AB 2164 cannabis fines marijuana
AB 2164 may create surprises for cannabis landlords.

Prior to the enactment of AB 2164, California law required cities and counties to grant a person responsible for a continuing municipal code violation a reasonable time to remedy the violation before the city or county could impose fines or penalties when that violation pertained to building, plumbing, electrical, or other similar structural and zoning issues that did not create an immediate danger to health or safety. Cal. Gov. Code section 53069.4.

In June, California’s Fifth District Court of Appeal interpreted Government Code section 53069.4 to require the County of Fresno to provide a cannabis cultivator a reasonable time to abate cultivation activity before imposing a fine. See Thao v. County of Fresno, Court of Appeal of the State of California, Fifth Appellate District, Case Nos. F072276, F073035, Filed June 28, 2018 (unpublished).

Apparently, the state legislature didn’t like that, because earlier this month, Governor Brown signed AB 2164 into law, which amends Government Code section 53069.4 and allows local governments to eliminate the “reasonable time period” to correct a code violation in cases of cannabis cultivation. According to the bill’s author, this removes at least one monetary incentive for illicit grows to continually move while giving local governments the ability to bring meaningful penalties on willfully illegal growers.

While it may sound reasonable, in practice this new law will have drastic impacts on unwitting landlords who may or may not know that cannabis cultivation is occurring at their property. Even the most sophisticated property owners are befuddled by California’s new regulatory scheme, unsure of whether cannabis activity is authorized as a matter of right in all jurisdictions (it is not), or whether they are even allowed to prohibit cannabis use or activity in their leases (they can).

We have been assisting a number of property owners facing excessive fines and penalties imposed by cities due to unlawful cannabis activity by their tenants (see here for more on that). Some cities impose strict liability against property owners for their tenants’ code violations, rack up fines of $10,000 per day, and then record the fines as an assessment on the property owner’s tax bill. This can result in a tax bill for hundreds of thousands to millions of dollars, non-payment of which results in sale of the property by the county.

Providing a reasonable period of time to correct a violation like cannabis cultivation ensured that property owners, who generally cannot proactively inspect property that is leased to a tenant (and therefore may be unaware of illegal activity) could take action to eliminate unlawful activity before it became an insurmountable financial burden. Now, property owners face serious and immediate risks and must take steps to ensure they are not held liable for unlawful cultivation activity by their tenants.

Fortunately, AB 2164 includes a “safe harbor” that requires cities and counties to provide a reasonable period of time to correct a violation prior to the imposition of administrative fines or penalties if all of the following are true:

  1. A tenant is in possession of the property that is the subject of the administrative action;
  2. The rental property owner or agent can provide evidence that the rental or lease agreement prohibits the cultivation of cannabis; and
  3. The rental property owner or agent did not know the tenant was illegally cultivating cannabis and no complaint, property inspection, or other information caused the rental property owner or agent to have actual notice of the illegal cannabis cultivation.

So, if you are a commercial landlord and want to protect yourself from municipal fines and penalties without warning, make sure that either (1) your tenant is lawfully cultivating pursuant to all local and state laws, or (2) you are complying with items 1-3 above. Otherwise, the consequences of city or county action can be painful.

Our firm’s main practice areas include cannabis, China, trade and immigration. As such, it may not surprise you to learn that we get a lot of questions about the developing international cannabis trade. This is in large part due to the fact that Canada is on the verge of legalizing marijuana nationwide.

Importing or exporting cannabis in the United States at this point is extremely limited. Marijuana is listed as a Schedule I substance in the Controlled Substances Act (CSA) and it is illegal under federal law to possess or sell marijuana. The Controlled Substances Import and Export Act incorporates the schedules of the CSA. That means that the U.S. Customs and Border Protection is likely to seize any shipments of marijuana, even if shipments are going to or coming from a nation that has legalized marijuana in some form. There has even been some noise about barring travel by foreign marijuana company investors themselves as of late.

All of that said, not all parts of the cannabis plant are considered marijuana. The CSA defines “marihuana” as “all parts of the plant Cannabis sativa L., whether growing or not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt, derivative, mixture, or preparation of such plant, its seeds or resin.” The second classification under the CSA is “Exempt Cannabis Plant Material” which includes the following four categories:

  1. Mature stalks
  2. Fiber produced from mature stalks
  3. Oil or cake made from seeds
  4. Seeds incapable  of germination

Exempt Cannabis Plant Material also includes “any other compound, manufacture, salt, derivative, mixture, or preparation” of the items listed above. The term does not include resin derived from mature stalks as that is considered marijuana, not Exempt Plant Material.

