There many questions you should ask before hiring someone as a budtender, grower, or trimmer for your cannabis business—but Oregon recently passed several laws banning certain questions. Oregon Cannabis employment lawToday’s post will discuss Oregon’s, and specifically, Portland’s, “ban the box” ordinances.

“Ban the box”—named for the box on employment applications asking about criminal history—ordinances became popular in the United States between 2007-2009. In general, ban the box ordinances prohibit employers from asking applicants about their criminal histories before an initial interview. Oregon enacted ban the box legislation in 2016. This means employers cannot ask on a job application whether an applicant has a past conviction, but they are allowed to ask about past convictions during the interview process and to consider that information when making a hiring decision. Certain employers, such as those required by federal, state or local law to consider an applicant’s criminal history, are exempt. If you are not required to conduct a background check, assume you fall under Oregon’s ban the box ordinance.

The city of Portland takes the state ban the box legislation several steps further. The Portland ordinance, effective as of July 1, 2016, applies to any employer with six or more employees and to positions that require work within Portland for more than half of the employee’s time. Portland employers cannot ask an applicant on an application about conviction history and cannot ask about convictions during interviews. A Portland employer may only gain information about an applicant’s criminal history after making a Conditional Offer of Employment (COE). The Portland employer must offer the position to the applicant conditioned solely on the results of an inquiry into the person’s arrest or conviction history. If the inquiry reveals a criminal history, the Portland employer can only rescind the job offer after an “individualized assessment” is done to determine if the prior conviction is “job related to the position in question and consistent with business necessity.” This requires consideration of the nature and gravity of the criminal offense, the time elapsed since the offense took place, and the nature of the employment held or sought. Examples include rescinding a job offer made to an applicant for an auto-dealership who has a prior conviction for auto theft or an applicant who will be in charge of handling money and has a prior conviction for money laundering.

What happens if you decide to rescind the offer after learning about a past conviction? The Portland employer must notify the applicant in writing of its decision and identify the relevant criminal conviction on which the decision is based. The applicant then has the opportunity to file a complaint with the Oregon Bureau of Labor and Industries (BOLI).  If BOLI determines the employer violated the Portland ordinance, it can assess up to a $1,000 fine. The Portland ordinance also allows the city to bring an action against employers that have demonstrated a pattern and practice of violating the ordinance. In such cases, BOLI may assess a penalty of up to $5,000 for each violation.

The ban the box legislation is especially important in the cannabis field. Cannabis was legalized relatively recently and many applicants for positions with cannabis businesses have convictions for past possession, sales, or distribution of marijuana. If you ask about past convictions on the job application or in any way prior to the initial interview you are in violation of the Oregon ordinance. Be careful when requesting background information from applicants—even asking about unexplained employment gaps may be considered requests for conviction history. If you requested conviction information before the initial interview you are in violation of the Oregon ordinance even if the applicant was not offered an initial interview for another reason. If you are a Portland employer, you may only ask about conviction history after a COE is made. Remember—you can only rescind the job offer after an individualized assessment has been completed.

 

Representative Blumenauer provides a great overview here on the current political climate regarding opioids and cannabis. The Trump Administration claims to be working on solutions for the opioid crisis but seems too blinded by the stigma of cannabis to consider it as a viable solution. Research increasingly shows cannabis is at least a partial solution for opioid addiction, but the federal government remains immovable on cannabis.

We have to keep pushing until the politicians get on board.

California cannabis lawyers

Our California cannabis lawyers are constantly asked how big sales and tax revenues will be in California once adult use cannabis becomes legal there. With recent reports of increased sales in Colorado and Nevada, everyone is expecting California – with its population of nearly 40 million people – to dwarf the sales of other adult use cannabis states. Many see California sales exceeding Colorado and Washington sales (together!) by at least ten times. To say our law firm is bullish on California would be an understatement; we literally cannot find good lawyers fast enough for our two California offices (Los Angeles and San Francisco).

