Cannabis franchising
Who will be the McDonald’s of Marijuana?

We often work with cannabis businesses that want to license their brands to third parties. Licensing is a great way to expand the reach of a brand and make some revenue without the capital expense of funding and owning a new location outright. For states that restrict ownership of marijuana businesses to state residents, licensing can be one of the primary ways non-state residents get into the market.

But any time a business enters into a licensing deal where the licensee is in the same line of work as the licensor, challenges arise. Specifically, that licensing agreement can be interpreted by state and federal regulators to create a quasi-franchise. As we’ve written before, this can cause problems because franchises must comply with a bevy of state and federal rules with which non-franchises do not have to contend.

Just because franchises are regulated, however, does not mean they are to be avoided forever. The first cannabis company to execute on a well-planned franchise model is going to make an absolute fortune. To date, there hasn’t been a lot of movement of would-be marijuana franchisors. Part of the reason is that would-be franchisees want to see established brand and operations value before entering into a franchise agreement. To demonstrate that value, a franchisor company’s best bet is to show positive performance at multiple locations. A single cannabis retail store may do great business, but from the outside, it is hard to tell whether that store is benefitting more from its location or its local team or its marketing or its branding. But when multiple locations carrying the same branding and using the same business practices consistently put up big numbers, they become very enticing to potential franchisees.

Market consolidation is already happening — a first step in creating the types of chains that can be precursors to franchises. In Colorado, data shows that more and more retail stores are becoming part of corporate retail chains. Washington recently increased its cap on direct ownership of marijuana businesses, allowing an individual to own up to five retail licensed businesses, and has seen similar movement toward consolidation.

In looking for potential franchise locations, California’s new demand-rich market is a logical target. California also boasts some of the nation’s most restrictive franchise laws, providing significant protections for franchisees. Franchises must, of course, be registered with both the Federal Trade Commission and with the state of California. California also requires the Franchise Disclosure Document, a large comprehensive document defining the ins and outs of the franchise relationship, to be registered with the state. Franchisors are prohibited from terminating franchise agreements early without good cause, and a franchisor cannot stop a franchisee from selling or transferring the franchise to a different person that meets all of the franchisor’s current standards for new or renewal franchisees. If a franchisor wrongfully terminates a franchise, the franchisee is entitled to the fair market value of the franchised business and assets as damages.

And though California has the strongest protections for franchisees, most other states offer similar protections. A franchise isn’t a relationship a franchisor can enter into on a whim; it is a significant long-term commitment of time and money.

All that said, it’s only a matter of time until we see big movement in cannabis franchises. They represent part of the natural progression of a growing industry.

Please join us today from 12 pm to 1:15 pm Pacific for a webinar on the rights, opportunities, and responsibilities of California municipalities regulating cannabis. The webinar will feature Brad Rowe of BOTEC Analysis, a drug and crime policy research and consulting firm, and Hilary Bricken of our LA office, who will present on the information, data, and legal and policy considerations local governments need regarding MAUCRSA and their ability to regulate or ban cannabis.

Topics covered during the webinar include:

  • How can municipalities balance cultivation, production, sales and use restrictions while staying eligible for funding under MAUCRSA?
  • What can local governments expect from MAUCRSA funding long term? How and when does MAUCRSA money sunset, and who will be affected?
  • What are realistic and lawful municipal cannabis tax policies? What groups would be affected and how?
  • What might taxing by THC content look like? What groups would be affected and how?
  • How can market measurements help localities model tax revenues and assist in locating dispensaries?
  • What are the opportunities for communities that have enacted a ban and plan to reverse it down the road?
  • How can cities leverage unionized cannabis workers (see LA) to create a credit union and a pool of money to support small and minority-owned business?
  • What are current banking options for operators?
  • What are the policy considerations of allowing only medicinal versus recreational and what have we learned from other states and local governments about this?
  • How should municipalities value and reward existing operators without being overly protectionist?
  • What are the mechanisms for municipalities to communicate effectively with each other and with the state in an environment of ever-changing regulations?

Brad and Hilary will address audience questions both during and at the end of the webinar.

