olcc violation marijuana cannabis
Settling alleged OLCC violations is often possible.

Back in February, I discussed administrative litigation in Oregon and the types of violations Oregon cannabis businesses can be hit with. But what about settlement? Like in civil litigation, administrative litigation can be settled with the right tools and right team of lawyers on your side.

As a quick refresher, the Oregon Liquor Control Commission (OLCC) is the agency tasked with implementing and enforcing the recreational marijuana rules. The OLCC can and does conduct random inspections of marijuana licensees. These inspections sometimes lead citations for rule violations. These rule violations may then lead to a charging document outlining potential penalties– sometimes several months after the problematic inspection occurred.

A charging document is only the beginning. Depending on the category of the violation(s) assessed, and whether they are grouped together as single violation or listed as separate infractions, the charging document will allow the licensee to either: 1) waive its right for a hearing and pay a reduced fine or serve a reduced suspension, 2) request an administrative hearing, or 3) pay the full fine or serve the full suspension. If the licensee receives a Category I violation, the licensee will only have the option to request a hearing or surrender the license. You can view a table of violations and their categories here.

In order to enter settlement negotiations with the OLCC, you must request an administrative hearing prior to the relevant deadline. After an administrative hearing is requested, the matter will be referred to the OLCC “Administrative Policy and Process Division” and a staff member will be assigned to the case. Typically the staff member will reach out to the licensee (or their representative) but the licensee can also contact the OLCC and find out who is the assigned staff member. The OLCC staff member is the person the licensee will enter into settlement negotiations with.

According to my latest communications with OLCC staff, the agency has standard settlement agreements they enter into for Category II through V violations. Whether the OLCC will agree to a standard settlement is dependent on the number of violations cited and the number of violations the licensee has committed in the last two years. This means the staff member has the power to enter into the settlement agreements without approval from higher-ups. However, the OLCC does not have standard settlements for Category I violations. If a Category I violation is to be settled, it will take a lot of finesse, and ultimately, any Category I settlement must be approved by the OLCC director. We have settled all categories of violations on behalf of licensees.

Once a settlement agreement is reached, it has to be approved by the OLCC Board of Commissioners. The Board meets once a month and the pending settlement agreements are offered to them at the meeting. The Board then votes on the agreement and if approved, the licensee will then have to adhere to the terms of the settlement through either a penalty payment or temporary license suspension.

Administrative settlement is similar to civil litigation settlement. It involves the negotiation of two parties to reach a mutual agreement. One of the key differences with administrative litigation and settlement is that typically, the administrative body–in this case, the OLCC–holds most of the power. This is especially true with Category I violations. The fact that OLCC has leverage does not mean, however, that the OLCC will not enter settlement; it just means some more work and skill is necessary to reach an agreement.

Because an OLCC license is the lifeblood of an Oregon cannabis business, it is always best to adopt a compliance program and avoid alleged violations entirely (and remember– you are on the hook even for unauthorized actions of employees). If you do find yourself on the other side of a charging order, make sure you work with someone familiar with system and OLCC personnel, in order to give yourself the best possible shot at saving your license.

california cannabis lease
Entirely avoidable, fortunately.

We’ve written previously about some common issues landlords run into when leasing to cannabis businesses (see links at the bottom of this article). Now that we’ve seen almost a year’s worth of emergency regulations, and the state has released its proposed final regulations, we’ve also seen a variety of cannabis leasing issues crop up. Here are a few of the most common ones.

Insurance

This is a frequent problem. Sometimes it’s an issue with the landlord’s current carrier being no longer willing to provide coverage, or a questions of how to pass the increased cost of premiums on to the tenant if coverage is actually available. Or sometimes it’s about the tenant’s inability to obtain reasonably priced coverage with sufficient policy limits and necessary endorsements. But more often than not, insurance presents a problem for one or both parties. Fortunately, insurance is becoming more available and reasonably priced as more admitted carriers join the market. There are different strategies suitable for different insurance-related problems, but some examples have been building a termination contingency into the lease for landlord’s inability to obtain or maintain coverage on the building, or for tenant’s failure to obtain or maintain its required policies. Generally in cannabis leases, the cost of premiums gets passed directly onto the tenant, and in a multi-tenant building the increase will be allocated directly to the cannabis tenant. We do anticipate that insurance will become less of a problem as the market for providers continues to expand.