Back in May 2018, the Drug Enforcement Administration (DEA) issued an internal directive acknowledging that Exempt Plant Material is not “marijuana.” The directive touched on how the distinction impacted internationally traded cannabis

[A]ny product that the U.S. Customs and Border Protection determines to be made from the cannabis plant but which falls outside the CSA definition of marijuana may be imported into the United States without restriction under the Controlled Substances Import and Export Act. The same considerations apply to exports of such products from the United States, provided further that it is lawful to import such products under the laws of the country of destination.”

There you have it straight from the horse’s mouth: Importing or exporting Exempt Cannabis Plant Material is lawful under the Controlled Substance Import Export Act. What is not clearly indicated is whether or not the DEA considers exporting industrial hemp, grown pursuant to the 2014 Farm Bill, as outside of the scope of the CSA.

By nature of the 2014 Farm Bill, industrial hemp cannot be imported. This is because the cultivation of industrial hemp is only permitted if grown pursuant to a state’s agricultural pilot program under the guidance of a state department of agriculture.

But before you go and order a metric ton of mature cannabis stalks, keep in mind that any shipment of any cannabis-related good can come with additional scrutiny. Even if a product is solely derived from Exempt Cannabis Plant Material, that doesn’t mean that Customs will thoroughly investigate its shipment. Importers and exporters should be prepared to prove that the product was solely derived from Exempt Cannabis Plant Material and not marijuana. This can be difficult to do as there is no way to truly test from what portion of the plant a product was derived. You may be thinking, “well can’t a lab confirm that a product contains no THC?” The answer, of course, is “yes”, but even though verifying THC content is important (THC is listed separately from marijuana as a controlled substance in the CSA) it is not dispositive in determining whether a product is derived from Exempt Cannabis Plant Material.

Intrepid importers and exporters should prepare to detail the chain of title for Exempt Cannabis Plant Material. This can include an affidavit from the original supplier of the plant that only Exempt Cannabis Plan Material was used, lab certifications, purchase orders, shipping documentation, and any other documentary evidence showing the source of the plant material. There is no single item guaranteed to satisfy the authorities, so it’s best to prepare multiple documents in case they are needed.

california cannabis enforcement
Unlicensed cannabis traders, beware.

California has experienced some growing pains as it has continued to roll out its regulated cannabis regime pursuant to the Medicinal and Adult Use Cannabis Regulation and Safety Act (“MAUCRSA”), but despite delays in implementing permanent regulations, the state and many local jurisdictions are not waiting to enforce against unlicensed operators. We first covered this dynamic back in April, and the enforcement trend has only accelerated since then.

As we’ve noted many times before, in order for state legalization to succeed in the long run, regulators will need to take a tough stance against black and “gray” cannabis markets in order to ensure an even playing field for licensed, compliant operators. Other states have already taken action to make sure that unlicensed, unregulated cannabis operators don’t undermine their licensed counterparts, and California is finally beginning what will undoubtedly be a long and extensive endeavor to do the same. Although the Compassionate Use Act will not be repealed until January 9, 2019, there is no protection for cannabis businesses engaged in commercial activity without a local and state license.

And the enforcement in California will come from both state and local authorities. The City of Los Angeles recently launched a massive crackdown on unlicensed, illegal cannabis businesses, filing misdemeanor charges against more than 500 people and shutting down 105 illegal cannabis businesses, including cultivation operations, extraction labs, and delivery companies across the city. In Los Angeles, a charge of unlicensed commercial cannabis activity within the city carries a potential sentence of six months in jail and $1,000 in fines. Los Angeles’ City Attorney Mike Feuer, who has a track record of going after illegal cannabis businesses within the city, summed up the city’s reasoning behind its recent enforcement actions succinctly:

If they’re going to go through this process, it just cannot be the case that others that flout the rules are allowed to function. It’s bad for those who buy from them, it’s bad for the communities in which they’re located and, again, it threatens to undermine the viability of a system that’s predicated on lawful licensing.”

Although there are currently around 165 approved cannabis storefronts and delivery businesses in Los Angeles, there are many more operating without the necessary approvals, a problem that has plagued the city for years and will likely be an ongoing issue.

