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.

Oregon Cannabis and PhysiciansOn Saturday, I gave a fun talk at the National University of Natural Medicine’s Medical Cannabis Conference on “Oregon Cannabis Laws and Naturopathic Doctors.” I say it was fun because almost always, we corporate cannabis lawyers wind up speaking in front of other lawyers, accountants or industry entrepreneurs. Health professionals have a different and unique perspective. This talk was also enjoyable because I got to reacquaint myself with the caregiver side of the Oregon Medical Marijuana Program, a program my firm rarely advises on anymore, because, as a business proposition, it is all but dead.

Perhaps the most fun part of the presentation, though, was the incredible number of questions called out in this one-hour talk on “Oregon Cannabis Laws and Naturopathic Doctors.” Here are some of the highlights.

What’s the deal with CBD/hemp right now? This spring, the DEA announced a new Final Rule regarding its classification of “marihuana extracts,” which caused a bunch of Colorado hemp growers to file suit. Even without the questionable DEA action, though, CBD remains firmly entrenched on Schedule I of the federal Controlled Substances Act. (Bills pop up from time to time attempting to change that.) Like medical marijuana, CBD may be legal under many states’ laws, including Oregon’s, but the federal picture is a whole ’nother story. Therefore, physicians should steer clear of advising patients that CBD extracts, topicals, concentrates, etc., are non-controlled substances when extracted from U.S. hemp– even if one can buy some of these products easily online, or in big box grocery stores.

Who can dispense medical cannabis in Oregon? Only an Oregon Health Authority (OHA) registered caregiver or grower, or a licensed OHA or Oregon Liquor Control Commission (OLCC) retail dispensary, can dispense medical cannabis in Oregon. Further, for a patient to acquire cannabis from any of these sources, the patient must first secure an “Attending Physician Statement” explaining that the individual “has been diagnosed with a debilitating medical condition and that the medical use of marijuana may mitigate the symptoms or effects…”. OAR 845-008-0010(4). The term “Attending Physician” is defined as “a Doctor of Medicine (MD) or Doctor of Osteopathy (DO).” OAR 845-008-0010(3). This means that naturopathic doctors, chiropractors, acupuncturists, etc., cannot facilitate access.

What have courts said about physicians discussing medical marijuana with patients? Mostly good things. Conant v. Walters, 309 F.3d 629 (9th Cir. 2002) held that the feds cannot revoke a physician’s DEA license to prescribe controlled substances, or investigate that physician, solely for “recommendation” of the use of medical marijuana. Other cases, like Rust v. Sullivan, 500 U.S. 173 (1991) and Planned Parenthood of S.E. PA. v. Casey, 505 U.S. 833 (1992) observe that regulations on physician speech may “impinge on the doctor-patient relationship” and that doctors have a First Amendment right not to speak, respectively. Because the Oregon Constitution has even broader speech protections than the U.S. Constitution, it seems that physicians in Oregon would be within their rights to discuss medical marijuana treatment of debilitating conditions with their patients.

What about other types of claims? In theory, we could see a patient or a patient’s representative bringing a tort claim against a doctor, if the doctor had recommended cannabis while the patient was prescribed other substances, resulting in a negative reaction. Unfortunately, due to the status of federal law, there is a relative paucity of cannabis research as compared to other controlled substances; but if there were not, it is possible cannabis would be contraindicated for any number of scheduled pharmaceutical drugs. Aside from traditional tort claims, we could also see a doctor get roped into a RICO suit for encouraging the violation of federal laws through providing basic patient services. We are not aware of any case involving physician liability for malpractice or RICO claims to date, but it’s possible.

How many cannabis patients can an Oregon physician have? A total of 450, without significant additional compliance hurdles. Yes, that’s a lot!

Oregon cannabis lawAs the marijuana industry grows and consolidates, marijuana businesses are forced to consider more complex business structures to meet their business needs. Such business structures must reduce costs, increase operating efficiency, and most importantly, strictly comply with federal and state law.