Local governments in California are squarely in charge of who gets to participate under MAUCRSA; they are on the front lines of policing operators while balancing communal impact and concerns. As such, don’t miss this webinar to better educate yourself on the range of policy and tax choices and regulatory and legal oversight mechanisms available to local governments under MAUCRSA. To register, please go here.

Josephine County Cannabis
The scales have tipped sharply against legal growers in Josephine County, Oregon.

At the end of September, we discussed the successful efforts of local growers in Josephine County, Oregon, to stop an ordinance that would have effectively banned commercial and medical marijuana on rural residential land in the county. After passionate argument by the growers, the Josephine County Board of Commissioners (“Board”) went back to the drawing board.

And they came back with something arguably worse. For comparison purposes, here is a short summary of the ordinance that almost passed back in September:

  1. Any OLCC licensed site would need a 300-foot setback on all sides. Currently, the code requires a setback of 30 feet in the front, 10 feet on the sides, and 25 feet in the rear.
  2. The property would need to be owned directly by the OLCC licensee. This would be problematic because many licensees lease land, or hold the land in a separate holding company for liability purposes.
  3. No OLCC site could be serviced by private road, easement, or owner maintained public right-of-way unless the OLCC producer owns all of the land adjacent to the right of way.

Any farm that could not meet these requirements would have had thirty days from the date the ordinance went into effect to request a Determination of Non-conforming Use. To qualify for a non-conforming use determination, a recreational site needed to:

  1. Be in full compliance with the county codes as they existed prior to the amendments; and
  2. Either have obtained a Land Use Compatibility Statement (“LUCS”) from the county planning department prior to the adoption of the new ordinance amendment, or have applied for a LUCS prior to the adoption of the amendment that is being “actively processed by [the] OLCC with the intent to issue a license.” 

And here is a short summary of the ordinance that was officially adopted on December 6, 2017. Any property zoned rural residential with more than 12 mature plants (the ordinance doesn’t seem to distinguish between medical and recreational) must comply with the following requirements:

  1. Cannabis production will be banned outright on all lots or parcels of five acres or less. This provision was included even though Commissioner Dan DeYoung has previously been quoted as saying “The rules should be the same for all rural residential whether it’s one acre, two and a half acres, five, ten, twenty-nine.”
  2. Lots larger than five acres may have up to a 1,250 square foot indoor grow area or a 5,000 square foot outdoor grow area (compared with the 10,000 square foot indoor or 40,000 square foot outdoor maximum per license allowed by OLCC regulations).
  3. The property must have a 100 foot setback on all sides for all structures and grow canopies.
  4. “The person regulated by the State of Oregon must have an interest in the lot or parcel where the marijuana production site is located.” At a minimum, this provision will ban the common practice of landowners leasing a property to third-party cannabis farms. Whether this will affect the practice of a farm owning the land in a separate holding company is a bit less clear. OLCC licensees are almost always companies, so is the company the “person regulated by the State of Oregon”? If so, it seems the licensee company will have to have some direct ownership interest in the separate holding company
  5. All security personnel on the property must obtain and maintain Marijuana Worker Permits from the OLCC. Normally, only workers that physically interact with cannabis must have a permit.
  6. Indoor production must use odor control systems. We believe this just requires what farms should be doing anyway, as we have previously recommended cannabis farms use odor control systems to avoid costly neighbor disputes.
  7. The county will notify all neighbors of any cannabis farm and owners must post notices of cannabis production where their properties meet public streets. Both of these requirements raise safety and security concerns.

Any farm licensed by the OLCC before March 6, 2018, will be considered a “special or unusual circumstance” and may apply for a variance from these regulations.

The group of growers and concerned citizens we discussed in the previous post have formed F.A.R.M.S. (Farming and Agricultural Rights Management Society) and are vowing to challenge this ordinance in court. We will keep you posted.

 

Cannabis Litigation Webinar
Please join us for our cannabis litigation webinar

On January 11, 2017, Harris Bricken will present a FREE lunch hour webinar on cannabis litigation. Please click here to sign up.

Harris Bricken’s cannabis litigators have been handling cannabis disputes for years. These cases involve business entities including partnerships, corporations, and LLCs; intellectual property; employment; investment and financing; landlord-tenant issues; and administrative actions. As the cannabis industry expands, litigation in these areas, as well as in new areas such as product liability and patents, will increase.

