Oakland cannabis regulationsTuesday night, in a continuation of more than ten months of contentious debate and revisions, the Oakland City Council revisited and reargued the terms of its yet-to-be-implemented Equity Permit program for cannabis businesses. The program aims to address inequity in the local cannabis industry by prioritizing permit issuance to those with roots in certain identified Oakland neighborhoods that have been historically impacted by disproportionate drug law enforcement, and to members of the Oakland community that have been arrested and convicted of cannabis crimes in Oakland in the last 20 years. The law moves qualifying Equity Applicants to the front of the cannabis permitting line, and it also creates access to approximately $3.4 million in earmarked interest-free business loans and other assistance.

The law was first introduced in May 2016, but in response to community concern about how it might affect the local economy, the City Council commissioned an extensive race and equity analysis of medical cannabis regulations and scheduled another vote for early 2017. Among the most jarring of the City Council’s findings was that over the past 20 years, African Americans, particularly those living within certain Oakland police beats, have been dramatically and consistently overrepresented in cannabis-related arrests, reaching as high as 90% of all cannabis arrests in the late nineties.

Two weeks ago, the Oakland City Council approved a last-minute amendment to the program mandating that any general (non-Equity) applicant must have lived in Oakland for at least three years to get a cannabis business permit. Because Equity Applicants must already demonstrate residency and a past connection with Oakland, this amendment would have effectively placed a residency restriction on all new or existing cannabis businesses. After a motion passed 6-2 Tuesday night removing the residency requirement for general applicants, the current version (which still requires another Council vote to become law) provides that, when issuing permits for any kind of cannabis business, the City must give half (i.e. maintain a 1-to-1 ratio) of all permits issued in its initial issuance phase to “Equity Applicants,” defined as Oakland residents with an annual income at or less than 80% of the City average and who either lived in certain defined Oakland police beats for 10 of the last 20 years, or who have been convicted of a cannabis crime committed in Oakland within the last 20 years. Tuesday night’s motion also requires dispensary staff be at least 50% Oakland residents with at least half of those residents from areas identified as having high unemployment or low household incomes.

Though Oakland’s Equity Permit program has garnered praise for its stated policies and goals, it also has generated controversy—as illustrated by the lively hearing Tuesday night—particularly due to its now-withdrawn general residency requirement. Some questioned its efficacy in achieving the City’s goals, while others argued that it would benefit the City by requiring that Oakland cannabis business permits go only to those living in Oakland. The proposed residency requirement would have jeopardized any existing cannabis businesses that could not meet the residency requirement, regardless of how many jobs or how much tax revenue those entities were contributing to the local economy.

Though it is unclear what the ordinance will look like in its final form, and though the residency requirements were relaxed by Tuesday night’s revision, a residency requirement remains for Equity Applicants and dispensary staff. Because the City of Oakland intends to issue only eight cannabis dispensary licenses per year (excluding delivery-only operations), an aggrieved party may challenge the ordinance for favoring longtime residents of certain Oakland neighborhoods at the expense of newer Oakland residents and those living in other neighborhoods, or even for favoring Oaklanders over out-of-towners. Some who spoke at Tuesday night’s meeting explained how, despite having lived all of their lives in Oakland, but not in one of the identified neighborhoods or having lived in a historically disadvantaged neighborhood but not for long enough or having been forced to move out of Oakland after many years because of gentrification, they would not qualify as Equity Applicants. It is these sorts of presumably unintended consequences of the residency requirements that could lead to the program getting bogged down in legal challenges.

The Equity Permit Program’s express preference for Oakland residents over out-of-towners, as an element of its greater approach to addressing longstanding systemic racial disparity in cannabis enforcement, raises some important legal issues. We have previously touched on the constitutionality of residency requirements and the potential difficulties presented by California’s own residency requirement in Proposition 64, such as access to funding from out-of-state investors—a challenge that has been somewhat ameliorated by Oakland withdrawing its requirement that majority ownership and control of cannabis permittees must be strictly City residents.

The Privileges and Immunities Clause of the U.S. Constitution and the Dormant Commerce Clause generally prevent states from discriminating against residents of other states. When a state or local government enacts legislation that facially discriminates against nonresidents, reviewing courts will ask whether the government has a “substantial reason” for the difference in treatment, and whether the law is “closely related” to that rationale. But because cannabis is federally illegal, constitutional claims would likely be a stretch.

