Defendants describe the lawsuit as an “attempt to put some shiny federal lipstick on an otherwise quite beleaguered pig of a state-law nuisance claim.”

We’ve previously discussed a RICO case that is slowly worming its way through federal court in Portland, Oregon. Styled as McCart v. Beddow et al., the case was filed by an attorney who is fed up with two neighboring cannabis grow operations next to her rural home. But rather than focusing solely on the allegedly troublesome cannabis producers, the McCart plaintiffs have filed suit against anyone even tangentially related to the producers’ business, including many dispensaries (“Dispensary Defendants”) that only purchased their product. We counted over 70 named defendants!

In our previous discussion, we suggested that the plaintiffs’ case against the Dispensary Defendants is fairly weak and our opinion hasn’t changed. Since we last checked in, the plaintiffs have filed a substantially expanded amended complaint, and numerous defendants have filed motions to dismiss. Although the Court won’t consider the motions to dismiss until January, it is worth checking in on the parties’ current positions. We are going to continue to focus on the Dispensary Defendants because there could be serious repercussions in the industry if the Dispensary Defendants are found liable even though they apparently didn’t have anything to do with the grow operation.

The Law

RICO law is complex, but as a general matter the RICO statutes allow a plaintiff to recover treble damages in a civil claim if the plaintiff can prove the following:

  • 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.

Of course, the devil is in the details, as the Dispensary Defendants point out in their motion to dismiss.

The Amended Complaint

The plaintiffs filed their amended complaint on September 1, which added 95 paragraphs onto their hefty original complaint. The amended complaint adds many new defendants, including employees at the farms and it alleges that nearly all of the defendants were exporting product out of Oregon.

In broad terms, the plaintiffs’ claims against the Dispensary Defendants have not changed in that they still allege the following:

  1. The cannabis grow operation (“Marijuana Operation”) is an enterprise affecting interstate commerce, as defined in the RICO statutes;
  2. All of the defendants were associated with and conducted the Marijuana Operation’s affairs through racketeering activity;
  3. Plaintiffs suffered a variety of kinds of harm as a result of the Marijuana Operation:
    1. Physical Injury to Real Property: littering, driveway damage, tire tracks, damage to some trail cameras, and unreasonable use of easements.
    2. Diminution of Property Value: noise pollution, light pollution, vibration, odors, exhaust fumes.
    3. Personal Injuries: harassment and damage to plaintiffs’ use and quiet enjoyment of their property.

The Motions to Dismiss

Eighteen Dispensary Defendants joined together in a single motion asking the Court to throw out plaintiff’s entire case against them. Their motion is well worth the read, not least for its colorful language, such as the lipstick-on-a-pig quote below the pig picture above. The arguments in this motion fit into two general categories:

The Dispensary Defendants are not part of a racketeering enterprise.

To establish an “enterprise” exists for RICO purposes, plaintiffs must show there was an ongoing organization with a common purpose. Both of these elements get to the same idea: a criminal enterprise is a group of people all working together to enrich themselves. Courts have found “ongoing organizations” among disparate businesses when there are legitimate interconnections between the entities, such as similar ownership and overlap in personnel. Similarly, courts have found a common purpose where the alleged members are working to promote a single economic interest, and not where they are simply pursuing individual economic interests. There don’t appear to be any of these kinds of links in this case. The Dispensary Defendants appear to be owned, operated, and staffed by distinct individuals working towards their own individual business purposes. This ties back to our initial read of this case: mere supplier-purchaser relationships like these do not rise to the level of RICO enterprises.

In any event, plaintiffs need to establish that the Dispensary Defendants were associated with and conducted or participated in the enterprise. Yet plaintiffs have not alleged that the Dispensary Defendants had any say over the operation of the farms. Their case against the Dispensary Defendants will likely die here.

Plaintiffs’ alleged harms cannot be recovered as a matter of law.

Even assuming plaintiffs can get over the hurdle of establishing that the Dispensary Defendants directed the farms, plaintiffs still must establish that their specific harms are actionable. The Dispensary Defendants also seem to be on the right side of the law here, arguing that the alleged harms and the speculative claim that the value of plaintiffs’ home has decreased cannot form the basis of a RICO claim against any of the defendants and cannot form the basis of a state-law claim nuisance claim against the Dispensary Defendants, in particular.