When Californians voted for the Adult Use of Marijuana Act (a/k/a AUMA or Prop 64), you could smell the enthusiasm. Our California offices were deluged with a flood of investors looking to invest in California cannabis businesses. Then Governor Brown and the California legislature removed Prop 64’s in-state residency requirement with the enactment of the Medicinal and Adult-Use Cannabis Regulation and Safety Act (a/k/a MAUCRSA or SB 94) this past June. With residency requirements removed, my firm saw a significant increase in interest from clients outside California seeking to obtain cannabis business licenses in the Golden State.

Unfortunately, local legislators in California’s cities and counties have not kept pace with the enthusiasm on the business side. Prior to SB 94, the legal cannabis landscape consisted of California jurisdictions focused on their medical cannabis ordinances in step with the Medical Cannabis Regulation and Safety Act of 2015(MCRSA). The MCRSA was California’s first attempt at establishing a statewide regulatory and licensing regime. The MCRSA also allowed medical cannabis businesses to operate as for-profit businesses starting in 2018.

With most local jurisdictions playing catch-up with the MCRSA, it’s unlikely Californians will be able to purchase recreational cannabis on January 01, 2018. That’s because most California cities and counties are waiting on the state’s main cannabis regulatory agencies – the Bureau of Cannabis Control, the Department of Food and Agriculture, and the Department of Public Health – to publish their emergency regulations before they enact their own adult use cannabis ordinances. The emergency regulations should be released in mid to late November and the Bureau of Cannabis Control has stated that cannabis businesses will be able to apply for temporary permits online in December.

Though it might take a little longer than expected before adult use cannabis sales in California become commonplace, we are seeing local regulators moving in the right direction. In our Cannabis Countdown series, we keep our readers apprised of cannabis ordinance developments on the local level and the below is an updated snapshot of what’s going on across the state regarding adult-use commercial cannabis activities:

Los Angeles: On March 07, 2017, Los Angeles residents came out in full force and voted for Proposition M, a much-needed effort at clearing up Los Angeles’s previously confusing, complicated, and unfriendly position towards medical cannabis businesses. On June 8th of this year, the Los Angeles City Council released draft requirements for commercial cannabis activities – which we covered here. After the release of these draft requirements, there was a 60-day comment period and on September 22nd, the City Council revised the draft requirements – which we covered extensively here. On September 25th the City Council Rules Committee requested the Los Angeles City Attorney prepare and present a draft ordinance addressing the changes made in the revised draft regulations. Though Los Angeles will authorize seed to sale license types (indoor cultivation, non-volatile and volatile manufacturing, distribution, and retail) it’s unlikely it will have an adult use cannabis permitting process in place by the start of 2018.

San Francisco: The city of San Francisco (where I am located) proposed draft cannabis legislation on September 26th of this year. The proposed legislation requires creating an equity program, authorizes the issuance of temporary local licenses for medical cannabis businesses, and will have seed to sale license types (including the microbusiness license). It also allows for medical and adult use cannabis licenses, but adult use licenses won’t be issued until the equity program is in place. The ordinance does not cap the number of permits to be issued citywide, nor does it limit the number of licenses a person can hold – except that testing licensees cannot hold other cannabis licenses. However at a recent stakeholder meeting I attended, it was discussed that the Board of Supervisors (BOS) may revisit the issue of licensing caps (at the individual applicant and citywide level). It’s paramount that cannabis supporters stay politically active and fight complacency — don’t let what happened in San Luis Obispo happen in your city. San Francisco’s Office of Cannabis is to provide the BOS with an equity report, a medicinal access report, and a proposed fee schedule by November 1st of this year. Much like Los Angeles, San Francisco has proposed a cannabis-friendly ordinance that likely will not be ready for 2018.

Humboldt County: As part of the famed Emerald Triangle, Humboldt County is a cannabis business-friendly jurisdiction. On September 7th, Humboldt County’s Planning and Building Department released a draft cannabis ordinance that provides for the following:

  • Licenses all seed to sale commercial activities (including non-volatile and volatile manufacturing);
  • Allows farm-based retail sales, subject to receiving a retailer’s license from the state (we’ll have to see what the Bureau of Cannabis Control has to say about that);
  • Authorizes temporary special events for cannabis sales and consumption;
  • Allows on-site consumption for retailers and microbusinesses (for persons 21 years of age and older); and
  • Allows for cannabis tours and cannabis farm stays.

