California cannabis rulesAt a Sacramento conference I attended last week, a panel of California’s cannabis regulators discussed the status of the state’s new cannabis laws under the Medicinal and Adult Use Cannabis Regulation and Safety Act (“MAUCRSA” a/k/a SB 94) that aim to reconcile California’s 2015 Medical Cannabis Regulation and Safety Act (MCRSA) and the 2016 Adult Use of Marijuana Act. MAUCRSA comes on the heels of a comprehensive set of proposed MCRSA regulations (see here, here, herehere, and here) and a slew of pubic hearings and commentary on those proposed rules. According to regulators, they are now incorporating public comments as well as MAUCRSA into their efforts to finalize the licensing rules before licenses begin to issue in January 2018.

Here are some of the potential changes to the MAUCRSA regulations discussed at Monday’s panel:

  1. The MCRSA proposed rules will be withdrawn in full, and new MAUCRSA rules will likely come in the fall that cover both medicinal and adult use. Some regulations likely will change from their current MCRSA form, but what likely won’t change is the license application requirements, and the state expects to begin issuing temporary licenses in early December for applicants with prior local approval. The temporary licenses will be good for only four months, though, and these licensees will still have to go through the full application process.
  2. Based on public feedback received to date, the regulators expect some cultivation rules to change, including the definitions for “mixed light,” “indoor,” “outdoor,” and “owner.” Also, the requirement for 42% renewable source energy for indoor grows will likely be revised to define exactly what qualifies as a renewable source and to potentially alter the percentage mandated, though it is unclear whether that would increase or decrease.
  3. MAUCRSA allows individuals to hold both medicinal and adult use licenses but only if there are located at “separate and distinct” premises. The MAUCRSA regulations will aim to clarify what “separate and distinct” means, and regulators on the panel didn’t seem to want a strict interpretation of that term so as to require entirely separate parcels, but instead discussed the possibility of allowing “physical barriers” of some sort between separately licensed medicinal and recreational activities.
  4. Under California’s existing Compassionate Use Act, medical cannabis operators have utilized mostly non-profit mutual benefit corporations as the preferred corporate form for compliance. What MAUCRSA doesn’t do is explicitly clarify how these non-profits might transition to for-profit companies without jeopardizing their licenses or prior local approval or triggering regulator scrutiny. The regulators acknowledged that this omission in MAUCRSA may foreclose specific regulation on the subject until further “cleanup” legislation is handed down from the legislature.

Though the public comment period on the MCRSA proposed rules has already passed, regulators stressed that they welcome further feedback from cannabis industry stakeholders ahead of their releasing proposed MAUCRSA regulations in the fall. They made clear that public input is an essential element of making sure California “gets it right” on developing and regulating a successful and safe recreational and medical cannabis industry.

To help you better understand what MAUCRSA means for your cannabis business, three of our California attorneys will be hosting a free webinar on August 8, 2017 from 12 pm to 1 pm PT. Los Angeles-based Hilary Bricken will moderate two of our San Francisco-based attorneys (Alison Malsbury and Habib Bentaleb) in a discussion on the major changes between the MCRSA and MAUCRSA, including touching on vertical integration and ownership of multiple licenses, revised distributorship standards, and what California cannabis license applicants can expect more generally from California’s Bureau of Cannabis Control as rule-making continues through the remainder of the year. They will also address questions from the audience both during and at the end of the webinar.

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

California cannabis financing

For cannabis companies in California, 2017 is a period when neither companies nor investors are living in the moment. In addition to all of the risk factors cannabis investors need to heed, everyone is planning for future uncertainty because of  the recent passage of MAUCRSA. The state is currently working on MAUCRSA regulations, and local governments are changing policies with what seems like every public hearing – not to mention comments from our federal leadership that seem tailor-made for cooling investment into cannabis companies (the job creators!).

At the same time, California cannabis companies need funding now to scale up their operations in anticipation of future licensure under MAUCRSA and to appease local regulators through local licensing and permitting processes. The result of all this is that our California cannabis lawyers are seeing and working on many deals involving hybrid financing structures – an element of cash investment now, and warrants, options, and convertible debt later. Each has different triggers and rights for the cannabis company and investors, but all are in essence a different form of “kicking the can down the road” to 2018.