The plaintiffs face a number of legal obstacles that seem insurmountable. First and foremost, Oregon has long since decided that it is in the best interests of the state to protect farming uses and it has decided to treat cannabis the same as any other farm crop. Accordingly, Oregon’s Right to Farm Act likely bars plaintiffs’ nuisance and trespass claims for damages based on odors, noise pollution, light pollution, vibrations, and smoke fumes. The Dispensary Defendants rely on ORS 30.936(1), which provides farmers in farming areas with immunity from suit for any trespass or nuisance claims, defined elsewhere as claims “based on noise, vibration, odors, smoke, dust, mist from irrigation, use of pesticides and use of crop production substances.” Since RICO case law suggests that harms to property interests should be determined by state law, plaintiffs’ diminution of value claims are likely dead on arrival.

In any event, plaintiffs’ specific diminution of value claims are likely too speculative. The Dispensary Defendants argue that a RICO plaintiff must plead and prove that plaintiff has suffered a “concrete financial loss” but that plaintiffs’ complaint only contains pure guesswork that the odors, etc. diminished the value of plaintiffs’ property. Even if the plaintiffs could plead a specific dollar amount of diminished value, Oregon law bars claims for diminution of property value if the nuisance can be stopped. In other words, if the harm would disappear if the grow operations shut down, plaintiffs cannot recover damages for loss of value. Instead, plaintiffs should be asking the court to shut down the grow operations, which would have little to no effect on the Dispensary Defendants.

Plaintiffs will also likely fail on their claims for loss of quiet enjoyment and harassment because personal injuries like these are not compensable under RICO.

We will have to wait until next year to find out if the Court agrees with the Dispensary Defendants but we predict vindication for the dispensaries. In fact, we predict the claims against all of the defendants will get tossed, except possibly some small state-law claims. It seems that if you are a good neighbor and you don’t set up your operations next door to property owned by a lawyer, then you’ll likely never be drawn into a mess like this.

Oregon Cannabis Laws
New Oregon recreational cannabis businesses are waiting over five months to get licensed.

It is a daily frustration for our clients in the licensing pipeline in Oregon. Some applicants have been waiting for over five months to have an inspector assigned by the Oregon Liquor Control Commission (“OLCC”). These delays mean lost time and lost profits. Some form of the following conversation can be overheard at our Portland office on an almost daily basis:

Client: How long will the OLCC application process take?

Lawyer: About five to six months, if your first application is perfect.

Client: What can we do to speed that up?

Lawyer: Nothing, really.

Client: Why?

Though the process can be incredibly frustrating, it is important to keep in mind that the fault rarely lies with the employees at the OLCC. The OLCC has simply been overwhelmed by the number of cannabis license applications. At a speech earlier this year, the OLCC’s Administrative Policy & Process Director, Jesse Sweet, said the OLCC has received twice the number of applications as budgeted for. The OLCC is short staffed and no matter how frustrated you might become, it will never hurt to be kind to your overworked OLCC contact.

The OLCC maintains up to date records of cannabis applications granted and received in Oregon, and the statistics are alarming. As of this week, the OLCC has 1,536 active cannabis licenses and 1,390 pending applications. In other words, the OLCC is currently processing nearly as many applications as the number of licenses it has issued since the beginning of Oregon’s recreational cannabis program! In fact, there are more producers currently waiting for their licenses than there are existing licensed cannabis growers.

There is a bit of good news/bad news in all of this though. Yes, things are taking a long time, but a large reason for the massive number of cannabis license applications is because Oregon is a very good state in which to start up and operate a cannabis business. The applications are relatively cheap and easy and Oregon remains one of the few states that are open to licensing out-of-state individuals and companies, including individuals and companies located outside the United States. It was no accident that after analyzing all 50 states last year (and the beginning of this year) we chose Oregon as the best for cannabis.

There isn’t much that can be done, except to be patient. However, if you really want to get involved, the OLCC recently announced it is looking to fill a management position to oversee licensee activities in the Portland Metropolitan area. The OLCC is accepting applications through October 10, so there is still time.

On September 20, the Josephine County Board of Commissions held a public hearing on proposed zoning amendments that meant life or death for many small cannabis farmers.

At the end of last year, we discussed the successful efforts of Jackson County, Oregon to remove cannabis production as an allowed use in its rural residential zones. This led to an uproar among some growers, and a failed appeal before the Oregon Land Use Board of Appeals (LUBA).