This proposed ordinance cements Humboldt’s reputation as a place that thinks outside the box when it comes to attracting cannabis businesses. Humboldt’s proposed ordinance was up for review and public comment on October 18 and we expect its enactment by early December. We are not sure whether Humboldt will allow current medical cannabis businesses to convert over to adult use and for-profit enterprises before January 01, 2018.

Though some of California’s biggest population centers will take their time before enacting adult use cannabis ordinances, we envision some of the more sparsely populated (and tax-starved) California jurisdictions will be the first to move into the adult use cannabis marketplace.

We will be sure to keep you posted on new developments in our Cannabis Countdown series.

California cannabis lawyersCalifornia’s Bureau of Cannabis Control (the “BCC”) held public licensing workshops in three cities in California last week. If you didn’t get a chance to make it, don’t worry. We did and we’ve got you covered.

At the Los Angeles event, hundreds of people showed up to the point where most did not even get inside the building.The workshop focused on licensing information and resources available for people planning on applying for California state cannabis licenses. The BCC staff passed out flyers with the information required for temporary license applications. Temporary licenses will be effective starting January 1, 2018, and will allow businesses to engage in commercial cannabis activity for a period of 120 days.

Local jurisdiction authorization is still paramount to receiving a temporary license. If your business has not yet received this, it will delay your ability to receive a state temporary license. A license or permit issued by the local jurisdiction will be sufficient to show the applicant is allowed to conduct commercial cannabis activity at the location.

Other information required are names of the applicant (either individual or entity); license type; license designation; contact information; names of the owners; physical address and authorization to use the location for commercial cannabis activity; and a premises diagram showing the layout of the proposed location.

The last of the public licensing workshops was held in Sacramento this past Tuesday before a packed house at the Convention Center. Representatives from all of the state’s cannabis licensing agencies – California Department of Public Health (“CDPH”), California Department of Food and Agriculture (“CDFA”), and the BCC – were in attendance to answer the public’s questions. There were also representatives from the following departments:

  • California Department of Tax and Fee Administration;
  • California Department of Fish and Wildlife;
  • California Department of Insurance;
  • California Secretary of State;
  • California Employment Development Department;
  • California Department of Industrial Relations; and
  • Sacramento’s Office of Cannabis Policy and Enforcement.

The scene in the Sacramento’s Convention Center can be described as polite chaos as the public made its way through the tables staffed by these departments. Cannabis businesses, advisors, and investors were all hoping to gather as much information and clarification as possible in what is still an evolving California cannabis regulatory landscape. The lack of clarity is a source of consternation for many cannabis businesses worried about their business model going forward and I highly recommend California cannabis business owners (and all interested stakeholders) review the proposed medical regulations released in April of this year; you can find the BCC’s here, the CDPH’s here and the CDFA’s here. I then recommend you review how each department summarized and responded to public comments when the proposed medical regulations were withdrawn. You can find the BCC’s response here and here (the latter on testing facilities), the CDPH’s here, and the CDFA’s here. Get a pot of coffee brewing and delve into those weeds (too many puns I know but I just couldn’t help myself).

Lori Ajax, the Chief of the BBC, did speak briefly and reiterated that the state will issue emergency regulations in mid to late November and that the state’s licensing agencies will accept temporary license applications online in early December. Ms. Ajax was not able to say what the cost of the temporary permit would be (the fees will be released with the emergency regulations) but did stress that the temporary permit fee will be separate from the annual license application fee.

When the emergency regulations are released in November, our California cannabis attorneys expect a flurry of activity as cannabis businesses seek to gain temporary licensure and an early foothold in what will be the new California cannabis landscape. However, current cannabis businesses and new entrants should take this time to review their business model and entity structure. We’ll be sure to stay on top of this for you and we’ll continue with our popular California cannabis webinar series when the emergency regulations are released.

