Washington State Cannabis LawyersThe Washington State Liquor and Cannabis Board (LCB) yesterday rescinded its interim policy prohibiting a business or individual from owning multiple cannabis producer licenses. Now, a business and its principals can own up to three cannabis production licenses, which is up from just one license.

Though the LCB’s own rules (WAC 314-55-075) state that “any entity and/or principals within any entity are limited to no more than three marijuana producer licenses,” as of 2014, it restricted cannabis producers to no more than one producer license. Our Washington State cannabis lawyers never liked that restriction as we thought it encouraged illegal grows and bad behavior. See Washington LCB Producer License Roll-Back May Encourage Black Market Growers

The LCB announced its decision to rescind its one producer license policy at yesterday’s LCB meeting and noting how Washington State cannabis producers had been pushing to be able to expand and how the LCB’s own rules (WAC 314-55-075) allow ownership of up to three producer licenses. The LCB said it was time for the Board to “get out of the way” of Washington State cannabis producers.
We wholeheartedly agree.

To be clear, this shift in LCB policy towards producer licenses does not mean the LCB will be accepting new producer applications or expanding canopy space for existing producers; the LCB will not issue producer licenses to any new applicants nor will its policies on canopy space change. What this announcement does mean though — and this is a big deal — is that anyone who already holds a Washington State producer’s license will now be free to expand its cannabis production capabilities and canopy by purchasing other licensed producer businesses (up to two more). We know there is a massive pent-up demand for such purchases and sales because hardly a week goes by without one of our Washington State cannabis producer clients telling us of their desire to expand their production operations (mostly to better achieve economies of scale), and we also get frequent calls from companies (and clients) wanting to sell their production operations.

What we predict will happen in the market is a massive consolidation of smaller and/or struggling cultivators who will sell their businesses to larger-scale producers that are well organized and well capitalized. For years we have suspected this market consolidation of cannabis producers would occur in Washington and we see it likely to happen in other states as well.

If you are contemplating buying or selling a Washington cannabis production business/license you should be sure to check out the following:

 

 

Washington State New Cannabis lawsIn 2015, Washington passed Senate Bill 5052, which allowed medical marijuana patients and their designated providers to grow cannabis plants for personal medical use and band together to form medical marijuana cooperatives. That bill did not provide a legal pathway for cooperatives, medical marijuana patients, or designated providers to acquire plants. It also did not allow retail sales of plants directly to consumers. In 2016, the Washington Legislature passed legislation allowing cooperatives to purchase plants from licensed marijuana producers, but failed to address the ability of other patients to acquire plants.

Washington lawmakers recently addressed this issue with Senate Bill 5131, which allows qualifying patients and designated caregivers to purchase cannabis plants directly from licensed marijuana producers. A “qualifying patient” is a person who has been recommended medical marijuana by a healthcare professional and a “designated caregiver” is a person the qualifying patient designates in writing as authorized to procure medical cannabis. Qualifying patients can enter into a medical marijuana authorization database and receive a recognition card from the state. Not all qualifying patients enter the database and so some qualifying patients do not hold recognition cards. Carrying a recognition card brings advantages, such as tax discounts and the right to purchase larger quantities of marijuana in a single transaction.

All Washington marijuana patients can grow marijuana for their personal use, unlike recreational users, but qualifying patient cardholders can grow more. Cardholders may cultivate six cannabis plants at home (up to fifteen plants if their physician recommends it) which can yield a maximum of eight ounces of useable marijuana. Cardholders can also join state-registered medical marijuana cooperatives to cultivate marijuana with four other patients. Patients who are not cardholders may grow up to four cannabis plants and possess up to six ounces of useable marijuana produced from those plants, but cannot join a cooperative.

SB 5131 also allows qualifying patient cardholders to purchase immature plants and clones:

Qualifying patients and designated providers, who hold a recognition card and have been entered into the medical marijuana authorization database, may purchase immature plants or clones from a licensed marijuana producer as defined in RCW 69.50.101.

The Washington State Liquor and Cannabis Board (LCB) recently issued an interim policy statement that describes how members of cooperatives, cardholder, and cardholder’s designated providers can purchase cannabis plants and seeds but makes no mention of how patients without qualifying patient cards can purchase seeds. The LCB is mandating that Washington State cannabis producers receive documentation before selling plants or seeds. Members of a cooperative must show a valid recognition card and a copy of the letter from the LCB confirming the person is part of a registered cooperative. Qualifying patients must show a valid recognition card. It appears that there still is no means for patients who do not enter the database and receive a recognition card to legally obtain seeds to grow their own medical cannabis.