Three big factors are driving hybridized financing in The Golden State:

1. Regulatory Uncertainty and Red Tape.

Investors inherently accept risk in any investment, but they do not enjoy reading the tea leaves on major issues that are out of the control of company and investor – any of which could pose an existential threat to their entire investment. This means investors are searching for creative ways to mitigate these risks, and risks abound in cannabis regulations that change pretty much all the time. Many cannabis investors are uncertain whether they want to cross the 20% ownership threshold to be considered an “owner” under MAUCRSA, which ultimately requires they be disclosed to and heavily vetted by California state regulators.

2. License Transfer and Corporate Structuring Issues.

California’s draft cannabis business regulations make clear that future licenses are not transferable. And many local governments are also making sure cannabis operators cannot transfer their permits or local licenses after-the-fact. Further, most existing medical cannabis operators are organized as non-profit entities pursuant to Proposition 215, and there’s an outstanding question as to whether these entities will be able to merge into for-profits once they have their state licenses under MAUCRSA, though such a move could potentially jeopardize state and local licensure altogether. Though all parties should undertake their cannabis financings with this knowledge, investors understandably still want to reduce risk by withholding some of their investment until 2018 when more of these questions will likely have been resolved by state and local governments.

3. The Size of the Opportunity.

In the last two weeks, we’ve seen the situation in Nevada where despite a 33-37% tax on all retail sales, dispensaries simply cannot keep up with demand and are selling out of supply. In the event California has a similar supply crunch, we are seeing investors in California cannabis cultivators seeking warrants or options as a “kicker” for additional upside – more equity in the event the opportunities prove even greater than anticipated.

This is not to say that investors are dictating all terms in the world of cannabis finance. Cannabis companies, too, can and do negotiate for control of the trigger points or adjustments to the future exercise price (or regulatory triggers). Some cannabis companies are choosing hybrid investment structures because they, too, want to feel out the size of the opportunities and many believe they will be able to demand much greater valuations and investment terms in 2018, once the initial dust settles on the regulatory sphere.

What are you seeing out there by way of California cannabis funding?

 

The cannabis movement has always had a benevolent streak. Many people produce and disseminate the plant to alleviate illness and suffering. Others support legalization for social justice reasons– unwinding the prison industrial complex, for example. And still others are simply interested in solving hard problems, such as the outsized environmental footprint of cannabis grows. When people of this general orientation approach our cannabis attorneys to start cannabis businesses, they often ask about “benefit company” status.

Over the past several years, most states in the U.S. have adopted benefit company statutes. Generally speaking, a benefit company is a type of corporation or limited liability company that considers its impact on society in making decisions. Sometimes, B Corps and B LLCs are said to have a “triple bottom line” which includes not just profits, but also the community and the environment. A few well known benefit companies include Patagonia and Ben & Jerry’s.

Because of the triple bottom line ethos, benefit companies do not impose a strict duty on their directors, officers, managers or members to maximize profits. This differs from a traditional corporation, where governing individuals can be exposed to shareholder litigation for failing to make decisions that maximize profits. Cannabis entrepreneurs, like business people in other industries, may find this element of benefit company status attractive.

Benefit companies may sound a bit like non-profit corporations, but they aren’t. For state and federal tax purposes, benefit companies are considered for-profit entities. They also tend to be structured no differently than for-profit companies, in terms of underlying company paper and personnel. Benefit companies do behave like non-profits in the sense that they are mission-oriented, but that’s about it.

Almost all states now accept benefit companies and follow the model B Corp legislation, which hasn’t been around all that long. As a result, the process of becoming a benefit company is fairly consistent from state to state. Some especially progressive states, like Oregon, have adopted a broader version of the benefit corporation law that allows founders to form benefit LLCs, in addition to corporations. In the Oregon cannabis industry, we have formed both kinds of companies.

In most states, forming a benefit company isn’t terribly difficult: as far as filing, it’s typically a “check the box” election that is made in the entity’s Articles of Organization (LLC) or Articles of Incorporation (corporation). It’s what comes after the election that takes some thought. The benefit company is required to adopt a third party standard to judge its efforts to accomplish a public benefit (such as the B Labs Impact Statement). Each year, the company must also draft a benefit report detailing its efforts in achieving its public benefit, and distribute the report to its owners and through its website.

Benefit companies often help owners and investors feel good about their enterprises, and, from a branding point of view, the B Lab certification is a great look. Looking back, the cannabis industry has made big strides over the past few years with respect to community integration and acceptance. Let’s see whether recreational pot businesses continue to embrace the benefit model, especially as key states like California come online in 2018.

California cannabis leaseCommercial leases for cannabis businesses are unique and require special considerations for risk management during the tenancy. Commercial cannabis leases in California are prone to the following pitfalls inherent in a landlord doing business with a cannabis tenant, and these risks should be considered when deciding how to structure your landlord-tenant relationship:

  1. Accepting ownership in the cannabis tenant company. Buying and selling shares in privately held cannabis companies can trigger state and federal securities laws and create regulatory problems under California’s cannabis licensing program. A landlord’s acceptance of an ownership share from a tenant in lieu of or in addition to rent can jeopardize the cannabis tenant’s California state cannabis license status. California’s proposed cannabis rules define an “owner” as a person with 20% or more ownership in the licensed cannabis company, a CEO or board member with 5% or more ownership in an entity with 20% or more ownership in the licensed entity, or any individual that exercises “direction, control, or management” of the licensed business. All such “owners” are subject to thorough background checks as part of the company’s ability to acquire and maintain its cannabis business license. A change in ownership or control puts the tenant’s license at risk of being revoked, harming both landlord and tenant.
  2. Receiving cannabis product as rent payment. Though cash-poor cannabis tenants may have trouble finding financing, they usually have plenty of valuable cannabis product. But for the same reasons landlords should avoid accepting ownership in their cannabis tenants business entities, they should also avoid accepting cannabis product as well. Not only does a tenant providing its landlord with cannabis jeopardize the tenant’s license (and thus the landlord’s source of rent revenue), it also exposes the landlord to liability for operating as an unlicensed cannabis merchant. California’s proposed cannabis rules strictly control who can and cannot handle or accept cannabis product as part of a licensed operation, and circumventing those strictures exposes both landlord and tenant to liability.
  3. Profit/revenue sharing. Commercial leases for garden-variety business tenants sometimes include terms requiring the cannabis tenant pay a certain percentage of its profits or revenue to its landlord in addition to or as part of rent. Though this sort of arrangement can be advantageous in other situations, it raises problems for cannabis tenancies since receipt of profits or revenue specifically tied to cannabis sales can expose the landlord to liability for unlicensed cannabis activity as a de facto owner. 
  4. Liens for build-outs. Indoor agricultural grows require unique environmental control systems and this in turn often means cannabis tenants must engage in expensive build-outs. Landlords may want to seek lease provisions ensuring all alterations be authorized in writing beforehand, that the landlord acquires no ownership or benefit from any alterations, and that all alterations must be removed when the tenancy ends unless the landlord elects otherwise, in addition to serving notices of non-responsibility where appropriate. Essentially, landlords will want to avoid allowing build-outs that might result in liens filed against their real property. On the other hand, the landlord may want to be involved in the build-out to outfit the facility to its own preferences. In other words, landlords should seek to avoid unintended entanglements while structuring their leases to reflect their intent.
  5. Access and security. Though landlords typically want commercial cannabis leases to allow them access at any time with reasonable notice for things like maintenance, inspections, and showings, the situation is different for cannabis business tenants. California’s proposed cannabis rules under the Medical and Adult Use Cannabis Regulation and Safety Act (MAUCRSA) require cannabis tenants to set up and maintain a rigorous security protocol that only allows product to be handled by authorized individuals, and that only allows authorized individuals to access the premises. Unfettered access by a landlord will likely raise problems with California’s cannabis regulators, and with good reason. Part of the rationale for complying with strict state-mandated security requirements is to further federal enforcement goals, such as preventing diversion of product to minors or to states where cannabis has not been legalized. By failing to sufficiently regulate access in the lease, the landlord can unintentionally entangle itself with the operations of the licensed cannabis entity and thereby place its tenant’s cannabis license in jeopardy.

Bottom Line: California commercial cannabis tenancies benefit from being kept as arms-length transactions so as to protect against problematic entanglements, both intended and unintended and any proposed tenancy should be analyzed with this goal in mind.

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

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

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

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

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

Specifically, the McCart Plaintiffs allege that:

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

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

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

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

But what about the other McCart defendants?

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

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

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

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

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

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

Washington state cannabis compliance
Prohibition lives on in Washington State’s cannabis laws

Washington State continues to regulate intra-industry cannabis transactions more than just about any other state. When Washington voters passed I-502, they did so based on a campaign that said we should regulate cannabis like we do alcohol. It turns out that certain legacy alcohol-style regulations can be extremely onerous and simple business transactions that most people wouldn’t imagine could violate any rules can get marijuana licensees into hot water.

The term “tied-house” refers to a statutory scheme implemented for alcohol in the wake of prohibition to regulate both the marketing and cross-ownership of licensed operations. The goal of a tied house regime is to prohibit vertical integration or dominance by a single producer within the marketplace. These rules were also intended to discourage bribery and certain predatory marketing practices and overconsumption of alcohol. The whole idea was that if things were sufficiently difficult for the businesses involved, it would somehow lead to less alcohol use by the populace. It’s like a reverse version of trickle-down economics.

The Washington State’s Liquor and Cannabis Board’s most recent update newsletter specifically brings up Washington’s implementation of tied-house rules in the marijuana marketplace under both RCW 69.50.328 and WAC 314-55-018. We’ll focus on the WAC — the rules issued directly by the WSLCB. In terms of my Washington State cannabis regulatory practice, this rule is the one that comes up the most often by far. WAC 314-55-018 broadly prohibits various practices, including:

  • Any agreements that would cause one industry member to have “undue influence” over another industry member;
  • Any advances, discounts, gifts, loans, etc. from a producer/processor to a retailer;
  • Any contract for the sale of marijuana tied to or contingent upon the sale of something else, including other marijuana.

These prohibitions can be extremely broad in scope. They prohibit any type of agreement for the sale of more than one shipment of product, so a cannabis retailer and a cannabis producer/processor cannot enter an agreement where the retailer agrees to be bound to purchase regular monthly shipments of product. Every transaction must stand alone pursuant to its own purchase order. Recently, and as repeated in its newsletter, the WSLCB has focused on producer/processors that want to provide display equipment to retailers. The WSLCB’s position is that, under WAC 314-55-018, even a lease of a branded display case would constitute a “loan” in violation of this section. This type of arrangement — the leasing of branded display coolers from manufacturers to retailers — is common in other industries.

Confusingly, section (1) of WAC 314-55-018 contains a caveat that states, “This rule shall not be construed as prohibiting the placing and accepting of orders for the purchase and delivery of marijuana that are made in accordance with usual and common business practices and that are otherwise in compliance with the rules.” However, that caveat only applies to agreements that would otherwise create “undue influence” in Section 1 — it doesn’t mean that contracts that violate the LCB’s interpretation of the other sections are okay so long as they are part of usual and common business practices.

Regulations like WAC 314-55-018 have a few different effects. They are vague enough that it is difficult to tell whether an activity is or is not prohibited, which drastically increases compliance costs for cannabis businesses that either pay their attorneys to review transactions or try to get an answer from an LCB enforcement officer — a process that can take an extremely long time and often leads to inconsistent answers given by different LCB officers. To give you an idea of the scope of these issues, we have roughly an equal number of cannabis clients in the three states in which we mostly practice (California, Oregon and Washington) and we probably see double the compliance problems in Washington as in the other two states combined). The risks to these companies range from fines to a termination of their cannabis license.