As California rolls out its new regulations under the Adult Use of Marijuana Act (AUMA), it will be important to watch how those laws address a state licensee’s right to do business within the state, and how local regulations interact with state law. Though the Medical Cannabis Regulation and Safety Act (MCRSA) requires local government approval before a state license can issue, the AUMA does not, but the AUMA does allow localities to enact their own regulations so long as they do not conflict with state law. It remains uncertain how the AUMA will apply to a state-licensed cannabis entity seeking to conduct business in Oakland if that entity is unable to obtain a business license from Oakland because of its residency requirements. We will be tracking the rollout of California’s new regulations and how the interplay between the state and localities like Oakland will affect cannabis businesses and the state’s soon-to-be massive regulated cannabis economy.

Editor’s Note: Daniel recently joined our firm as an attorney in our San Francisco office, where he will be focusing on mostly California cannabis real estate and dispute resolution issues.

Oregon cannabis lawyersOregon lawmakers are considering legislation to protect Oregon cannabis consumers and patients against potential federal government enforcement actions. Proposed legislation, Senate Bill 863, would require marijuana retailers to purge patients’ personally identifiable information and would prohibit dispensaries from “record[ing] and retain[ing]” such information. This bill seeks to shield individual cannabis patients and consumers from federal authorities by eliminating a potentially damning piece of evidence. Oregon dispensaries currently keep much of this information, in contrast to other states where purges are commonplace by law or custom.

SB 863 defines “information that may be used to identify a consumer” to include information found on a consumer’s passport, driver’s license, or other identification document.” The information is protected whether it is on a physical copy of the identifying document or stored otherwise, such as in a customer database. Though dispensaries may collect aggregate non-identifying information, the bill would make it unlawful for dispensaries to “record or “retain” individual customer data. The legislation would further limit the spread of personally identifiable information by prohibiting dispensaries from requiring customers to produce any other form of identification.

In addition to preventing the recording of personally identifying information, the bill would also prohibit transferring any personally identifying information in the dispensary’s possession. On its face, this would appear to prevent dispensaries from cooperating with federal enforcement against customers, though it remains to be seen whether a state law requiring something like this would hold up in a federal court.

What personally identifying information does the bill not cover? The bill does not cover other forms of record-keeping that could contain personally identifying information. For instance, the bill would not prevent dispensaries from retaining recorded security footage that could include recognizable images of its customers or from capturing license plate numbers of cars coming and going from the parking lot. The bill also would not cover information received incident to credit and debit card-based transactions.

What about data retained for marketing purposes? A dispensary may record and retain the name and contact information of a consumer for the purpose of notifying them of products, services, discounts, etc. if the consumers gives informed consent. Even then, however, the dispensary may not transfer the information to another person — good news for those wary of their personal data being sold to third party marketers.

Will the bill pass? It seems likely some form of the bill will succeed and our Oregon cannabis lawyers are predicting passage. SB 863 enjoys bipartisan support and lawmakers are moving quickly to consider the proposal. Of course, the bill may change significantly as it gets through committee.

The next action on the bill should come this week of March 20, so keep an eye on this fast-moving issue.

Marin County CannabisCalifornia 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 plan to cover who is banning, who is waiting, and who is embracing California’s change to legalize marijuana — permits, regulations, taxes and all. For each city and county, we’ll discuss its location, history with cannabis, current law, and proposed law to give you a clearer picture of where to locate your cannabis business, how to keep it legal, and what you will and won’t be allowed to do.

Our last California Cannabis Countdown post was on Nevada County, and before that, the City of Lynwood, the City of Coachella, Los Angeles County, the City of Los Angeles, the City of Desert Hot SpringsSonoma County, the City of Sacramento, the City of BerkeleyCalaveras CountyMonterey County and the City of Emeryville.

Welcome to the California Cannabis Countdown.