The state is also commencing its own enforcement actions in conjunction with local authorities, and has sent out several emails in recent weeks to stakeholders with the details of those crackdowns. Enforcement actions are being carried out by the Bureau of Cannabis control (BCC) and the Department of Consumer Affairs’ Division of Investigation – Cannabis Enforcement Unit (DOI-CEU). It appears that many of these actions, including one last month against an unlicensed cannabis home delivery business in Sacramento called The Cannaisseur Club, and another against an unlicensed cannabis retail store in Costa Mesa called Church of Peace and Glory, both resulting in criminal charges, have been initiated based on complaints received by the BCC (complaints related to unlicensed commercial cannabis activity can be filed here, by the way). Based on our experienced in other jurisdictions, we anticipate that the number of complaints filed, especially by licensed and compliant operators, will continue to increase.

As a reminder, all commercial cannabis activity in California requires a license from either the BCC, the Department of Public Health, or the Department of Food and Agriculture. Obtaining these licenses requires local approval. This is only the beginning of extensive enforcement by both state and local authorities, which will be necessary to ensure that California’s regulated cannabis market succeeds, not just in sales, but in eradicating the black market.

oregon marijuana data breach cyberA few weeks ago, we mentioned that cannabis companies that fall victim to a data breach are required, under state law, to inform employees and customers whose data was compromised by the intrusion. However, not every stolen piece of information demands notification. This post further dives into these laws—all 50 states have now enacted breach notification laws—by addressing the notification requirements imposed by the State of Oregon.

Oregon Revised Statutes (“ORS”) 646A.602 defines “breach of security” as “an unauthorized acquisition of computerized data that materially compromises the security, confidentiality or integrity of personal information that a person maintains.” “Personal information” means an Oregon resident’s:

  • Social security number;
  • Driver license number or state identification card number;
  • Passport number or other identification number;
  • Financial account number, credit card number or debit card number, in combination with any required security code, access code or password that would permit access to a consumer’s financial account;
  • Physical characteristics, such as an image of a fingerprint, retina or iris, that are used to authenticate the consumer’s identity in the course of a financial transaction or other transaction;
  • Health insurance policy number or health insurance subscriber identification number in combination with any other unique identifier that a health insurer uses to identify the resident; or
  • Any information about their medical history or mental or physical condition or about a health care professional’s medical diagnosis or treatment information.

Personal information also includes any of the data elements listed above, without the resident’s name, if the data elements, alone or in combination with others, would enable a person to commit identify theft against the resident.

However, the breach of a resident’s personal information does not, in and of itself, prompt the notification requirement. In Oregon, notification is not mandated if, after an appropriate investigation or consultation with law enforcement agencies, the company reasonably determines that the resident has not and is not likely to be harmed from the breach. Such determination must be documented in writing and maintained by the company for a minimum of 5 years.

If the company determines that the stolen data will harm or is likely to harm the resident, then the company must notify the resident “in the most expeditious manner possible, without unreasonable delay,” but no later than 45 days after discovering or receiving notification of the breach. Notification may only be delayed if the notice were to impede on a criminal investigation.

The notification, which must be made in writing, by phone or electronically, must include, at a minimum:

  • A description of the breach in general terms;
  • The approximate date of the breach;
  • The type of personal information that was subject to the breach;
  • The company’s contact information;
  • The contact information for national consumer reporting agencies; and
  • Advice to the consumer to report suspected identity theft to law enforcement, including the state Attorney General and the Federal Trade Commission.

Moreover, if more than 250 residents are notified, the company will be required to submit, in writing or electronically, a copy of the notification to the Attorney General. If more than 1,000 residents are notified, then the company will also have to notify all nationwide Consumer Reporting Agencies.

Data breach notification laws are demanding on hacked companies, but they are not the only laws with which these business entities must comply following a cyber attack. State and federal laws, including employment, medical, and financial laws, usually apply. In addition, states like Oregon impose pre-data breach measures, also known as information security standards—we will further cover this issue in our next post—on any company doing business in the state to protect the security, confidentiality and integrity of personal information before a breach. (California just passed one such law, specifically targeted at marijuana businesses.)

Cannabis companies affected by a data breach should always consult with experienced cyber security attorneys to avoid any civil penalty, but also to retain public confidence and maintain their competitive edge in this high-risk cyber environment.

california cannabis data privacy
California is taking steps to safeguard canna consumers.

Yesterday, California Governor Jerry Brown signed a new piece of privacy legislation—AB-2402—which places restrictions on how licensed cannabis companies in California share information about their customers.