These complicated compliance issues also create a situation lawyers dread — what to do when your clients want to follow the lead of market participants that openly violate the rules. Many cannabis industry members are willing to ignore the rules and enter into sales agreements or other agreements that technically violate WAC 314-55-018. This, in turn, disadvantages those that seek to remain compliant. When the LCB then doesn’t consistently enforce those rules, it maintains the disadvantage for the compliant industry members.

Tied-house rules are always going to be annoying to industry participants — that is the point. They are purposeful wrenches thrown into the works of the open market because government believes an open cannabis market would lead to intemperance. These same rules don’t exist for apples because the government doesn’t care if you eat too many apples, but it doesn’t want you to smoke too much marijuana or drink too much. There isn’t a clear logical line between tied-house rules and a reduction in either intemperance or corruption, but the rules do seem to be here to stay and this means industry members should stay on top of current interpretations to make sure that their deals are not running afoul of Washington rules.

Oregon Cannabis laws
Oregon’s Cannabis Laws

Last week, the 2017 Oregon legislative session came to an end and it wound up basically how we thought it would. During the five-month term, the Oregon legislature passed a raft of cannabis bills related to medical marijuana, adult use pot, and industrial hemp. In addition to the new laws (which I’ll get to in a minute), this session was notable for the dissolution of the aptly named Joint Committee on Marijuana Regulation. The Joint Committee was created over two years ago for the express purpose of implementing Oregon’s Measure 91. Now that the Joint Committee has dissolved, you can expect to see fewer bills on cannabis going forward: most of the work to shape legislation and public policy is done in committee.

With no more Joint Committee and only a short legislative session to look forward to in 2018, industry players can only prepare for what probably feels like water torture at this point: the seemingly never-ending treacle of administrative rule-making by the Oregon Liquor Control Commission (adult use / recreational, and now medical marijuana); Oregon Health Authority (strictly medical marijuana) and Oregon Department of Agriculture (industrial hemp). Each of these agencies will make rules to implement and interpret Oregon’s revised cannabis statutes, as summarized below.

Senate Bill 1057. This was the big one, which, among other things: (1) requires medical growers use the METRC tracking system; (2) establishes immature plant limits for medical growers; (3) allows OLCC licensees to declare themselves as exclusively medical cannabis growers; and (4) assigns all cannabis labeling operations to OLCC. For a full list of the SB 1057 provisions and our take on their impact go here.

Senate Bill 56. Because the immature plant limitation in Senate Bill 1057 had many people freaked out, especially medical growers in transition to OLCC, the legislature quickly scrambled to pass SB 56, which suspends the immature plant limitation for a premises at which an OLCC application was pending as of June 23, 2017. This one seemed to make sense to everyone. The new law also allows for limited cannabis processing by small, licensed OLCC producers (<5,000 square feet of canopy; water or mechanical extraction only) and provides for the immediate suspension of any marijuana license for diversion of product to the illegal market.

Senate Bill 302. This bill removes provisions related to marijuana offenses from the state Uniform Controlled Substances Act. It also removes and/or reduces various criminal penalties related to marijuana crimes by unlicensed operators. The thrust of this bill was to treat marijuana crimes more like alcohol crimes, and it achieves that purpose. Because penalties for marijuana offenses were scattered throughout the Oregon statutes, this one has an enormous amount of tedious, conforming amendments, to something like 125 statutes.

Senate Bill 303. This law is similar in nature to SB 302. It amends, clarifies, and reconciles statutes related to minors possessing and purchasing both cannabis and alcohol. Generally speaking, it should have little effect on the cannabis industry.

Senate Bill 863. This one concerns consumer privacy, and it serves as a further attempt by Oregon to shield its citizens’ information from the federal government. The new law prohibits marijuana retailers from recording, retaining and transferring “information that may be used to identify a consumer.” This bill was short, sweet and non-controversial.

Senate Bill 1015. This new law provides that industrial hemp growers may transfer hemp to OLCC licensed processors. Similarly, industrial hemp handlers may transfer both hemp concentrates and extracts to processors. Expect a fee and some forms.

House Bill 2197. This is a neat bill that passed toward the end of the session. It allows the Oregon Department of Revenue to enter into agreements with the governing body of federally recognized Indian tribes (read: The Confederated Tribes of Warm Springs). Under those agreements, the State of Oregon would make rebate payments to the tribes for the estimated tax on marijuana items sold by tribes. Let’s wish the Warm Springs tribe luck.

House Bill 2198. HB 2198 is the only bill on this list that is not yet a law. It currently sits on Governor Brown’s desk for review, and we expect she will sign it. If she does, the bill would establish an Oregon Cannabis Commission, to report back to the legislature on the status and condition of the Oregon Medical Marijuana Program (which the legislature keeps curtailing). The idea here is to find a way to help medical marijuana patients who might otherwise be left behind. Among other things, this bill contains the controversial “20 pound amendment” which would allow designated Oregon medical marijuana growers to sell up to 20 pounds of excess flower annually into the OLCC market. It also makes changes to miscellaneous items, like the buffer rule related to schools and cannabis dispensaries.

Cannabis attorneysIn Joe Hemp’s First Hemp Bank and Distribution Network v. City of Oaklanda federal judge ruled against a cannabis business that had sued the city of Oakland for putting it out of business for having failed to obtain proper permits.

The plaintiffs in this lawsuit were Joe’s Hemp and its founder David Clancy. The plaintiffs claimed they operated a “warehouse” to store medical marijuana for members using a “closed distribution network.” According to plaintiffs, members could pay a fee to store marijuana in the warehouse and then remove it from the warehouse when necessary.

Oakland requires any dispensary operating within the city have a cannabis dispensary permit and pay necessary fees and it deemed Joe’s Hemp to be a dispensary.  When Joe’s Hemp refused to apply for the required Oakland city dispensary permit, Oakland imposed fines against Joe’s Hemp and mandated Joe’s Hemp vacate the premises. Joe’s Hemp then sued the City of Oakland in federal court claiming it was not operating a dispensary, but rather a warehouse.

Joe’s Hemp contended that it was operating legally under federal law under the “warehousemen exemption” to the Federal Controlled Substances Act (CSA) which exempts common carriers and warehousemen from criminal liability for possessing Schedule I substances. Joe’s Hemp also claimed this exemption removed it from Oakland’s cannabis dispensary permit scheme. The court was not impressed, calling the alleged warehouse arrangement “a sham” that involved nothing more than its purported members paying fee to get marijuana. The court found this transaction to be a sale of cannabis and held that Joe’s Hemp sat squarely outside any purported warehouseman exemption.

Joe’s Hemp argued the CSA preempted Oakland’s cannabis permitting scheme. The court held the CSA did not preempt Oakland’s ability to permit marijuana business because there was no “positive conflict” between the City of Oakland’s cannabis permit scheme and federal law. The CSA did not preempt Oakland’s permitting scheme “because the permit scheme itself does not violate the Controlled Substances Act, but rather regulates certain entities that do.” The court also ruled that Oakland’s cannabis permitting scheme did not create obstacles to CSA execution because the federal government was free to enforce federal law and the permitting scheme did nothing to prevent that.

Plaintiffs also claimed Oakland’s permitting scheme required they forfeit their Fifth Amendment rights against self incrimination by requiring those running Joe’s Hemp to admit they operate a cannabis dispensary, pushing them outside the warehouseman exemption. The court ruled that even if Joe’s Hemp was only storing cannabis, it would fit Oakland’s definition of a dispensary because the city defines an entity that “stores” or “makes available” marijuana as a dispensary. In other words, an Oakland “dispensary” could — in theory — be a warehouse. The court also found that the permit itself did not require that the business actually admit to cultivating or selling marijuana.

In considering the self incrimination issues the court concluded as follows:

In any case, plaintiffs can simply stop their activity and avoid having to admit anything, i.e., get out of the [cannabis] business and avoid any penalties and admissions. If they choose to continue in an activity that is on the borderline of illegal under federal law, then they cannot escape compliance with local police regulation by saying compliance would constitute an admission under the Fifth Amendment.

The court granted the City of Oakland a motion to dismiss and terminated the case. However, Clancy and Joe’s Hemp have appealed the decision to the Ninth Circuit Court of Appeals and we will provide an update if and when the Ninth Circuit issues an opinion on appeal.

 

NOTE: The above is part of our plan to summarize all cannabis civil cases with a published court decision. By civil case, we mean any case that involves cannabis or the cannabis industry that is not a strictly criminal law matter. These cannabis case summaries are intended both to keep you up to date on cannabis laws as interpreted by the courts and also to serve as a resource for anyone conducting cannabis law research. We also will seek to provide key unpublished cannabis law decisions as well, when available.

California cannabis leaseWe’ve written previously on arbitration and why it so often makes sense for cannabis business contracts, primarily because of enforceability issues stemming from cannabis being illegal under federal law. But in the realm of commercial real estate leasing, cannabis uses can present other unique challenges that require thoughtful solutions to disputes, and, more importantly, thoughtful planning to prepare for potential disputes down the road.

Below are some of the issues our California cannabis lawyers typically consider when anticipating how to draft dispute resolution clauses for commercial cannabis leases.

  1. Enforceability of the lease and the arbitration award. Federal illegality of cannabis impacts all cannabis business transactions. Though the Federal Department of Justice has issued cannabis enforcement guidelines in the Cole Memo (and every cannabis-touching lease agreement should include language mandating compliance with these guidelines), this does not guarantee against federal civil asset forfeiture or other federal enforcement actions. Another consequence of federal illegality is that cannabis companies must consider what recourse they will have in enforcing their contracts and account for federal district courts being unwilling to enforce any such contract. For this reason alone, it will nearly almost always be better for you to have your disputes resolved in a California state court that will be far more likely to apply and enforce California state cannabis laws. California state courts can also apply federal law, but because there is often a risk of your case being removed to federal court you should always consider putting an arbitration clause in your cannabis commercial leases, specifying the arbitral body, limiting how the lease and the arbitration award can be enforced (confining it to state courts, perhaps) and limiting potential appeals.
  2. Choice of law. We’ve written about how California commercial cannabis landlords (and tenants) should consider beefing up their lease’s indemnity provisions, allowing for early termination in the event of enforcement actions, disallowing federal illegality as a grounds for invalidating the lease, and generally requiring strict compliance with California state law for the specific proposed cannabis use. For similar reasons, arbitration clauses can include a mandate that the arbitral body apply state law and the California Arbitration Act, and not, for example, the Federal Arbitration Act, which allows an award to be vacated where the arbitrator “manifestly disregards the law.” It is not difficult to imagine a scenario where a federal court vacates an arbitral award for an arbitrators having failed to apply the Controlled Substances Act or void the cannabis lease ab initio. California arbitration clauses should, at minimum, specifically outline 1) the method for choosing the arbitrator, 2)  the laws the arbitrator must apply in resolving the dispute, and 3) the standard of review any reviewing court must apply. For many California real estate transactions, the arbitration clause should also include specific statutory notice language.
  3. Carve-outs for Unlawful Detainer, Nonpayment, and other Early Termination Causes. Though arbitration can be a highly useful tool, landlords will also want to maintain their ability to seek remedies for nonpayment of rent and unlawful detainer (eviction) without having to go through the arbitration process. Similarly, if a tenant faces a state or federal enforcement action, the landlord (and even the tenant for that matter) will likely want to maintain its ability to terminate the lease quickly and without arbitration. The parties to a California commercial cannabis lease should always consider carving out exceptions to arbitration to keep options open and to encourage timely performance of the lease.
  4. Arbitrator’s industry expertise. California arbitrators tend to be retired California state court judges and the changes of this sort of arbitrator having deep knowledge about the cannabis industry or cannabis laws are not good. But spelling out the arbitrator selection process in your commercial lease agreement (or even naming the specific arbitrator or arbitrators) can allow you to make certain your arbitrator has sufficient cannabis industry knowledge to understand any eventual dispute.
  5. Consider making mediation the first step. Arbitrations can be expensive and their outcomes uncertain. So instead of drafting a commercial lease agreement that requires you to jump right into that process whenever a dispute arises, consider making private mediation a mandatory first step before a demand for arbitration can be made.

Though every commercial lease dispute is unique (even more so for cannabis commercial leases), there are common themes and one is that private dispute resolution tends to work best for disputes between cannabis businesses.

Sonoma County cannabis lawsCalifornia has 58 counties and 482 incorporated cities across the state, each with the option to create its own rules or ban marijuana altogether. In this California Cannabis Countdown series we’re updating Sonoma County because Sonoma County will begin accepting applications for commercial medical cannabis businesses on July 5th at 8am (enjoy your 4th of July but be ready bright and early to get your application in at the permit center).

Our last California Cannabis Countdown post was on the City of Davis, and before that the City of Santa RosaCounty and City of San BernardinoMarin CountyNevada County, the City of Lynwood, the City of CoachellaLos Angeles County, the City of Los Angeles, the ,City of Desert Hot Springs, the City of Sacramento, the City of BerkeleyCalaveras CountyMonterey County and the City of Emeryville.

Welcome to the California Cannabis Countdown.

The 411 on Sonoma County. We should start off by stating that Sonoma County is only accepting applications for medical cannabis businesses — recreational cannabis businesses are still prohibited but may be considered by the Board of Supervisors in the future. But starting on July 5th, Sonoma County will begin accepting applications for medical cannabis cultivators, manufacturers, dispensaries, and distributors. Here’s some important information (not an exhaustive list) for those interested in operating a medical cannabis business in Sonoma County:

  • Permits will not be limited to local cultivators. However, local cultivators operating prior to 2016 with a local hiring plan will receive priority processing.
  • An individual or entity can apply for multiple medical cannabis cultivation permits, so long as their total combined cultivation area does not exceed an acre (nurseries are considered cultivation and will be included in the one acre limit).
  • An individual or entity can hold a medical cannabis cultivation license and apply for a medical cannabis manufacturing permit (non-volatile) or other medical cannabis business.
  • Stand alone delivery services will not be allowed – deliveries will only be allowed as part of a medical cannabis dispensary use permit.
  • Sonoma County will cap the number of medical cannabis dispensaries at nine. There are currently five permitted dispensaries and three applications currently pending.
  • If you granted the Sonoma County Agriculture and Open Space District (“District”) an easement then you can say goodbye to your hopes of operating a medical cannabis cultivation site on your property. The District collaborates with the Federal Government and it will not risk the potential for federal enforcement.
  • Edible cannabis manufacturers and dispensaries will require a health permit with the County Environmental Health and Safety Division on top of a minor and conditional use permit.
  • Edible cannabis products cannot be designed to appeal to children or include other addictive substances (such as tobacco or alcohol), and must list ingredients and allergens. They must also indicate serving size, servings per container, and have a host of warning labels (font size could be an issue when it comes to packaging).
  • Taxes for medical cannabis manufacturers and dispensaries will be based off of gross receipts. Medical cannabis manufacturers will have to pay a 3% tax while medical cannabis dispensaries will be taxed at 2%. Medical cannabis cultivators will be taxed per square foot. Taxes will range anywhere from $1.00 to $11.25 per square foot depending on the cultivation license type.
  • On May 23rd, 2017, the Sonoma County Board of Supervisors passed a Code Enforcement Temporary Penalty Relief Program which allowed certain cannabis businesses to operate without being subject to land use fines while their permit applications are being reviewed.

Sonoma County should be considered a progressive and enlightened jurisdiction for its sensible cannabis regulations and well-informed staff (unlike many other parts of California). With skyrocketing real estate prices in San Francisco and Oakland, our Bay Area attorneys are seeing increasing interest in opening up cannabis businesses in Northern California and Sonoma County.

Well played Sonoma, well played.