Cannabis Production

So you’ve set your sights on joining the next generation of Oregon cannabis producers. Congratulations! You’ve identified talented growers, you’ve resolved the intractable indoor vs. outdoor cannabis growing dilemma, you’ve saved up some money, and now you are eager to get your cannabis operation up and running.

But what’s next? Your first question is a classic: Where will I grow?

When you apply for an Oregon Liquor Control Commission license, you will need to prove you have a deed or lease to an eligible property. A letter of intent to lease or to purchase will also suffice, but the OLCC will not actually issue the license until you close the lease or sale. You should work with a realtor with experience in the cannabis industry to identify a few possible locations. As you begin your search, remember the following:

Not all counties and cities are alikeOn the most basic level, you need to be aware of the various cities or counties that have banned recreational producers outright. The OLCC maintains a list of these hostile local governments and you may be sad to hear that Grass Valley, Oregon is still off-limits!

Even the cannabis friendly local governments vary significantly in their local requirements, with some counties going to great efforts to be cannabis friendly, and others putting up an unfortunate amount of red tape. An exhaustive county-by-county or city-by-city analysis is beyond the scope of this post and we recommend you speak with cannabis entrepreneurs and professionals who have worked with your top choices for county or city to get a sense of potential local government roadblocks.

Distribution Channels. Though rural land is likely cheaper, your best markets will likely be in the cities. It is never too early to begin cultivating relationships with wholesalers, processors and even retailers to help bridge this gap. Proximity to testing labs is also a plus.

Perform Your Due DiligenceOnce you find a location in a friendly area with room for your operation, you need to ensure that the property complies with all state, county, and municipal requirements and regulations. This can be done by thoroughly reviewing county codes, city comprehensive plans, land use regulations, relevant zoning ordinances, and CC&Rs and, in some cases, talking with the appropriate government officials. You also need to be sure your property has access to adequate water as you will be required to show proof of “water rights,” and adequate power.

Failing to do due diligence on a property can have disastrous consequences. We recently had a cannabis client come to my law firm ready to close on a perfect piece of real estate in a location with a cannabis-friendly local government. This company had even paid for certain improvements to the property, and it was just days away from closing on the property transaction. Fortunately, as soon as we were provided the counties’ records on the property, we noted a provision from the 1980s that prohibited their business. We identified this issue just in time to prevent the purchase and free up our client to move on to greener pastures.

Once you’ve acquired rights to your perfect cannabis property, you are ready to apply for a Land Use Compatibility Statement (LUCS) from the local jurisdiction and to begin preparing the property for the OLCC licensing/inspection process. Check back soon for part 2 of this series.

I recently had the pleasure of attending the Cultivation Classic 2017, the “world’s only cannabis competition exclusively for ethically-grown product free of pesticides, defining craft and celebrating community.” Producers from around Oregon, including several of our clients, came together in a friendly competition to celebrate Oregon’s unique cannabis culture and ethos. Alongside the competition, the organizers put together a series of panels discussing a range of social, political, and legal issues facing the Oregon cannabis industry. The first panel featured the launch of a new industry group devoted to defining and supporting Oregon’s craft cannabis community.

This Craft Cannabis Alliance is an association of cannabis and cannabis-related businesses dedicated to creating an Oregon craft cannabis industry to rival Oregon’s renowned craft beer industry. Alliance Executive Director Adam Smith, a founder of Students for Sensible Drug Policy, took the stage to explain what “craft” means to these industry leaders:

Pictured left to right: Adam Smith, Cannabis Craft Alliance; Ashley Preece, Ethical Cannabis Alliance; Jodi Haines, Alter Farms
Pictured left to right: Adam Smith, Craft Cannabis Alliance; Ashley Preece, Ethical Cannabis Alliance; Jodi Haines, Alter Farms

These industry leaders are working to ensure that sustainable, ethical craft cannabis growers retain a seat at the table as Oregon’s cannabis industry matures. Gabriel Cross, CEO of Odyssey Distribution, LLC, expressed a sentiment shared by many of his fellow founding members.

“As a values-driven company, how we do things is as important to us as the bottom line. The CCA shares many of our values, and more importantly will bring together values-driven cannabis companies under one roof. We have a rare opportunity right now to define how an entire industry operates.”

