Recreational Marijuana

Cannabis tax lawyer 280EWhen folks in the medical and adult use marijuana industries hear “280E,” they tent to shudder since they know it means a large protion of their revenues will be going to the IRS without the usual deductions. However, just this week, Grover Norquist, a GOP political advocate and the well-known president of Americans for Tax Reform (which favors repealing 280E), opined that our GOP-led Congress may enact sweeping tax reform this year that would reduce the stress of 280E on state-legal marijuana businesses by lowering corporate income tax rates.

In case you missed it, 280E is the provision of the Internal Revenue Code creates such an onerous tax burden for cannabis businesses because it provides as follows:

“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”

Congress passed 280E in 1982 in response to a Tax Court ruling that a taxpayer could deduct expenses relating to his sales of cocaine, amphetamine, and marijuana. Deductible expenses included the costs of packaging, travel, and even scales used to weigh the illegal substances. This is no longer possible in the world of 280E.

Since cannabis is a Schedule I controlled substance, the IRS uses 280E to disallow marijuana businesses from deducting their ordinary and necessary business expenses. The result is that marijuana companies — regardless of their legality under state law –face higher federal tax rates than similar companies in other industries. There are differing opinions on the level of tax rates imposed on marijuana companies – from 40% to 70% to as high as 90% – all of which are higher than the 35% corporate tax rate paid by most other businesses in the United States.

But if Norquist’s predictions are accurate, there may be a bit of light at the end of the 280E tunnel for cannabis businesses. though if Norquist’s predictions are accurate. In an interview with MJ Business Daily, Norquist stated:

There’s a big tax bill this year – the tax reform package that takes corporate rates to 20% – which solves some of the problem for marijuana producers because now you’re paying 20% on all your sales instead of 35%. But we still need to get normal and reasonable and legal deductions made legal and normal for the marijuana industry, as well as for all other industries. Marijuana could get into that package if some of the libertarian Republicans made that a condition of voting for the whole package.

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So, as we build support for a fix, we need to build support state by state, where we say, “Look, you don’t want federal tax law used to gut the effectiveness of federalism. Because you could say something can be legal at the state level, but if the federal government is going to tax it into oblivion, you really haven’t allowed federalism at all.

Norquist then went on to predict these tax law changes will occur within the “next few years.” Though our cannabis tax lawyers do see cannabis tax changes coming, they are less confident than Norquist on timing. There has been no successful standalone 280E fix bill in Congress and the current presidential administration’s back and forth policies on marijuana legalization make predicting such federal action difficult. But with legalization in California and marijuana reform in 28 other states and more coming soon, the odds of Congress rectifying this tax situation are increasing. We cannot and should not expect favorable 280E changes from either the Tax Court or the IRS unless and until Congress mandates such changes. It is therefore good to know that such changes are at least on the table.

Cannabis lawyersJust about whenever Attorney General Jeff Sessions speaks, the cannabis industry panics. Stop it people.

This week Jeff Sessions gave an interview where he was asked about possibly using the federal Racketeer Influenced and Corrupt Organizations (RICO) Act to tackle legal marijuana. The media (the cannabis media in particular) have covered that interview as though it sets forth a roadmap for federal cannabis policy. And since that interview, probably every single cannabis lawyer at my law firm (in California, Washington and Oregon) has received at least one client call seeking an opinion on it.

Stop it everyone. Just stop it. Really. Sessions didn’t do anything in this interview but muse about a seldom used federal statute.

In this interview, Sessions hinted that he might be open to using RICO to pursue cannabis businesses in cannabis legal states:

INTERVIEWER: One RICO prosecution against one marijuana retailer in one state that has so-called legalization ends this façade and this flaunting of the Supremacy Clause. Will you be bringing such a case?

SESSIONS: We will, marijuana is against federal law, and that applies in states where they may have repealed their own anti-marijuana laws. So yes, we will enforce law in an appropriate way nationwide. It’s not possible for the federal government, of course, to take over everything the local police used to do in a state that’s legalized it. And I’m not in favor of legalization of marijuana. I think it’s a more dangerous drug than a lot of people realize. I don’t think we’re going to be a better community if marijuana is sold in every corner grocery store.

Of course he might be open to using RICO to pursue federal criminal law violations by cannabis businesses. I actually do not believe Attorney Generals Holder and Lynch, who were the Attorney Generals during the Obama Administration) would have answered this question substantively much differently. You are not going to get an Attorney General to say, “yes, we have this really important law on the books, but nobody worry because we will never enforce it. Just go ahead and violate it.” Really?