Cannabis cases are different than any other type of business litigation, and nearly every case has a federal law component. State legalization has also led to an enormous statutory and regulatory apparatus that cannabis businesses — and their lawyers — must navigate every day. To meet the needs of the cannabis industry, Harris Bricken has experienced and dedicated civil litigators in its Seattle, Portland, San Francisco, and Los Angeles offices, including Vince Sliwoski, Hilary Bricken, John Mansfield, and Will Patterson. These lawyers will speak on various topics, including:

  1. The state of cannabis litigation and emerging trends
  2. How cannabis disputes are different than disputes in other industries
  3. Disputes involving partnerships and other business entities
  4. Intellectual property disputes
  5. Product liability disputes
  6. Federal law issues
  7. Employment disputes
  8. Remedies in cannabis lawsuits
  9. Ways to avoid cannabis litigation

If you are in the cannabis industry, understanding business disputes and how to avoid them is critical. And if you are unfortunate enough to find yourself in a dispute, you need advisors experienced in handling these issues. We hope you will join us next month for a lively panel discussion on this important topic. Go here to sign up.

In the meantime, here is a healthy list of articles regarding cannabis litigation:

California cannabis lawyers
Get ready for California cannabis licensing

If you are looking to get involved in California’s soon to be massive legalized cannabis industry, you do not want to miss our upcoming webinar, entitled, “What You Need to Know Now to Get Your California Cannabis License on January 1,” will be on Monday, December 18, from noon to 1:15 p.m.

Featuring two of Harris Bricken’s Los Angeles-based cannabis attorneys, Hilary Bricken and Julie Hamill, and two of our San Francisco-based cannabis attorneys, Alison Malsbury and Habib Bentaleb, this webinar will give listeners an overview of the recently issued emergency MAUCRSA rules governing medicinal and adult use cannabis licensing and operations in California. It will cover the licensing process for each license type, operational standards for all license types (including renewable energy requirements for cultivators), the 6-month “transitional” period for product and operations, major changes between the MCRSA and MAUCRSA rules, and key unknowns posed by the rules.

You can register for this free webinar here.

We will be taking audience questions before, during, and after the presentation. For logistical questions or to send questions to presenters in advance of the webinars, please email firm@harrisbricken.com.

We look forward to “seeing” you there.

Consolidation, Connection and Automation Differentiate Blockchain from Current Technologies

Following my last post about blockchain technology and the cannabis industry, a Canna Law Blog reader commented, “[m]aybe I’m missing something. How is this better than just scanning a barcode when the item changes hands like they do with FedEx?”

Great question. I asked similar questions early on in my work with blockchain technology. What differentiates blockchain from applications like DocuSign, DropBox and Google Drive which already provide a shared, instantaneous and relatively secure system.

Among other things, blockchain connects these isolated applications and consolidates them into one place — enabling faster, more secure, automated transactions. A barcode scan by FedEx is a single event trapped in the FedEx system. When shipping an item, FedEx, the shipper and the recipient can track the package by entering the tracking number on FedEx’s website. Blockchain, on the other hand, reveals all of the steps to all of the parties with permission to view the chain, such as the manufacturer, its suppliers, the seller, the various warehouses and intermediate sales channels (e.g., Amazon’s distributed sales network), the carrier (FedEx), the recipient, any inspectors at stages along the way, the paying bank, the receiving bank, the government taxing and other authorities. All are all linked. In a non-blockchain system, all of the various participants work on their own independent systems, which are arguably insecure and not linked into one, single, immutable ledger.

The FedEx scanning is, as you can see, only one small step in a larger chain of events and participants.

FedEx Scanning and Tracking Does Not Create Self-Executing Smart Contracts

In addition to the linking of participant networks as described above, blockchain technology can also be used to create self-executing “smart contracts,” where automatic and instantaneous responses are triggered by certain pre-defined events. Participants in a smart contract, for example, should get paid at the right time without the need for anyone to issue an invoice, receive an invoice, write a check, make a wire transfer, or execute a credit card transaction. Payment triggers would be written as code into the blockchain. According to Accenture, investment banks alone could save up to $12 billion per year by adopting blockchain and smart contracts. Gartner has estimated that by 2022, defined impact smart contracts will be in use by more than 25% of global organizations.