One of the thorniest issues the CCA will face is the task of defining what “local control” means within the context of Oregon’s craft cannabis culture. Long-time readers of this blog will recall that Oregon originally implemented strict and confusing control and ownership residency requirements on recreational cannabis businesses. This created a host of problems, and the Oregon legislature responded by swinging the pendulum in the other direction, opening Oregon’s cannabis industry to unrestricted foreign investment and control. Over the coming months, the CCA will be working to find a balance its members believe will allow Oregonians to share in the profits of the state’s newest state-sanctioned “crop” without choking off the supply of vital capital that residents from other states can bring.

Oregon Cannabis SeminarOn June 9, my Portland colleague Will Patterson and I will present at an all-day continuing legal education (CLE) event called The Business of Marijuana in Oregon. This will be my third year presenting at the event and my second year as chair. The roster of speakers lined up for this CLE is better than any year to date, and everyone, including non-lawyers, would be well served to attend. For a full event description, including topics, speakers and registration links, click here.

Looking back over the past few years, it is amazing to see how much things have changed in Oregon cannabis. At this point, the OLCC’s recreational marijuana program has begun to hit its stride, with over 2,500 applicants now on file with the state. We are proud to call many of these Oregon producers, processors, wholesalers and retailers our clients, alongside the many investors and ancillary service providers we represent.

Sometimes, it is said that pioneers get slaughtered and settlers get rich. Now that the Oregon regulatory groundwork has largely stabilized, we have begun to see a second wave of entrepreneurs move in on the local industry. Many of these entrepreneurs bring skills, capital and experience from other regulated markets, while others are new to the space. Over the next year or so, with the increase in market entrants, we expect to see a fair amount of market consolidation throughout the Oregon cannabis industry.

Oregon attorneys and business owners alike need to be familiar with the unique regulatory concepts and industry dynamics that will be discussed on June 9, in order to best serve the Oregon cannabis industry. These concepts include state administrative governance and pending legislation, developments in the highly dynamic federal sphere, and practical approaches to working with and in the cannabis industry.

We hope you will join us on June 9 for an eight-hour survey of Oregon cannabis that is both broad and deep. And if you are a Harris Bricken client or a friend of the firm, please click here to request a promotional discount code, which can be applied to either the webcast, or to in-person attendance.

See you soon.

CBD

We previously discussed the two-tier industrial hemp registration system Oregon adopted last year. In brief, the Oregon Department of Agriculture allows registration as either a grower (producer of industrial hemp), or a handler (processor of industrial hemp into commodities, products or agricultural hemp seed). Currently, only registered hemp handlers can process industrial hemp or sell industrial hemp products. However, a bill winding its way through the Oregon legislature could significantly upend the status quo for CBD concentrates and extracts.

Oregon’s hemp advocates should keep a close eye on Senate Bill 1015. When it comes to CBD concentrates and extracts, the bill would open up industrial hemp processing to Oregon Liquor Control Commission (OLCC) licensed recreational marijuana processors. The processed CBD concentrates and extracts could then be delivered to recreational marijuana retailers for sale in OLCC licensed dispensaries.

Of course, the bill places some restrictions on OLCC processors:

  • The recreational processor must be registered with OLCC for the express purpose of processing industrial hemp into CBD concentrates and extracts. Presumably, the OLCC would create a new registration process for this purpose;
  • The grower must provide the recreational processor with all test results on the hemp and the recreational processor must retain the test results in its records; and
  • The industrial hemp must still be tracked as outlined in ORS 475B.150.

The bill would also allow the processed CBD products to be delivered to an industrial hemp handler for resale provided that:

  • The CBD products were produced “independently” of any marijuana products. This might require separate processing facilities to prevent cross-contamination;
  • The products have been properly tested;
  • The products are tracked as required by ORS 475B.150; and
  • The THC concentration in the products are below a threshold to be set by the OLCC (probably .3 percent if the OLCC follows the Department of Agriculture’s lead).