I’d bet most Californians would be surprised that Marin County, known for its affluence and laid back lifestyle, does not have a single licensed medical marijuana dispensary collective (though there are some delivery services). It’s been twenty years since the enactment of the Compassionate Use Act – which 73% of Marin residents approved – and Marin is still figuring out how to convert the will of its voters into practice. This resistance by Marin County elected officials to move forward on cannabis is even harder to grasp after the more recent results of the Adult Use of Marijuana Act (AUMA) vote where nearly 70% of Marin residents voted for marijuana legalization. Prior to the AUMA, the California State legislature passed the Medical Cannabis Regulation and Safety Act (MCRSA). The MCRSA covers the comprehensive licensing and regulatory framework for medical cannabis while also granting local jurisdictions the authority to enact their own licensing requirements. Under the MCRSA, a license applicant must demonstrate local approval to secure state licensure. And under the AUMA — though licensees do not need local approval to receive a California state cannabis license, they must be in compliance with all local laws to be able to open the doors of their cannabis business. In turn, the MCRSA and the AUMA are motivating jurisdictions to act, and with the intent of its voters so clear, Marin is slowly taking steps towards local marijuana business licensing.

Medical marijuana is still banned in Marin County’s cities but some, like San Rafael and Larkspur, are gradually adopting local marijuana regulations. The Marin County Board of Supervisors – which has jurisdiction over the unincorporated areas of Marin County – has taken the lead in licensing medical marijuana entities, but not recreational marijuana businesses yet. Under its current medical marijuana ordinance, the Board has authority to issue up to four medical cannabis licenses in Marin County’s unincorporated areas. Over the past couple of months, the County held three public hearings for ten applicants vying for those four licenses.

I attended those hearings and it was clear to me that many of the applicants had not done their homework and therefore had essentially disqualified themselves from getting one of the four medical cannabis licenses. Many disqualified themselves by submitting incomplete or misleading forms. Worse yet, some disqualified themselves by having questionable business partners, which in turn incited the community’s ire — which is not something you want to do in Marin County!

These hearings also call to mind something our cannabis business lawyers are always telling our clients: be careful what you share on social media because your posts can come back to haunt you. At one of the hearings I attended, one license application faced a barrage of attacks because the applicant had partnered with someone whose social media posts glorified essentially the worst stereotypes of marijuana. This individual had Facebook and Instagram accounts glorifying guns, drugs and money, perfectly feeding into the sort of cannabis fears pot prohibitionists love to peddle. Printouts of this person’s social media posts were passed out to everyone at the hearing, both attendees like me and representatives of the Marin County Board.

As California cities and counties continue to put local regulations in place for medical and recreational marijuana operators, marijuana business applicants must start now in developing the first (and second) impressions they will be conveying on their communities, especially if you are looking to open a cannabis business in an county like Marin that is really just getting started with legal cannabis businesses.

What I saw at these Marin County hearings reinforced how critical it is for potential cannabis licensees to do their due diligence regarding the pressure points of the community in which the cannabis business will be located. For example, are you seeking to enter a community where you are likely to run into aggressive NIMBYs or one with such restrictive cannabis business regulations that it is nearly impossible to operate? See High Dive: How To Fail In The Marijuana Industry. With California’s “new” legalization comes new opportunities to find the best possible and permissible location for your new or renewed cannabis business and new opportunities to engage and educate the relevant community to alleviate concerns and misbeliefs.

Editor’s Note: Habib recently joined our firm as an attorney in our San Francisco office, where he will be focusing on mostly California cannabis regulatory and dispute resolution issues.

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?

Washington Cannabis LawyerThe Washington State Liquor and Cannabis Board (LCB) enforces a wide range of rules and laws on cannabis. Because of this, our cannabis attorneys constantly stress to our clients the need for them to set up and rigorously maintain comprehensive regulatory compliance protocols to avoid violations of LCB rules and regulations and to mitigate penalties should such violations occur.

When the LCB believes a licensed cannabis business has committed a rule violation, it will issue the licensee an Administrative Violation Notice (AVN), describing the alleged violation and a recommended penalty. The LCB has broad discretion in assessing penalties for cannabis rule violations, based on Washington Administrative Code instructions that it consider mitigating and aggravating factors in making that penalty assessment. Penalties generally increase if the cannabis licensee has had repeat offenses within a two-year window.