Stay tuned!

Santa Cruz Cannabis
Will Santa Cruz lead on cannabis?

With less than three months until the end of the year and the commencement of California’s medical and adult use cannabis licensing program, most local jurisdictions are still without regulations to govern adult use commercial cannabis businesses. This has created concern throughout the industry that despite the Bureau of Cannabis Control’s (BCC) promise that it will begin issuing licenses on January 1st, few — if any — adult use commercial cannabis businesses will have secured the requisite local approvals for state licensing. Last month San Francisco, for example, introduced legislation confirming the city would not allow recreational cannabis sales by January.

San Francisco’s stance on adult use commercial cannabis activity is echoed across the state, with cities and counties waiting for state guidance before drafting, adopting and implementing their own adult use regulations. Though Proposition 64 gave local jurisdictions broad authority to adopt cannabis regulations, without draft rules from the state, cities and counties are in a tough place. It doesn’t necessarily make sense to put resources into drafting regulations when the state rules could necessitate hefty revisions.

But last week, the City of Santa Cruz recommended to its City Council amendments to the local zoning ordinance and the Local Coastal Program to regulate adult use commercial cannabis businesses. The Bay Area in particular lacks local regulation of adult use commercial cannabis businesses, so adoption of these recommendations could provide opportunity for those looking to open a recreational business.

The City’s recommendations are broken down by retail sales, manufacturing and cultivation, and delivery. Here are the highlights of the proposed regulations for each category:

Retail Sales

  • Retail uses should be limited to the same zoning districts that currently allow medical marijuana dispensaries: CC, CT, IG, and IG-Per 2.
  • There should be a 600-foot buffer between marijuana retail outlets, with the City maintaining discretion to consider smaller separations when certain findings are met;
  • Based on the MAUCRSA locational restrictions (600 feet from any K-12 school, childcare center, or youth center), the definition of “youth center” is broad and should include parks with playgrounds or those that provide youth programs, both athletic and educational. The city has provided a map indicating the locations where retail outlets would be allowed.
  • The city may limit the number of retail outlets to a maximum of five. This would include both medical and adult use retail stores. The two currently operating legal medical marijuana dispensaries in Santa Cruz may be allowed to sell recreational cannabis in addition to medical cannabis.
  • Applications should be reviewed with consideration to factors of importance to the community, including local preference, preference for women- and minority-owned businesses, and treatment of employees (living wage and benefits).
  • Licenses should be non-transferrable.
  • Onsite consumption, including smoking lounges, should not be allowed.

Manufacturing and Cultivation

  • Commercial outdoor cultivation should not be allowed within city limits.
  • Marijuana testing, manufacturing, distribution and warehousing, and indoor cultivation should be allowed in industrial districts only (IG and IG-Per 2) with approval of an Administrative Use Permit at a public hearing by the Zoning Administrator.
  • The 600-foot MAUCRSA buffer would not apply to commercial uses that are not open to the public, except for manufacturing that uses volatile solvents.
  • Indoor cultivation should be limited to a maximum of 10,000 square feet.

Delivery

  • Deliveries should be prohibited within the City from businesses located outside the City limits. Santa Cruz acknowledges the difficulty of enforcing this rule.
  • The ordinance should specifically prohibit deliveries from other than licensed retailers, microbusinesses or nonprofits.

The City Council will take up this issue this Thursday, October 19th, and we’ll be standing by to see whether the city adopts these proposed cannabis ordinance amendments.

Cannabis business disputesThe cannabis litigation lawyers at my firm have litigated many partnership lawsuits involving cannabis businesses where better planning could have avoided the dispute. Business owners will always disagree with one another, but good partnership agreements, LLC operating agreements, and shareholder agreements figure out ways to get past disputes without going to trial. Litigation is expensive and stressful and doesn’t leave either side feeling great. In a business ownership dispute we are working on now, in addition to legal fees, both sides are hiring their own forensic accountants to come up with a company valuation more favorable to their side, and this is before a complaint has even been filed. Costs add up fast. Partnership disputes have a lot in common with divorces disputes, where logic and reason often give way to emotion, and the parties seek to punish each other more than they try to come to a reasonable settlement. The best time to plan for disputes is before your company has any revenue, any investment, any debt, or any obligations. In this post and subsequent posts in this series, I’ll discuss negotiable provisions in partnership agreements that business owners should make sure to address as early in their business’s life cycle as they can.