The bill is now before the Joint Committee on Marijuana Regulation, which will hold a public meeting on Senate Bill 1015 today (May 9), at the Oregon Capitol Building. If you want to get involved in the future of Oregon’s hemp industry, arrive at Room HR B before 5:00pm. Also, take note that the Committee will be considering this classic “gut-and-stuff” amendment, so you can safely ignore the text of the bill as originally introduced.

Cannabis attorneysThe owners of a vineyard in Yamhill County, Oregon, filed a lawsuit in April to block a neighboring property owner from using his land to grow and process cannabis. The plaintiffs alleged that the odor and runoff from the cannabis farm will negatively affect their grapes and claim to have already lost one buyer. Another neighbor, who has plans to turn its property into a vineyard as well, has joined the lawsuit.

The case is interesting because it is in response to a novel fact situation that has not been the subject of much real-world study or legal precedent.

The idea that the odor of cannabis plants could materially alter the quality of grapes in an adjacent parcel of land is a significant divergence from more typical odor-related lawsuits that allege a neighbor’s cannabis activities create a nuisance. Those lawsuits have sometimes succeeded, but in this instance the trier of fact will need to determine whether there actually is an impact on the grapes. Though the plaintiffs say they have already lost a buyer, it is unclear whether that was because the buyer speculated there could be an impact on the grapes or whether there was in fact such an impact. The case has not gotten far enough along for discovery to reveal exactly what kind of evidence the plaintiffs actually have.

As for the cannabis farm owner, he states that he can grow cannabis on his property without seeking permission because it is zoned for that kind of agricultural use and because he is following all rules and regulations. He also asserts that he uses cannabis processing techniques to minimize the smell from his property.

Depending on the results of this case, the issue of adjacent cannabis farms and wine vineyards may be an issue for the Oregon state legislature. Both the cannabis and wine industries are important components of Oregon’s economy and there is significant overlap between locations.

The lawsuit was filed in Yamhill County earlier this week so there is a long way to go for it to reach resolution. If it goes to trial, the court’s reasoning when it comes to the interaction between the two crops and the relationship with their owners’ property and economic rights could be instructive for similar conflicts in the future. We will keep an eye on this case and update you as the lawsuit progresses.

Oregon cannabis attorneys lawyersWe often work with Oregon cannabis companies that undergo ownership changes either during the licensing process, or shortly after license issuance. In some cases, this happens by design: the company is structured to take on investors, and the offering process overlaps with the state license application. In other cases, an LLC member or a corporate shareholder may depart due to a buyout or disagreement. Whatever the situation, ownership transitions require careful consideration of the state of the license, or pending application.

As with all states that license pot businesses, Oregon has rules around required disclosures before the state will issue a license. The look-see process in Oregon is similar to that for liquor licensing — and both licenses are given by the Oregon Liquor Control Commission (OLCC). In short, Oregon wants to ensure: (1) it is not issuing cannabis licenses to undesirable parties; (2) it can follow the money a cannabis business will generate (or at least try to); and (3) it has satisfied the feds that the state is running a tight ship. The specific disclosure criteria apply not only to license issuance, but to changes, as well.

Compared to other states, Oregon is straightforward when it comes to changing the ownership structure of a cannabis licensee– at least in the minds of us attorneys, and at least under the most recently adopted version of the Oregon rules. Here are two key rules to note:

  • OAR 845-025-1160(4) provides that “[a] licensee that proposes to change its corporate structure, ownership structure or change who has a financial interest in the business must submit a form prescribed by the Commission… prior to making such a change.”
  • OAR 845-025-1160(4)(d) provides that “[i]f a licensee has a change in ownership that is 51% or greater, a new application must be submitted in accordance with OAR 845-025-1030.

Let’s take them one at a time. Read literally, OAR 845-025-1160(4) requires any licensed cannabis business to notify the OLCC before making an ownership change. This would include a business bringing on a minority investor, given the broad definition of “financial interest” elsewhere under the rules. That said, OLCC policy is not to read this rule as written in every case. Instead, if a licensed cannabis business wishes to add a party who does not rise to the level of an “applicant,” it may do so prior to alerting the OLCC. For guidance on who must be listed as an “applicant,” start here.