And if you listen to the entire interview here, you will hear Sessions poo-poo the benefits of bringing a RICO action against state-legal cannabis businesses:

INTERVIEWER: [I]t would literally take one racketeering influence corrupt organization prosecution to take all the money from one retailer, and the message would be sent. I mean, if you want to send that message, you can send it. Do you think you’re going to send it?

SESSIONS: Well, we’ll be evaluating how we want to handle that. I think it’s a little more complicated than one RICO case, I’ve got to tell you. This — places like Colorado — it’s just sprung up a lot of different independent entities that are moving marijuana. And it’s also being moved interstate, not just in the home state.

RICO was designed to pursue the mafia and other organized crime groups. RICO provides powerful criminal and civil penalties against people who engage in a “pattern of racketeering activity” and have a relationship to an “enterprise.” “Racketeering activity” includes roughly a hundred different offenses, including violations of the Controlled Substances Act. A “pattern” is established when an offense occurs more than one time in a given statutorily defined time period. An “enterprise” includes any individual, partnership, corporation, association, or other legal entity, and any group of individuals associated together even if they are not in a formal business relationship.

The broad interpretation of “enterprise” means that on a technical legal basis, RICO could pose a significant risk to cannabis businesses. The production and sale of cannabis is prohibited by the CSA and, therefore, regular sales of cannabis could serve as the predicate offense for a RICO charge and all those involved with legal cannabis sales, including vendors, contractors, landlords, lawyers, accountants, and even state officials could arguably be in an enterprise engaging in illegal activity.

But nobody should panic about this, not even close. RICO is a powerful but seldom used tool and that is because both prosecutors and judges view it as a very powerful weapon that should only be used in limited circumstances. The RICO statute has been around since 1970 and I cannot recall a single cannabis case having been brought under it. I am not saying there has never been such a case, but I am saying that it has been used sparingly in dealing with cannabis, if at all, including during Nixon’s “War on Drugs” and Reagan’s “Just Say No” administrations. In this same interview Sessions noted that the federal government has limited resources and it cannot simply commandeer local police forces to pursue RICO charges against cannabis users. RICO cases take a massive amount of effort to prosecute criminally and apparently not even Jeff (“good people don’t smoke cannabis“) Sessions deems this would be money and time well spent.

It also bears mentioning that a few years ago, some private citizens brought RICO claims against marijuana businesses and non-cannabis businesses alleged to have been operating in concert to sell cannabis. As we wrote here, the federal court dismissed those claims.

There is though one important thing cannabis businesses should take from this interview. Sessions is concerned about cannabis businesses that move marijuana from state to state. Note how he brings this up when he says: “it’s also being moved interstate, not just in the home state.” This IS important. The states are mostly in charge of prosecuting criminal activities that happen entirely within their own state borders. A robber in Portland or Seattle or San Francisco will almost certainly be prosecuted by state-city prosecutors; but a robber who brings stolen goods from Seattle to San Francisco could very well be prosecuted federally. The same has always been true of illegal drugs, including cannabis. If you are caught with weed in Newton, Iowa, you risk city or state prosecution. But if you are caught transporting cannabis from Iowa to Illinois, you risk federal prosecution.

So if you want to panic based on this Jeff Sessions interview, you should if you are planning to transport cannabis across state lines. The federal government has never liked interstate cannabis transport and it has always made this clear, as have we, in the following posts:

In Marijuana Law Myths. Not Everything Changes With Legalization, in Myth #2, we explain why it is so dangerous to fall for the myth that you can legally transport cannabis from one legal state to another and why this myth is so dangerous:

2. Now that marijuana is legal in Washington, Oregon, and Alaska, it is legal to sell Washington-grown marijuana in all three states. We hear this one ALL the time, mostly from marijuana businesses that intend to do this, believing it to be legal. It isn’t and please, please do not do this, unless you want to go to federal prison. The same holds true for Washington D.C., where marijuana was just legalized. You cannot just take your “legal” marijuana there and start selling it.

Taking legal pot across ANY state borders by boat or by car or by air is a big deal as it amounts to unlawful interstate drug trafficking.

More importantly, taking marijuana from one marijuana legal state to another is a federal crime. Marijuana is still a Schedule I Controlled Substance. The U.S. Constitution gives the federal government the authority to regulate interstate commerce. This means that it can (and does) prosecute people for transporting marijuana across state lines, even if the transport is from one marijuana legal state jurisdiction to another.

We are not saying that you should expect FBI agents to be sitting at the borders waiting to arrest people for going from one state to another with marijuana, but this is to say that traveling from state to state with marijuana is not advised, particularly by boat or by airplane. More importantly, a business plan that assumes this is legal is a business plan that will set you up to fail, especially if you publicly reveal that your business does this.