Federal and state enforcement actions

As we’ve also written previously, while federal enforcement is a concern both parties need to account for, state enforcement is the more pressing and predictable concern, especially now that both federal and state enforcement priorities are ostensibly aligned. The keys to accommodating enforcement concerns are: building early termination options into the lease; training indemnification obligations to enforcement event-related costs, damages, and claims; and including robust use restrictions in the lease. One solution has been to levy hefty increases in the security deposit to act as an indemnification bond, and to expand its use to act essentially as a landlord legal defense fund in the event the tenant’s noncompliance with the lease triggers an enforcement action.

Licensing

The easily obtainable temporary state cannabis license is a thing of the past: Now applicants must submit the full annual license application, which is far more robust and demanding. Similarly, it can take months for an applicant to obtain a conditional use permit in localities that require one, which is common. Understandably, neither landlord nor tenant will know quite how they feel about the tenancy–and how much they want to invest in tenant improvements–until there is more certainty on licensing. A common solution has been to build into the lease an anticipated licensing timeline with benchmark contingencies that allow the parties to evaluate progress and decide whether to terminate if there is not enough.

Security instruments

If a landlord’s property is financed, the note and deed of trust will often have terms requiring compliance with “all laws” (including federal), or prohibiting nuisances, or maintaining insurance coverage. A landlord’s compliance with those requirements can be jeopardized by a cannabis use on the premises, so the parties need to consider the possibility that landlord could be held in breach by the mortgagee, or would not be able to finance or refinance the property if needed. One solution to this problem has been to build in an early termination option for the landlord, but to also provide the tenant the option of securing or providing alternative financing, or paying the difference in interest rate between the landlord’s traditional loan and a hard-money loan.

Payment

Cannabis tenants are forced to deal mostly in cash because of federal banking regulations, and would love to be able to pay their rent the same way. Landlords should resist the temptation, and prohibit the tenant from paying in cash. Right now there really isn’t a great solution for this problem, except for landlords to make sure it’s not their problem. There are a handful of banks that serve cannabis businesses, and it’s the tenant’s responsibility to find them.

Subletting, multi-tenant buildings, and premises modification

Often, a cannabis tenant will be applying for multiple types of permits and licenses, with the intent of conducting several separate operations on site. For example, indoor cultivation, manufacturing, and distribution businesses all owned by tenant and operated under separate licenses under the same roof. Under current proposed regulations, this is possible, but licensed premises must remain separated by distinct barriers and locked doors. This means that where one or more cannabis tenants are operating on the same site (often a former warehouse) tenant improvements will be needed (often they already are due to a required increase in utilities capacity), and strict protocols must be followed regarding access and security. The parties should anticipate these issues with a through regulatory review during the leasing process and crafting of the tenant work letter, and part of that can also include requiring the tenant to submit its security and access plan to the landlord for approval, as it already will have to be submitted to the state (and often the local government as well).

One thing we have not noticed since this time last year is a cool-down in real estate purchases and leasing. Because of the limited number of jurisdictions allowing cannabis uses, and the even more limited number with accessible permitting regimes and attractive taxation, real estate in suitable locales has stayed expensive and competitive. Now that California is seriously considering the prospect of a public bank for cannabis, it will be interesting to see if real estate prices ease off at all as more jurisdictions open for business.

For more on California cannabis leasing, check out the following:

marijuana trademark cannabis licenseI’ve worked on many celebrity licensing and endorsement deals, and my firm’s cannabis intellectual property lawyers have received countless inquiries from companies looking to partner with one celebrity or another. And while the best of the deals can be very lucrative (and interesting) for everyone involved, plenty of them fizzle out for one reason or another. Often, the excitement over the prospect of partnering with a celebrity can blind businesses to the bigger intellectual property and trademark issues they should consider before negotiating one of these deals.

Earlier this month, Above the Law published a great article on the potential pitfalls of utilizing personal names as trademarks, as is done in celebrity licensing deals. The author noted the recent trademark litigation brought by a company that owns a registered trademark for SWIFTLIFE for “consulting services in the field of design, selection, implementation and use of computer hardware and software systems for others” against none other than Taylor Swift and her “SwiftLife” app. And while a celebrity’s name and likeness can be protected under rights of publicity or privacy law, this case raises the issue of when and how personal names can be recognized as trademarks.