When the rules around “financial interests,” “applicants” and changes in ownership were revised again in January, we had several Oregon cannabis clients undergoing structural changes. Our lawyers worked with the OLCC to gain an understanding of the new rules and policies in the context of these changes, but we cannot say whether the agency’s policies will remain flexible on the timing of disclosure of non-applicant ownership changes. That is the story today, however, and we are pleased that the OLCC has taken this pragmatic approach.

With respect to OAR 845-025-1160(4)(d) and ownership shake-ups of 51% or more, there is no wiggle room in the “new application” criterion. We have written before that you cannot sell an Oregon license: instead, the OLCC works with the new applicant and the outgoing licensee concurrently. Assuming the incoming party is eligible for licensure, the OLCC arranges with the departing licensee to surrender its papers on the day the new license issues.

Ultimately, we do not recommend that an applicant or licensee make changes of any type to its ownership structure without first alerting the OLCC and we strongly recommend our clients run these changes by us first as well. This ensures the proper steps are taken so as to avoid violating some internal company agreement or governing law and it also ensures that the company paperwork is properly executed, whether it’s a buy-sell agreement, admission agreement, or other species of contract.

Finally, we recommend that thoughtful consideration be given to business structure and composition before applying for licensure. It may be tempting to acquire your cannabis business license as quickly as possible and then sort out your ownership issues on the back end, but this approach creates headaches that may be difficult or even impossible to cure. It’s good to understand Oregon’s change-in-ownership rules, but it’s better not to have to use them.

Oregon marijuana lawyer

Oregon Senator Floyd Prozanski’s bill to prohibit Oregon employers from restricting or penalizing off duty marijuana consumption will not pass this session. As originally introduced, Senate Bill 301 would have prevented employers in Oregon from banning marijuana consumption by their employees during nonworking hours, provided that the consumption did not lead to on duty impairment. Additionally, collective bargaining agreements could still have prohibited off-duty use of marijuana without running afoul of the new law.

The bill ultimately died because of strong opposition from industry on two general grounds relating to worksite safety and federal law. In written testimony before the Judiciary Committee, representatives from the Oregon Association of Hospitals and Health Systems and the Oregon Columbia Chapter of Associated General Contractors, focused on federal law preemption and more specifically on the federal Drug-Free Workplace Act. These representatives argued that SB 301 would force employers that either contract with or receive grants from the federal government to choose between violating federal law or violating Oregon state law.

These representatives also testified that the impairment exception was meaningless, noting that there are no available technologies for reliably testing for marijuana impairment. Since marijuana remains present in the body long after use, employers contend it is simply not possible to determine whether employees are under the influence of cannabis while on their jobs.

Supporters of the bill dismissed these concerns, arguing that the various exceptions would still have permitted employers to restrict marijuana use by employees working on federal contracts and pursuant to collectively bargaining agreements. Beth Creighton, of the Oregon Affiliate of the National Employment Lawyers Association, testified that “[t]hese exceptions create a balance between the rights of Oregonians as individuals to engage in legal activities and the rights of employers to provide a safe workplace.“

Senator Prozanski sought to salvage the bill by amending it to cover only medical marijuana cardholders. This watered-down version managed to squeak through the Senate Committee on Judiciary, but Oregon’s Senate Democrats ultimately decided it would not be able to pass the full Senate and they pulled it from consideration.

We will have to wait until next session to see if Senator Prozanski, or someone else, takes up this cause once again. In the meantime, in Oregon, as in most states, employees can relatively easily be terminated for consuming cannabis during off-hours.

Oregon cannabis laws

We recently discussed proposed legislation to prevent Oregon marijuana retailers from recording, retaining, or transferring any information “that may be used to identify a consumer,” such as a consumer’s name, birthday or address. Some marijuana retailers had been collecting and storing this information for marketing purposes, often without their customers’ knowledge. The Oregon legislature was concerned that this practice would create a paper trail the federal government could use against cannabis consumers in a federal crackdown on recreational marijuana.

As we predicted, the legislature moved quickly. Yesterday, Oregon Governor Kate Brown signed SB 863 into law less than two months after the bill was introduced. In a strong signal to Oregon’s marijuana businesses and consumers, the bill enjoyed broad bipartisan support and passed the Oregon Senate by a vote of 21-6 and the Oregon House by a margin of 53-5. The bill requires all Oregon recreational marijuana retailers to destroy existing customer personal information within 30 days and it prevents cannabis retailers from collecting personal information in the future without the customers’ informed consent.