AB-2402 is significant in that it prevents licensed cannabis businesses from sharing expansive categories of customers’ personal information with third parties—except in limited circumstances in connection with payments, or where a customer has consented to sharing his or her data with a third party. Notably, AB-2402 prohibits licensed cannabis businesses from discriminating against or refusing service to consumers who do not consent to disclosure of their personal information to third parties.

So what kinds of personal information is AB-2402 designed to protect? The bill incorporates the definition of “personal information” from existing California law, which definition includes a person’s first name or initial and last name in combination with a (1) Social Security number, (2) driver’s license number, (3) financial account number in combination with a security or access code, (4) medical information, or (5) health information. “Personal information” can also include a username or email address in combination with a password, or with a security question and answer that would permit access to an online account.

AB-2402 is also significant in that it expands the legal definition of “medical information” in the cannabis context to include medical marijuana identification cards, which also cannot be disclosed except as noted above (and also to certain government officials if necessary to perform certain official duties). In fact, AB-2402 goes so far as to deem licensed cannabis businesses that receive medical marijuana identification cards to be providers of health care—but only for purposes of the Confidentiality of Medical Information Act—which could subject businesses to penalties for improper use or disclosure of information.

The law is welcomed by many privacy advocates, including the Electronic Frontier Foundation, which cited surveys by Politifact which had found that a number of cannabis dispensaries kept broad categories of customer information. It is understandable why privacy advocates support stronger consumer rights in the cannabis industry. Cannabis is, after all, still illegal at the federal level, and so it is not difficult to imagine why customers would want their information to be kept under lock and key.

At the same time, compliance with this new privacy law may appear difficult to cannabis companies. That said, the law is not a totally new concept—California already requires companies (and not just cannabis companies) to provide notification to affected individuals in the event that similar information is acquired by a third party without authorization. AB-2404 simply modifies and expands existing obligations to encompass almost any kind of third-party information sharing.

Complying with AB-2402 will likely require companies to take stock of and retool their data security and sharing practices, and to retrain employees. This is not an impossible task, but it’s one that companies should place at the top of their agenda. After all, California is the state with (arguably) the most intense focus on protecting citizens’ personal information.

AB-2402 was only just signed, and its text does not identify when it takes effect.  We’ll keep you posted on any updates.

california marijuana cannabis licensing
So many questions.

We’re still in the early days of the complete roll out of the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”) in California. Currently, the only rules in play are the readopted emergency rules that are still full of ambiguities and unknowns, which will hopefully be addressed in the final permanent rules, which the state will likely release in coming months. We detailed the initial proposed permanent rules from back in July, the public comment period for which concluded at the end of last month. We assume the state is going to take into account a lot of that public comment before it pulls the trigger on adopting any permanent rules, which will likely happen by the end of the year.

While we’re in this interim emergency rules period, there are still a lot of unanswered questions for California cannabis businesses as they try to navigate an emerging, newly regulated industry. And some unknowns keep coming back again and again. I cover the top ones below.

1. Cannabis banking–when, when when. We’re all familiar with the cannabis banking epidemic. As a result of current federal laws, in certain states securing a bank account is nearly impossible (though in some states, banking is readily available because of the 2014 FinCEN guidelines). Unfortunately, California is still one of those “banking no-no” states because we don’t have a robust licensing scheme yet (that will certainly come though as regulators get down to business on permanent rules and enforcement). As a result of a lack of banking, there’s a lot of bad behavior out there, so beware of cannabis banking scams and fraudsters. And don’t count on any form of a public bank saving the day. However, if you’re lucky enough to find a financial institution in California that’s following the FinCEN guidelines, here are some useful tips on how to secure an account.

2.  Provisional licenses. There’s a sinister deadline looming for all temporary licensees. Namely, after December 31, 2018, no more temporary licenses will issue to any cannabis businesses. In addition, if you secure a temporary license on or around December 31 of this year, it will run its 120-day course and the governing state agencies will not renew it after that. To date, the agencies implementing MAUCRSA have renewed temporary licenses for 90-day stints (so long as a licensee is in pursuit of their annual license) to allow licensees to continue to operate once they secure local approval but before they get their full-blown annual license. Temporary licensure is without a doubt a big deal since it’s the only way to legal operate prior to receiving annual licensure, which is taking months at the state level to nail down. The silver lining is that the state legislature is contemplating creating provisional licenses under MAUCRSA to ensure that the industry doesn’t come to a screeching halt after December 31, but that bill is still pending.

