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With a foundation in advocacy for cannabis legalization built through involvement on University of Washington's campus and with the Washington State Liquor and Cannabis Board, Daniel has positioned himself as a fearless advocate for the cannabis industry.

hemp federal law
Are the glory days of hemp returning?

Senator Mitch McConnel (R-KY) recently introduced S.2667, a bill which would allow states and tribes to regulate hemp production. The proposed law is appropriately titled the “Hemp Farming Act of 2018” (the “Act”). As the Senate Majority Leader, McConnell is one of the most powerful politicians in Washington, so it goes without saying that this is a big deal. In addition, the Act is being fast-tracked through the Senate, bypassing the standard committee review process.

The Act is currently in draft form and the details are subject to change. As written, “hemp” would be defined as:

“the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-0 [THC] concentration of not more than 0.3 percent on a dry weight basis.”

This proposed definition is significant, because it specifically includes the term “extracts”, thereby undermining the DEA’s much-maligned “marihuana extract” rule, which broadly defines any extract from the cannabis plant as “marijuana” and not hemp. The proposed “hemp” definition also includes “cannabinoids” contained in hemp which could add much needed legal certainty to the already booming CBD market. The Act would also explicitly remove hemp from the Controlled Substances Act’s definition of marijuana.

The authority to regulate legal hemp would be placed in the U.S. Department of Agriculture. One major issue with the current federal “Industrial Hemp” program is that the 2014 Farm Bill, which established the program, does not name a federal agency to oversee it. Feel free to debate whether government regulations help or hurt an industry, but at least this bill provides some guidance as to who is responsible for the program.

Speaking of the 2014 Farm Bill, the Act would repeal and replace the “Industrial Hemp” section of that the 2014 Farm Bill one year after Act is passed into law.  The 2014 Farm Bill allows states to enact pilot programs for hemp research making hemp legal within the state’s borders. Hemp cultivated in compliance with a State’s program is expressly legal under the Farm Bill. The Drug Enforcement Administration (DEA) and other federal agencies have issued a joint Statement of Principles claiming that the commercial sale and/or the interstate transfer of Industrial Hemp is outside the scope of the Farm Bill and therefore unlawful. However, Congress has limited the DEA’s ability to use federal funds “to prohibit the transportation, processing, sale, or use of industrial hemp” grown in accordance with the 2014 Farm Bill.

Ultimately, the Act would require that states and tribes submit a plan to the US Department of Agriculture in order to cultivate hemp. The plan must include details on how to track the land where hemp is produced, a procedure for testing the THC concentration in hemp, a procedure for disposing of products that are not in compliance, and procedures for enforcing the Act. The Act would also allow hemp researchers to apply for grants from the and make hemp farmers eligible for crop insurance.

McConnell introduced the Act in the Senate on April 12, 2018, and it was co-sponsored by Oregon senators Ron Wyden and Jeff Merkley. That same day saw Representatives James Comer of Kentucky introduce companion bill H.R. 5485 in the House of Representatives with and Rep. Jared Polis of Colorado co-sponsoring.

McConnell hails from Kentucky and it’s no surprise that lawmakers from Kentucky, Oregon, and Colorado would support hemp legalization. In 2014,  we predicted Kentucky would lead the nation in industrial hemp as it was one of the first states to implement a hemp cultivation program under the 2014 Farm Bill. Kentucky was also one of the first states to legally obtain hemp seeds after it stepped up to fight the DEA in federal court in order to obtain those seeds. Since then, farmers in Kentucky have been happily producing hemp as a replacement for tobacco crops. McConnell and Kentucky Agriculture Commissioner Ryan Quarles highlighted Kentucky’s hemp program in announcing the Act:

McConnell: Hemp has played a foundational role in Kentucky’s agricultural heritage, and I believe that it can be an important part of our future. I am grateful to join our Agriculture Commissioner Ryan Quarles in this effort. He and his predecessor, Jamie Comer, have been real champions for the research and development of industrial hemp in the Commonwealth. The work of Commissioner Quarles here in Kentucky has become a nationwide example for the right way to cultivate hemp. I am proud to stand here with him today, because I believe that we are ready to take the next step and build upon the successes we’ve seen with Kentucky’s hemp pilot program.

Quarles: Here in Kentucky, we have built the best Industrial Hemp Research Pilot Program in the country and have established a model for how other states can do the same with buy-in from growers, processors, and law enforcement. I want to thank Leader McConnell for introducing this legislation which allows us to harness the economic viability of this crop and presents the best opportunity to put hemp on a path to commercialization.