The bill is an explicit response to the Trump administration’s recent comments calling for a crackdown on the recreational marijuana industry and it is widely viewed as part of Governor Brown’s commitment to protect Oregon’s marijuana consumers from federal intervention or harm. SB 863’s streamlined journey from bill to law was helped by Section 4 of the bill, which declared that the Trump administration’s regressive statements regarding marijuana legalization have created a state of emergency requiring immediate action to preserve the public peace, health and safety.

Oregon’s consumers can now rest a bit easier, knowing their local retailer will not be maintaining a database of personal information to which an unfriendly federal government may someday have access.

Oregon cannabis lawyersLast month, the Oregon State Police Drug Enforcement Section published a report titled “A Baseline Evaluation of Cannabis Enforcement Priorities in Oregon.” It’s a great read. The big takeaway, as reported by The Oregonian, is that Oregon remains a top source for black market pot— despite our legal cannabis programs. Those familiar with the industry have long known this fact, of course, and the problem has been exacerbated as of late for various reasons. These include: state and local regulatory hurdles, high start-up costs, and increased federal uncertainty.

We have been been writing about the unsanctioned Oregon market for quite some time. To be clear: there has always been a black market in Oregon, and will be for a while. There is also a dark gray market, an off-white market, and many shades between. As a general concept, the further that weed gets from the grower, the darker the market. This is especially true in poorly regulated systems like the Oregon Medical Marijuana Program.

Right now, Oregon probably grows four or five times the amount of cannabis that is consumed in-state. (It’s not that consumers aren’t trying; there’s just too much pot.) The Oregon State Police study estimates that just 30 percent of all pot transactions are state-approved. Much of the surplus weed goes from sea to shining sea, but especially to hubs like Illinois, Minnesota, New York, and Florida. Because Oregon weed is an excellent brand, demand is high nationwide.
The lion’s share of Oregon’s exported weed is grown in two southern counties: Jackson and Josephine. And much of that weed is straight-to-black market—e.g., a pound of local weed may sell for $1,000 here, and re-sell somewhere like Texas for $7,000. Other transactions may be grayer and comparatively benign—e.g., a pound of weed grown under the medical program may be sold to the cardholder’s friend, at friendly prices.
As with any commodity, the blacker the market gets, the higher the price for cannabis. This is because buyers compensate dealers for increased risk of arrest, the cost of turf, and so on. One day, when pot becomes legal nationwide, the black market will probably look similar to those for other controlled substances, like tobacco and booze. Today, a few people still buy loosies and moonshine, but most of us go to the store.

It will be a while before Idaho, Texas, and other miserable states change their laws, so Oregon attempts to moderate the black market in three primary ways: law enforcement, supply, and taxation. Oregon needs to improve its enforcement, and turkeys like Jeff Sessions point to this as evidence that the program must end altogether. This argument ignores the demand side, though, where federal prohibition has created an irrepressible national market for Oregon weed.

On supply, the state is doing better. The goal here is to have enough legal weed so that no Oregonian needs to go off-system. Oregon is close on that one, but issues with state-mandated testing and license approval have caused temporary shortages. Recently, we have seen a spike in client requests for requirements contracts that cover the sale of cannabis even before it is grown—at least in the OLCC system. This should even out by 2018.

As for taxation, the goal is to generate revenue but keep prices low. When prices drop and stay below the black market, the black market disappears. The last people to leave will be the heaviest cannabis users, who are generally most price-sensitive and accustomed to informality. When all of those folks are finally going to the store, the black market will be gone—at least for Oregon sales. When the national laws change, the black market will dissipate altogether.

Over the past few months, our clients who have weathered the storm and resisted the urge to retreat to black and grey markets–and thereby remained our clients–have reaped dividends. Demand for state-sanctioned weed is robust among Oregon consumers, and we expect prices to remain high throughout the supply chain for a while. The Oregon Sate Police report is a helpful snapshot of where the state of the market today. Where it goes next is the fun part.