The Washington Administrative Code separates cannabis violations into five categories:

  • Group One—Public safety violations. These violations are considered the most serious and they have the harshest penalties. For example, a cannabis licensee caught buying or selling marijuana to or from an unauthorized source faces cancellation of its license with even a first offense.
  • Group Two—Regulatory violations. These violations include failing to keep proper records, failing to submit required monthly reports, and improper advertising.
  • Group Three—License violations. These violations include failing to abide by licensing requirements and license classifications. Some Group Three violations can result in cancellation of the cannabis license even on the first offense. For example, a licensee’s failure to disclose everyone who owns, operates, or loans money to a licensed cannabis business is a violation of Washington’s true party of interest rules and it can lead to a cancellation of the cannabis license. Other Group Three violations can result in monetary penalties and/or a suspension of license.
  • Group Four—Nonretail violations. These violations involve the manufacture, supply, processing, and/or distribution of marijuana by nonretail licensees and prohibited practices between nonretail licensees and retail licensees. Generally, a first offense of a Group Four violation will result in a fine, but the LCB may cancel a license after the third Group Four offense.
  • Group Five—Violations involving the transportation freight of marijuana. These violations can result in cancellation of a license for a first offense if marijuana is transported from or diverted to an unauthorized source. This includes marijuana transported outside the state of Washington.

The LCB generally doesn’t temporarily suspend producer or processor licenses; it instead employs monetary fines, destruction of inventory, and/or license cancellations to penalize non-retail cannabis licensees. On the other hand, Cannabis retail license holders generally see temporary license suspensions, monetary fines, or license cancellation.

A cannabis licensee has 20 days after receiving a Violation Notice to accept the penalty, request a settlement conference, or request an administrative hearing before an administrative law judge. At these settlement conferences, the cannabis licensee and the LCB discuss the circumstances surrounding the LCB allegations, the recommended penalty, and any aggravating or mitigating factors. You are allowed to bring an attorney to these settlement conferences and you should. The hearing officer’s settlement authority is often limited, but the primary goal of the hearing is to explain why the incident occurred, to identify what failures there were in the licensee’s internal compliance program, and for the licensee to detail a plan to prevent future violations. If a licensee successfully explains all of that, the penalty is generally mitigated. In mitigation, fines and suspension periods are generally cut by 40%-50%.

The administrative hearings on LCB rule violations are similar to court proceedings but a bit less formal. For example, these proceedings do not use the strict evidentiary rules of courts. At these hearings, the cannabis licensee and the LCB may question witnesses and submit and challenge documents regarding the alleged violation. The administrative law judge typically reviews the circumstances surrounding the alleged violation, including any mitigating and aggravating factors and determines guilt or innocence and then hands down a penalty pursuant to the penalty guidelines in the Washington Administrative Code. If the cannabis licensee is not satisfied with any aspect of the administrative judges’ decision, it can appeal to the LCB to have the decision overturned.

Bottom Line: Cannabis licensees should have company-wide policies and procedures in place to avoid rule violations and as a mitigation factor should any rule violation occur. They should also know their various options for dealing with any alleged violations.

Cannabis LawA litany of comments made by White House Press Secretary Sean Spicer, Attorney General Jeff Sessions, and many other Tump administration officials have sent tremors through the cannabis industry in the weeks since Trump’s January inauguration.

Most alarming to many cannabis industry stakeholders was the administration’s uncertain position on state-legal cannabis programs. True to form, Press Secretary Sean Spicer predicted, “greater enforcement” of the Controlled Substances Act in recreational states under the Trump administration during a press conference two weeks ago. More recently, Attorney General Jeff Sessions reportedly reassured some GOP senators that he will not be moving away from Obama-era deference to state-legal cannabis programs. To many invested in the marijuana industry, however, Sessions’ statement is cold comfort coming from an Attorney General who harbors an irrational hatred of cannabis and intends to enforce existing federal drug laws to the letter.

Nevertheless, a glimmer of silver lining shines from the House of Representatives hopper for Democrats in the form of HR 1227 or the Ending Federal Marijuana Prohibition Act of 2017. The bill, introduced by Congressman Tom Garrett (R-VA), is co-sponsored by congressional Democrats Tulsi Gabbard of Hawaii and Peter Welch of Vermont. This law would de-schedule cannabis from the Controlled Substances Act and allow for states to self-regulate their own cannabis programs.