This is also a good time to remind you that if you are going to drive from state to state, clear out your cars, your boats, your airplanes, your clothes and your luggage before going from a cannabis legal state to one that is not. State troopers in states like Nebraska, Kansas, and Idaho (and even Nevada where cannabis is legal for medical us but not recreational) love making easy money by arresting and fining people entering with marijuana from Colorado and Washington.

Transporting a Schedule I Controlled Substance, including marijuana, across any state line is a federal felony. This is the case even if your medical marijuana patient card is honored in the next state over, and even if you are moving between jurisdictions that have legalized recreational marijuana. Keep and consume your cannabis in the state where you purchased it, or you run the risk of federal criminal charges for transporting a controlled substance.

So yeah, moving cannabis across state lines (yes, even from one cannabis legal state to another) is a really bad idea.

Oh, and one more thing, many (even some in the cannabis industry) are acting as though one RICO case would do what this interviewer says and “send the message” to all those in the cannabis industry to terminate all their employees and shut down their state-legal cannabis businesses. In other words, many are acting as though one RICO claim would be “lights out” for legalized cannabis all across the country.

This is absurd. The federal government has been trying to shut down cannabis for more than one hundred years, and for much of that time, it had overwhelming popular support for doing so. Today though, the majority of Americans favor legalization and those numbers keep getting better. Were the federal government to pursue “just one” RICO claim, it would likely be against a really large cannabis business that transported cannabis across state lines and I do not believe such a lawsuit would lead to a single state-legal cannabis business shutting down. If anything, it would be more likely to galvanize our country to legalize cannabis once and for all.

So please, nobody panic.

Cannabis due diligence
Know the red flags and find them.

Our marijuana business attorneys handle lots of purchase transactions for marijuana businesses. These deals often involve two sides rushing to complete a transaction handled by a business broker who doesn’t know or care about the applicable marijuana laws. The worst case scenario is when a company asks us to review a purchase agreement drafted by the seller without having done any due diligence on the potential purchase. Buyers of businesses (like investors) take the lion’s share of risk, which is why buyer due diligence is key. Before buying a cannabis business you should know exactly what assets and liabilities you will be taking on.

The below are the top 5 due diligence items you need to protect yourself and your money (for sellers, check out Preparing to Sell Your Marijuana Business):

  1. State and local law compliance. This is by the number one due diligence item for buyers. State and local law compliance varies greatly by state and by county and by city and you have to know what state and local licensing or permitting is required for a given marijuana business before you purchase it. I cannot tell you how many times we have had buyers come to us thinking they are buying a licensed marijuana business only to find out that the license is only pending and has not actually been issued or that the cannabis business is facing license revocation for rule violations, or that the municipal law has changed and the business must re-locate to continue operating. Before buying a cannabis business you should, at minimum, confirm that the company you will be buying is in good standing with the Secretary of State and the regulators and you should review its proof of licensing and permitting and its history of administrative violations, including any written warnings. If you fail to do this, you may find yourself with a cannabis business without a license to legally operate or that is about to lose it.
  2. State law procedures for ownership changes. Marijuana businesses are heavily regulated and there are onerous state law procedures in place for changes in ownership. Generally, the seller must disclose the buyer to the state and the buyer must be successfully vetted by the relevant regulators. Buyers and sellers of cannabis business cannot undertake these sales like any other business. No matter what any seller or broker may tell you as the buyer about the ease of the transaction, you as the buyer should ensure that the sale can comply with applicable state law requirements for changes in ownership and that the purchase and sale agreement accounts for the timing of performance obligations set forth in that purchase and sale agreement. We have had company’s come to us after the fact that have lost their earnest money for not closing quickly enough on deals where the closing date was impossible to meet from day one.
  3. Corporate authority. Ownership disputes are common in the marijuana industry because many marijuana operators still neglect (to their detriment) to put their corporate and contractual relationships in writing. We often see cannabis business buyers who (based on the word of a single seller in a multi-owner entity), believe they are free and clear to purchase all the stock in a corporation or all of the membership units in an LLC when they actually are not. Purchasers must get copies of all bylaws and subscription agreements when contemplating buying a corporation and they must get a copy of the current operating agreement for an LLC to know whether the seller has authority to sell their (or all of the) membership interests in the business. Failing to secure this authority will violate the seller’s corporate obligations and the sale can likely be undone. If all of the existing owners do not agree to the buy-out or transfer or there is a right of first refusal on sales or transfers, the buyer (and the seller) are going to have serious issues enforcing the purchase agreement.
  4. Real property. When you buy a business, you typically buy all of its assets, including any real estate it owns or has an interest in. Buyers therefore need to get a list of all real property owned and leased by the business that is to be sold. Most importantly, you want to know if the company you are seeking to buy is locked into a long-term lease or whether you’ll be able to re-locate it upon buying it. Many buyers have their own property on which they want to run the cannabis business and for these buyers, the ability to move the business can be key. If there is a lease, you want to know its terms and whether you can or want to comply with it. And because boilerplate leases don’t cut it in this industry, you need to make sure that lease sufficiently covers your issues when it comes to state and local law compliance and the federal law conflict.
  5. Financial liabilities. Again, because too many marijuana business owners don’t memorialize their business and corporate relationships in writing, you as the buyer must thoroughly vet the business’s financial liabilities. You want an agreement that requires the seller to have disclosed every handshake deal with every consultant, investor, and service provider so you know what you’re getting and to whom you’re financially obligated and so that if an undisclosed problem arises, it is the seller’s financial problem, not yours. This should include any instrument that grants a security interest from the cannabis business you are buying to a third party.