In the United States, a person’s name can be eligible for trademark protection only if that individual is able to establish secondary meaning for their name. In other words, a celebrity will only be able to trademark their name if, through use of the name, it has come to identify a single source of origin for a particular set of goods or services. And it isn’t enough for the name to be well-known – the name must actually be associated with a set of goods or services in order to qualify for protection. While for a celebrity like Bob Marley, the connection to cannabis goods may seem clear, for many other celebrities, there is simply no connection at all and establishing trademark protection would be difficult (even setting aside the federal issues surrounding cannabis trademarks, which we have written about at length).

Some key takeaways to consider if your cannabis business is looking to partner with a celebrity for a licensing deal are as follows: First, the more unique the name or moniker, the better the chance of that name being protectable. And second, consider whether the celebrity name has a strong association with the cannabis products you’re looking to sell, as this will help determine whether the name could be shown to have secondary meaning. A licensee should be secure in the licensor’s ability to protect what it is licensing, otherwise what is the licensee paying for?

With a number of celebrities having jumped on the cannabis branding bandwagon–including the Marley estate, Snoop Dogg, Willy Nelson, Whoopi Goldberg and Melissa Etheridge, along with many lesser known celebrities who have used their name to promote ancillary cannabis products–these deals are certainly promising. Though trademark registrations are at play for many of these brands, the rights of publicity of the celebrities are at the center of each of these branding deals. Because state law and not federal law regulates the right of publicity, it is not subject to the same restrictions based on legality of use as federal trademarks. This makes enforcement in the event of infringement much easier for celebrities.

It’s important to remember, however, that using one’s name and likeness to sell cannabis is not without risk. Even ancillary companies face the risks posed by federal illegality, since these companies and their financial backers could be subject to charges of aiding and abetting or conspiring to violate the Controlled Substances Act for providing goods and services to cannabis businesses. Given the proliferation of celebrity-branded cannabis, however, this appears to be a risk that many celebrities are willing to take to become early entrants into the cannabis market.

It’s clear that celebrity licensing and endorsement deals in the cannabis industry are trending, but if your company is seeking a celebrity partnership, be sure to assess the deal not only from a business perspective, but from a legal perspective as well. While celebrity trademark rights in the cannabis industry are particularly difficult, rights of publicity have provided celebrities with a powerful tool for establishing and protecting their cannabis brands. This is a real leg up in an industry where federal law has made brand protection such a complex legal issue.

united nations international marijuana cannabis
Will they get it right this time?

Cannabis prohibition under U.S. federal law is nonsensical and causes many problems, from oppressive taxation to civil rights violations. Under international law, however, things may be even worse. Fortunately, it was reported this week that the United Nations (U.N.) will finally take a closer look at cannabis prohibition this fall. It was also reported that the World Health Organization (W.H.O.), an agency of the U.N., has recommended that cannabidiol (CBD) no longer be controlled under international law. Both developments are terrific news.

For public international law nerds, like me, the question of why international law is more intractable than U.S. law on marijuana is fun stuff. The short answer is that cannabis, along with opium poppy and coca bush, is restricted not just through “scheduling”, but by the core text of the principal treaty at issue. This means that under international law, 185 or so countries are going to have to agree to amend the Single Convention on Narcotic Drugs of 1961 (“Single Convention”) (specifically, Articles 1, 22, 28 and 49) in order to truly end prohibition. Then, cannabis would also need to be removed from the Single Convention’s Schedules I and IV. All of that is no small feat.

Still, it isn’t impossible that the Single Convention would be amended to loosen or abolish restrictions on cannabis. The treaty was amended once before, by the 1972 Protocol, which inter alia amended Article 22 to require nations to actually enforce laws on their books against both poppy and cannabis cultivation. Since 1961, the U.N. has also taken other action on controlled substances, mainly through the Convention of Psychotropic Substances of 1971 (which will need amending one day, too) and the Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances of 1988. So, the U.N. does re-think its stance on controlled substances from time to time, and for better or worse.