One strategy for cannabis retailers, especially those with multiple outlets, is to establish an employee leasing company. If the retailer has three stores, for example, each organized as an LLC, its owners may organize a fourth LLC to lease employees to the stores. This leasing company will then contract with, and act as paymaster for, each store LLC. In this arrangement, the employees who work at each store LLC are not store employees; rather, they are leased employees who receive their W2s from the leasing company. Accordingly, the employee leasing company is solely liable for employment tax.

Employee leasing companies offer two key benefits: consolidation of costs and employee retention. Without the leasing company, each retailer in the example above is required to manage the compliance costs of accounting, employment taxes, workman’s compensation, and medical benefits. By consolidating these functions, the employee leasing company should be able to reduce these compliance costs.

Employee leasing companies also benefit employees by making the marijuana retailer a more attractive employer. As leasing company employees, they receive their W2s from a non-cannabis company, it may be easier for them to sign leases, acquire mortgages and take on other formal obligations. In addition, the consolidated purchasing power of the employee leasing company should provide more robust employee benefits at a lower price.

State law on employee leasing companies varies considerably. Some states scarcely address the concept; others regulate extensively. A good example of the latter is Oregon. In Oregon, employee leasing companies must be licensed by the state’s Workers Compensation Division. The completed application is detailed, takes a few months to process, and entails a $2,050 licensing fee (paid every two years). Once licensed, the leasing company is jointly responsible for the hiring company’s entire workforce—including non-leased employees—which requires special procedures and insurance.

In a payroll leasing arrangement, the leasing LLC will have service agreements with each store LLC. Such agreements must reflect an arm’s-length market rate. Many methods are used to determine an arm’s length market rate but all are based on the facts and circumstances of your business. One common methodology is “Cost-Plus.” In a Cost-Plus arrangement, the employee leasing company compiles its costs and adds an arm’s-length market profit. The IRS carefully examines on audit, arm’s-length charges between affiliated entities.

Finally, employee leasing companies cannot be used as a device to avoid taxes, circumvent the correct application of Code §280E, or to launder money.

The use and benefits of an employee leasing company are not limited to retailers; producers, processors, and manufactures may also benefit from using an employee leasing company. But before you establish an employee leasing company for your cannabis business(es), it is critical you have an operational strategy in place and reasonable projections of the costs. It is even more critical that you understand 280E and structure your entities to comply fully with that. Only after having done all this will you be in a good position to evaluate whether an employee leasing company is best for your cannabis business.

Oregon cannabis Filing this in the odd news section: The Portland Tribune has reported that an Oregon dispensary owner has been fined $3,000 by Wood Village, Oregon for the mannequins he sets up on the sidewalk to advertise his cannabis. These blonde cannequins mannequins are animated and brandish “Got Chronic” signs at potential clients.

The town recently revised its sign code to prohibit Portable Signs, defined as “signs not permanently affixed to a building structure or the ground and designed to move from place to place except garage sale signs, special event signs, political signs, real estate signs or as otherwise provided in this Code . . .”

The owner sees the long list of exceptions as a clear sign that this ban is specifically targeted at his mannequins. After all, his dispensary is the only cannabusiness in town. He has also been fined under the new code for having a sign on the roof of his neighboring cupcake business.

Even if the ordinance isn’t specifically targeted at the mannequins, the ordinance is likely unconstitutional. Under first amendment jurisprudence, content-based regulation of speech is subject to “strict scrutiny,” that is, to survive, content-based regulations must 1) be passed to further a compelling government interest, and 2) be narrowly tailored to achieve that interest. In practice, strict scrutiny is a difficult hurdle to overcome.

In a recent case, the US Supreme Court struck down a similar city code governing outdoor signs. The offending ordinance identified various categories of signs “based on the type of information they convey, then subjects each category to different restrictions.” Sound familiar? The Supreme Court continues: “[A] municipal government vested with state authority, ‘has no power to restrict expression because of its message, its ideas, its subject matter, or its content . . . Content-based laws–those that target speech based on its communicative content–are presumptively unconstitutional and may be justified only if the government proves that they are narrowly tailored to serve compelling state interests.”