For the past several months, Josephine County has been following suit, moving full steam ahead towards severely curtailing cannabis cultivation as an allowed use in residential rural zones throughout the county. This spring, the Board of Josephine County Commissioners (“Board”) placed Measure 17-81 on the Josephine County 2017 Special Election ballot, which asked voters to provide a non-binding advisory opinion: “In your opinion, should Josephine County prohibit the production of commercial, recreational marijuana in all rural residential zones?” Approximately 64% of voters said yes.

The Board listened, and in July 2017, the Board authorized the Josephine County Planning Director to invite applications for proposed language for amendments to the Josephine County zoning codes. The Rural Planning Commission held a public hearing at the end of August and issued draft language for the amendment. The language appeared designed to outright ban medical grow sites, and while it did not outright prohibit recreational cannabis cultivation, it did place severe restrictions that seemed to be written with the hope that no one would ever be able to comply.

Fortunately, over the weekend the Board threw out the planned draft language, thanks to the combined efforts of several licensed farms in the area, including East Fork Cultivars and Medicinal Roots, with the support of the Craft Cannabis Alliance.  (Full disclosure: Harris Bricken is a founding member of the Craft Cannabis Alliance).

This team utilized a savvy media strategy focused on educating Board members and the public. One lesson to be learned from this effort is the importance of engaging respectfully and eloquently at public hearings on any proposed cannabis regulations. For example, at the September 20, 2017 public hearing on these proposed amendments, Yusef Guient, of Medicinal Roots, spoke passionately about the effect the amendment would have had on his small family farm:

As family farmers, local business owners, neighbors and community members, we respectfully urge the commissioners to reject the proposed ordinance. The proposed amendments miss the mark by harming local family farms that are fully licensed and compliant and have invested tremendous resources in order to meet strict state regulations, as well as undermining the efforts of medical farms that are currently preparing to adapt to much higher levels of regulation and scrutiny. Further, the changes as written would expose the county to potential litigation costs without solving the issues raised by community members. Instead, we request that the county allow time for legislative changes to take effect, and to continue to bring community members together through the advisory committee process that is just now getting underway. We can create reasonable regulations that protect livability and public safety while supporting family farms, creating local jobs, and creating a lasting economic opportunity for Josephine County.

It appears the Board was swayed, at least in part, by these and other cogent arguments that the State legislature is aware of the prevalence of black market farming in southern Oregon and is taking appropriate steps. The team argued successfully that the recent changes set forth in SB 1057, including seed-to-sale tracking for medical operations, should be given time to work. However, the team and the Board still recognize the need for more precise regulations that target bad actors in Josephine County, and the Commissioners are going back to the drawing board.

Josephine County will not be the last county to attempt to reign in cannabis production with an axe instead of a scalpel, and the battle for common sense regulations in Josephine County is far from over. With that in mind, it is worth looking at the draconian draft zoning changes that almost became the law of the land. Under the draft amendment as previously proposed:

  1. Any OLCC licensed site would need a 300 ft setback on all sides. Currently the code requires a setback of 30ft in the front, 10ft on the sides, and 25ft in the rear.
  2. The property would need to be owned directly by the OLCC licensee. This would be problematic because many licensees lease land, or hold the land in a separate holding company for liability purposes.
  3. No OLCC site could be serviced by private road, easement, or owner maintained public right-of-way unless the OLCC producer owns all of the land adjacent to the right of way.

Any farm that couldn’t meet these requirements would have had thirty days from the date the ordinance went into effect to request a Determination of Non-conforming Use. To qualify for a non-conforming use determination, a recreational site needed to:

  1. Be in full compliance with the county codes as they existed prior to the amendments; and
  2. Either have obtained a LUCS prior to the adoption of the new ordinance amendment, or have applied for a LUCS prior to the adoption of the amendment that is being “actively processed by [the] OLCC with the intent to issue a license.”

The Board has recognized these kinds of broad brush regulations would do more harm than good, and are not appropriately focused on the few bad actors that are negatively affecting the community. Responsible cannabis cultivation can be a huge boon to local economies, but it always requires a genuine commitment to community engagement, like that on display down in Josephine County over the past few weeks.

Will the (former) Senator yield?

The Oregonian, Willamette Week, and KGW, to name a few, are reporting that US Attorney General Jeffrey Sessions is visiting Portland today to meet with federal and local law enforcement. These reports suggest Mr. Sessions is in town primarily to discuss immigration, sanctuary cities, and his unconscionable position on the Deferred Action for Childhood Arrivals program (“DACA”).

Given the recent exchange of letters between Oregon Governor Brown and the Attorney General, it seems likely Mr. Sessions has also come to Oregon to discuss and criticize Oregon’s medical and recreational cannabis programs. We’ve recently discussed how this exchange of letters demonstrates how Oregon sits uncomfortably within Mr. Sessions’ crosshairs. Governor Brown eviscerated Mr. Sessions’ reliance on a leaked, incomplete, and misleading draft of a report prepared by the Oregon State Police on cannabis in Oregon. Our money says Mr. Sessions is also here on a fact-finding mission, to see if he can drum up some better (or any?) sources for his claims that Oregon has so far failed to comply with Cole Memorandum guidelines.

Anyone in the cannabis industry here in Oregon knows Oregon treats these guidelines with the utmost respect and importance. Heck, if they didn’t, our Oregon cannabis business lawyers would not all be putting in 12 hour days! The Governor, the legislature, and Oregon’s relevant regulatory agencies, including the Oregon Liquor Control Commission and Oregon Health Authority, have been working tirelessly to improve their policies and procedures to ensure that Oregon’s recreational and medical cannabis programs protect public safety and prevent illegal activity.

Hopefully, Mr. Sessions’ visit will change his heart, but I wouldn’t count on it.

Receiver time?

Back in 2014, we wrote that bankruptcy is not an option for marijuana businesses. That issue has been litigated here and there since then, but as of today, cannabis businesses are no better off than before. The hard reality is this: all bankruptcy cases are handled in federal courts under rules outlined in the U.S. Bankruptcy Code. Those courts have held that it would be impossible for a U.S. Trustee to control and administer a debtor’s assets (cannabis) without violating the federal Controlled Substances Act.

Bankruptcy laws are designed to afford a fresh start to honest but unfortunate debtors, while providing equal treatment to creditors. Without recourse to bankruptcy, parties can only: (1) liquidate without court supervision, or (2) explore state court receivership. Liquidating without court supervision offers no protection to pot business creditors. State court receivership does afford protections, but adds complexity because states closely regulate who is allowed to possess and sell marijuana (through licenses). For a while, it was an open question as to whether a state court receivership would actually work in the cannabis context. Recently, one actually did.

In the case at issue, a landlord (creditor) had leased space to a licensed marijuana business tenant (debtor). The tenant failed to pay rent, and the landlord evicted the tenant and acquired a judgment for unpaid rent. Because RCW 7.60.010 et seq. provides that a Washington state court may appoint a receiver over a marijuana business, the landlord convinced the court to issue an order appointing a receiver to sell the tenant’s cannabis and satisfy the judgment. The landlord then successfully navigated the licensure issue with the Washington State Liquor and Cannabis Board, sold the pot, and collected on its judgment.

Washington is not the only pro-cannabis state with statutes and administrative rules that seek to bridge the bankruptcy gap by allowing creditors to seize and sell cannabis. In Oregon, OAR 845-025-1260 provides “Standards for Authority to Operate a Licensed Business as a Trustee, a Receiver, a Personal Representative or a Secured Party.” Our Oregon and Washington cannabis lawyers have assisted numerous clients in acquiring and perfecting security interests under the relevant rules. We expect California to adopt a similar regime.

One of the reasons creditors get such high rates of interest for loans to cannabis businesses—in addition to the fact that banks won’t lend to them—is because many pot businesses lack lienable collateral. For many of them, the net worth of the business is mostly tied up in the cannabis itself. It is now clear that, at least in Washington, the cannabis can be liquidated by a third party, whether or not the pot was initially proferred by the debtor as collateral for a loan. In that way, cannabis businesses are being treated by progressive states much like non-pot concerns.

That we finally have had one successful state court receivership probably won’t nudge circumspect lenders to reach out to the cannabis industry. However, cannabis businesses can feel encouraged that their number one asset (their cannabis) may have marketable value when looking for loans; and lenders can feel hopeful that if everything falls apart, there may be liquidation value in the cannabis crop. None of this “solves” the bankruptcy issue, but it’s a step in the right direction.

At the beginning of this month, Oregon implemented a critical change to its cannabis pesticide testing regulations: As of August 30, 2017, every batch of cannabis produced in Oregon must be tested for pesticides prior to transfer or sale. This simply wasn’t possible a year ago, when the Oregon Liquor Control Commission (“OLCC”) issued a finding that there were not enough accredited labs available to allow for universal pesticide testing. As a stop-gap measure, the OLCC limited testing to one-third of all batches from each harvest. According to the OLCC, the situation on the ground has changed substantially. There are now twice as many accredited labs and the Oregon Health Authority (“OHA”) has recently increased testing batch sizes. The net result is that the OLCC believes there is now capacity to ensure universal pesticide testing.

We’ve written quite a bit about how Oregon is slowly shifting responsibility for medical cannabis from the OHA to the OLCC, but product testing remains an outlier. The OHA retains responsibility for issuing cannabis testing rules for both the medical and recreational program, and has issued some of the strictest pesticide testing requirements in the nation. With this recent change, all Oregon cannabis, recreational and medical, will be tested for pesticide contamination prior to transfer to retailers and processors, and ultimately to the consumers.

 

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

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

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

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

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

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

Oregon Cannabis
Oregon Governor Kate Brown fights for cannabis

As we have discussed elsewhere, US Attorney General Jeff Sessions has been sending out intimidating letters to the Governors of cannabis-friendly states. In his letter to Oregon Governor Kate Brown, Mr. Sessions focused significant attention on a recent draft report created by the Oregon State Police that raised concerns about Oregon’s success in complying with the Cole Memorandum guidelines. Fortunately, Governor Brown is having none of it. In her August 22, 2017 response, Governor Brown meets Mr. Sessions head on with a simple message: “It is important to understand that this draft report does not (and frankly does not purport to), reflect the ‘on the ground’ reality in Oregon in 2017. This document was originally meant to provide a baseline understanding of the state of things related to marijuana in Oregon prior to legalization. Of course, such a baseline provides little insight into the effectiveness of Oregon’s post-legalization regulatory measures aimed at Cole Memorandum compliance.”

Governor Brown then notes that the leaked draft report was not ready for primetime and “required significant additional work and revision, because the data was inaccurate and the heavily extrapolated conclusions were incorrect.” In particular Governor Brown notes that the draft report relies on “an assortment of random blog and newspaper articles that should hardly form the basis of informed policy discussion.” (you wound me Governor!) In other words, Mr. Sessions, your sourcing is bad and you should feel bad.

After thoroughly dismantling the Attorney General’s assumptions, Governor Brown outlines Oregon’s recent legislative efforts to ensure Oregon is at the forefront of common-sense cannabis regulation:

  • Oregon has already implemented seed to sale tracking for all recreational cannabis, and on May 30, 2017 Oregon Senate Bill 1057 expanded the seed to sale tracking to the medical regime as well.
  • On August 21, 2017 Oregon Senate Bill 302 expanded criminal penalties for cannabis crimes, and “makes it easier to prosecute the unlawful imports and export of marijuana products, a provision specifically aimed at stopping diversion of marijuana across Oregon’s borders.”
  • Oregon already has the “most robust resting regime of any state to legalize marijuana.”

Governor Brown finishes her letter to Sessions by explaining that she is “confident that Oregon’s regulated marketplace, coupled with our enforcement work, will serve to ensure compliance with the Cole Memorandum” and by inviting further dialogue with the Attorney General and the Department of Justice.

Your move Mr. Sessions.

Our Oregon cannabis lawyers are often asked to include noncompetition provisions in employment agreements to ensure our cannabis clients don’t lose top talent to their competition. In many states, such as California, noncompetition provisions are flat out prohibited. Though Oregon allows noncompetes in principle, the reality is they are still strongly disfavored by the courts and the legislature. An Oregon cannabis employer must jump through a number of hoops to get an enforceable noncompete, but even that looks likely to change.

In Oregon, noncompete provisions are governed by ORS 653.295, which provides some severe restrictions:

  • At least two weeks before the first day of employment, a prospective employee must receive a written employment offer explaining that a noncompete will be required. Alternatively, a new noncompetition provision can be created when an employee receives a legitimate advancement, such as a promotion that expands job responsibilities to include protectable company information along with a raise.
  • The employee must:
    • have access to trade secrets; or
    • have access to other competitively sensitive confidential business or professional information, such as product development plans, product launch plans, marketing strategy, and sales plans.
  • Unless the employer is willing to pay 50% of the employee’s previous compensation during the noncompetition period then:
    • The employee must be paid at least $62,000 annually (this is tied to US Census Bureau data, so will sometimes fluctuate).
    • The employee must be engaged in administrative, executive, or professional work and
      • perform predominantly intellectual, managerial, or creative tasks;
      • exercise discretion and independent judgment; and
      • earn a salary and be paid on a salary basis.
  • The noncompete can only last 18 months after the termination of employment.
  • The geographical area for noncompetition must be reasonable (“Southern Oregon” might be reasonable, “the Continental United States” is probably not).

The first take away is that noncompetes in Oregon can’t currently bind your rank and file employees unless you want to continue paying 50% of their previous wages after they leave. If you want to prevent your trimmers and budtenders from seeking greener grass next door, it is going to cost you. The second take away is that your employment agreements should include nondisclosure provisions to prohibit your employees from sharing trade secrets, such as processes and procedures, with their new employers when they do jump ship.

As we said above, it looks like the Oregon legislature intends to clamp down even more severely on noncompetes. As initially introduced this session, Oregon SB 977 would follow California’s example and effectively void all noncompetition provisions. SB 977 was referred to the Oregon Senate Committee on Judiciary, where certain amendments are being considered. Once it gets back into session, the Judiciary Committee will consider amendment SB 977-2, which would require an employer to keep paying a terminated employee their full salary during the restricted period.

If SB 977, as introduced or as amended, is ultimately adopted, then noncompetes as we know them in Oregon will be gone. They will either be voided outright, or become so expensive to maintain as to be effectively useless. Either way, this will make nondisclosure provisions even more critical in the future. You may not be able to stop your key employee from heading next door, but you should still try to stop the flow of critical information to your competitors.

The paths for Oregon cannabis are narrowing

Two roads diverged in a yellow wood,
And sorry I could not travel both
And be one traveler, long I stood
And looked down one as far as I could
To where it bent in the undergrowth.

Robert Frost, The Road Not Taken

 

At the end of this month, the Oregon Health Authority (“OHA”) will issue a notice to all Oregon medical cannabusinesses about the new medical seed-to-sale tracking requirements that will come online no later than July 1, 2018. As we previously mentioned, in passing SB 1057 earlier this year, Oregon decided that expanding the current recreational seed-to-sale tracking program (METRC) to the medical program will help cut down on cannabis being diverted to illegal markets. This move comes not a moment too soon in light of the Attorney General’s recent letter to Oregon Governor Kate Brown that is highly critical of Oregon’s success in meeting the Cole Memorandum enforcement guidelines. It appears the Department of Justice (think Jeff Sessions) has come to believe the Oregon Medical Marijuana Program is a major source of illegal cannabis exporting. The tracking requirement is a new financial burden on Oregon’s medical cannabis industry and it will eliminate one of the few remaining economic advantages legitimate medical businesses had over recreational businesses.

All signs point to the conclusion that Oregon ultimately wants to eliminate its medical cannabis program and convert all legal marijuana production to the recreational system. So, it isn’t surprising that the State is using this new tracking requirement as an opportunity to implicitly encourage medical cannabis businesses to convert over to recreational. As will be explained in the forthcoming notice, each medical cannabis business will have until December 1, 2017 to make an election on whether to continue under Oregon’s medical regime (with the new tracking requirements), or to convert to the recreational regime. Critically, even if you intend to continue as a medical operation you can’t just sit on your hands: If you don’t make an election either way by January 1, 2018 you will be at risk of losing your business.

The process for converting from a medical cannabis business to a recreational cannabis business does not appear to be too arduous. After timely submitting your election, you must submit an Oregon Liquor Control Commission (OLCC) license application by January 1, 2018. You will then be allowed to continue your medical cannabis operation until you get your recreational license, or as the OLCC explains it: “Once approved for an OLCC retail license you must cease all medical business practices and no medical marijuana products may be located on the licensed premises. The investigator reviewing your application will keep you informed of the status of your application, you will know when it is the appropriate time to possibly sell down all medical products to prepare for OLCC licensure.”

If you run an Oregon medical cannabis business, you’ve probably already seen your competitors flocking to the recreational system. Many of our clients that produce medical cannabis have informed us that it is becoming more and more difficult to find medical dispensaries willing and able to take on their product. At this point, it would seem you should all be taking the recreational road.