Like other international treaties that deal with drugs, the Single Convention is not self-executing. This means that signatory countries must pass domestic legislation to fulfill their treaty obligations. For its part, the U.S. passed the federal Controlled Substances Act (“CSA”) back in 1971. Unlike with the Single Convention, cannabis is not included anywhere in the body of this law. Instead, “marijuana” and other items are listed on separate “schedules” to the CSA. Each schedule then dictates the extent to which those items are controlled. “Marijuana” is a Schedule I drug with “no accepted medical use” and a “high potential for abuse.” That’s not so different than the Single Convention’s placement of “cannabis” at its Schedules I and IV, reserved for drugs that are “particularly liable to abuse and to produce ill effects” and where “such liability is not offset by substantial therapeutic advantages.” It’s important to note that even if the Single Convention were abolished entirely, its legacy would live on in the CSA and other domestic laws of its signatories, until those laws were also repealed.

Because the Single Convention has not been amended with respect to cannabis legality, it is controversial whether the U.S. has acted lawfully in allowing many of its states to promulgate medical and adult use marijuana programs in defiance of that treaty and the CSA. Recent U.S. delegations to UNGASS have made the argument that there is “sufficient flexibility” under the Single Convention to accommodate what has occurred under our federalist system of government. That’s a topic for another day, but suffice it to say that the “sufficient flexibility” argument is a thin one.

Many countries are no longer bothering with legal arguments, and simply ignoring their treaty obligations altogether. Canada and Uruguay are signatories to the Single Convention, and those countries have fully legalized sale and distribution of cannabis. Canada, for one, likely won’t even bother to withdraw from the Single Convention or submit reservations: It will just violate the treaty. Other countries around the world, from Israel to Germany to Columbia to Australia, have also pushed ahead to import or export medical marijuana in recent years. And many more, like the Netherlands and Spain, license or tolerate commercial or quasi-commercial marijuana activities.

Clearly, the Single Convention is outdated when it comes to cannabis prohibition, and global enforcement against licit marijuana economies is both impractical and legally problematic. In the coming months and years, countries will continue to legalize marijuana in abnegation of their treaty obligations, whether for moral or economic reasons. So let’s hope that the U.N. starts by acting on the W.H.O. recommendation to loosen controls on CBD, which shouldn’t be terribly difficult. But most importantly, let’s hope for an enlightened “big picture” approach on cannabis, even if that takes some work.

marijuana cannabis Oregon packaging labeling
Don’t worry, your favorite symbol isn’t going anywhere.

Last year, the Oregon Legislature passed Senate Bill 1057, which transferred cannabis labeling authority from the Oregon Health Authority (“OHA”) to the Oregon Liquor Control Commission (“OLCC”). The new rules, which became operational on August 15, 2018, merged the OHA rules with those of the OLCC and further clarified the labeling and packaging regulations. Overall, this is a good thing.

Although the new regulations do not drastically differ from those under the old rules, OLCC licensees (i.e., recreational marijuana producers, processors, wholesalers, and retailers, including those processing and selling hemp products) and OHA registrants (i.e., medical marijuana growers, processors, and retailers) will need to familiarize themselves with these revisions and update their labels to be in compliance by April 1, 2019. At that point, all marijuana items transferred to dispensaries or retail shops will have to be packaged and labelled pursuant to the new rules.

To comply with these new standards, existing licensees will need to resubmit their label and package applications for pre-approval before the April 1, 2019 deadline. Also note that all new label and package applications submitted for pre-approval as of August 15th will be reviewed and evaluated by the OLCC under these rules. Typically, pre-approval takes 2 to 4 weeks but can occasionally last longer.

