The Washington State Liquor and Cannabis Board (LCB) enforces a wide range of rules and laws on cannabis. Because of this, our cannabis attorneys constantly stress to our clients the need for them to set up and rigorously maintain comprehensive regulatory compliance protocols to avoid violations of LCB rules and regulations and to mitigate penalties should such violations occur.
When the LCB believes a licensed cannabis business has committed a rule violation, it will issue the licensee an Administrative Violation Notice (AVN), describing the alleged violation and a recommended penalty. The LCB has broad discretion in assessing penalties for cannabis rule violations, based on Washington Administrative Code instructions that it consider mitigating and aggravating factors in making that penalty assessment. Penalties generally increase if the cannabis licensee has had repeat offenses within a two-year window.
The Washington Administrative Code separates cannabis violations into five categories:
- Group One—Public safety violations. These violations are considered the most serious and they have the harshest penalties. For example, a cannabis licensee caught buying or selling marijuana to or from an unauthorized source faces cancellation of its license with even a first offense.
- Group Two—Regulatory violations. These violations include failing to keep proper records, failing to submit required monthly reports, and improper advertising.
- Group Three—License violations. These violations include failing to abide by licensing requirements and license classifications. Some Group Three violations can result in cancellation of the cannabis license even on the first offense. For example, a licensee’s failure to disclose everyone who owns, operates, or loans money to a licensed cannabis business is a violation of Washington’s true party of interest rules and it can lead to a cancellation of the cannabis license. Other Group Three violations can result in monetary penalties and/or a suspension of license.
- Group Four—Nonretail violations. These violations involve the manufacture, supply, processing, and/or distribution of marijuana by nonretail licensees and prohibited practices between nonretail licensees and retail licensees. Generally, a first offense of a Group Four violation will result in a fine, but the LCB may cancel a license after the third Group Four offense.
- Group Five—Violations involving the transportation freight of marijuana. These violations can result in cancellation of a license for a first offense if marijuana is transported from or diverted to an unauthorized source. This includes marijuana transported outside the state of Washington.
The LCB generally doesn’t temporarily suspend producer or processor licenses; it instead employs monetary fines, destruction of inventory, and/or license cancellations to penalize non-retail cannabis licensees. On the other hand, Cannabis retail license holders generally see temporary license suspensions, monetary fines, or license cancellation.
A cannabis licensee has 20 days after receiving a Violation Notice to accept the penalty, request a settlement conference, or request an administrative hearing before an administrative law judge. At these settlement conferences, the cannabis licensee and the LCB discuss the circumstances surrounding the LCB allegations, the recommended penalty, and any aggravating or mitigating factors. You are allowed to bring an attorney to these settlement conferences and you should. The hearing officer’s settlement authority is often limited, but the primary goal of the hearing is to explain why the incident occurred, to identify what failures there were in the licensee’s internal compliance program, and for the licensee to detail a plan to prevent future violations. If a licensee successfully explains all of that, the penalty is generally mitigated. In mitigation, fines and suspension periods are generally cut by 40%-50%.
The administrative hearings on LCB rule violations are similar to court proceedings but a bit less formal. For example, these proceedings do not use the strict evidentiary rules of courts. At these hearings, the cannabis licensee and the LCB may question witnesses and submit and challenge documents regarding the alleged violation. The administrative law judge typically reviews the circumstances surrounding the alleged violation, including any mitigating and aggravating factors and determines guilt or innocence and then hands down a penalty pursuant to the penalty guidelines in the Washington Administrative Code. If the cannabis licensee is not satisfied with any aspect of the administrative judges’ decision, it can appeal to the LCB to have the decision overturned.
Bottom Line: Cannabis licensees should have company-wide policies and procedures in place to avoid rule violations and as a mitigation factor should any rule violation occur. They should also know their various options for dealing with any alleged violations.