Today’s post will talk about individuals getting ownership for services and what happens when a company needs to raise more capital.

Ownership Interest in Exchange for Service

This is a common arrangement, but companies often get themselves into hot water by not thinking through the implications. If an individual is going to receive a significant percentage of equity in a company without putting in a proportional value of cash or property, company owners need to think long and hard about the implications. The question that all too often goes unasked is what happens if the partner receiving the equity in exchange for services stops working for the company or fails to perform those services well? If the partnership group doesn’t put thought into how it structures the grant of ownership in exchange for services, it can find itself having signed away a large chunk of equity in their cannabis business without any recourse if the service-for-equity owner stops working.

There are a couple of solutions to this. One common fix is for the equity interest to vest over time. Every month or quarter or year in which a partner contributes services corresponds to a partial grant of the equity interest. With a vesting schedule of three to five years, the company knows it will either be getting good value for the services or it will be able to terminate the services and cut off any further vesting. But another problem shows up even if the services are terminated — you have a voting owner of the company who likely holds some ill will against the other partners. This is where another clause in the operating agreement can help – company buyout right triggered by termination of the partner’s services. The company will still have to pay out for the equity vested to date by the services provider, but it has a clean way of removing that person from the company, likely avoiding additional clashes.

Additional Financial Contributions

It’s hard to estimate how much capital a company is going to need. Many of our cannabis producer clients found out mid-stream that they were having a tough time selling their dried marijuana flower, so they pivoted and moved into the oil extraction business. But the capital equipment needed for that and the construction costs to set up the lab can be expensive, and when those expenses are not planned for additional capital is needed.

One of the main differences between LLCs and corporations is that default corporate law makes it easier to bring in new capital in exchange for equity than default LLC law does. In corporate law, the board of directors generally has the authority to issue new shares in exchange for capital. And if the current shareholders don’t have a negotiated right of first refusal, the directors are free to look to whomever they want, whether that person is a current shareholder or not. Compare to LLCs, where the default law tends to say that unless the operating agreement says otherwise, the members of the company must unanimously approve of any new members. LLC agreements, then, should have clear clauses on what happens when the company needs more money. If only one member is willing to put that money in, do they get additional interest that dilutes the other members? If the company doesn’t want a dilutive issuance but wants a member to loan money to the company, does that member get priority payback on the loan debt? And if no one in the company is willing to pay money, can they still vote against allowing a new member into the company in exchange for capital? Because if they can refuse to put in more money themselves and can keep the company from raising money from an outsider, they have the power to tank the company. Any negotiated partnership agreement needs to address this issue.

California cannabis contracts We previously explored enforceability problems presented by commercial cannabis contracts in California, as well as some examples of how courts have strained to reconcile state-legal conduct with federal illegality. On October 6, California Governor Brown signed into law AB 1159, a short bill with important implications for commercial cannabis operators, service providers, and investors relating to the enforcement of commercial cannabis contracts in California.

Section 1 of the bill states that “commercial activity relating to medicinal cannabis or adult-use cannabis conducted in compliance with California law and any applicable local standards, requirements, and regulations shall be deemed to be: (1) A lawful object of a contract; (2) Not contrary to, an express provision of law, any policy of express law, or good morals; and (3) Not against public policy.”