In addition to Kentucky’s leadership on hemp, Oregon has reconfigured its hemp program and is a national bellwether in this space. Oregon hemp growers and handlers are able to sell their products to state-licensed marijuana businesses (as well as anyone else in the country). The merger of Oregon’s hemp and marijuana markets is unique and other states will likely follow suit, especially if the Act becomes law. Finally, Colorado has more acreage dedicated to hemp cultivation than any other state at present.

As mentioned above, it appears that McConnell is flexing his considerable political muscle to get this bill fast-tracked through Senate. McConnell is using procedural Rule 14 which allows a bill to skip over the committee process so that legislation may be brought up on the Senate floor. This doesn’t guarantee that the Hemp Farming Act will get a vote, but it does indicate that McConnell means business.

washington cannabis license

As of April 1, 2018, Washington marijuana processors are required to hold a special endorsement from the Washington State Department of Agriculture (WSDA) to make marijuana-infused edibles (MIEs). This requirement follows from the WSDA’s appointment to share regulatory authority over MIEs with the Washington State Liquor and Cannabis Board (LCB). The WSDA’s Food Safety Program regulates, inspects and provides technical assistance to food processors generally, regarding product safety issues. Now, the WSDA will conduct similar activities with MIE processors including carrying out enforcement and recalls when necessary.

The endorsement costs $895 initially and $895 for each annual renewal. Applications must be submitted to the Washington State Department of Revenue Business Licensing Service website. Technically, processors are required to hold the endorsements as of April 1, but WSDA is providing a 30-day grace period. Therefore, the clock is ticking on any processors who have not yet acquired this mandatory endorsement.

Note that the endorsement is only available to businesses that already hold a processor license. The LCB is not currently accepting applications for new processor licenses. To add an MIE endorsement, a business or individual must currently have a processor license and only produce MIE products at a single facility. A business or individual cannot add MIE products under a Food Processor license, process MIE products at a facility that processes non-marijuana food products, or process non-marijuana food products at a facility that produces MIE products.

Prior to April 1, the WSDA had contracted with the LCB to inspect the facilities of processors making MIEs, so in some ways, not much is changing. Other than the new $895 fee, processors shouldn’t feel the impact of this regulatory change immediately. The LCB will maintain authority over marijuana activities such as processor license requirements, packaging, and labeling. Processors that are currently in compliance with food-related regulations for MIEs will not need to re-submit food safety information (e.g., floor plan, sanitation procedures) when applying for the MIE endorsement. If there are no changes to ownership, location, or products, WSDA will not require an inspection. Processors that have not produced MIEs before will have to submit additional information to WSDA and LCB. In 2015, the WSDA provided an outline of the basic requirements for processing MIEs and that document is available here.

Looking forward, processors can expect to deal with the WSDA more frequently. The WSDA now has authority to undertake enforcement action and implement recalls. On March 19, the WSDA issued a letter to stakeholders, stating that processors “may experience more frequent inspections, as well as more outreach efforts and industry engagement.” WSDA intends to inspect MIE-producing facilities within 12 months of the endorsement and may collect additional information during those inspections. Processors who make ownership, location, or product changes must submit materials to both WSDA and LCB.

If you hold a processor license that currently produces MIEs, you need to apply for this special endorsement this month to continue operating. This firm is very familiar with licensing procedures and can assist your business throughout the process of applying for this new endorsement. Feel free to contact us with any questions and stay tuned for additional updates.

An appeals court in Washington ruled last week that Clark County has the authority to ban the retail sale of recreational marijuana, settling any remaining dispute as to whether local governments in Washington can ban marijuana activities. The ruling was a long time coming, and not unexpected.

Washington law and rules promulgated by the Liquor and Cannabis Board (LCB or the Board) give local authorities the option to object to whether the LCB will grant a license. However, the LCB gets to make the final decision. In 2014, Attorney General Bob Ferguson issued a General Opinion that opined that state law had not preempted local jurisdictions from banning marijuana. Shortly after the Attorney General’s opinion, Clark County passed its prohibition ordinance.

The dispute in Emerald Enterprises LLC v. Clark County stems from Clark County’s ordinance prohibiting the retail sale of recreational marijuana in unincorporated Clark County. In spite of the ordinance, Emerald Enterprises applied for a retail marijuana license at a location in Clark County. The Board granted the license but Clark County revoked Emerald’s business permit for violating the ordinance by selling recreational cannabis.

Emerald challenged the ordinance in court, claiming that state law preempted Clark County’s ordinance and the County could not ban all retail sales. The trial court ruled in favor of the County and Emerald appealed, arguing that state law preempts local law with respect to permitted sales of cannabis.