3. Local control. Before you can receive a state temporary license, you must first show the state that you have the local approval of your city or county to operate within their borders. Once in pursuit of the state annual license, you can voluntarily provide evidence of your local approval, but the state will follow up with your local government regardless to make sure that you’re in compliance with local laws. The debate over local control and the fact that most California cities and counties ban commercial cannabis activity continues to rage in Sacramento. And the debate will ultimately play out in the permanent MAUCRSA regulations. For example, in the initial proposed permanent rules, state agencies, specifically the Bureau of Cannabis Control, proposed that retail delivery be borderless–meaning, licensees wouldn’t have to get local approval to delivery into/complete delivery in a given city or county. We are positive that such a decision made cities and counties cringe, but that likely won’t be the last time that the state and local governments butt heads over control over licensees.

4. CBD. CBD derived from industrial hemp in California is nothing short of a complete enigma. Why? Because, unless you’ve been living under a rock, you know that the California Department of Public Health Food and Drug Branch (CDPH-FDB) via an FAQ recently prohibited using hemp-derived CBD in food for pets and humans. Essentially, California is following the FDA lock-step on its treatment of hemp-CBD under federal laws. Other states have decided not to kowtow to the FDA in this area, but California surprised everyone by attacking hemp-CBD in this way. How enforcement will go and what it looks like remains a mystery. And since you’ll be hard-pressed to find a ton of juice bars, health food stores, breweries, coffee makers, and pet stores across the state not carrying hemp-CBD products meant for human or pet consumption, enforcement from CDPH-FDB could take a while.

5. Corporate versus cottage interests. The express intent of Prop. 64 was to hoist up and protect cottage interests in the cannabis industry. One of the biggest points of contention in Sacramento over MAUCRSA regulations has been the refusal of regulators to limit the number of cultivation licenses available to licensees. Namely, even though Type 3 medium sized cultivation licenses (I.e., 10,001-22,000 square feet of plant canopy) has been limited to one person/entity, anyone can still secure multiple and endless Type 1 and Type 2 cultivation licenses thereby getting around the limitation on medium sized grows. Combined with other regulatory barriers to entry and reporting and tax requirements, a lot of smaller cultivators and smaller business licensees are crying foul on MAUCRSA regulations being too corporatized. Whether regulators will really listen to this camp will be revealed in the permanent rules, and only time will tell.

6. DOJ and Jeff Sessions rescinded all DOJ marijuana guidance in January. As we all know, Jeff Sessions personally loathes cannabis. Sessions and whether you believe he’ll make good on his personal hatred or not, you cannot argue with the fact that the rescinding of the 2013 Cole Memo is unsettling if you’re a state-licensed cannabis business. Now that Sessions has take the position that U.S. Attorneys should prosecute cannabis crimes within their districts essentially according to the resources and priorities of the individual district, no one really knows what exactly enforcement will look like in each of the four federal California districts. So far though, to the best of our knowledge, the DOJ in California hasn’t been busting people for securing licenses under MAUCRSA.

7. Enforcement of rule violations. Temporary cannabis licenses began issuing in California on January 1, 2018. The program has been up and running for about a year and a half, and enforcement of rule violations against licensees has been varied at best. The state is mostly in the mode of getting people into the system and licensed in the first place. I’m confident that enforcement will finally begin to increase into next year as the dust settles on permanent licensing. And cities and counties are beginning to take the lead on enforcement anyway (see, for example, the latest from the City Attorney in Los Angeles). Still, exactly when the state will kick into higher enforcement mode is genuinely unknown.

We recently wrote about the new Oregon Liquor Control Commission (OLCC) rules for marijuana businesses, and observed that those rules were issued with the stated intent to stave off diversion of cannabis. In addition to its public-facing actions, we have seen an apparent shift in internal OLCC review policies and procedures. A few weeks ago, we covered the apparent adoption of new settlement policies. Today, we cover what appears to be increased scrutiny for each of the following: new license applications (those submitted prior to June 15th), license renewal applications, change in business structure applications, and change-in-ownership applications. OLCC investigators are looking at all of these submissions more carefully than ever.

It was never easy to get an OLCC license. It only felt that way, given the stricter and more tedious requirements faced by cannabis program applicants in other states. In Oregon, the application process was somewhat cumbersome initially (remember the narrative-based forms, released in 2015?), but the state quickly progressed to “check the box” paperwork in combination with its online data entry system. Today, there are a few interesting quirks in that protocol, but it’s navigable and sensible and clean overall.