DocuSign is similarly just one small piece in a larger chain of events and participants. In a blockchain setting, a law firm would not be required to issue an invoice or to continually bug a client about paying a retainer as it would happen automatically. Submitting the engagement document to the blockchain with a digital signature would trigger a series of events. One event would be payment to the firm. The digital signature would be an authorization to the client’s bank to pay the bill automatically, with no additional approval needed from the client. If the payment is subject to conditions, then the “smart contract” would set out those conditions and the method for proving fulfillment. When fulfilled, the payment would be made. Consider the amount of time and friction that would save for a small entity. Then consider the amount of time and friction it would save for a large company and the economy as a whole.

Same with a DropBox type program. Once a document is accepted into a blockchain ledger, it does not just sit there inert as it does in DropBox. The entry into the ledger would trigger other actions: payment of a bill, issuance of a deed or registration of a deed of trust. Isolated transactions would be linked into the chain. If there is no need for this chain, e.g. if no network of participants exists, then blockchain is not required and the dead letter box of DropBox would be adequate.

 

The Downsides – Implementation Costs, Loss of Privacy and Intrusive Government Surveillance

Blockchain reduces time and friction, but what about the time and friction required to create a blockchain program, adapt old records into the system, program smart contracts with highly specific code language, and maintain the program over time? When blockchain’s benefits outweigh these downsides, we will see mass adoption of the technology.

As discussed in my previous article, blockchain technology has obvious benefits in the cannabis industry as a supply chain tracking mechanism. Regulators and technology companies have already shown interest in implementing a blockchain-based track and trace system. What has not been discussed, however, is how intrusive government participation could be if regulators are included as an authorized party in a blockchain system. Most would feel uncomfortable knowing the government could comb through all of their cannabis transaction histories with just one click. In fact, the Fourth Amendment protects United States citizens against such unreasonable searches. Further, the European Union’s incoming General Data Protection Regulation regarding consumer data privacy and ownership rights and the US Fair Credit Reporting Act, the Gramm-Leach-Bliley Act and the SEC’s “Regulation SP” all require personal financial data be redactable—something not possible on an immutable platform.

It remains to be seen how blockchain systems will strike a balance between privacy rights and the needs of government regulators. We will likely see mechanisms to allow government review of transaction history only upon demonstration of probable cause or upon consent of the participants. We should also expect to see opposition from the cannabis business community to the ability of government to participate in the blockchain ledger at all. I will monitor developments in this space as the technology and regulations evolve and continue to post about them here.

Cannabis legaization and federal law
We are hoping for a good roll from the Christie case

Christie v. NCAA is a U.S. Supreme Court (SCOTUS) challenge to the federal law that bans states from allowing sports gambling. Though nothing in Christie addresses cannabis directly, SCOTUS’s decision, due out next year, could give Congress a tool to ban states from allowing legal marijuana.

In 1992, Congress passed the Professional and Amateur Sports Protection Act (PASPA), which prohibits states (save for some that were grandfathered) to “authorize” gambling on sports. The state of New Jersey, which was not grandfathered, passed laws in 2012 to authorize sports betting. In a federal case, the state admitted that these laws violated PASPA, but argued that PASPA unconstitutionally allowed the federal government to “commandeer” the state to enforce federal law. The Court of Appeals found that the Constitution’s anti-commandeering doctrine (derived from the 10th Amendment) didn’t apply here because PASPA didn’t affirmatively require New Jersey to do anything, but simply prohibited it from enacting laws that allowed betting on sports. The Supreme Court declined to review the Court of Appeals’ decision.

In 2014, New Jersey passed a new law that merely repealed existing its laws prohibiting sports betting. The Court of Appeals was unconvinced that the new law was any different than the 2012 law. According to the Court of Appeals, the difference between “authorizing” sports gambling and “repealing” laws that prohibited sports gambling was insignificant. The result in either case was that New Jersey allowed gamblers in New Jersey to bet on sports, which was banned by PASPA.

This time SCOTUS took notice and agreed to hear the case. New Jersey’s brief before SCOTUS argues that under the anti-commandeering doctrine, it makes no difference whether the federal law prevents a state from repealing a law or affirmatively forces it to pass a new law. Either way, the federal government is forcing New Jersey to regulate conduct that its voters would rather leave unregulated. At least one amicus curiae brief argued that upholding the lower court’s decision would allow Congress to require states to affirmatively ban medicinal or recreational cannabis, denying the states their traditional role as experimenters in parallel legal regimes.

On December 4, 2017, SCOTUS heard oral argument in Christie v. NCAA. While it is difficult to predict the final decision simply from oral arguments, at least one noted commentator opined that “Justices seem to side with the state on sports betting.”

But what will happen to state-legalized cannabis if SCOTUS goes the other way and upholds the lower court’s decision? Nothing at first. Christie will only decide the question of whether the lower court properly found that PASPA applies to the New Jersey law. Although Justice Sotomajor mentioned marijuana in passing at oral argument, the issue of state marijuana regulations is not before SCOTUS in Christie. In the future, however, it is at least conceivable that Congress could take its lead from such a ruling and pass a law that requires states to repeal their legal cannabis regulations.

 

corporate cannabis lawyer
What will you say about cannabis this holiday season?

For many of us, the holiday season means attending a number of office holiday parties. Between trying to snag egg-rolls and chicken skewers there’s a lot of networking, re-connecting, and small talk (so what do you think about Jimmy Garoppolo?). If you’re talking to a stranger, the conversation often leads to “and what do you do?” When I tell them I’m a corporate attorney who advises cannabis businesses, they usually ask about the federal government. Specifically, they ask what’s keeping the federal government from cracking down on the cannabis industry? That’s when I ask them if they’ve ever heard of James Cole, Dana Rohrabacher, and Earl Blumenauer. I then give them a brief history lesson (while keeping an eye out for new appetizers) on the Cole Memorandum and the Rohrabacher-Blumenauer amendment (formerly known as the Rohrabacher-Farr amendment).

We’ve previously covered the tenuous nature of the Cole Memo since U.S. Attorney General Jeff Sessions can revoke it at any time. Fortunately for the burgeoning cannabis industry, Sessions has managed to restrain himself and has kept the Cole Memo in place. What’s of more immediate concern is the status of the Rohrabacher-Blumenauer amendment (“RBA”).

The RBA prohibits the U.S. Department of Justice (“DOJ”) from spending money to interfere with the implementation of a state’s medical cannabis laws. The RBA has proven to be one of the strongest protections for the cannabis industry since the Ninth Circuit Court of Appeals enforced the spending prohibition against the federal government. After that ruling, the DOJ filed a motion to put a stay on one of its cases against medical cannabis growers in Washington (known as the Kettle Falls Five case). In order for the RBA to survive, either the House of Representatives or U.S. Senate appropriations committees need to attach the RBA to a federal spending bill. That federal spending bill then needs to be approved by the House and Senate and then signed by the President. The House is doing its best to keep everyone in the cannabis industry nervous this year as they blocked a floor vote on the RBA back in September. To add to the unease, Congress came dangerously close to another government shutdown this past week as it had until December 8th to pass a budget to fund the government. Congress didn’t pass a comprehensive budget but instead passed a stopgap spending bill to keep the government running – and the RBA in place – until December 22nd.

A two-week extension of the RBA does not come close to providing the stability cannabis businesses in a billion dollar industry need when making strategic business decisions, but it’s better than the alternative: a government shutdown and wild uncertainty. What the stopgap bill does do, however, is buy everyone time to call their local congressperson and Senator to voice their support for the RBA and for an end to the federal government’s antiquated (and unjust and immoral) position on cannabis. What we’ve learned in President Trump’s first year in office is that he hasn’t made cannabis policy a priority and he will most likely sign whatever spending bill Congress puts in front of him.