California statutory law requires contracts have a lawful object, but until now it was not clear whether this legality requirement encompassed federal as well as state law. And since cannabis is illegal under federal law, both state and federal courts wrestled with how and whether to enforce contracts that involved cannabis. Even though California law allows for commercial cannabis activity, the law pertaining to interpretation and enforcement of contracts in California remained ambiguous, and as noted in the Senate Floor Analysis of the bill, many California cannabis companies have been reluctant to litigate meritorious claims for fear the courts would not enforce their contracts. AB 1159 changes that by making clear that parties to contracts involving commercial cannabis activity can now rely on statutory law in making sure those contracts are enforceable—provided that the underlying activity complies with California state and local laws and provided the contract is interpreted under California law.

This will make it crucial you think carefully about the jurisdiction and the choice of law provisions you put into in your cannabis contracts.

The second section of AB 1159 is essentially an amendment to the California Evidence Code that solidifies the attorney-client privilege for “legal services rendered in compliance with state and local laws on medicinal cannabis or adult-use cannabis, and confidential communications provided for the purpose of rendering those services … provided the lawyer also advises the client on conflicts with respect to federal law.” The general rule in California (as elsewhere) is that the attorney-client privilege does not apply to legal services sought or obtained to enable or aid a crime or fraud. Because cannabis activity is still a crime under federal law, some thought this jeopardized the confidentiality of the attorney-client relationship in the event of an indictment or litigation. AB 1159 changes that by securing the attorney-client privilege where it pertains to cannabis activity, but only if the legal services were rendered in compliance with California state and local law and only if the lawyer advises the client on conflicts regarding federal law.

Bottom Line: California is making serious and productive moves to normalize things for its cannabis businesses. But for California cannabis businesses to take advantage of these new opportunities, they must be sure to comply with California state and local laws.

Defendants describe the lawsuit as an “attempt to put some shiny federal lipstick on an otherwise quite beleaguered pig of a state-law nuisance claim.”

We’ve previously discussed a RICO case that is slowly worming its way through federal court in Portland, Oregon. Styled as McCart v. Beddow et al., the case was filed by an attorney who is fed up with two neighboring cannabis grow operations next to her rural home. But rather than focusing solely on the allegedly troublesome cannabis producers, the McCart plaintiffs have filed suit against anyone even tangentially related to the producers’ business, including many dispensaries (“Dispensary Defendants”) that only purchased their product. We counted over 70 named defendants!

In our previous discussion, we suggested that the plaintiffs’ case against the Dispensary Defendants is fairly weak and our opinion hasn’t changed. Since we last checked in, the plaintiffs have filed a substantially expanded amended complaint, and numerous defendants have filed motions to dismiss. Although the Court won’t consider the motions to dismiss until January, it is worth checking in on the parties’ current positions. We are going to continue to focus on the Dispensary Defendants because there could be serious repercussions in the industry if the Dispensary Defendants are found liable even though they apparently didn’t have anything to do with the grow operation.

The Law

RICO law is complex, but as a general matter the RICO statutes allow a plaintiff to recover treble damages in a civil claim if the plaintiff can prove the following:

  • The existence of an “enterprise” affecting interstate or foreign commerce;
  • The specific defendant was employed by or associated with the enterprise;
  • The specific defendant conducted or participated in the conduct of the enterprise’s affairs;
  • The specific defendant’s participation was through a pattern of racketeering activity; and
  • Plaintiff’s business or property was injured by reason of defendant’s conducting or participating in the conduct of the enterprise’s affairs.

Of course, the devil is in the details, as the Dispensary Defendants point out in their motion to dismiss.

The Amended Complaint

The plaintiffs filed their amended complaint on September 1, which added 95 paragraphs onto their hefty original complaint. The amended complaint adds many new defendants, including employees at the farms and it alleges that nearly all of the defendants were exporting product out of Oregon.

In broad terms, the plaintiffs’ claims against the Dispensary Defendants have not changed in that they still allege the following:

  1. The cannabis grow operation (“Marijuana Operation”) is an enterprise affecting interstate commerce, as defined in the RICO statutes;
  2. All of the defendants were associated with and conducted the Marijuana Operation’s affairs through racketeering activity;
  3. Plaintiffs suffered a variety of kinds of harm as a result of the Marijuana Operation:
    1. Physical Injury to Real Property: littering, driveway damage, tire tracks, damage to some trail cameras, and unreasonable use of easements.
    2. Diminution of Property Value: noise pollution, light pollution, vibration, odors, exhaust fumes.
    3. Personal Injuries: harassment and damage to plaintiffs’ use and quiet enjoyment of their property.

