Cannabis lawyers
A good look indeed.

The Irish poet and dramatist Oscar Wilde once said, “You can never be overdressed or overeducated.” There were no cannabis companies in those times, but the idea that a little formality never hurt anyone holds true today. In the context of running a pot venture, Wilde’s aphorism remains particularly useful as a matter of policy. So, this is a post about cannabis companies doing things right.

We represent a large number of marijuana companies up and down the west coast. Though they are all eager to comply with state and local laws, some of our clients are dangerously informal regarding company structure and documents. These companies may suffer from inexperience, budgetary constraints, practical hurdles (i.e. lack of banking services), or lack of discipline. In nearly every interaction we have with informal businesses, we admonish them to get some basic paperwork in order. Today.

Marijuana companies are similar to other companies in that a lack of formality can be fatal. Take your standard C-corporation, for example. At a minimum, this type of company should have bylaws, a shareholder agreement, stock certificates, subscription agreements and articles of incorporation that comport with state statutes. When key company decisions are made, they should be documented through consent resolutions. Company funds should be kept separate from personal funds, and actions by directors and officers should be taken in their official capacities. Failure to follow these touchstones will expose shareholders to both legal and tax liability (through “piercing the corporate veil”). Often, lack of basic documents defeats the purpose of having a company altogether.

Long-time marijuana entrepreneurs are accustomed to informality. Historically, these individuals come from black and gray markets, and are used to operating underground. New market entrants tend to be more cautious, but as a general matter, they too have a belly for risk, given the status of federal law. But, although federal illegality is a difficult risk to mitigate, running an unstructured and improperly documented business is wholly unnecessary. It is taking risk for risk’s sake, and it is unwise.

In seven years of representing cannabis businesses, our firm’s cannabis lawyers have yet to see a client shuttered by federal agents. We have, however, seen plenty of them buckle under from disputes or tax headaches that were foreseeable, preventable and directly attributable to either a lack of basic documentation, or a lack of adherence to protocol. Often, we meet these clients for the first time mid-stream: sometimes the situation is salvageable; other times, not.

Even a company with the tightest, most polished documents possible may stumble if its owners or agents fail to follow formalities. Having an exquisitely tailored operating agreement, for example, will not avail an LLC member if he commingles business and personal funds. Similarly, if a corporation’s president ignores her company’s bylaws for an end-run around the board, she could find herself in peril. It is not enough to have good paper: good governance is also needed.

Getting appropriate documents in place should not be terribly challenging for a cannabis venture. It is something that should be done thoughtfully at the outset with guidance from an experienced corporate cannabis attorney, and it should not break the bank. As the business grows, existing documents will be amended or restated from time to time, and new documents will be generated. And if company owners and agents keep it formal enough — as Oscar Wilde would have it — things are likely to work out fine.

Trial_by_Jury_UsherWe are business and corporate lawyers, not criminal lawyers. This means we know enough about the law to tell someone when he or she may need criminal defense services, but we do not provide those services. Still, the specter of federal criminal charges is ever-present in the cannabis industry. When cannabis clients ask us about theoretical legal risks, we advise them that both civil and criminal liability exposure exist, on a spectrum from asset forfeiture to actual imprisonment. And we advise them that if they were charged for a violation of the federal Controlled Substances Act (CSA), we would help them find them a criminal lawyer.

In Oregon, Washington and California, we represent large cannabis businesses and vanguard industry players. For this reason, ever since Donald Trump was elected—and especially once Jeff Sessions was appointed attorney general—the question of whether our clients could eventually need criminal lawyers became more likely than before. The theory among many lawyers and policy-makers, after all, is that if the federal government takes action, it would not start with state programs or even with individual users, but with marquee industry players.

It is well established under Supreme Court jurisprudence that the federal government can enforce the CSA against state-legal operators. It is also worth noting that the Rohrbacher-Blumenauer amendment only safeguards medical marijuana programs and participants. Therefore, if the feds sue an adult-use (“recreational”) operator and drag it into court, a jury would likely be instructed that if the operator traded in marijuana it had violated the CSA. And that is where things could get interesting.

Most people—and even many lawyers—are surprised to learn that juries are not required to follow the law. When a jury’s conscience takes over and tells it that someone does not deserve criminal punishment for his or her actions, regardless of the law, the jury can choose to acquit. In legal terms, this is known as “jury nullification“: a systemic public safeguard from government run amok. To the chagrin of prosecutors, when jury nullification occurs, the Fifth Amendment’s Double Jeopardy Clause also prevents the acquitted person from being re-tried for the same charge.

Jury nullification has been a thorn in the side of state and federal prosecutors from our country’s early days. It became common in trials under the immensely unpopular Fugitive Slave Act of 1850, which criminalized any action that interfered with the recovery of fugitive slaves by slave owners. It again became common in the 1920s, when the immensely unpopular Volstead Act criminalized alcohol possession, on the heels of the 18th Amendment. These examples beg a timely question: what other federal law has become immensely unpopular of late?