If passed, the Act would be an unprecedented win for the cannabis industry as a whole and fundamentally change the landscape of legal cannabis in the United States. Here are the details:

What would HR 1227 do?  Essentially, the Act would remove cannabis from Schedule I of the Controlled Substances Act (CSA). This is distinct from hints from the Drug Enforcement Administration in 2015 that it might consider re-scheduling cannabis from Schedule I to Schedule II of the CSA. Though de-scheduling cannabis would allow state marijuana programs to carry on essentially unfettered, re-scheduling could introduce new obstacles akin to those that other fledgling and experimental drugs must overcome.

What wouldn’t HR 1227 do? HR 1227 will not give blanket permission for transferring cannabis across state lines; states would be free to prohibit shipments of cannabis to and from their own jurisdictions. The bill also would not override state-level regulations that set standards for licensure, labeling, and purity. The status quo of state cannabis laws would therefore persist, but against a far less draconian backdrop of federal criminal law.

What are the bill’s prospects in 2017? Not great, unfortunately, but it is not all its fault. Congress has a lot on its plate this session – including still-pending confirmations of several presidential appointees – and cannabis reform is just not a high priority for lawmakers on either side of the aisle. Prospects for meaningful cannabis reforms on the federal level are dim under a unified Republican government absent an ideological shift. At least in the short term.

Why does this sound so familiar? The bill is identical to the Ending Federal Marijuana Prohibition Act of 2015 introduced by Senator Bernie Sanders (I-VA). The 2015 bill was a hit among Sanders’ core supporters at the time but it failed to gain any significant traction in Congress.

 

 

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.

washington state cannabis law marijuana lawOn Thursday, President Trump’s Press Secretary Sean Spicer predicted “increased enforcement” against recreational cannabis. By Friday, Washington State Attorney General Bob Ferguson was promising Washington State would “resist any efforts by the Trump administration to undermine the will of the voters in Washington state.”

Washington State AG Ferguson’s office also tweeted  the following:

 I was deeply disappointed to hear the White House Press Secretary’s comment today regarding marijuana legalization by states like Washington.

Last week [Washington State] Governor Inslee joined me in sending a letter to Attorney General Sessions, asking for a meeting on this issue. I look forward to sharing how our state’s approach is working.

I will also be very clear with AG Sessions that I will defend the will of Washington voters. My office will use every tool at our disposal to ensure that the federal government does not undermine Washington’s successful, unified system for recreational and medical marijuana.

The Ferguson/Inslee letter describes how legalization in Washington State has allowed local law enforcement to use its limited resources to combat other, more serious crimes, and how legal marijuana has generated significant tax revenue for the state. Ferguson and Inslee also requested Sessions continue to uphold the the Cole Memo.

Sessions has not yet indicated how he will treat legal cannabis nor what his position will be on the Cole Memo, which essentially says the federal government will stay away from robustly regulated state-legal cannabis. Washington State has already scored a legal victory by blocking the President’s travel ban, so few view AG Ferguson’s stated intention to fight for cannabis as an idle threat.

If the Feds do seek to shut down Washington State’s highly successful recreational cannabis industry, we expect the state would argue that federal law on cannabis cannot preempt state law. Washington State would likely argue there is no conflict between Washington’s recreational laws and the federal Controlled Substances Act because the two can stand together. Washington’s recreational marijuana laws support the intent of the federal Controlled Substances Act, which is to sufficiently control and oversee scheduled narcotics.

Though Washington State will likely concede that the federal government has the power to enforce its own marijuana laws, it will likely argue that the Tenth Amendment of the Constitution prohibits the federal government from forcing Washington State to use any of its own resources to carry this out. Since Jeff Sessions concedes that marijuana enforcement is a question of “federal resources,” the more the states with legal cannabis force the federal Department of Justice to expend federal funds and resources to eradicate cannabis, the less likely it is to occur. If the federal government is serious about going after recreational marijuana in states like Washington, we should expect serious and sustained resistance from states whose citizens voted legal marijuana.

 

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.