The Motions to Dismiss

Eighteen Dispensary Defendants joined together in a single motion asking the Court to throw out plaintiff’s entire case against them. Their motion is well worth the read, not least for its colorful language, such as the lipstick-on-a-pig quote below the pig picture above. The arguments in this motion fit into two general categories:

The Dispensary Defendants are not part of a racketeering enterprise.

To establish an “enterprise” exists for RICO purposes, plaintiffs must show there was an ongoing organization with a common purpose. Both of these elements get to the same idea: a criminal enterprise is a group of people all working together to enrich themselves. Courts have found “ongoing organizations” among disparate businesses when there are legitimate interconnections between the entities, such as similar ownership and overlap in personnel. Similarly, courts have found a common purpose where the alleged members are working to promote a single economic interest, and not where they are simply pursuing individual economic interests. There don’t appear to be any of these kinds of links in this case. The Dispensary Defendants appear to be owned, operated, and staffed by distinct individuals working towards their own individual business purposes. This ties back to our initial read of this case: mere supplier-purchaser relationships like these do not rise to the level of RICO enterprises.

In any event, plaintiffs need to establish that the Dispensary Defendants were associated with and conducted or participated in the enterprise. Yet plaintiffs have not alleged that the Dispensary Defendants had any say over the operation of the farms. Their case against the Dispensary Defendants will likely die here.

Plaintiffs’ alleged harms cannot be recovered as a matter of law.

Even assuming plaintiffs can get over the hurdle of establishing that the Dispensary Defendants directed the farms, plaintiffs still must establish that their specific harms are actionable. The Dispensary Defendants also seem to be on the right side of the law here, arguing that the alleged harms and the speculative claim that the value of plaintiffs’ home has decreased cannot form the basis of a RICO claim against any of the defendants and cannot form the basis of a state-law claim nuisance claim against the Dispensary Defendants, in particular.

The plaintiffs face a number of legal obstacles that seem insurmountable. First and foremost, Oregon has long since decided that it is in the best interests of the state to protect farming uses and it has decided to treat cannabis the same as any other farm crop. Accordingly, Oregon’s Right to Farm Act likely bars plaintiffs’ nuisance and trespass claims for damages based on odors, noise pollution, light pollution, vibrations, and smoke fumes. The Dispensary Defendants rely on ORS 30.936(1), which provides farmers in farming areas with immunity from suit for any trespass or nuisance claims, defined elsewhere as claims “based on noise, vibration, odors, smoke, dust, mist from irrigation, use of pesticides and use of crop production substances.” Since RICO case law suggests that harms to property interests should be determined by state law, plaintiffs’ diminution of value claims are likely dead on arrival.

In any event, plaintiffs’ specific diminution of value claims are likely too speculative. The Dispensary Defendants argue that a RICO plaintiff must plead and prove that plaintiff has suffered a “concrete financial loss” but that plaintiffs’ complaint only contains pure guesswork that the odors, etc. diminished the value of plaintiffs’ property. Even if the plaintiffs could plead a specific dollar amount of diminished value, Oregon law bars claims for diminution of property value if the nuisance can be stopped. In other words, if the harm would disappear if the grow operations shut down, plaintiffs cannot recover damages for loss of value. Instead, plaintiffs should be asking the court to shut down the grow operations, which would have little to no effect on the Dispensary Defendants.

Plaintiffs will also likely fail on their claims for loss of quiet enjoyment and harassment because personal injuries like these are not compensable under RICO.

We will have to wait until next year to find out if the Court agrees with the Dispensary Defendants but we predict vindication for the dispensaries. In fact, we predict the claims against all of the defendants will get tossed, except possibly some small state-law claims. It seems that if you are a good neighbor and you don’t set up your operations next door to property owned by a lawyer, then you’ll likely never be drawn into a mess like this.