So what changed? Generally, the administrative environment is different these days. Licensing has existed for a couple of years, OLCC has refined its processes, and investigators are better trained than before. Specifically, investigators have raised the bar for the content of application submissions, and they are looking under rocks that previously would have been left unturned. In many cases, they are finding things.

OLCC marijuana cannabis license
OLCC investigators are taking a harder look.

Gone are the days when an applicant could submit a business document in the belief that, regardless of that document’s contents, the inspector would summarily tuck it into her file essentially unread, and pass the application along to “final review.” OLCC investigators are now actively requesting and reviewing legal documents, and doing a really good job of it. Here is a sampling of investigator questions we have seen in the past month or so, that never would have surfaced even a year ago:

  • “Does this lease’s rent reconciliation provision mean that the landlord is entitled to a percentage of profits? Explain that.”
  • “Was this asset purchase agreement ‘deposit’ escrowed? Or have these funds used in the business operations already?”
  • “Why does this business structure form contain an LLC member who is not listed on the state business registry?”
  • “At what point did the seller transfer these utility bills into the buyer’s name?”

Etcetera. We have seen businesses tripped up (badly) in the both the change-in-ownership and renewal processes by questions like these. In the worst case, these inquiries can result in proposed license cancellation and/or non-renewal by OLCC. Those situations can be incredibly frustrating and stressful for a business, especially one with sunk costs and accumulating obligations. They should be avoided if legitimately possible.

In all, the new licensing paradigm leaves us with a couple of key takeaways going forward. The first is really simple: Run your business like a real business and ensure you have everything in place prior to OLCC submission. This means writing things down, to start, and using appropriate forms to do so. The second takeaway is to enlist help when needed. That doesn’t mean you need to pay an attorney or a consultant thousands of dollars to process your application. In our Portland office, for example, we have experienced marijuana licensing paralegals who process OLCC applications literally all day every day, and who talk with OLCC investigators on the regular. Our cannabis business lawyers only enter the picture to draft documents, or deal with nuanced or delicate matters.

Going forward, we expect OLCC to continue to ratchet up standards for both applicants and licensees on everything from rulemaking to license review to site inspections. That’s a good thing for compliant operators and for businesses that want to do things correctly. Really, it’s exactly how it should be.

marijuana cannabis employment discrimination
Nice job by the court.

As a general rule of thumb, employers are not allowed to discriminate against employees with disabilities. Both federal and state laws provide this protection. This means that an employer cannot take an adverse employment action against an employee because of the employee’s disability. Again, this is a “general” rule of thumb: In the cannabis context, things are always a bit different.

Some states have passed legislation protecting medical marijuana users off work marijuana use. Employers in those states cannot terminate an employee or refuse to hire an applicant because of their off-work medical marijuana use. Historically, however, the big problem with these laws is that state and federal courts have readily determined the Controlled Substance Act (CSA) preempts state law, and that employers may terminate medical marijuana patients for off-work use. Recently, for the first time, a federal court sided with an employee who brought a claim against her employer for termination for off-work use of marijuana.

According to the lawsuit filed in Connecticut, Katelin Noffsinger is a registered medical marijuana user. In 2016, Noffsinger applied for a job with Bride Brook Nursing & Rehabilitation (“Bride Brook”). Bride Brook offered her the job contingent on passing a pre-employment drug test. Noffsinger informed her potential employer that she was a medical marijuana patient and likely would not pass the drug test. Noffsinger took the drug test which confirmed the presence of THC. Bride Brook rescinded its job-offer. Noffsinger brought a claim against Bride Brook alleging Bridge Brook had violated the anti-discrimination provision of the Connecticut Palliative use of Marijuana Act (PUMA). Bride Brook attempted to dismiss the case, asserting the claim was preempted by the CSA, the Americans with Disabilities Act (ADA) and the Food, Drug and Cosmetic Act (FDCA).

The federal court first addressed the CSA preemption claim. The Court held that the CSA did not prohibit employers from employing marijuana users. Meaning, if state law prohibited employers from discriminating against medical marijuana users, it would control.

The Court next determined that the ADA did not preempt PUMA because the ADA explicitly allows employers to prohibit illegal drug use at the workplace but does not authorize employers to take adverse employment action based on drug use outside of the workplace. Finally, the Court determined the FDCA does not regulate employment and therefore was inapplicable in the current case.