In one passage, the Supreme Court states “The restrictions in the Sign Code that apply to any given sign thus depend entirely on the communicative content of the sign. If a sign informs its reader of the time and place a book club will discuss John Locke’s Two Treatises of Government, that sign will be treated differently from a sign expressing the view that one should vote for one of Locke’s followers in an upcoming election . . . On its face, the Sign Code is a content-based regulation of speech.”

Let’s rewrite that passage with the facts at issue here: “The restrictions in the [Wood Village sign code] that apply to any given sign thus depend entirely on the communicative content of the sign. If a [portable] sign informs its reader [that a mannequin has “got chronic”], that sign will be treated differently from a sign [advertising a nearby garage sale] . . . On its face, the [Wood Village sign code] is a content-based regulation of speech.”

In this light, it is easy to see that the Wood Village ordinance will likely be struck down if the owner decides to take it up with the courts. We will have to see if the owner decides it is worth it.

Setting aside the specter of unconstitutionality, it is worth looking at whether state law prohibits the mannequins. The state is subject to the same restrictions on content-based regulations, so the Oregon Liquor Control Commission (“OLCC”) has issued loose cannabis advertising restrictions that seem designed to survive strict scrutiny. The OLCC’s stated goal is to prevent cannabis advertising that is attractive to minors, promotes excessive use, promotes illegal activity, or presents a significant risk to public health and safety. More specifically, cannabusinesses cannot advertise cannabis in any way.

  • That contains deceptive, false, or misleading statements;
  • That contains any content that targets minors, such as images of minors, cartoons, toys, etc.;
  • That encourages the transportation of cannabis across state lines;
  • That asserts that cannabis items are safe because they are regulated by the OLCC and have been tested by a lab;
  • That claims recreational cannabis has curative or therapeutic effects;
  • That displays the consumption of marijuana items;
  • That contains material that encourages excessive or rapid consumption; or
  • That contains material that encourages the use of marijuana because of its intoxicating effect.

These blonde got-chronic-bots don’t seem to fit neatly into any of these categories, so the mannequins are likely legal under state law. Accordingly, the owner may very well decide it is worth taking this dispute to the courtroom.

California cannabisThough we very much want states (and our clients) to follow the federal government’s “robust regulation” directives in the 2013 Cole Memo, we can’t help but bemoan when “robust” state cannabis regulations take the fun and creativity out of cannabis business operations.

Over the years, clients and potential clients have come to the cannabis lawyers at my firm with a bevy of business proposals that in federally lawful world would make sense and probably even be profitable. Unfortunately, we have to nix most of the “creative” business models and product proposals we see in California, Washington, and Oregon (the cannabis states in which we have our offices and in which our lawyers do most of their work) because these states rarely tolerate or permit unique business models or ideas.

In the spirit of the innovation that we have had to quash, the below are the five best/most interesting business proposals killed (or suffering a slow death) from comprehensive cannabis business regulation:

  1. Delivery. It’s a small miracle when a state allows cannabis delivery to customers by dispensaries. And even those few states that permit this typically put it under such serious restrictions you’d think the driver is moving millions in gold or a high level federal prisoner. Washington State doesn’t allow delivery, which helps the illegal market there. Oregon didn’t permit home delivery by retailers until February of this year. Even California’s proposed MCRSA retailer regulations (which will be withdrawn in full, but probably re-issued in similar form in the near future) restrict deliveries to retail licensees that have complied with a massive amount of security procedures.
  2. Fresh food manufacturing and manufacturing certain other products. States do not generally like cannabis manufacturers processing fresh foods or potentially hazardous foods or foods that might appeal to kids. The list of prohibited products varies by state, but the following fresh food items nearly always make the list: heated food, refrigerated food, anything with alcohol for drinking, pies, fruits, vegetable butters, dairy products, meats and seafoods. California planned to ban caffeinated products in its draft MCRSA manufacturer rules. And good luck trying to find any legally sold cannabis-infused gummy candies (or really any traditional candies other than chocolate and fruit chews) in California, Oregon or Washington.
  3. Cannabis events. We’ve previously written about how state cannabis regulations tend to be the death knell for the kinds of cannabis events that were immensely popular just a few years ago. Many states prohibit any gifting of cannabis and that has led to far fewer cannabis cups and cannabis parties.
  4. Marijuana online exchanges and marketplaces. Cannabis-legal states just aren’t ready for cannabis businesses to sell online or through exchanges of any kind. Whether it’s because of a lack of transparency or trust, or just the potential logistical nightmares, states pretty much force in-person transactions within the cannabis chain of distribution, all the way down to the consumer. California may be the one hope here since MAUCRSA retailers can use “technology platforms” they own and control for customer deliveries.
  5. On-site consumption and branded merchandise. No state allows public consumption of cannabis and most also prohibit their cannabis licensees from selling branded merchandise. Though some cities (Denver and Portland) have made a push for social, on-site consumption, most states loathe this as well, which is a real shame since consuming with others in a social setting normalizes cannabis and would likely boost tourism. California is another bright spot here as MAUCRSA will allow for consuming cannabis on the premises of retailers and micro-businesses, but only if the cities and counties in which those businesses sit also allow for this. As far as sales of branded merchandise, the majority of states prohibit cannabis businesses from selling any branded merch. from their licensed premises. For example, Washington State bans that practice (but Oregon does not). California is trying to take it a step further by stopping the sale of all branded merchandise by any cannabis businesses whatsoever.

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.

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.

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.

Dear Californian cannabis entrepreneurs,

As you prepare to open your cannabis businesses under the MAUCRSA, perhaps with a few lifelong friends, you may be tempted to think “we’re friends, we don’t need to get the lawyers involved.” We don’t mean to be blunt, but you need to get it in writing regardless of the current camaraderie.

Cannabis contracts
Cannabis contracts. Because they make sense.

Failing to properly paper your company or your company’s transactions is a recipe for trouble in any cannabis state. In the rush to license, many Oregon and Washington State entrepreneurs skipped these vital steps. The result is that a few years after Oregon and Washington legalized recreational cannabis, we are seeing a rise in litigation among formerly friendly service contractors and marijuana businesses and especially between partners of marijuana businesses fighting over percentages, control, and responsibilities.

With the classic marijuana business ownership dispute, you have a case that makes attorneys, judges, and litigants pull their hair out. Two people start a business with the basic understanding that they are 50/50 partners. A third partner is introduced and they agree to give that person a stake but they never specify the amount of that stake nor whether the original partner shares will be equally diluted. The parties do not even know if they have entered into a binding contract. Nothing specific is in writing, but various emails and phone calls reference slightly different versions and iterations of the same deal. There is no right answer in a case like this, but everyone knows that if they do not settle, litigation will be expensive and contentious and risky.

Compare this to when a licensed marijuana business orally agrees on the basic terms for a future cannabis product transaction. We have written before about the Uniform Commercial Code (the “UCC”), which applies to transactions for the sale of goods. Though the lack of a written document in the business ownership matter (as discussed above) leads to all sorts of difficulties, in a sale of goods situation, the lack of a written contract can (but does not always) work out just fine. The default provisions in the UCC exist to protect parties with reasonable contract terms where they fail to bargain on those terms, even if there is nothing in writing. In other words, the UCC will fill in with clear-cut default provisions whatever the parties failed to agree upon. Nonetheless, having clearly worded and detailed contracts avoids any need to rely on the default provisions of the UCC, which may not be to your benefit if left ignored.

Without written agreements, these fights devolve into often intractable (and nearly always expensive) court battles over who said what and when. In many cases, these disputes would never occur if the parties could had a clearly worded set of bylaws, an operating agreement or services agreement. And if the dispute must go to litigation, it is often cheaper to argue over the meaning of a written contract, than to argue over what the parties orally agreed to in the first place.

Cannabis businesses need to take the same ordinary business steps as other business do to properly memorialize their business relationships. Please, take it from our lawyers who have operated in other highly regulated cannabis states–just get it in writing. You won’t regret it.

Sincerely,

Our Oregon and Washington cannabis lawyers

 

Oregon cannabis due diligenceWelcome to the latest installment in our series on Oregon cannabis company acquisitions. In Part I of this series, we wrote about the general deal structures these acquisitions tend to take. In Part II, we wrote about how those structures are outlined at a high level, through term sheets. Today, we offer additional details on a topic we have covered before, for purchasers: due diligence on the target company.

If you are the type of person who enjoys sifting through large stacks of files and correspondence, or more likely, wandering around online in a virtual data room, you will love due diligence. If you are not that type of person, well, you get to do it anyway. The good news is that a corporate cannabis lawyer skilled in acquisitions can start things off with a comprehensive due diligence checklist, and begin looking under rocks on your behalf. Note that the form of checklist provided will vary, depending on whether the acquisition of the cannabis company is an asset purchase agreement, stock sale, merger, or other form of agreement.

Because due diligence occurs after a term sheet is executed, but before an acquisition is final, the due diligence period is the parties’ last big chance to walk away from a deal. On several occasions over the past few years, we have spotted show-stopping issues during the due diligence period, on either side of a transaction. If the issues cannot be fixed, these deals tend to die. Other times, the due diligence period will turn up nothing remarkable at all. And that is what you want, because in the world of due diligence, turning over rocks and finding nothing is progress.

When we covered this topic in March, we wrote that too often cannabis deals involve two sides rushing to complete a transaction without having done adequate due diligence on the potential cannabis company purchase. We offered a top five of due diligence items for purchasers, including some of the big ones: state and local law compliance, state law procedures for ownership changes, corporate authority, real property, and financial liabilities. We recommend you revisit that post, and today offer five more crucial items to look for during the diligence period.

Funky financial statements. Oregon cannabis companies tend to be new companies, and businesses with three or four years worth of financial statements, or even tax returns, are almost unheard of. Many cannabis companies stuff their skinny financial statements with unreasonable assumptions, under-estimates of working capital requirements, misleading margins, etc. If you are not comfortable auditing this type of information, enlist someone who is, and do not be afraid to ask lots of questions as you attempt to read the tea leaves.

Intellectual property. In an ordinary business transaction, a purchaser will be very interested in the target’s intellectual property. In the Oregon cannabis trade, brand power is important, but formally registered IP is less common than in other businesses, given the nature of federal law. That said, do not overlook: trade secrets (particularly for cultivators and processors), state trademark filings, and licensing agreements, to start.

Sales and Clients. Before investing in or purchasing a marijuana producer, processor or wholesale business, a buyer should understand who its top 5 or 10 clients are, whether these clients (who are usually other Oregon cannabis businesses) are loyal to the company, whether their operations will cause fluctuations in company revenues (common with producer clients, for example), and other factors. This means that in addition to doing diligence on the target company, it’s worth looking into the target company’s clients, at least in a cursory way.

Contracts. Like most businesses, a cannabis business will be party to numerous material contracts; and if the target business has no contracts for review, RUN. Types of contracts worth a close look include: customer and supplier contracts, equipment leases, real estate leases and purchase agreements, employment agreements, loans and credit agreements, and non-competes. Internal company contracts are also key, beginning with charter documents like shareholder and operating agreements.

Disclosure Schedules. As a part of any large or mid-sized acquisition, the target company will prepare a disclosure schedule addressing due diligence items, and identifying any exceptions to the representations and warranties requested by the buyer. If you are a target company, this will be the most important and laborious portion of the sale: so, it’s wise to start early, involve key employees and work with an attorney. If you are the buyer, this is the document you will cross-check against everything requested in your due diligence checklist.

If you make it through this vetting period, and are satisfied with what you have seen, congrats! It’s time to close the sale.