To mitigate against anything your due diligence investigation might miss, you need comprehensive and solid seller representations and warranties in the purchase and sale documents. But even skillfully crafted representations and warranties may not be enough to capture all of the liabilities that fall through the cracks, especially if your seller lacks the financial wherewithal to pay for them. So, do your due diligence or buyer beware.

Los Angeles Cannabis LawsCity of Los Angeles Voters Approve Measure M. The City of Los Angeles is making moves to change its current marijuana policies, which have so far made it impossible to start and operate a new cannabis business in the City. Yesterday, voters in the City were asked to decide between two ballot measures to repeal and replace Proposition D with one of two new cannabis ordinances that both regulate and permit marijuana businesses. Both ballot measures also opened up the opportunity for the City to permit activities besides retail sales by dispensaries, including cultivation, manufacturing, transportation, testing, as well as distribution. As of last night, Measure M was officially passed by voters, making the City of Los Angeles the largest municipal cannabis market to regulate cannabis businesses. The City Council hopes to have comprehensive regulation set up by September 30, 2017, and the existing 135 dispensaries operating in compliance under Prop D will be be first in line to receive city approval under the new regime. These 135 dispensaries just became even more valuable, and the “buying and selling” of those dispensaries will no doubt continue apace. For more on that, see How to “Sell” Your California Medical Marijuana Collective.

Los Angeles County May Lift Its Cannabis Ban Today. Today the Los Angeles County Board of Supervisors will hold a regular meeting to consider a plan for closing all unlicensed medical marijuana dispensaries within unincorporated areas of the County. The details of the proposed plan have not yet been ironed out, but the Board will be reviewing a yet to be submitted report from the Sheriff, District Attorney and County Counsel. If this plan is passed, the Los Angeles County Sheriff will be tasked with shutting down about 70 medical marijuana dispensaries currently operating in the County without a license. Since passage of Proposition 64, the Los Angeles County Sheriff’s Department’s Narcotics Bureau been cracking down on illegal marijuana dispensaries popping up throughout the County.

Los Angeles County currently has a ban on almost all marijuana activities. Since 2011, the County has banned marijuana dispensaries, and in 2016, the County extended the ban to include cultivation, manufacturing, testing, and distribution activities. For more on Los Angeles County’s cannabis laws and enforcement measures, check out The California Cannabis Countdown: Los Angeles County.

On February 7, 2017, the County Board voted ahead of time to extend its current ban on medical marijuana activities as well as implement a new ban on all recreational marijuana activities. During this meeting, the Board also requested the plan to close all unlicensed dispensaries that is being considered today and requested $25 million to fund the shut-down plan.

However, during this same meeting, the Board also voted unanimously to consider allowing marijuana businesses within the County, stating they “support moving from a ban to permitting and regulating the use.” The apparent softening of marijuana policies followed by the proposed plan to shut down all unlicensed businesses has left marijuana advocates in the County confused and concerned. They recommend that instead of punishing the unlicensed businesses, the County provide clear regulations and create a pathway for current operators to obtain a license and establish legitimacy.

Based on comments made by the Board, it is unlikely Los Angeles County will keep its ban in place, though they raised concerns about the state’s ability to meet the January 1, 2018 deadline to issue recreational licenses, the concentration of dispensaries in low-income communities, and increased access to marijuana by young people.

The shift in policies in both Los Angeles County and the City of Los Angeles is a welcome change in an area where there is a great demand from cannabis patients and consumers but a long history of unfriendly cannabis laws and enforcement. Though the County may ultimately shut down its current unlicensed businesses, it does at least look as though it will at the same time begin paving the way towards a regulated and legitimate local market.