Things were not perfect for the cannabis industry under the Obama Administration and Eric Holder and the Cole Memo (to which Holder is referring above), but they certainly were better than Jeff Sessions’ odd and obsessive loathing of cannabis.

But instead of our getting all nostalgic, we just need to keep fighting. The populace and the numbers are on our side and we will win in the end. You agree, right?

Cannabis trademark litigation
Can they live together?

A recent post here looked at the “Gorilla Glue” trademark dispute between a cannabis business and a glue maker. As we’ve often seen, the cannabis business gave up its brand, rather than litigating. Sometimes a settlement is the best choice. When the cannabis business is the smaller, newer, less financially-sound company, facing an established brand holder with more resources for litigation, it may be smart for the cannabis business to spend its money on rebranding rather than on litigation. But settlement is not the only option when a cannabis business uses a mark similar to the mark used by a non-cannabis business.

Imagine a hypothetical business, “Naturewave Furniture, Inc.” (“NFurn”). NFurn has been selling furniture for 25 years throughout the United States to consumers who want environmentally-friendly products. In 1995, NFurn federally registered “Naturewave” in international trademark class 20, “furniture.” Though NFurn is a player in the enviro-friendly products market, it is not a household name. Now imagine Naturewave Cannabis, LLP (“NCanna”), an Oregon cannabis producer that also sells branded rolling papers. In June 2016, NCanna registered “Naturewave” with the Oregon Secretary of State under class 131, “agricultural products,” and class 134, “tobacco & smokers articles.”

NFurn sues NCanna in federal court, alleging 1) NCanna’s use of Naturewave infringes on its trademark because confusion with NFurn’s Naturewave® mark is likely, and 2) NCanna’s use of Naturewave® to sell cannabis and rolling papers is diluting or tarnishing its mark. But NCanna has invested heavily in marketing its cannabis products and accessories under the Naturewave name, and its Naturewave cannabis products are popular and profitable. Does NCanna have good defenses to either claim? You bet it does.

The basic question for trademark infringement is whether consumers would mistake the source of the goods. Here, the goods offered by each party—furniture and cannabis—are unrelated. No stores sell both furniture and cannabis and the marketing channels for these two products do not overlap. The customers for both goods are sophisticated, careful shoppers. People looking for enviro-furniture usually spend at least 10 hours before buying a particular item. Cannabis consumers are known for research that borders on the obsessive, as shown by the proliferation of sites like MassRoots, Leafly, and Fresh Toast. Neither company is going to move into the other’s product line. Though NCanna had heard of Naturewave Furniture, the words “nature” and “wave” have different connotations in the different industries. NCanna isn’t branding itself as environmentally friendly, and NFurn isn’t suggesting its furniture will let the buyer “ride a wave.” It is unlikely a customer would think NFurn is the source of the cannabis sold by NCanna, or that one of NCanna’s customers would walk into a natural furniture store looking to buy cannabis.

The claim for tarnishment requires a different analysis. Under trademark law, the owner of a famous trademark can sue for using its mark in a way that dilutes or tarnishes the mark. There is no need to show a likelihood of confusion in a tarnishment claim; you only need to show that your mark is famous and similar to the accused mark. Although it is easier to list famous trademarks—Coke®, Amazon®, Google®, Starbucks®, Xerox®—than it is to define “famous,” generally a highly distinctive mark that is very well-known throughout the market, and has been used extensively and continuously for a long time, can be found to be famous. NFurn argues that NCanna’s use of Naturewave® with a traditionally illegal product will tarnish or dilute its mark. But is Naturewave® “famous” under trademark law? Arguably not, at least on our hypothetical facts. In that case, NFurn would not have a claim for dilution.

The upshot of this imagined case is that NCanna could evaluate NFurn’s lawsuit and know it had solid arguments to defend the case. The strength of the litigation position is, however, only one factor. Ultimately, whether to litigate a trademark dispute or settle or seek a coexistence agreement is a business decision for the cannabis company.

Related posts: