this: do not attempt to adapt an online form for a marijuana business. Please.

There are two primary reasons even the most expertly drafted generic form, if tested, will fail in the cannabis context. First, marijuana is a heavily regulated industry at the state and local levels, which implicates ownership and licensing concepts. This must be addressed in every agreement. Second, marijuana is illegal to produce and distribute under federal law. This must also be addressed. These two issues flow through nearly every marijuana contract, whether the contract is an internal company document or an outward facing form.

Using a standard, non-marijuana form for a marijuana business can lead to dire results. Take a limited liability company operating agreement, for example. On the limited topic of state licensure, what happens when an individual does something to jeopardize the license? (Is this a call option triggering event? Is expulsion in play?) What happens if the company fails to acquire or maintain a license? (Does the company dissolve? What happens with its capital?) What if the company wishes to acquire a second license? (Who gets to decide? Can a capital call be made?) Or what if one of the members, listed on the license, wants to transfer her interest to a third party? (Is this allowed? What transfer restrictions does the state impose?) The list goes on and on. With lawyers inexperienced with the cannabis industry consistently getting these sorts of things wrong, forms stand no chance. See The 5 Worst Pieces of Cannabis Legal Advice We’ve Seen in California (From a Much Longer List)

Unfortunately, getting any one of these items wrong can have disastrous consequences for company governance and operations, which we have seen time and again in cannabis litigation. The same pot-centric concept applies to outward facing agreements, as we have noted with cannabis leases, land sale contractscompany acquisition agreements, and other types of cannabis contracts. It is worth noting that even if federal law were to change tomorrow, cannabis industry documents would still require cannabis specific provisions due to heavy local regulation.

As attorneys who work with a great number of pot businesses in California, Washington and Oregon, we are constantly tweaking our cannabis documents to accord with changes in state and local laws and rules, market dynamics, and evolving federal policy. If there is one piece of advice we can give someone thinking of entering the marijuana industry, it is this: do not mess around with ill-fitting forms. It’s not worth it. Not even close.

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.

Cannabis law
No biggie, apparently, per DOJ

U.S. Attorney General Jeff Sessions is worried about this country’s “historic drug epidemic and potentially long-term uptick in violent crime.” Because he is so worried, Sessions has spent the past month doing things like: (1) asking his old colleagues for funds to prosecute the War on Drugs, including medical marijuana; (2) writing letters to state Governors with “serious questions” about their local cannabis programs (which letters the states have politely observed are misleading and inaccurate); and (3) disseminating bogus weed statistics far and wide. Every day that Sessions perseverates on cannabis enforcement, an average of 142 Americans die from opioid abuse, per the Centers for Disease Control. And since 1999, a total of 560,000 drug overdose deaths have occurred. That number is accelerating.

If Jeff Sessions were truly concerned about our nation’s historic drug epidemic, he would not be scheming to shutter state cannabis programs. Instead, he would be taking action against the bad actors who have fueled the opioid epidemic. Specifically, he would be filing public interest lawsuits, like last week’s bombshell filed by Multnomah County (the home of Portland, Oregon). As it stands, however, the federal government has done little to engage the opioid crisis apart from commissioning a report, and Sessions has done nothing. It tends to boggle the mind.

As with cannabis law and policy, the federal government has been terribly slow and backward in its consideration of the opioid crisis. This means that once again, states and local jurisdictions are being forced to take the lead. Lately, these localities have been doing so with gusto: a growing number are suing pharmaceutical companies and doctors for causing a public health hazard by pushing opioids on their citizens. Fundamentally, this is the same strategy that states first pursued in the 1990s with lawsuits against Big Tobacco. The local governments are essentially saying: you guys knew what you were doing all along with opioids; we are going to make you stop and make you pay.

In legal terms, the allegations in these cases include tort claims like public nuisance, fraud, conspiracy, negligence, gross negligence, etc. These lawsuits contain jarring and memorable lines, such as “the Purdue Frederick Company, Inc., is a convicted felon and admitted liar.” The filings also detail the methods used by the defendants to push their highly addictive products, and they contain demoralizing statistics, such as:

  • Opioids are now the most prescribed class of drugs, generating $11 billion in revenue for drug companies in 2014 alone;
  • Since 1999, the amount of prescription opioids has nearly quadrupled;
  • In 2010, some 254 million prescriptions for opioids were filled in the U.S. – enough to medicate every adult in America around the clock for a month;
  • In 2010, 20% of all doctors’ visits resulted in the prescription of an opioid;
  • While Americans represent only 4.6% of the world’s population, they consume 80% of the opioids supplied around the world and 99% of the global hydrocodone supply; and
  • By 2014, nearly two million Americans either abused or were dependent on opioids.

And Jeff Sessions is concerned about marijuana.

According to its website, the mission statement of the Department of Justice (DOJ) is to “…ensure public safety against threats foreign and domestic; to provide leadership in preventing and controlling crime; [and] to seek just punishment for those guilty of unlawful behavior…”. With respect to controlled substances in general and opioids in particular, DOJ should be doing all of these things. It is not. Instead, it is beating about the bushes with states on cannabis.

The opioid crisis kills 146 Americans every single day; conversely, even the U.S. Drug Enforcement Administration acknowledges that no one has ever died of a cannabis overdose. If Jeff Sessions and DOJ continue to waste valuable federal resources investigating state-legal weed and not the opioid crisis, it will be an American travesty. In fact, it already is one.

California cannabis lawyer
When it comes to California’s cannabis laws, you cannot afford to live in a dream world.

Since moving to Los Angeles, I have non-stop been reviewing the work of other “cannabis attorneys” from all over California that were working for their clients under Proposition 215, and I have to say that far too much of what I’ve seen has disturbed me when it comes to corporate formation, financing, and entity structures. What seems to have occurred under Prop. 215 (which is a terrible piece of law if you’re looking to be a real cannabis business) is that many self-proclaimed industry attorneys in and out of California abandoned any semblance of helping their clients comply with the corporations code, federal and state tax laws, and various basic transactional laws and standards. All of this is coming to light now because many Prop. 215 “collectives” want to start for-profit companies to pursue licensure under the Medicinal and Adult Use Cannabis Regulation and Safety Act (“MAUCRSA“) and/or merge their collective into a for-profit entity for the same reason. Unfortunately, this kind of transition is going to be legally impossible because of how these collectives were originally structured (combined with their failure to comply with corporate laws) or it will be rife with liabilities because of straight-up bad legal advice.

In defense of California, I have to say that this sort of off-the-cuff lawyering is always par for the course in states where cannabis businesses had to operate in the grey. In those situations, few successful corporate lawyers are willing to risk their law license and so what happens instead is that criminal lawyers (whose business is on the decline due to decreased arrests) and new lawyers step in to fill the void. From this the problems arise. Now might be a good time for you to check out Seven Keys to Choosing Your Cannabis Business Law Firm.

Below then is my top five list of the worst legal advice our California lawyers have seen given to Prop. 215 collectives here in the Golden State.

  1. Your bylaws aren’t that big of a deal. The majority of operators in California are non-profit mutual benefit corporations (“NPMBC”) because a 2008 California State Attorney General memo interpreted Proposition 215 to permit only non-profit entities to “collectively or cooperatively” produce and distribute cannabis medicine by and among qualified patients. Many lawyers (apparently unfamiliar with California’s corporate laws) failed to draft corporate bylaws or provided only boilerplate bylaws for the directors and members to control the entity. A very specific portion of the California corporations code deals with NPMBCs and if your NPMBC does not have proper bylaws in place, its operations will be controlled by statute and you may be legally prohibited from acting on behalf of the entity. What’s even worse though than having no bylaws are boilerplate bylaws that are not followed by the corporation’s directors. I’ve seen bylaws that focus on essentially made-up compliance with Prop. 215. and that ignore every other facet of actually running the NPMBC and I’ve heard multiple times of lawyers who claim that the only reason to have these bylaws at all is to show to the police in an event of a raid. This is obviously a problem when it comes to what happens on wind-up and dissolution, where assets go upon dissolution, how the entity is managed, and who has authority to do what, and these corporations are having to learn this now, in their hour of  need.
  2. Membership voting doesn’t matter. This ties in to having poorly written or no bylaws. Member voting absolutely matters. Most NPMBCs were never told that they vested corporate voting rights in their entire patient membership, which means they cannot do anything without putting it to a vote of their entire collective. We have also seen many NPMBCs set up where their directors vote on day-to-day decisions but all members get to vote about dissolution, dissemination of assets, etc., which is not what you want to see if you want to do a for-profit merger. To make matters even worse, many of these NPMBCs require a vote of their entire membership to amend the bylaws to address these sorts of situations. Some even require this vote be unanimous for anything to happen. Just imagine for a minute finding and getting hundreds of people to vote your way; not going  to happen.
  3. The IRS won’t care about relationships between collectives and their management companies. Some lawyers told collective operators to start a parallel management company along with their NPMBC so that they could get bank accounts, run payroll, and provide various “management services” to the NPMBC. Their real plan though was to strip out cash from the NPMBC (which can’t otherwise make a profit).  Unfortunately, astoundingly few of these lawyers gave a thought to how the IRS would view all this for income tax purposes. Fast forward just a bit and we now have the IRS applying Section 280e to these management companies that are managed or controlled by the same people who sit on the board of the NPMBC. In many instances, the IRS sees these as “designed to hide” relationships set up as a front set up to allow those who control the NPMBC to get paid large amounts. And no surprise, the IRS is not liking what it is seeing.
  4. Don’t document anything. Is cannabis still illegal at the federal level? Yes. Is there criminal liability for doing pretty much anything related to cannabis? Yes. But if you are going to run a cannabis operation that complies with state law you need to  document what you are doing, especially your compliance efforts. And if you ever want legitimate relationships with future financiers, handshake deals and fly-by-night dealings are not going to cut it, especially now that MAUCRSA has passed. The number of collectives that have told me that they can’t now operate properly under local law requirements or that they’re getting hung up on negotiations with a financier because of a lack of documented operating history or a lack of vendor or other contracts is staggering.
  5. Merger is a collective’s best option under MAUCRSA. Definitely not true for most collectives, and don’t even get me started on the stupidity of selling your collective. In California, many collective operators want to merge with for-profit entities using the same management, name, and assets as the non-profit entity. But mergers, even those done purely as a reorganization, can be complicated beasts. For many collective operators, their relationships with amorphous management companies, their outstanding tax liabilities, their lack of any written operating history or contracts, and their prior general corporate incompetence would make merging a poor choice. The corporate, tax, tort, contract, and debt liabilities of the nonprofit would transfer to the surviving entity — and those liabilities can be countless for businesses that have worked outside the bounds of the law for years. Unless your collective has followed California’s corporations code, reported its income to the IRS and paid its taxes to the Board of Equalization, documented its arm’s length transactions with third parties, and has transferable assets of real value,  a merger will probably not be the way for you to go unless you want to carry all of your Prop. 215 baggage with you.