The LCB’s policy statement provides additional guidance on the sale of plants and seeds. Immature plants or clones are defined as plants that have no flower, are less than 12 inches in height and less than 12 inches in diameter. Producers must abide by security and traceability requirements including a 24-hour waiting period imposed on all cannabis transfers. Patients and providers must notify a producer 24 hours before picking up plants or seeds. All transfers must occur on the producer’s licensed property and deliveries are prohibited. Cooperatives, patients, and caregivers are not permitted to purchase more plants than they were authorized to grow by a physician or under Washington law. The patient or caregiver must buy the plant in person and producers cannot sell to anyone other than those who called in on a product. Sales tax applies to the sale of plants or seeds, but the state’s marijuana excise tax does not.

You can find more on SB 5131 at the following links:

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.
Cannabis financing
Cannabis financing. Cash is good.

Washington State marijuana businesses face heavy regulations regarding business financing. One of the unique aspects of Washington’s cannabis business regulations is its level of control over every dollar contributed to a licensed cannabis company. Prior to receiving a license, a marijuana company must declare all capital it will receive, whether in the form of equity or in the form of debt. There is no de minimis exception, so if someone is putting a thousand dollars into a million dollar company, that thousand dollars and whomever contributed it must go through the state’s pre-clearance process. Once a company is licensed as a Washington cannabis business, any additional contributions or loans to that business must be approved by the Washington State Liquor and Cannabis Board (LCB) before they can be paid to the company, including additional loans or contributions from individuals who were previously approved. The one exception to this rule is that loans from chartered financial institutions do not need LCB approval.

This creates a major problem when cannabis licensees get into financial danger, which can happen for any business. Sometimes, money problems arise with very little notice. Whether due to a failed crop, unexpected bills, an employee emergency, or something else, cash crunches happen. Even for cannabis businesses with access to banking, it is rare for them to have access to an unsecured line of credit similar to what other non-cannabis businesses can get. When a cannabis business runs into a cash crunch, it has to figure out how to keep things afloat while figuring out how to infuse capital without violating Washington regulations. If a business is lucky, its current owners have sufficient personal capital to make additional contributions, because the LCB clearance process is shorter for individuals already in the system. If a business is unlucky and it has to bring in outside capital, it is looking at what can be a months long approval process before any of that capital can be paid in. Those months can mean the death of a business.

All of this leads to a common outcome — cash contributions to businesses without LCB clearance in violation of LCB regulations. When the worst thing the LCB can do is cancel a business’s license, you can understand why someone would be willing to violate those regulations when the alternative is worse. Many marijuana business owners have more tied up in their business than just the business assets — they signed personal guarantees with landlords and other vendors that will survive business failure. If you are in that scenario, it is hardly illogical to bring on an outside financier outside the rules and hope you don’t get caught.

But regulations that put business owners into this type of quandary are the type that should be revisited and revised. There are plenty of simple fixes to avoid or at least mitigate the current challenges struggling cannabis businesses face. For example, the LCB could change the structure of approval for interest rate lending to make it more of a notice requirement — save the hard approval process for equity owners and profit-sharers.

Unless and until the LCB takes another look at this issue, the best advice we can give is to shore up your capital reserves. If you are just starting out in the cannabis industry, contribute more capital than you need to your cannabis business and let your unused capital sit in the bank as a rainy day fund. If you are making sales, put a portion of that money to the side and don’t use it for either reinvestment or profit distributions. The more cash you have on hand to deal with unexpected challenges, the greater your chances of surviving those challenges long enough to go through the LCB’s regulatory process of getting new lending or capital contributions approved.

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

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

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

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

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

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

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

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

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

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

Washington State cannabis lawsAs Washington’s cannabis industry continues to develop, marijuana businesses continue to face new challenges. And with an ever growing number of consumers buying and using marijuana the risk of lawsuits against those who produce or sell cannabis keeps growing as well. Under what is called product liability law, manufacturers, distributors, suppliers, retailers, and others who make products available to the public can relatively easily be held liable for any injuries those products cause. Cannabis business owners must be mindful of product liability lawsuits arising from the cannabis products they make or sell.