What are your thoughts?

Cannabis laws on public eventsI’ve said it before and I’ll say it again–more state regulation of marijuana is going to lead to fewer and fewer cannabis cups and similar marijuana events and this in turn will force the purveyors of such events to get creative. Case in point: the 2017 High Times Cannabis Cup on the Moapa Band of Paiutes reservation in Nevada near Las Vegas. The most recent update on this particular Cup is that despite receiving two warning letters from U.S. Attorney David Bogden, the Tribe is moving forward this Saturday with the Cup as planned.

The High Times Cannabis Cup, and others like it, revolve around events that assess the cannabis and cannabis products submitted to them by local competitors. At their core, these cups are commercial boons for the sponsors who use them to increase their brand recognition and for the local marijuana businesses that perform well and can use their good performances to tout their products for months and years down the road. Having the right to label your cannabis products as a “High Times Best In (fill in the blank)” is not an honor to be taken lightly in the marijuana industry where such accolades can and do influence cannabis buying decisions.

Even cannabis-friendly states have myriad prohibitions against selling or even gifting cannabis without specific state operational licenses. And virtually all states prohibit consuming cannabis in public and even quasi-private spaces. For example, High Times had to cancel its cannabis cup in Seattle in 2015 because such an event would have violated Washington State’s “sampling” laws that allow only state-licensed marijuana businesses and not consumers to “sample” cannabis products. High Times also had to cancel its Cup in both Denver and Pueblo, Colorado last year because Colorado restricts public cannabis consumption. I assume High Times chose to host this upcoming event on Moapa tribal lands because Nevada’s medical marijuana laws would not allow for such an event and because the Tribe can enact its own ordinances allowing for such Cups.

Given the Wilkinson statement regarding Tribal cannabis from and the Cole Memo regarding federal enforcement of its cannabis laws, it’s easy to see why the Moapa Indians are trying their hand at hosting this Cup. Nonetheless, tribes that have tried to legalize or “medicalize” marijuana on their lands have been met with mixed reactions and enforcement by the federal government (see here, here, here, here, and here). The Moapa are no exception.

On February 16th and 23rd, U.S. Attorney Daniel Bogden sent “warning letters” to the Tribe concerning this upcoming cannabis cup, reiterating that marijuana remains federally illegal and that the Tribe has an “incorrect interpretation” of the Cole Memo and Wilkinson statement. Bogden’s letters also reminded the Tribe that neither the Cole Memo nor the Wilkinson statement alter the power of the federal government to enforce federal laws on tribal lands. At no point in his February 16th letter did Bogden threaten to shut down the Cup. But Bogden’s February 23rd letter states that his office communicated with tribal officials and his understanding is that no cannabis or cannabis products will be present at the Cup. He also writes that High Times’ promotion of this event mentions nothing about the prohibition on cannabis and he asks the Tribe to confirm their understanding on this prohibition matches his. Given that the heart of these High Times Cannabis Cups are the competitions for best cannabis products, one has to wonder if there’s any advantage to High Times having the Cup on tribal lands at this point.

Since Bogden’s warning letters come on the heels of White House press secretary Sean Spicer’s comments about the likelihood for increased federal enforcement in states with recreational marijuana programs, many are wondering if Bogden’s actions are the beginning of what “increased enforcement” may look like. We do not believe so; we think this federal intervention is just another example of the Department of Justice’s continued unpredictable treatment of tribes and cannabis and its varying regional positions on cannabis.

Time will surely tell…

California marijuana
Bears are tough animals, and California will fight hard for its cannabis laws.

Last Thursday, White House Press Secretary Sean Spicer stated during a press conference that we should expect to see greater federal enforcement against recreational marijuana use and in the following days the cannabis industry had a lot to say in response. Representatives from several states, including Washington, have spoken out against potential federal enforcement, saying they will fight any attempts by the federal government to interfere with their legalized marijuana systems. We want to assure you that California is ready to fight back as well. (Though not everyone in California is on the same side; we’re looking at you San Bernardino City Council.)

The day after Secretary Spicer’s statements, California elected officials announced that they were preparing for a potential showdown in the courts and Congress to defend recreational cannabis under Proposition 64, which the state’s voters passed in November. California Attorney General Xavier Becerra said:

I took an oath to enforce the laws that California has passed. If there is action from the federal government on this subject, I will respond in an appropriate way to protect the interests of California.”