The possibility of jury nullification in a CSA case against a cannabis business is both fascinating and realistic. It is realistic not just because of the favorable polling for cannabis nationwide, but also because these juries would be empaneled in jurisdictions that voted to legalize pot in the first place. Imagine a hapless U.S. attorney being ordered to charge a popular cannabis farm in Humbolt County, California, which is America’s largest cannabis labor market. It would make for an interesting show, to say the least.

We tend to write more about law than policy on this blog, but the 29 states with medical marijuana programs, the 8 states with adult use programs, and the overlapping 46 states that allow some form of cannabis possession, are all acting at the direction of their citizens when it comes to marijuana, ignoring federal law. The Cole Memorandum, which has helped facilitate state-level legalization since 2013, likewise discounts federal law.

What’s to say a jury wouldn’t do the same? If you were on a jury would you convict for cannabis?

EDITOR’S NOTE: This article stems from a paper titled “Jury Nullification Risks for Federal Cannabis Enforcement: How History and Common Sense Protect the Recreational Marijuana Market.” The paper was written by Emily Baker, a third year student at Lewis & Clark Law School in Portland, Oregon.

Marin County Cannabis
Marin County Cannabis: fog with a bit of sun

We’ve written recently about Marin County in our Cannabis Countdown series. We started with a history and update of Marin County’s medical cannabis ordinance. We then followed up with an update when the County Administrator rejected all ten applicants for medical cannabis dispensary licenses in Marin County (unincorporated Marin that is). Of the ten applicants that were denied, eight filed appeals to the rejections by the County Administrator and seven presented oral arguments before the Marin County Board of Supervisors and the public on May 23rd (one applicant withdrew its appeal before the hearing).

Before hearing the appeals, the County Administrator and Marin County Board of Supervisors released their reasoning behind their rejection of the applicant’s request for medical cannabis dispensary licenses. Although they varied from applicant to applicant there were a couple of common threads our readers will find useful:

  1. Applicants that did not have prior experience running cannabis dispensaries were facing an uphill battle. Sure, people can learn on the job, but a lack of experience is not going to be viewed favorably. If an applicant did not have a substantial background running cannabis dispensaries it was one of the first things the Board of Supervisors pointed out.
  2. The tiniest details do matter, especially if you’re hoping to open up a cannabis business in a jurisdiction that’s apprehensive about allowing in cannabis businesses. The Marin County ordinance listed 17 criteria for review in determining whether to grant or deny a medical cannabis dispensary license (See Section 6.85.061 of Ordinance 3639). Make sure your application clearly and forcefully addresses every single one of these areas for review because if you don’t, your minor oversight(s) could very well be the cause for denying your application. This is something we know well from the hundreds of cannabis applications we have done in multiple states (mostly California, Washington and Oregon).
  3. Not every locality is ready to open up to for-profit cannabis businesses. Mind you, I’m not talking about recreational cannabis use under the Adult Use of Marijuana Act (AUMA) but for-profit medical cannabis businesses allowed under California’s Medical Cannabis Regulation and Safety Act (MCRSA). The Marin County Board of Supervisors was quick to point out if an applicant was well-positioned to convert from a non-profit entity to a for-profit one. They were concerned that a for-profit entity would be more concerned about sales than the health concerns of their patient members and being a good community partner. Such a concern may have been unfounded but it didn’t diminish the weight the board placed on the distinction between non-profit and for-profit cannabis businesses.
  4. This is California so don’t ever forget about traffic and parking. The Board considered either a likely increase in traffic or insufficient parking spots as an issue with every single applicant. America is a pretty divided country on many issues right now, but I’ve yet to see a pro-traffic party so be prepared to address this issue as everyone is concerned with it.
  5. Public support is important. What was clear from the start was that most of the applicants had learned their lessons from the public hearings previously held during the application process – which were overwhelmingly attended by those against cannabis businesses. There were many people in the audience there to support of the applicants, as demonstrated by stickers favoring certain dispensary applicants and more encouraging comments when the floor was open to the public. Practice, practice, practice. Although not a stated reason for their rejection, it was clear some of the applicants did not spend enough time properly preparing their oral arguments to the Board of Supervisors. Your attorney represents your business so select them wisely. It’s also important to highlight that tone matters. One applicant seemed to treat the Board with outright contempt. You may find yourself before that board again or word of your behavior will travel across the state and imperil your future endeavors; so take a deep breath before you tell a Board of Supervisors at a public hearing how you really feel. Not a good strategy.

Professionalism, tone, and demeanor are especially important because although the Marin County Board of Supervisors dished out heavy doses of stick, they also dangled a carrot at the end of the hearing by requesting the County Administrator’s office and its working group report back to the Board with suggestions for a medical delivery business licensing plan. There’s no denying that these hearings were a momentary setback for the medical cannabis movement in Marin County but there were some positives to take away. First and foremost, the Board of Supervisors reiterated its desire to provide Marin County residents with safe access to medical cannabis and to structure a licensing program to meet that need. Second, Marin County and its municipalities will want to address this issue or they will continue to lose significant tax revenue to neighboring counties. Yesterday was not a good day for cannabis in Marin County, but there are more days ahead.

Cannabis trade associationsLast week, we wrote about a new cannabis industry group in Oregon, the Craft Cannabis Alliance. In addition to national groups like the National Cannabis Industry Association, more and more regional, state, and local cannabis trade associations have been forming. Generally, they begin with political goals in mind. The national groups work toward marijuana legalization at the state level and on lifting restrictions at the federal level. State and local cannabis groups typically work for specific regulatory fixes or lobby local governments to resolve land use challenges. When cannabis trade associations go beyond run of the mill lobbying work, however, they can present legal risks to their members with potentially harsh consequences. Specifically, if trade association members take steps to limit their competition with one another, they can face massive civil penalties.

Competition law, referred to in the United States as antitrust law, has both federal and state components. Federally, antitrust law stems from the Sherman Act of 1890, the Federal Trade Commission Act of 1914, and the Clayton Act of 1914. The Sherman Act prohibits every “contract, combination, or conspiracy in restraint of trade.” The Sherman Act has been interpreted by courts over the years not to outlaw every restraint of trade — it specifically targets “unreasonable” restraints such as price fixing, dividing markets, and rigging bids. Most states also regulate unfair competition. In Washington State, we have the Consumer Protection Act, which largely mirrors the Sherman Act’s prohibitions in restraint of trade.

In most international jurisdictions, actions for violation of competition law are limited to governments. In the United States, however, both state and federal statutes provide for private rights of action. This means private parties that are damaged or potentially damaged by unreasonable restraints of trade may be able to collect treble damages, attorney’s fees, and injunctions against any company that is a party to the unreasonable restraint of trade.

Trade associations, then, provide an easy pathway to violations of state and federal competition law. Many of the smaller regional trade associations are focused on a specific sector of the industry. Retailer groups as well as cultivation groups have formed across the legal cannabis states in the western United States. Imagine this situation: a trade group made up of farmers meets to discuss lobbying on state pesticide rules. As the meeting winds down, conversation turns to talking about the glut of supply in the market, driving down prices. One producer says she has no plans whatsoever to sell below a certain price. Another producer says the same thing, and others nod in assent – agreeing it would be unprofitable for any of them to sell below that price.

That conversation can create huge liability problems for all its participants and for the trade group as a whole. Even if there isn’t a formal written agreement, an aggrieved party could still show an unreasonable restraint of trade. Actions of an association or actions of its members consistent with an unreasonable restraint of trade can be evidence of an agreement of the association’s members. Certain agreements, including price-fixing and market allocation agreements, can actually be crimes that include jail time. And though federally criminal conduct is nothing new for participants in the cannabis industry, those that violate competition law are not even granted the minimal protections of the Cole Memo.

Trade associations are particularly susceptible to certain types of anti-competitive behavior. Associations with codes of conduct, standard setting, and certification can unwittingly create anti-competitive behaviors. If a provision of the code of conduct is unreasonable and deemed to act as a restraint of trade — as opposed to a reasonable attempt to pursue a legitimate goal –could make association members that act pursuant to that code section liable for antitrust violations. Judges and juries have large amounts of discretion in determining whether a restraint on trade is unreasonable or not, so a legitimate safety standard to one person may be an illegal attempt to force a boycott of a competitor to another person.

Trade associations need to take steps to ensure their group does not create antitrust liability for its members. Anti-competitive agreements can be inferred if two or more market actors are taking parallel action and it can be shown that the competitors have engaged in illicit communications. So it makes sense for a trade association’s leadership to run tight meetings. All business should be formally proposed to an executive committee, which then limits discussion at broad group meetings to the specific business on the table. Agendas and presentations can be distributed in advance, and participants should be informed to stick to the specific issues at hand. Leadership can further inform the members that certain topics are completely off limits: pricing, whether to do business with certain market participants, decisions regarding company product output, and complaints about the business practices of other companies.

By taking these steps, an association can help prevent its meeting minutes from being used as proof of anticompetitive conduct. And if individual members engage in such conduct with one another, it is easier for other members to claim they were not involved in the anticompetitive acts.

There are many areas of law that the young cannabis industry hasn’t had major problems with yet. Products liability laws, antitrust laws, and others have seemed like distant problems, given that simple banking and taxation has been such a problem. But it is vital for industry members to remain proactive. Otherwise, public and private actors can upend the industry with a well-timed lawsuit.

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

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

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

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

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

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

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