In Washington State, product liability law is codified in the Washington Product Liability Act (WPLA), which broadly applies to virtually any injury claim resulting from a product covered under this act. The WPLA distinguishes between product manufacturers and non-manufacturer sellers. Washington’s marijuana market is divided between businesses who grow and process cannabis and businesses that sell the product to consumers. Manufacturers, for WPLA purposes, are the licensed producers that grow cannabis and turn that cannabis into edibles, extracts, concentrates, and other marijuana products. Non-manufacturer sellers are retailers that sell marijuana to consumers. A business can hold a license to produce and process marijuana but it cannot also have any ownership interest in a retail business. In turn, a retailer may have not an ownership interest in a cannabis producer or processor.

A product manufacturer is subject to liability under the WPLA if it was negligent or failed to provide proper warnings or instructions or if the product was not designed as reasonably safe. A plaintiff can show negligence by proving the manufacturer owed a duty to the plaintiff, the defendant breached that duty, and the breach caused the plaintiff damages. A plaintiff can prove a manufacturer failed to provide an adequate warning by showing that a product’s warning or instructions were not likely to notify the consumer of the potential harm and the manufacturer could have provided instructions or warnings that would have been adequate. A plaintiff can show that a product was defectively constructed by establishing that “when the product left the control of the manufacturer, the product deviated in some material way from the design specifications or performance standards of the manufacturer, or deviated in some material way from otherwise identical units of the same product line.” Finally, a plaintiff can prove that a product lacked adequate warning and was designed defectively if the product “was unsafe to an extent beyond that which would be contemplated by the ordinary consumer.”

Washington’s robust marijuana regulations may provide producers and processors with some safeguards against claims brought under the WPLA.  Producers and processors may present evidence of compliance with Washington’s extensive cannabis laws and regulations as a defense to a product liability lawsuit. However, compliance with these state law cannabis standards does not automatically bar products liability claims as it is still possible the state required warnings or acceptable standards for growing and processing are inadequate.

Under the WPLA, non-manufacturer sellers can be liable in some scenarios, but simply selling a product that eventually leads to injury does not by itself establish liability. This means that retailers have a lower risk of being subject to product liability than a manufacturer because they do not manufacture the products they sell. However, a retailer may be liable to an injured consumer if the consumer’s harm was caused by the seller’s own negligence by the breach of a warranty made by the seller, or by a seller’s intentional misrepresentation of facts about the product it is selling. A seller may also be liable if there is no financially solvent manufacturer. Because many producers and processors do not have the funds or the insurance to pay off on large (or even not so large) product liability lawsuits, even cannabis retailers in Washington State need to be wary of product liability lawsuits.

Marijuana businesses operators can reduce their product liability risks by doing the following:

  1. Set up your cannabis business so as to protect yourself from personal liability. See Cannabis Businesses And Corporate Separateness and Cannabis Business and Corporate Separateness, Part II
  2. Vet the businesses with which you conduct business and, in particular, seek to ensure they are complying with applicable regulations and industry standards. See Buying a Cannabis Business: The Top Five Due Diligence Items or Buyer Beware.
  3. Draft your contracts so that vendors must indemnify you for any damages arising from their defective product.
  4. Use appropriate packaging and warning labels on the products you sell. See Cannabis Products and Dosing: Educate, Educate, Educate and Label, Label, Label and Pot Puppies? Let’s Talk Labeling and Packaging. NOW.
  5. Get good insurance for your business. The LCB requires cannabis licensees carry and maintain commercial general liability insurance, but you should also consider adding additional insurance to cover potential product liability lawsuits.

1600px-Flag_of_Washington.svgI previously wrote how “change would be coming” to Washington State’s cannabis law were Governor Inslee to sign SB 5131 into law. Governor Inslee has signed SB 5131 and is now set to go into effect on July 23, 2017.

If you hold a license to produce, process, or sell marijuana in Washington, you need to prepare for the legal changes stemming from SB 5131. This post summarizes some key of the key changes you should expect from SB 5131.

Requires disclosure of IP licensing deals. We previously wrote how the passage of SB 5131 would impact cannabis branding and intellectual property transactions and rights because it requires licensed cannabis businesses to disclose their IP licensing deals to the Washington State Liquor and Cannabis Board (the LCB).