The President’s lack of interest in protecting the legal cannabis industry means it’s vitally important YOU call your representative to make sure the RBA is included in the spending bill that ends up on the  President’s desk. So make that call and send that email! We don’t want the conversation at the next holiday party to be in remembrance of the Rohrabacher-Blumenauer amendment.

cannabis litigation
Cannabis litigation is its own thing

Two previous posts (here and here) discussed the McCart v. Beddow case, in which an attorney who was fed up with cannabis grows next to her rural home filed RICO (Racketeer Influenced and Corrupt Organizations Act) claims against dozens of defendants who allegedly participated in a criminal enterprise that damaged her by diminishing her property value, among other things. The defendants aptly described the lawsuit as an “attempt to put some shiny federal lipstick on an otherwise quite beleaguered pig of a state-law nuisance claim.”

The McCart case appears to be wending its way towards settlement.  Although motions to dismiss the complaint were filed, the plaintiff never responded to them and the court never addressed the merits. We probably won’t get to see the terms on which the parties settled, as settlements are usually kept confidential.

Meanwhile, the same attorney has filed a similar lawsuit on behalf of property owners in the Lebanon/Albany Oregon area, against various grow defendants. Ainsworth v. Owenby, Case 6:17-cv-1935, D. Or. It will be interesting/important to see how the RICO/nuisance claims hold up this time around.

In the meantime, this case nicely highlights how cannabis litigation can be so different from other litigation; who brings a RICO claim against their neighbors? Which is a perfect segue to tell you how I and three of our other Oregon, Washington and California cannabis litigation lawyers will be putting on a FREE webinar on January 11. Go here for full information and to sign up.

Ignore harassment complaints and face liability.

If you have a successful cannabis business, you likely have employees. Whether you have a few or many employees, your cannabis business can be liable for the actions of those employees. This post (the first in a series) will explore the various ways your cannabis business could be liable for the actions of your employees and the ways you can protect against such liability.

We recently discussed the importance of your cannabis business having a sexual harassment policy. A sexual harassment policy is important to establish a workplace that is safe for all employees but it is also an important tool to protect your cannabis business from liability for sexual harassment claims.

There are two types of sexual harassment: Quid pro quo and hostile work environment. Quid pro quo harassment is committed when some type of employment benefit or employment decision is made contingent on sexual advances or favors. Examples of quid pro quo harassment are when a supervisor fires an employee after the employee refuses the supervisor’s sexual harassment or if the employee does not receive a deserved bonus after refusing sexual advances. Only supervisors can commit quid pro quo harassment. Employers are automatically liable for quid pro quo harassment that results in a tangible job detriment.

A hostile work environment occurs when there are frequent or pervasive unwanted sexual comments, advances, requests, contact, conduct, or other similar conduct. Any employee can create a hostile work environment. Unlike quid pro quo harassment, employers are not automatically liable for employee actions that result in a hostile work environment. An employer is not liable if it can prove that it (1) exercised reasonable care to prevent the sexual harassment, (2) remedied the harassment and (3) that the aggrieved employee unreasonably failed to take advantage of those preventive and remedial measures.

An employer can demonstrate reasonable care to prevent sexual harassment by having a comprehensive non-harassment policy and complaint procedure in place. Merely having the policy in place is not enough. The employer must actually follow the policy. For instance, if the employer has a complaint procedure policy that requires employees to report the harassment to a specific person but that person is never available, the complaint procedure is not reasonable.

The employer must also have taken remedial action once it knew of the harassment. Remedial action includes a comprehensive investigation into the allegation and disciplinary action to ensure the harassment stops. If these procedures are in place, but the aggrieved employee unreasonably failed to take advantage of the preventive and remedial measures, an employer may not be liable for the alleged harassment.

If an employer knew or reasonably should have known about harassment, it can be found liable even if the employee victim does not follow the complaint procedure. For example, if a supervisor or someone else with decision-making power views an employee harassing another employee and does not investigate further, the employer may be liable for the bad acts of the employee.

The bottom line is that your cannabis business should create a strong no-harassment policy and complaint procedure and carefully follow it. You also should perform investigations when sexual harassment complaints arise and take disciplinary action as necessary. You cannot control the actions of your employees at all times, but you can take steps to protect your cannabis business from the bad acts of your employees. For more on drafting a strong anti-harassment policy and following the policy, view our post here.