The most noticeable changes and clarifications to the labeling and packaging rules are as follows:

  • The word “consumer” now excludes “a patient or designated caregiver.”
  • The new rules explicitly provide that they apply to marijuana items and industrial hemp products sold to consumers, patients, or designated primary caregivers. Consequently, the new rules require a clear label of whether the product contains marijuana or hemp. If it contains both, then the label must identify the item as a marijuana item.
  • Marijuana items and industrial hemp products must be packaged in a container that is “resealable and continually child-resistant.”
  • If the product is an industrial hemp commodity or product processed by a licensee, the principal display must include the hemp symbol in place of the marijuana universal symbol.
  • The new rules define “added substances” to mean “any additional component or ingredient added to usable marijuana, cannabinoid concentrate or cannabinoid extract during or after processing that is present in the final product. This includes added flavors, terpenes, and any substances used to change viscosity or consistency of the cannabinoid product.”
  • The new rules no longer provide a distinction for “flag labels.” Instead, the new regulations refer to “small container labels and “tiny container labels,” which have their own requirements.
  • The new rules no longer require test batch numbers on labels.
  • The new rules replaced the font size and font type requirements (at least 8 point Times New Roman, Helvetica, or Arial font) with a provision that the labels display a “legible font that is easy to read and contrasts sufficient with the background and is at least 1/16th of an inch in height based on the uppercase ‘K’.”
  • The new rules rephrased some of the warning requirements to read as follows: “Do not drive a motor vehicle while under the influence of marijuana.” And, “Keep out of reach of children.” (You are no longer required to mention animals.)

Note that while labels must comply with the new rules by April 1, 2019, marijuana items on dispensary or retail shelves that meet old packaging and labeling rules under the OHA will be allowed for sale until December 31, 2019. However, as of January 1, 2020, all marijuana items will have to meet the OLCC packaging and labeling rules and all items with labels that meet the pre-August 15, 2018 rules will be removed from the market.

So, if you are licensed to produce, process or sell marijuana or industrial hemp products in Oregon be sure to review the new rules now to have ample time to update your labels by the April 1, 2019 deadline and avoid any civil penalty, which can go up to $500 per day—Ouch!

cannabis hemp CBD
Don’t miss this one!

Cannabidiol (“CBD”) products are suddenly everywhere. But as much as opportunity and possibility have opened in the hemp-derived CBD industry, so too have legal pitfalls and snares that can confuse just about anyone breaking into this new market. When it comes to navigating the trails that are still being blazed, many are left wondering, “Is it legal or not?”

At a time when the popularity of CBD and hemp products meets legalization, the importance of this question cannot be overstated. Unfortunately, the answer is not an easy one. Individuals and companies alike are stepping forward with innovative ideas and using these products in health supplements, topical ointments, and even food and beverages. What they often find at all stages of production (manufacturing, distribution, and marketing), is that the law can be ambiguous and varied, especially when divided by state lines and the unavoidable intersections with federal law.

Our attorneys have been at the forefront of the struggle to effectively interpret and understand these challenging legal circumstances. Tomorrow,  August 16th, at 11 am PST, Harris Bricken attorneys Daniel Shortt and Alison Malsbury will present a webinar entitled “CBD Legal or Not: How State and Federal Laws Govern the Manufacture, Marketing & Distribution of CBD Products.”

Whether you are an individual or part of a company, working with U.S. or foreign grown products, an attorney or a government official, this webinar will equip you with the knowledge you need to successfully untangle the legal knots that may be preventing you or your clients from realizing the full potential of this industry. Our attorneys will discuss current state and federal laws, marketing do’s and don’ts, trademark protections, and FDA regulations. They will also address audience questions throughout the presentation.

To register, please go here.

In the meantime, for more on CBD law, check out the following:

marijuana cannabis loan
This industry is different, you know.

Many cannabis businesses are funded with debt. Sometimes, the debt is owed to one of the business’s owners, who pursued a debt structure for tax reasons. Other times, the debt is owed to a third party. That party could be a friend or family member, an investor keen on the industry, or even a professional hard money lender. Our marijuana business lawyers have papered a large number of loans in the industry, on behalf of both businesses and lenders. This blog post identifies some considerations for lenders making plays in the industry.

Do Your Diligence.

Before making a loan of any type to a cannabis business, do your diligence. Like so many things related to cannabis businesses, this exercise is different than with standard businesses. There are several reasons for this: 1) cannabis businesses often have short or non-existent operating histories; 2) by extension, cannabis businesses often have limited financial information at hand (tax returns, P&Ls, etc.); 3) the financial projections for cannabis businesses are more speculative than for other businesses, due to market dynamism; and 4) regarding operations, cannabis businesses may be “license pending” and thus offer little to vet.

Altogether, these factors make it supremely important to vet the actual owners of the business, as well as whatever you can get on the enterprise. This means having a look at personal financials and assets, credit reports, asking for personal references and calling around, etc. And when it comes to diligence on the business, make sure you do more than simply run a UCC search and review financials. Ask for company agreements. After all, a business may have an oppressive lease or licensing agreement which makes it less likely to succeed, or it may have similar documents with contingent or springing security interests that diminish your repayment prospects.

Prepare to Be Vetted.

The cannabis business will look into you, of course. But the real vetting is likely to happen by the licensing authority. In Washington, for example, the two groups that must report to the Liquor Control Board are “true parties of interest” and “financiers.” In California, it’s “owners and financial interest holders.” And in Oregon, it’s anyone with a “financial interest.” Each of these terms is defined in each state’s ever-evolving administrative rules, but it’s very likely that as a lender, you will need to be disclosed and vetted by the licensing authority. This may entail submission of information on your business, if you have one, and/or its owners and spouses. It also usually means fingerprints, background checks, and having your name on file as a part of the public record.

Demand Security.

Arms-length loans are almost never unsecured, so this one is a no-brainer, and if a marijuana business pushes back, it should be a dealbreaker. The best type of collateral is something tangible, like real property (land) that is unencumbered by senior interests, or where foreclosure by a senior noteholder would not wipe out all available equity. But there are other types of collateral, too, like personal property (including intellectual property); and there is always the option for a convertible note. Finally, lenders often get creative with deposit control agreements and other collection levers.

In the personal property category, the noteworthy asset when lending to plant-touching businesses is the cannabis itself. Most states have procedures for secured creditors to take control of a cannabis business under provisional licensing authority, for liquidation purposes. But, before you sign up for this, ask yourself: Could I really see myself chopping down cannabis plants one day? Or paying a receiver to do that? If not, and if the business has no other valuable assets, this loan may not be right for you.

Demand Personal Guarantees.

This ties into the diligence and security categories. A personal guaranty is just an extension on whatever security you can otherwise acquire as a part of the loan. Make sure these guarantees are uniformly integrated into the loan documents, and that each guaranty is more than a cursory sentence appended to a promissory note. The personal guaranty should cover various contingencies, e.g.: What happens if the guarantor dies? Are there any allowances for its termination, aside from repayment of the loan? Etc. Also, consider whether your borrower resides in a community property state like Washington or California, where the guaranty may not attach to marital property.

Do Market (and Legal!) Research.

Lenders to the cannabis industry are getting better rates than almost anyone else. They are taking on more risk, and feeding an insatiable capital market. We have seen loans with interest rates up to 50%(!) for relatively quick turns, but we have also seen loans that do not conform with licensing rules, or with state lending and usury laws. The exercise here is to ascertain market norms, look at your prospective borrower’s situation, and consider these factors in the greater context of lending statutes and marijuana licensing program rules. Finally, balance what you think you can get against the decreasing odds of collection that inevitably come with higher interest rates and compact repayment schedules.

Hacking back isn’t the answer, unfortunately.

As I have discussed for the last two weeks, cannabis businesses have become increasingly vulnerable to cyberattacks. It is natural for a company victimized by data breaches to want to retaliate by hacking back. However, under current U.S. law, which is codified under the Computer Fraud and Abuse Act (“CFAA”), it is strictly prohibited to intentionally access another’s computer without authorization.

Legislators have given some thought to this problem. Most recently, the re-introduction in October 2017 of the Active Cyber Defense Certainty (“ACDC”) Act, a bill sponsored by Congressman Tom Graves (R-Ga) and Congresswoman Krysten Sinema (D-Az), raised questions about the legality of counter attacking. Indeed, the ACDC Act proposes to amend the CFAA and enable victims of cyberattacks to adopt active defensive measures to identify the hackers, destroy information originally stolen from the victims’ networks, and attack the intruders’ servers to interrupt the ongoing attack. Although an eye-for-an-eye form of justice is appealing, unauthorized access to networks is not a good idea. Here is why.

First and foremost, the ACDC Act has not be enacted. This means that the CFAA remains the law of the land, and accessing others’ computer systems without their permission is a criminal offense. Every state law punishes hacking under the computer crime statutes. These crimes carry serious penalties ranging from a class B misdemeanor (punishable by up to six months in prison, a fine of up to $1,000, or both) to a class B felony (punishable by up to 20 years in prison, a fine of up to $15,000, or both).

Second, even if retaliation were legal, most companies would lack the expertise required to safely conduct an offensive cyber operation. It is incredibly difficult to identify individuals and entities behind cyberattacks. Most intruders cover their tracks very carefully by using encryption and by routing strikes through others’ computers. Given this, counter hacking would most certainly result in attacking computer systems and destroying data belonging to innocent third parties.

Then, there is the issue of whether victim companies have the technical proficiency required to effectively take counter measures against cyber intruders. Indeed, the internal tools needed to effectively hack back represent a major undertaking: a high level of expertise, constant vigilance, and huge financial resources. Moreover, it is highly unlikely that companies that could not prevent the intrusion of their networks would manage to take on their attackers on their own digital turf.

Lastly, retaliation by companies that fell victim of a data breach would most certainly impede law enforcement investigations and delete or temper with evidence that could be useful in a prosecution. Unlike law enforcement agencies, companies do not have the relevant technical expertise or diplomatic tools to pursue hackers. Most companies ignore how to preserve a chain of custody that would enable the introduction of untampered evidence at trial. In addition, counter hacking is an incredibly dangerous endeavor because it is very difficult, if not impossible, to see what a company would be up against. In retaliating, a company would run the risk of escalating the situation and of further injuring itself.

As I have discussed before (here and here), no one and no company is immune to cyberattacks. It is understandable that companies, including cannabis companies, are getting tired of being passive and of merely defending against these breaches. However, hacking back is not a feasible option given its illegality and the negative consequences it could have on the retaliating company. When faced with a data breach, don’t let your emotions dictate your actions; instead, stick with a comprehensive plan of action that will help you minimize your damages and let skilled, experienced law enforcement agents do the job of tracking and investigating your attackers.

marijuana federal employment cannabis
Will the laws change for federal worker marijuana use?

Could the federal government protect the rights of federal employees to use marijuana in states where its legal?

Possibly. A bipartisan bill was introduced in Congress on July 28 proposing to protect federal employees’ personal and private use of marijuana in states where it is legal. Congressmen Charlie Crist (D-Fl) and Drew Ferguson (R-Ga) jointly introduced the “Fairness in Federal Drug Testing Under State Laws Act”, which would prohibit federal employers from denying employment or subjecting federal employees to adverse personnel action if they test positive for marijuana and live in a state where it is legal.

Today, because marijuana remains an illegal substance under the Controlled Substance Act, federal employees can be terminated or denied employment if they test positive for marijuana on a drug test (and many federal agencies require regular or periodic testing). The bill would not apply to individuals occupying or seeking positions requiring top-secret clearance (meaning, they could still be tested), and the bill would allow federal employers to terminate employees for being impaired at work.

The bill, while incredibly important for federal employees, could also significantly impact private employers in states with legal cannabis. A majority of states have some form of legal marijuana, either medical or recreational. However, many of those states still allow employers to terminate employees for off-work use of marijuana, even medical marijuana patients. Several states, including Oregon and California, have attempted to pass legislation protecting employees’ off-work marijuana use, but the bills have failed in committees or did not garner enough votes to pass. Thus, both Oregon and California currently have statutes and/or case law allowing employers to terminate employees for off-work use.

So why are the state proposals failing? One big reason is that they have not made exceptions for private employers who contract with the federal government. Private employers who contract with the federal government are required to have drug-free workplace policies in place—meaning they have to terminate employees for positive drug tests to maintain their federal contracts. If the Fairness in Federal Drug Testing law passes, it likely would extend to private employers contracting with the government. And if the federal law passes, states may have a clearer path to protecting off-work use.

It is also important to note that the state laws and cases permitting employers to terminate employees for off-work marijuana use rests on marijuana’s continued classification as a Schedule I controlled substance under the federal Controlled Substance Act. While the Fairness in Federal Drug Testing act would not change marijuana’s status as controlled substance, states would at least be able to rely on the federal government’s position that it will not fire employees for off-work use. It seems more likely that the states where marijuana is legal in some form would be successful in passing legislation protecting employees’ off-work use of marijuana.