Restricts advertising by licensees. SB 5131 focuses heavily on advertising. Since passage of Initiative 502, cannabis licensees have been banned from advertising marijuana or marijuana products within 1,000 feet of a school or other sensitive area where children regularly populate. This largely prevented advertising cannabis products by radio, TV, or in publications likely to be heard or distributed in or near schools. This is why you mostly see marijuana advertisements only in publications geared towards adults. SB 5131 extends this cannabis advertising prohibition to include not only cannabis products but cannabis businesses. In other words, cannabis licensees now need to be cautious about advertising their cannabis business in any medium where their ad could end up within 1,000 feet of a sensitive area.

SB 5131 also makes the following changes to advertising:

  • No advertising on cars.  The use of “transit advertisements,” which includes any cannabis advertisement on public or private vehicles, is prohibited.
  • No targeting tourists. Advertisements and marketing practices may not target “persons residing outside of the state of Washington.”
  • 21 plus. All advertising must contain text stating that marijuana products can only be purchased by persons 21 and older.
  • No marketing to kids. Cannabis licensees cannot market to kids and cannot “use objects such as toys or inflatables, movie or cartoon characters, or any other depiction or image likely to be appealing to youth.”
  • No mascots. Cannabis licensees cannot use commercial mascots outside of or near a licensed marijuana business. “Commercial mascots” include humans, animals, or mechanical devices used to draw attention to a business, and specifically includes inflatable tube displays, persons in costumes, and sign spinners.
  • Limited outdoor advertisements. Outdoor advertisements are limited to only text that identifies the “retail outlet by the licensee’s business or trade name, states the location of the business, and identifies the type or nature of the business.”
  • Limited indoor advertisements. Indoor advertisements are only permitted in facilities where minors are not permitted, such as bars. Under SB 5131, cannabis advertising is explicitly prohibited in arenas, stadiums, shopping malls, state fairs, farmers markets, and arcades.
  • No billboard advertising, except by retailers. Retailers will be the only cannabis licensees permitted to use billboards, but like all outdoor advertising, they too may only include text identifying the name, location, and the nature of their business on these billboards.

Allows ownership of five retail stores.  SB 5131 will allow individuals to possess an ownership interest in five retail stores. up from three under current law. Existing retailers may (and no doubt will) be able to purchase other licensed retailers and rebrand them with their own name and open new storefronts under their already established name.

Changes for producers & processors. Though medical marijuana patients in Washington are already permitted to grow cannabis in their homes for personal use and may form a collective to grow medical cannabis together there has been no legal means for medical patients to buy cannabis plants because cannabis producers were prohibited from selling cannabis to individuals who did not hold a license to produce, process, or sell marijuana. SB 5131 changes this by allowing “qualified medical marijuana patients and designated providers to purchase immature plants, clones, or seeds from a licensed producer.” This means cannabis producers can now legally sell immature plants, clones, and seeds to medical marijuana patients. However, “to purchase plants or clones, the patients and providers must hold a recognition card and be entered in the medical marijuana authorization database.” Patients that choose not to enter Washington State’s medical marijuana database cannot obtain a recognition card and may only purchase seeds. Though SB 5131 goes into place July 23, the LCB will likely need time to create rules and implement this program.

SB 5131 requires the LCB to adopt regulations for designating cannabis as organic similar to the federal the “organic” classification granted pursuant to federal regulations. Since cannabis is illegal under federal law, it cannot qualify under federal standards for organic certification. Cannabis producers and processors who choose to comply with Washington State organic standards can market their cannabis products as compliant with the LCB’s organic-style regulations.

SB 5131 also tasks the LCB with studying the viability of allowing processors to process industrial hemp. Under current Washington State law, processors may only process cannabis material grown by a producer. SB 5131 will not change this. However, depending on the results of the LCB’s study, processors could eventually be allowed to process hemp products grown by Washington farmers with permits to grow industrial hemp.

Washington marijuana businesses for years have faced a very robust set of rules and laws. SB 5131 only adds to the Evergreen State’s complex regulatory framework. Though businesses may view these regulations as overly burdensome, compliance is not optional and come July 23, SB 5131 will be the law of the land. Washington marijuana businesses should do all they can now to avoid pitfalls after July 23.

Cannabis licensing dealsAs we wrote a few days ago, the Washington State Legislature recently passed SB 5131, which updates Washington’s cannabis laws and includes a provision that explicitly addresses licensing agreements. The bill has yet to be signed by Washington Governor Jay Inslee, but we are nevertheless exploring what the implications of these new regulations will be for our clients with existing and pending intellectual property licensing deals.