The Court did not rule on the substance of Noffsinger’s claim–meaning it has not determined if Noffsinger was discriminated under PUMA. That decision is still pending a jury trial.

The Noffsinger case is important. It’s the first case of its kind to determine that marijuana’s illegality under federal law does not bar an employment claim based on state law. State courts, such as the Oregon Supreme Court, have expressly held that the CSA preempts state medical marijuana laws—meaning employers in the State of Oregon, for example, may still terminate an employee for off-work marijuana use.

The decision in the Noffsinger case is not binding in other jurisdictions, but it could indicate a significant shift in federal courts’ view on medical marijuana. Perhaps this court’s sound reasoning will influence other federal judges to provide equal protections to medical marijuana patients until marijuana is de- or rescheduled under the CSA.

RICO cannabis landlord
RICO suits are not just busting up gangs these days.

The Racketeer Influenced and Corrupt Organizations Act (RICO) is a federal Nixon-era law originally intended to combat drug cartels and organized crime. Among other features, it allows average citizens claiming a loss in property value to bring suit for triple damages plus attorney’s fees against any “person” or “enterprise” that has a part in any neighboring “racketeering activity” which includes—you guessed it—“dealing in a controlled substance.” Currently, federal law continues to classify cannabis as a Schedule I controlled substance—meaning it has no medicinal value, and is supposedly more dangerous than methamphetamine, methadone, hydromorphone, and oxycodone, among other things.

RICO has been read broadly enough by its patrons to include operators, as well as landlords, lenders, and even government licensing agencies and customers, as co-conspirators in licensed cannabis operations, meaning angry neighbors have found their deliverance when it comes to trying to shut down state-legal cannabis businesses. The painful irony of all this is that anyone with an aversion to cannabis in a state where voters democratically decided to legalize it has unique power to be an American Gangbuster because of an almost-half-century-old relic of the federal War on Drugs; yet, meanwhile, companies that would be investing in local communities are looking north to do five-billion-dollar Canadian Blockbusters. The bottom line is that as long as federal law remains unchanged, it does not matter how state voters decide to govern themselves, or even how sensibly the federal government decides to enforce federal laws prohibiting cannabis. RICO provides a private right of action for any would-be provocateurs that can plausibly claim they have been damaged by a neighboring cannabis business.

So how can landlords and tenants approach this issue when designing a cannabis tenancy? The short answer is that RICO will continue to be a real issue for as long as federal law allows it to be, but the parties can take some proactive measures in drafting the lease to mitigate that threat:

Build in an early termination option for third-party lawsuits. Just as the lease can include early termination options for a variety of cannabis-specific occurrences, it can provide an opportunity for one or both parties to address an undismissed third-party lawsuit by terminating the tenancy. This can include RICO actions as well as standard nuisance actions, which often have longer legs than RICO lawsuits. It can also include indemnification obligations if, e.g., the tenant causes the problem by failing to comply with the lease terms, or if the landlord misrepresents neighborhood sentiment (more on that below).

Vet the neighbors. Just as a tenant would analyze the zoning laws applicable to a proposed use, a cannabis tenant should take some time to see what the neighborhood is all about. Does the community support the use? How are the neighboring areas zoned? Is there any kind of history of bad actors in this space that’s left a bad taste? The tenant will have to make sure the site isn’t within any prohibited buffer zones of schools or youth centers as part of its state license application anyway, and what better opportunity to get to know your potential neighbors? Even some casual exploring is better than nothing, and can save loads of trouble down the road. Depending on how the parties negotiate the lease, it can include, e.g., landlord warranties of no known neighbor objections after diligent inquiries, or a term that puts the responsibility on the tenant to figure out how the use would go over in the community.

Tighten up those compliance obligations. Compliance with state and local law is the key to avoiding enforcement actions, and is equally important when it comes to neighbor relations. State regulations contain strict requirements about security protocols, waste management, hours of operation, and product transportation. Local rules will typically dictate things like parking requirements, odor management, and noise. The stronger and more specific the lease is with regard to complying with these various rules, the better chance you will have that the tenant (i) knows them, and (ii) follows them. Simply indemnifying yourself in the lease makes little difference if you end up losing an otherwise good tenant because they were uninformed.

Research the local politics and get to know local law enforcement. California’s cannabis regulatory regime is unique in that local jurisdictions are still king when it comes to who gets to operate and where. And we’ve already seen a repeat of what’s happened in other states that have legalized: jurisdictions sometimes change their minds and declare previously allowed cannabis operations to be non-conforming uses. Having your finger on the community pulse and knowing the level of support for your local cannabis ordinance when it passed is going to put you in a better position to know whether your cannabis tenant or your cannabis operation is more likely to be a welcome neighborhood feature or a walking lawsuit.

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

california cannabis marijuana development
Development agreements are a unique process.

This is the second post in our three-part series on California development agreements. In our first post we provided an overview of the use (and misuse) of development agreements in the cannabis industry. This post breaks down the basics of development agreement laws.

California’s development agreement statutes are located in Government Code sections 65864 – 65869.5. According to the legislative findings and declarations, the lack of certainty in the approval of development projects can result in a waste of resources, escalate the cost of housing and other development to the consumer, and discourage investment in and commitment to comprehensive planning which would make maximum efficient utilization of resources at the least economic cost to the public. Cal. Gov’t Code § 65864(a).

Providing assurance to development project applications that, upon approval of a project, the applicant may proceed in accordance with existing policies, rules and regulations, and subject to conditions of approval, strengthens the public planning process, encourages private participation in comprehensive planning, and reduces the economic costs of development. Cal. Gov’t Code § 65864(b). In other words, the California State Legislature has determined that providing certainty and predictability in the development process is good for everyone.

Government Code section 65865(a) provides that anyone with a legal or equitable interest in real property may enter into a development agreement with a city or county for the development of the property.

“Development” is not defined in the development agreement statutes, but “development project” is defined in a subsequent chapter as any project undertaken for the purpose of development, including a project involving the issuance of a permit for construction or reconstruction, but not a permit to operate. Cal. Gov’t Code § 66000. Accordingly, a cannabis business that obtains permits for tenant improvements would fall under this definition, but a development agreement would likely not be appropriate where a cannabis business enters a turn-key facility that requires no construction. In practice, this does not seem to be the case, and we’ve seen cities require development agreements where no construction is contemplated.

The development agreement process begins with the local agency’s procedures for development agreements. If none exist, a city or county must adopt procedures upon the request of an applicant, at the applicant’s expense. Cal. Gov’t Code § 65865(c).

The development agreement statutes provide minimum standards for local procedures and requirements, including periodic review of the agreements at least once every twelve months, specification of the duration of the agreement, the permitted uses of the property, the density or intensity of use, the maximum height and size of proposed buildings, and provisions for reservation or dedication of land for public purposes. Cal. Gov’t Code §§ 65865.1-65865.2

A development agreement is a legislative act that must be approved by ordinance and is subject to referendum. Cal. Gov. Code § 65867.5(a). A noticed public hearing by both the planning agency and by the city council are required before a development agreement is approved. See Cal. Gov’t Code § 65867. A development agreement cannot be approved unless the legislative body finds that the provisions of the agreement are consistent with the general plan and any applicable specific plan. Cal. Gov. Code, § 65867.5(b). Like all other ordinances, the ordinance approving the development agreement must go through a two-reading process, with at least a five-day intervening period. See Cal. Gov’t Code § 36934. A development agreement cannot legally take effect until after the 30-day period for a referendum expires. See Cal. Elect. Code § 9141; Referendum Committee v. City of Hermosa Beach, 184 Cal. App. 3d 152 (1986); Midway Orchards v. County of Butte, 220 Cal. App. 3d 765 (1990).

In practice, all of this means that the development agreement approval process takes a substantial amount of time. First, the developer and local government need to negotiate essential terms. Once the terms have been negotiated, the agreement is placed on the planning commission calendar for hearing, followed by two separate city council meetings. Only after the referendum period has expired can the agreement become effective. In a best case scenario, this process may take 90 days. It often takes much longer.

Development agreements in California are rarely challenged, and when challenged, development agreements are usually upheld because the statutes are liberally construed to encompass agreements that substantially comply with their specific terms and conditions and achieve their essential objectives. Santa Margarita Area Residents Together v. San Luis Obispo County (2000) 84 Cal.App.4th 221, 228.

However, given the popularity of use of development agreements in the California cannabis industry, we anticipate seeing an increase in legal challenges, especially where the agreements are mandatory, require substantial fees, have short terms, and lack any connection with construction.

Stay tuned for our next post in this series regarding key terms to fight for in development agreement negotiations related to California cannabis use.