California Lieutenant Governor Gavin Newsom called Spicer’s remarks “grossly uninformed” and sent a letter to President Trump where he wrote:

The government must not strip the legal and publicly-supported industry of its business, and hand it back to drug cartels and criminals. Dealers don’t card kids. I urge you and your administration to work in partnership with California and the other eight states that have legalized recreational marijuana for adult use in a way that will let us enforce our state laws that protect the public and our children, while targeting the bad actors. We have a shared goal of reducing crime, and the best way we can achieve that is through a tightly regulated market.”

If the federal government chooses to move forward with marijuana enforcement, we provided an idea of what that might look like based on the options the feds can pursue. Though the federal government won’t be able to force states to shut down their marijuana programs or to enforce federal law under the Constitution, they could try to coerce local law enforcement into assisting them.

However, California already has measures in place to undercut the federal government’s ability to coerce local law enforcement through proposed Assembly Bill 1578, which would prohibit state and local agencies from assisting federal agencies against California’s legal medical and recreational marijuana businesses without a court order.

Spicer’s comments did not include specifics on how the federal government would proceed, plus he does not have the authority to make these types of decisions, so we have our doubts on whether the feds will make good on his threats. in any event. And since the Trump Administration has held out medical cannabis as good and recreational/adult use cannabis as bad, what would happen were California (or any other state) to call all cannabis “medical” and to give any cannabis “patient” who fills out a free online “medical” form access to cannabis so long as they check something like “occasional pain” or “sometimes sad” or “sometimes agitated” as qualifying symptoms for medical cannabis use?

The California Bureau Medical Cannabis Regulation has expressed its intent to continue “full speed ahead” on drafting state regulations for medical and state cannabis licenses until they see a formal plan from the federal government. For now, it’s business as usual for California’s cannabis companies and license hopefuls, but if the federal government does try to interfere know that the state is behind you.

tenth-amendmentYesterday, we wrote about the various ways that enforcement of federal cannabis laws could ensue, if the current administration were bullheaded enough to attempt such a thing. The day before, we wrote about the Washington State Attorney General’s promise to fight any potential enforcement action. Today, we offer a brief primer on what rights the states may have to uphold their medical and recreational marijuana programs in the face of federal enforcement action. The answers may surprise you.

As a baseline matter, it is imperative to note that Article VI, Clause 2 of the U.S. Constitution declares that federal law is “the supreme law of the land,” preempting conflicting state laws. This means—and courts have confirmed—that if the federal government wants to enforce its draconian marijuana laws by targeting specific actors, it can, and states cannot stand in the way. However, if the federal government wants to force states to shut down their marijuana programs, or to use state resources to enforce federal law, it probably cannot.

The constitutional question that will determine the outcome of any lawsuit to invalidate state cannabis laws, whether for medical or recreational marijuana programs, is whether those state laws impermissibly conflict with the federal Controlled Substances Act (CSA). Another way of asking this would be: “Does the federal CSA ‘preempt’ state cannabis programs?” Given the plain language of the CSA, we think the answer is “no.”

Section 903 of the CSA includes express anti-preemption language:

No provision of this subchapter shall be construed as indicating an intent on the part of Congress to occupy the field in which that provision operates, including criminal penalties, to the exclusion of any State law on the same subject matter which would otherwise be within the authority of the State, unless there is a positive conflict between that provision of this subchapter and the State law so that the two cannot consistently stand together. (Our bold emphasis.)

What would a “positive conflict” with state law be? It may sound funny, but a positive conflict might consist of a state law requiring a citizen or state official to possess or distribute marijuana. Such a law would almost certainly violate the CSA. But, state marijuana programs that only permit individuals to traffic in federally controlled substances—because states do not proscribe them—make no such requirement. Think about it: anyone in Oregon, Washington, California, or any other state with a cannabis program, is free to ignore these state programs and follow federal law.

This begs the question as to whether the federal government could require states to shut down their programs, and assist in enforcing its horrible laws. Again, we think the answer is “no.” The Tenth Amendment to the Constitution serves as a constitutional check to the Supremacy Clause. The Tenth Amendment provides that the federal government cannot “commandeer” states by forcing them to enact laws in the federal interest, or to enforce federal laws whatsoever. In the context of cannabis, this means that neither Congress nor any federal actor can require states to enact or maintain laws prohibiting the cultivation, distribution or intra-state sale of pot.

The upshot here is that the Tenth Amendment, coupled with the express, anti-preemption language of the federal CSA, grants the states authority to run cannabis programs. This paradigm gives the states a strong argument in any potential lawsuit by the feds seeking to shutter those programs. Thus, the extremely tall and unpopular task of chasing state-approved pot merchants, would be left to the resource-poor federal government. And if the federal government really wants to go there, well, we’re in for another kind of fight.