Section 16 of the bill reads as follows:

Sec. 16.   A new section is added to chapter 69.50 RCW to read as follows:

  • A licensed marijuana business may enter into a licensing agreement, or consulting contract, with any individual, partnership, employee cooperative, association, nonprofit corporation, or corporation, for:
    • Any goods or services that are registered as a trademark under federal law or under chapter 19.77 RCW;
    • Any unregistered trademark, trade name, or trade dress; or
    • Any trade secret, technology, or proprietary information used to manufacture a cannabis product or used to provide a service related to a marijuana business,
  • All agreements or contracts entered into by a licensed marijuana business, as authorized under this section, must be disclosed to the state liquor and cannabis board.

On its face, this provision does little to change things for those with existing licensing deals, except that those deals will now need to be disclosed to the licensee’s enforcement officer. But the provision does validate the position that these types of licensing agreements were permissible under the rules all along, which provides some level of security to the parties as to the legitimacy of the contracts.

The big question that remains unanswered is whether the State’s acknowledgement of the permissibility of “licensing agreement[s]” is also an acknowledgement of the permissibility of standard trademark licensing practices, including royalties. Currently, it is impermissible under the rules for a licensor to receive a royalty based on sales or profits from a licensee, where that licensor has not been vetted by the Liquor and Cannabis Board (LCB) as a true party of interest. Undisclosed true party of interest relationships are grounds for license cancellation by the LCB, so it’s important to structure these deals so they do not implicate Washington’s true party of interest rules when dealing with an out-of-state licensor, or a licensor that simply would not meet the state’s requirements.

Even if state cannabis law reform in Washington makes the state law compliance piece of any trademark licensing deal more straightforward, these deals are still by no means as cut and dry as your typically IP licensing deal. Ownership of IP in the cannabis industry remains a tricky issue, in large part because the USPTO will not issue federal trademark registrations for cannabis-related marks. Cannabis companies routinely come to us with proposed licensing deals where basic due diligence quickly reveals the licensor simply does not own what it purports to own. As a refresher, if you are looking to get a license for another company’s IP, here are the most basic questions you should be able to answer about that other company and its IP:

  • Does the licensor own any federal trademark registrations?
  • If so, what goods and/or services do those trademark registrations cover?
  • Was the description of goods and/or services filed with the USPTO accurate and true? Were there possible misrepresentations?
  • Are the trademark registrations based on actual use, or upon intent-to-use?
  • What representations and warranties is the licensor making (or, often more importantly, not making) regarding the marks?
  • If the licensor doesn’t own any federal trademark registrations, is it licensing someone else’s trademarks?
  • Does the licensor have a master licensing agreement? Do the terms of any proposed sub-licensing agreement mirror that master licensing agreement?
  • What quality control standards will you be held to by the trademark owner? Could these standards amount to impermissible control over a licensee under Washington’s cannabis rules?
  • Has the trademark owner warranted to keep all USPTO filings up-to-date?
  • Does the licensor own any state trademark registrations?
  • If so, has the licensor made lawful use of its mark in commerce in the state of registration?
  • Does the licensor have any common law trademark rights? Can the licensor even legally acquire common law trademark rights in your jurisdiction?

This is a substantial list, but it only scratches the surface of the issues you and your cannabis IP counsel must consider before you enter into any IP licensing deal. Parties are often quick to skip straight to negotiating commercial terms for a deal, without ever assessing whether the rights they are licensing actually exist. Just as with any other type of property, like a house or a car, a licensor of intellectual property must actually own the rights to that property to be able to confer those rights to another party. Seems basic, but it’s truly shocking to see the deals we’ve seen put together by attorneys who either do not know cannabis or, more often than not, do not know the intricacies (or even the basics) of intellectual property law.

Though cannabis IP licensing deals remain complicated, it’s encouraging to see the Washington State Legislature acknowledge and condone their existence. We’ll be following this bill closely to see whether its passage results in any changes to the current difficulties surrounding a royalties-based payment structure.

So stay tuned.