Editor’s Note: A version of this story originally appeared in the Portland Mercury’s “Ask a Pot Lawyer” column, also by Vince Sliwoski.

Tribal CannabisOver the past couple of years, we have written about tribal cannabis and the efforts by various tribes in Oregon, Washington and elsewhere to roll out marijuana programs. Last week, at the Cannabis Law & Policy course I teach, we had the great pleasure of hosting Pi-Ta Pitt from the Confederated Tribes of Warm Springs here in Oregon. Mr. Pitt is the tribe’s Cannabis Program Coordinator, and he offered some valuable insights for tribes rolling out cannabis programs. Based on that discussion, here are some key takeaways for tribes.

  1. The Wilkinson Memo is still in effect, and confusing as ever.

Way back in October of 2014, the federal Department of Justice issued its “Policy Statement Regarding Marijuana Issues in Indian Policy.” Like the Cole Memo before it, the Wilkinson memo provides that eight enumerated federal priorities “will guide United States Attorneys’ marijuana enforcement efforts in Indian County,” including where “sovereign Indian Nations seek to legalize the cultivation or use of marijuana in Indian Country.” It all comes back to prosecutorial discretion, and the current administration has yet to comment on the Wilkinson Memo specifically.

In the past few years, federal attorneys have watched warily as Warm Springs and other tribes have explored the cannabis space. While these attorneys have seemed tolerant, to an extent, of the tribal initiatives, the take on cannabis events on tribal lands seems to have touched a federal nerve. Because events are disfavored, tribes looking to legalize cannabis production and sale may wish to steer the focus away from festivities.

  1. Tribes subject to Public Law 280 have a tougher go.

Public Law 280 is a federal statute allowing states to “assume jurisdiction over reservation Indians.” The Act mandated a transfer of federal law enforcement authority within tribal nations to state governments in six states: California, Minnesota (except the Red Lake Nation), Nebraska, Oregon, except the Warm Springs Reservation), Wisconsin (except the Menominee Indian Reservation), and, upon its statehood, Alaska. Other states were allowed to elect similar transfers of power if the affected Indian tribes consented. Since 1953, Nevada, South Dakota, Washington, Florida, Idaho, Montana, North Dakota, Arizona, Iowa and Utah all have assumed some jurisdiction over crimes committed by tribal members on tribal lands.

Tribes not subject to Public Law 280 don’t have to worry about states attempting to shutter their cannabis programs. Although it may behoove those tribes to have good relationships with their neighboring states, local enforcement is not a possibility – even if the adjacent states are anti-cannabis. Tribes subject to Public Law 280, however, may face immediate local barriers, in the form of law enforcement.

  1. Conversations are key.

Even where Public Law 280 is not at play, it is critical for tribes to dialogue with the states, along with federal officials. The Warm Springs Tribe and the Suquamish Tribe, for example, each have entered into an inter-governmental compact with Washington and Oregon, respectively, regarding their cannabis efforts. This is critical for any distribution of pot off of the reservation, which is where the tribes stand to reap significant economic benefit, but also where states regulate cannabis commerce extensively.

Federal conversations may be even more important. Most tribes already are very familiar with local U.S. attorneys, but conversations around the topic of legalizing cannabis are unique. Any tribe considering a cannabis program would be wise to dialogue with the relevant U.S. attorneys, and to get a read on how that office may respond. To this point, U.S. attorneys may view a tribal program as more “legitimate” if the program is borne of a referendum taken within the tribe itself. And that’s yet another, local conversation.

  1. This could go any number of ways.

Twists and turns are inevitable during the design and implementation of a sovereign’s cannabis program. It happens with states; it happens with tribes. Like states, tribes need to maintain flexibility and build coalitions as they attempt to launch a pot venture. Tribes also need to be realistic about timelines and the roles of current collaborators. For example, what will the tribe’s current bank or credit union think of the effort? What about its other stakeholders?

In all, cannabis can be incredibly attractive to tribes as a revenue source and job creator – especially to those tribes on resource-poor land, and to tribes far from interstate highway corridors, which are unable to contemplate casinos or tourism. In all, cannabis may present a unique opportunity for certain tribes, given the right approach.