Recreational marijuanaWhite House Press Secretary Sean Spicer spoke today at a press conference on how he expects the Department of Justice to handle state-legal marijuana in America. In response to a question on how the Trump Administration will handle recreational marijuana, Spicer had this to say:

Well I think that’s a question for the Department of Justice . . . I do believe you’ll see greater enforcement of it. Because again there’s a big difference between the medical use … that’s very different than the recreational use, which is something the Department of Justice will be further looking into.”

There’s a big difference between [medical marijuana] and recreational marijuana, and I think when you see something like the opioid addiction crisis blossoming in so many states around this country, the last thing we should be doing is encouraging people. There is still a federal law that we need to abide by when it comes to recreational marijuana.”

Regardless of Spicer’s factually wrong take on the relationship between marijuana and opioid use, marijuana industry folks should not fret just yet.  Out of everything Spicer had to say, the key point is that marijuana enforcement falls on the Department of Justice and Attorney General Jeff Sessions. The job of the Press Secretary is “to act as spokesperson for the executive branch of the United States government administration, especially with regard to the President, senior executives, and policies” and the fate of the marijuana industry is not going to be decided in one White House press conference by the White House Press Secretary. The Department of Justice has so far declined to comment on Spicer’s briefing. It also bears mentioning that the Cole Memo setting out how the Department of Justice will treat state-legal marijuana (both medical and recreational) is still alive and well.

The bottom line. Though it is certainly unsettling to listen to Spicer predict increased enforcement of recreational marijuana businesses and to use stupid opium trope to boot, it is not time to lose heart or cash out. Will the jobs-focused Trump Administration really want to shut down cannabis businesses in multiple states and add a slew of hard-working people to the unemployment rolls? I don’t think so, but of course only time will tell.

 

California cannabis lawyerLast week, California lawmakers introduced a new bill to increase protections for California cannabis businesses from federal persecution. The timing couldn’t be better as a new president and incoming federal administration have many in the cannabis industry concerned about the future of legal marijuana in the United States.

California Assembly Bill 1578 would prohibit California state and local agencies from taking certain actions and assisting federal agencies in enforcing federal law against marijuana businesses for medical or recreational cannabis activities authorized under California law.

The prohibited activities would include:

  1. Using agency money, facilities, property, equipment, or personnel to assist a federal agency to investigate, detain, detect, report, or arrest a person for commercial or noncommercial marijuana or medical cannabis activity authorized by law in the State of California.
  2. Responding to a request made by a federal agency for personal information about an individual who is authorized to possess, cultivate, transport, manufacture, sell, or possess for sale marijuana or marijuana products or medical cannabis or medical cannabis products, if that request is made for the purpose of investigating or enforcing federal marijuana law.
  3. Providing information about a person who has applied for or received a license to engage in commercial marijuana or commercial medical cannabis activity pursuant to MCRSA or AUMA.
  4. Transferring an individual to federal law enforcement authorities for purposes of marijuana enforcement or detain an individual at the request of federal law enforcement for conduct legal under state law.

State and local agencies would only be allowed to take these actions if they receive a court order signed by a judge. Thus, AB 1578 would protect California cannabis businesses that are operating legally in the state from being handed over to federal law enforcement unless a judicial exception is made.

The bill is similar to other legislation proposed by California lawmakers and signed into law by California Governor Jerry Brown in September of last year. In Assembly Bill 2679, California lawmakers provided guidance for cannabis manufacturers currently operating in the state to increase their protection against misguided raids by local law enforcement. Then, under Senate Bill 443, California lawmakers revised the state’s asset forfeiture laws to reduce the risk of unfair property seizure by state and local law enforcement. SB 443 prohibits state and local law enforcement from transferring property seized under state law to a federal agency and also requires state agencies obtain a criminal conviction to receive a share of federally seized property or to recover their expenses.

If approved and signed into law, AB 1578 would be a good step to ensuring California cannabis businesses and consumers that the state of California is behind them and that it will not allow the federal government to interfere with their licensed and compliant cannabis businesses, at least not by providing the help of any state or local agencies.

How to sell a California cannabis businessSince passage of the Medical Cannabis Regulation and Safety Act (“MCRSA“) and Proposition 64, one of the top questions our California marijuana lawyers have been getting from existing medical marijuana operators is “how can I sell my medical marijuana collective?” Of course, many collectives are not hard-pressed to find willing buyers. In the City of Los Angeles, for example, where only 135 Proposition D-compliant dispensary collectives are allowed to exist (which will also receive priority status from the City under the MCRSA and Prop. 64 in the event Measure M passes on March 7th), buyers are lining up to try to buy LA dispensaries that can get them into that market. There is also plenty of buyer interest in other California collectives that can demonstrate continuous operation and good standing with their local jurisdictions to qualify for “priority status” under both the MCRSA and Prop. 64.

But here’s the big issue: neither the MCRSA nor Prop. 64 repealed Proposition 215 and Senate Bill 420, which together make up California’s current and very vague medical marijuana laws. What this means is that all medical marijuana collectives must still operate as non-profit entities unless and until the application period opens for licenses under the MCRSA or Prop. 64. And just to further complicate matters, “collective” is an industry term of art; it is not a specific type of California legal entity and you are not going to find it in the California Corporations Code. One of the main reasons for California’s “collective model” is that the California Attorney General’s office issued a memo in 2008 with its interpretation of the medical marijuana laws that concluded those laws forbid the sale of medical marijuana for profit and, therefore, only “non-profit operation” would be allowed in the event qualified patients were to “collectively or cooperatively” cultivate and distribute medical cannabis to other qualified patients.

As a result of that 2008 memo, most qualified patients form nonprofit entities to handle their “commercial” medical marijuana activity. They typically form nonprofit mutual benefit corporations (“NPMBCs”) that they refer to as “collectives.” In turn, it isn’t possible to “buy” a collective. Why? Because there’s no equity or stock to purchase. Of course, there are other solutions to this non-profit conundrum, but they must be carefully considered and well thought out by both a prospective purchaser and the collective.

In NPMBCs, the articles of incorporation and the bylaws govern the collective’s every move and decision–but the bylaws really govern the day-to-day activity and decision-making authority of the members. For example, NPMBC bylaws will have provisions that dictate, among a slew of other things, admission of new qualified patient members and what they must do to maintain their membership in the collective. In addition, well-drafted bylaws also typically will address the voting rights of the members and directors. Under the California Corporations Code, a prospective purchaser cannot buy the stock of a NPMBC (because none is authorized or issued). The California Corporations Code does however permit membership transfers if the collective’s bylaws allow them, and these transfers are fairly unrestricted unless the bylaws specifically create restrictions around them.

Section 7320 of the Corporations Code governing NPMBC membership transfers states the following regarding the transfer of membership rights:

Subject to [member voting restrictions in the bylaws]:

(a) Unless the articles or bylaws otherwise provide:

(1) No member may transfer a membership or any right arising therefrom; and

(2) Subject to the provisions of subdivision (b), all rights as a member of the corporation cease upon the member’s death or dissolution.

(b) The articles or bylaws may provide for, or may authorize the board to provide for, the transfer of memberships, or of memberships within any class or classes, with or without restriction or limitation, including transfer upon the death, dissolution, merger, or reorganization of a member.

(c) Where transfer rights have been provided, no restriction of them shall be binding with respect to memberships issued prior to the adoption of the restriction, unless the holders of such memberships voted in favor of the restriction.

The ideal situation is usually one where the bylaws create two classes of membership: usually directors who manage the NPMBC and qualified patient members who access the NPMBC for medical marijuana, with the directors being the only ones who vote on management decisions affecting the NPMBC. The bylaws usually also allow for director membership transfers (presumably with a fee), without requiring a vote of every single qualified patient who has ever become a member of the NPMBC. In turn, directors can sell their memberships to prospective buyers who can then take over and operate the NPMBC until MCRSA and Prop. 64 licensing.

Unfortunately, nearly all of the NPMCB bylaws our California cannabis lawyers have seen on the deals on which they have worked are a mess, largely because most of the lawyers in California that do cannabis law are criminal lawyers not corporate transactional lawyers. Much of the time, the NPMCB bylaws do not contain a provision allowing for membership transfers or they require every single member of the collective vote on such a transfer because they lack multiple membership classes or voting exceptions. In these situations, it is sometimes possible to set up a system where the departing directors provide notice to every single qualified patient member that new directors could take over the board of directors and those new directors might vote to pay the departing directors a fee for services to be rendered to the NPMBC after-the-fact. For example, the new directors could vote to hire the departing directors in a consultant capacity and pay them a fee for that work. Though neither ideal nor efficient, this is one of various workarounds that can be done to transition the management of an NPMBC with bad bylaws.

The bottom line is that non-profit collectives cannot be “purchased,” and it takes good bylaws (or convoluted workarounds) to be able to transition from one group of directors to another. So, if you are looking to “sell” or “buy” a California cannabis business, be sure that the relevant bylaws allow for such a change and that your transition documents are in-line with what the bylaws actually allow. If such care isn’t taken, the buyer can be left with nothing but an empty wallet and the collective may find itself in direct violation of California’s Corporations Code and an expensive and painful lawsuit as well.