Washington State cannabis lawyers

The Washington State Legislature recently passed SB 5131, which contains many tweaks to Washington’s cannabis laws. The measure now awaits signature by Washington Governor Jay Inslee. Here are ten ways SB 5131 could change Washington’s marijuana market if Governor Inslee signs it into law:

  1. Homegrown Marijuana. SB 5131 would allow licensed marijuana producers to sell immature cannabis plants, clones, and seeds to qualifying patients who enter the state’s medical marijuana database. Patients who choose not to enter the database may grow up to four plants in their homes under current Washington law and it’s not clear how those patients would legally acquire immature plants, clones, or seeds in light of SB 5131. Additionally, the Washington State Liquor and Cannabis Board (“LCB”) must examine the viability of allowing recreational users to grow their own marijuana in a way that complies with the enforcement priorities outlined in the Cole Memo.
  2. Retail License Ownership. Under this bill, a retailer or individual “with a financial or other ownership interest in” a retail license can own up to five retail licenses. Current Washington State law limits an individual from having an ownership interest in more than three licensed retailers.
  3. Forfeiting applications. The bill would require the LCB forfeit retail licenses that have been issued but are not operational and open to the public after two years unless the delay in opening and getting operational is due to circumstances beyond the licensee’s control. However, the LCB may not require forfeiture if the licensee has been unable to open because of a town or county’s moratorium prohibiting a retail cannabis store or because zoning, licensing or other regulatory measures prevent the retail store from opening.
  4. Processing Hemp. The LCB must study the viability of allowing licensed processors to process industrial hemp grown in Washington. This could eventually lead to legislation that would allow processors to purchase cannabis plant material from farmers licensed to grow industrial hemp. Currently, processors may only purchase products from licensed cannabis producers or other processors.
  5. Advertising. SB 5131 would make the following substantial changes to cannabis advertising laws in Washington.
    1. Advertising to Kids. The bill would prohibit marijuana licensees from taking “any action directly or indirectly to target youth in the advertising, promotion, or marketing of marijuana and marijuana products, or take any action the primary purpose of which is to initiate, maintain, or increase the incidence of youth use of marijuana or marijuana products.” This includes prohibiting using toys, movie or cartoon characters, or other images that would cause youth to be interested in marijuana. It also prohibits using a “commercial mascot” which is defined as “a live human being, animal, or mechanical device used for attracting the attention of motorists and passersby so as to make them aware of marijuana products or the presence of a marijuana business.” This includes inflatable tube displays, persons in costumes, and sign spinners. Cities and counties would be free to further restrict marijuana advertising.
    2. Outdoor Advertising. Billboards visible from any street, road, highway, right-of-way, or public parking area cannot be used to advertise cannabis, except that a marijuana retailer may use a billboard solely to identify the name or nature of  its business and directions to its retail store. Outdoor signs could not contain depictions of marijuana plants, products, or images that appeal to children. Outdoor advertising would be prohibited in “arenas, stadiums, shopping malls, fairs that receive state allocations, farmers markets, and video game arcades.” A limited exception would allow outdoor advertising at events where only adults are permitted.
  6. Gifting Marijuana. Adults twenty-one and over would be allowed to deliver marijuana to other adults so long as the marijuana is offered as a gift without financial remuneration and so long as the amount of marijuana gifted is no more than the amount an adult can legally possess in Washington — one ounce of useable marijuana flower.
  7. Licensing. This bill would allow a licensed marijuana business to enter into licensing agreements or consulting contracts “with any individual, partnership, employee cooperative, association, nonprofit corporation, or corporation” for goods or services, trademarks, and trade secrets or proprietary information. Licensees would be required to disclose these agreements to the LCB.
  8. Public Disclosure. SB 5131 would exempt trade secrets and other proprietary information of a licensed marijuana business from disclosure under Washington’s Public Disclosure Act.
  9. “Organic” Weed. The bill instructs the LCB to adopt regulations for marijuana similar to products certified as organic under federal regulations. The organic standard is granted pursuant to federal regulations and because marijuana is illegal under federal law, it cannot qualify under those federal standards. The LCB would adopt regulations so that marijuana could be grown in a way that mimics organic products. The products then could be labeled as compliant with the state’s standards.
  10. Tribal Oversight. SB 5131 would require the LCB receive approval from a federally recognized Indian Tribe before granting a license on tribal land.

Governor Inslee is likely to sign SB 5131 into law, though he may veto certain parts of the bill. Stakeholders in Washington’s cannabis market should keep an eye on this legislation and prepare to make changes necessary to comply with SB 5131 if and when it gets signed.

UPDATE: On May 16, 2017, Governor Inslee signed SB 5131 without vetoing any sections of the bill.

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.