It will certainly be interesting to see if the Fairness in Federal Drug Testing bill gains momentum in committee and in front of Congress. We will be sure to keep you posted for any movement on the bill after Congress returns from their August recess.

vape marijuana cannabis
Is the vape industry in real trouble?

Like so many other U.S. industries, the U.S. vaping industry is now in the crosshairs of a 25% tariff on products imported from China. The first two waves of President Trump’s proposed tariffs against China covered about $50 billion worth of Chinese products but they did not include any vaping products. After China retaliated and proposed its own equivalent tariffs on an estimated $50 billion worth of U.S. products imported into China, President Trump proposed a much bigger third list of China products to cover an additional $200 billion in imports from China. This third list targets vaping devices, vaping parts, and batteries from China. Because our law firm’s marijuana business lawyers represent so many companies involved in various aspects of the vaping industry, we are hearing a earful about how these tariffs will “decimate” the nascent industry.

The U.S. vaping industry is indeed particularly exposed to these tariffs. Though much of the e-liquid used for vaping is made in the United States, almost all of the vaping hardware is imported from China. Just as Gillette makes the most money selling razor cartridges and not razors, many U.S. vaping companies chose to focus on the higher margin e-liquids, rather than lower margin vaping devices. Some have noted that there are no U.S. companies that produce any vaping hardware products. We are hearing of how many vape and cannabis retail shops will be unwilling or unable to pay the extra 25% tariffs because they do not believe they will be able to pass these extra costs on to their customers. If this does prove true, the vaping industry will indeed be decimated.

Fortunately, there is still time for vaping companies to seek a tariff exemption for certain vaping products. The U.S. Trade Representative will accept comments until September 6 on whether entire categories of products listed on the third wave of proposed tariffs — the $200 billion in imports from China — should be exempted. There likely will be yet another chance to make more product-specific exclusion requests later in the fall.

For an exclusion request to have any realistic chance at being granted, marijuana and related vaping companies should address the following factors:

  • A description of the physical characteristics (dimensions, material composition, etc.) of the particular vaping products and the 10 digit subheading of the HTSUS tariff category applicable to those products.
  • Whether the particular vaping product is available only from China. In addressing this factor, requesters should address specifically whether the particular vaping product and/or a comparable product is available from sources in the United States and/or in third countries.
  • Whether imposition of additional duties on the particular vaping product would cause severe economic harm to the requester or other U.S. interests.
  • Whether the particular vaping product is strategically important or related to “Made in China 2025” or other Chinese industrial programs.
  • Requesters must provide the annual quantity and value of the Chinese-origin product the requester purchased in each of the last three years. If precise annual quantity and value information are not available, USTR will accept an estimate with justification.
  • Requesters may also provide any other information or data they consider relevant to evaluating their request.

The process for reviewing and deciding on these exclusion requests will not result in any immediate decision but the hope is that a favorable decision eventually will allow for refunding the tariffs paid.

The goal is to have the USTR review the comments and grant exclusions, particularly for products that are not made in the United States and can only be sourced from China. The last time similar tariffs were applied on steel products back in the early 2000s, many exclusions were granted that helped ease the impact of the tariffs on downstream users.

There have already been many opposing comments and exclusion requests submitted for the first two waves of proposed China tariffs. Many of the opposing comments have noted how the proposed tariffs on the Chinese products have nothing to do with  Chinese practices of stealing or extorting intellectual property from U.S companies, which are the reasons claimed for invoking the China tariffs in the first place. Many have also objected to how these tariffs are not likely to change how China respects intellectual property  rights, but will have a catastrophic effect on certain American companies.  What was a booming U.S. vaping industry now faces going bust with the proposed tariffs. If you are in the vaping industry, now is the time to do what you can to prevent this.

Editor’s Note: A version of this post previously appeared on our law firm’s China Law Blog. It focuses on the vaping industry but much of it holds true for a host of other U.S. industries caught up in the tariffs as well. The bottom line is that the situation for products and companies that will be hurt by these tariffs is not good and the chances of overturning the tariffs are in most cases less than 50 percent. But in many cases the situation is not yet hopeless and it behooves you to try.