“Preemption” occurs in situations when a higher authority takes precedence over a law passed by a lower authority. This comes up when state and federal law conflict but also applies to state and local law. Preemption is limited to laws that are actually in conflict. The Court of Appeals summarized when preemption occurs under Washington law:

A local law must yield to a state statute on the same subject matter if a conflict exists such that the two cannot be harmonized. The focus of the inquiry is on the substantive conduct proscribed by the two laws. For example, . .  an ordinance may punish littering more harshly than state law because both prohibit the same underlying conduct. No conflict exists if the provisions can be harmonized.  Here,the County’s local ban on retail marijuana stores can be harmonized with state law.

(Citations and quotations omitted.)

According to the Court, nothing in Washington law either expressly or implicitly preempted Clark County from passing its ordinance. Initiative 502 (I-502) and related statutes grant the LCB the authority to issue marijuana retail licenses but do not grant an affirmative right to sell cannabis. In other words, the law does not require the Board to issue licenses. The court stated that the fact that an activity can be licensed does not mean that the activity must be allowed under local law.  The Court also ruled that Clark County’s ban did not thwart the intent of I-502 because the purpose of legalization was to regulate and tax marijuana, not encourage the sale of cannabis.

Additionally, the Court determined that the State legislature considered the possibility that local governments would prohibit marijuana sales because it created a system where local governments that allow the sale of marijuana could share in the tax revenue derived from cannabis sales and cities and counties that prohibit retail sales can not. In 2015, when the state legislature created this tax program, we wrote that this settled the question of whether or not local authorities could prohibit marijuana activity.

Shortly after the Court of Appeals published its opinion, the Washington Attorney General issued a press release reiterating the fact that Bob Ferguson has long held the opinion that local governments have the authority to prohibit marijuana businesses and highlighting that his office intervened in the case. The press release also argued that allowing local governments to prohibit cannabis could help keep marijuana legal in Washington despite a hostile federal administration:

Local governments like Clark County that have banned marijuana businesses have indicated that if I-502 requires them to allow marijuana businesses, then they will challenge I-502 and argue that it is preempted by federal law. If courts agree with this argument, it could potentially threaten I-502 and Washington’s regulated marijuana system. But if courts continue to agree with the AGO opinion that Washington’s marijuana law does not require local governments to allow marijuana businesses, this threat will be avoided, because courts will not need to rule on the question of federal preemption. This allows legalized marijuana to continue in Washington, in accordance with voters’ wishes.

This result is not surprising and for the most part, marijuana businesses are not trying to operate in areas where cities or counties have banned marijuana activity. Cannabis businesses in Washington need to be aware of local rules and regulations in addition to the state’s robust regulations. For individuals living in Clark County (or any other jurisdiction that bans retail sales) who don’t like this result, this decision makes it clear that you’ll need to take it up with the County Commissioner, not the courts.

Crafting laws and regulations is more art than science. The authors of initiatives, legislators, and administrative agencies who create and implement rules to legalize medical and recreational marijuana are bound to get some things wrong. This may be due to political pressures, competing interests, and the simple fact that marijuana is prohibited under federal law.

Now that so many states have legalized, we figured a good way to determine what was working and what was not, would be to ask individuals those living in those states. So we did just that on our lively Facebook page by asking for our readers’ feedback. The responses were interesting and all over the board.

marijuana cannabis surveyMany of our readers expressed a concern that California has been over-regulating cannabis since voters approved legalizing recreational marijuana in 2016. (We wrote about this issue recently here.) Complaints were focused on the increased price of cannabis products since legalization went into effect on January 1. There were also complaints about how medical patients no longer had access to products that were available prior to the state’s new and expansive cannabis regulations.

In a similar fashion, many commentators claimed that Washington‘s regulatory framework was overly burdensome, though there were not nearly as many complaints about the price of cannabis which has dropped significantly since Washington retail stores first opened in 2014.  Washingtonians did take issue with the state being the only state that legalized recreational cannabis without allowing for home cultivation. Washington regulators have also faced criticism for the slow implementation of the state’s new traceability system.

Generally, people commented positively on Colorado and Oregon, citing the ability to home grow and good access to dispensaries. Some commentators complained about inconsistent enforcement in certain counties, claiming that police in some areas seemed to continually take issue with marijuana despite legalization. Hopefully, this issue subsides.

We did not get much feedback on other adult use states. One Facebook user was happy with Nevada but hoped that the state would have more options with regards to available strains. Alaska‘s program was criticized for problems with lab testing and the unfulfilled expectation that Alaskans would have social use cannabis clubs. One user from Massachusettes complained that legalization was progressing too slowly. And we did not receive any feedback on Maine or Washington D.C., unfortunately.

Some common complaints regarding states that only permitted medical marijuana were that it was too expensive to obtain an authorization card, and that the state burdened patients by the ways which patients could consume cannabis products. For example, New York allows medical cannabis but does not allow for smokeable forms of cannabis. Others argued that the cost of medical marijuana was too high or that states did not have enough products to satisfy the needs of patients.

Finally, in states that have either no legal marijuana program or medical programs that are limited only to CBD, the criticism was fairly straightforward: prohibition is not working! However, many commentators were hopeful that their state would legalize in the near future or that federal cannabis prohibition would end soon. Here’s hoping.

The Washington State House of Representatives is considering  House Bill 2334, which would allow licensed marijuana producers and processors to use cannabidiol (CBD) from a source not licensed by the Washington State Liquor and Cannabis Board (LCB). The bill defines a “CBD product” as “any product containing or consisting of cannabidiol” and would permit the use of CBD products from unlicensed sources so long as the CBD product has a THC level of 0.3 percent or less on a dry weight basis and has been lab tested.

Washington’s regulated cannabis market is a closed loop that works on the principle that no marijuana comes in and none goes out. Everything sold in a licensed retail store is grown by licensed producer and processed into products like oils and edible by a licensed processor. If a licensee is caught bringing in marijuana from an outside source, the LCB will cancel the license.

HB 2234 would have the most impact on processors who could add CBD to products such as marijuana oils, candies, capsules, and other infused products. Though HB 2334 is still far from being law, processors in Washington have flirted with the idea of using unlicensed CBD to create products with higher CBD concentrations. Processors who choose to enrich products with unlicensed CBD do so at their own risk.

The legal basis for claiming that using CBD from cannabis outside of Washington’s regulated market is based on the idea that not all cannabis is in fact “marijuana” and that products containing CBD derived from “Industrial Hemp” or from portions of the cannabis plant that are excluded from the federal Controlled Substances Act’s (CSA) definition of “marijuana” are legal under federal law.

Section 7606 of the 2014 US Farm Bill  (the Farm Bill) creates the framework for the legal the cultivation of “Industrial Hemp”, which is defined as cannabis with a THC concentration of less than 0.3% on a dry weight basis. The Farm Bill allows states to enact pilot programs for hemp research purposes. Washington has such a program, though it is underfunded. Hemp that is cultivated in compliance with a state’s pilot program is legal pursuant to the Farm Bill, although the sale of any products derived from this research is not explicitly allowed.

Last year, the state legislature required that the LCB study the viability of allowing processors to use hemp cultivated by licensed hemp farmers. See RCW 15.120.060. It’s also possible that a processor could use CBD derived from a hemp cultivator in another state that has implemented an Industrial Hemp program under the Farm Bill, but the Drug Enforcement Administration (DEA) has issued a Statement of Principle claiming that the interstate transfer of Industrial Hemp is outside the scope of the Farm Bill and therefore unlawful.

Processors may also claim that if CBD is derived from the mature stalks of the cannabis plant, it is not prohibited by the CSA. The CSA’s definition of marijuana “does not include the mature stalks of such plant, fiber produced from such stalks, oil or cake made from the seeds of such plant, any other compound, manufacture, salt, derivative, mixture, or preparation of such mature stalks (except the resin extracted therefrom), fiber, oil, or cake, or the sterilized seed of such plant which is incapable of germination.” 21 USC §802(16). In the early 2000’s, two cases out of the Ninth Circuit, Hemp Indus. Ass’n v. DEA, 357 F.3d 1012 (9th Cir. Cal. 2004) and Hemp Indus. Ass’n v. DEA, 333 F.3d 1082 (9th Cir. 2003) clarified that the DEA could not regulate hemp products merely because they contained trace amounts of THC. According to these rulings, some portions of the cannabis plant are explicitly outside the scope of the CSA. Thus, the court ruled that the DEA was not permitted to expand the scope of the CSA to encompass all parts the cannabis plant.

Because it was illegal to grow hemp in the United States until 2014, the Ninth Circuit decisions only applied to hemp imported from other countries. For CBD sourced from domestically grown hemp, today’s processors would need to know for certain from which part of the cannabis plant the CBD was derived to have a credible argument. If the CBD were sourced from any portion other than the mature stalks or seeds incapable of germination, then the product would be derived from marijuana and the processor could lose its license. There is also a question of whether a meaningful amount of CBD can even be extracted from mature stalks and seeds incapable of germination.

Processors who are using CBD additives do so at their own peril. Neither of the above legal theories provides much security as the licensee is counting on the fact that the LCB will accept this complex legal analysis and determine that the licensee is not using unlicensed cannabis. HB 2334 would provide some clarity and create a legitimate method to use unlicensed CBD. HB 2334 could also create an incentive for more farmers to participate in Washington’s fledgling hemp market. Finally, the bill would likely result in an increase in high-CBD products that some consumers–especially medical cannabis users–feel Washington’s market lacks.

For the bill to become law, it would have to pass the House, pass the Senate, and be signed by the Governor. It’s still too early to tell with HB 2334 will make it, but it’s worth keeping an eye on for now.

washington marijuana cannabis
Big ups to Bob.

Washington State Attorney General, Bob Ferguson, appears ready to defend his state’s marijuana program against Jeff Sessions and Donald Trump. Last week, Ferguson spoke to the Columbian’s editorial board about upcoming challenges for the Evergreen State. Naturally, the topic of marijuana came up.

Ferguson stated that his office was prepared for a legal fight over marijuana legalization in Washington, although he said, “we hope it doesn’t come to that.” Due to recent actions by US Attorney General Sessions, however, it seems likely that it “could come to that.” If it does, Ferguson told the Columbian that he would not hesitate to act:

Hypothetically speaking, right, there could be a business that’s licensed in Washington state selling marijuana that’s following state law. Let’s assume they’re following state law to a T—that’s important—and the feds go in and try to shut that business down, they seize the marijuana or the proceeds. If in my view, we’ve got a legitimate business, playing by our rules here in Washington state and the federal government comes in to try to shut that down, we’d be interested in that.

Ferguson also said that he would be willing to get involved if the federal government takes any “adverse action” against a marijuana businesses compliant with state law.

Earlier in January, Sessions rescinded Obama era guidance regarding federal enforcement priorities for states that legalized cannabis and replaced with the single-page Sessions Memo. Now, US Attorneys across the country, like Washington’s Annette Hayes, are authorized to use their own discretion when deciding whether prosecute federal marijuana crimes in their respective states.

Prior to Ferguson’s interview, the Washington State Liquor and Cannabis Board sent out an email on behalf of his office asking for Washington residents to share “if they experienced a change in your business practices or customer relationships that you believe is connected to the Sessions Memo.”

Clearly, this issue has been on Ferguson’s mind for a while. In his interview, Ferguson also emphasized the fact that Washington repeatedly reached out to Sessions to discuss Washington’s cannabis law and policy. In each case, Sessions declined. Ferguson also pulled no punches in deriding Sessions for sending him and Governor Jay Inslee a factually inaccurate letter on Washington’s marijuana program, which failed even to acknowledge that the state had merged its medical and recreational programs:

I think the first thing he accused us of was not having a system that had combined our medical and recreational marijuana systems together, relying on that old report—but, of course, since that report came out, we had! To me that’s embarrassing that the US attorney general, on an issue of that importance, is writing a letter to a governor and attorney general of another state and he’s just got his facts wrong. That’s a problem, I think. I think this is a problem in trying to move forward on these issues.

Ferguson wisely said that he was not willing to discuss legal strategies, but acknowledged that a legal fight could center on “whether federal law preempts state law when it comes to marijuana.” Under the US Constitution, federal law preempts state law when the two directly conflict, but there are strong arguments by states like Washington that their adult use cannabis programs are not in “positive conflict” with federal law. We explained how that works here.

Washington has consistently proven that it is not afraid to challenge the Trump administration. Sessions brought great uncertainty to the marijuana industry, but Washingtonians should feel confident that their Attorney General will fight to protect the will of Washington voters. Hopefully, Ferguson never has to take up his promise, but it’s reassuring to know he is willing to do so.

Congratulations to defiant Vermont!

Yesterday, Vermont Governor Phill Scott signed a bill into law legalizing marijuana. Vermont has become the first state to legalize recreational marijuana through its legislature. Alaska, Colorado, California, Maine, Massachusettes, Nevada, Oregon, Washington, and Washington DC all legalized the recreational use of cannabis through voter initiative. Vermont also becomes the first state to legalize after Jeff Sessions rescinded Obama-era guidance on federal enforcement in states with legal marijuana and issuing his own memo. The new law goes into effect on July 1, 2018.

Vermont’s bill is also unique in that it is noncommercial. It does not create a regulated market (yet) or a tax structure for cannabis sales. The bill simply makes it legal to possess and grow small amounts of marijuana. This is similar to the legal framework regarding recreational cannabis in Washington DC.

The Vermont legislature summarizes the intent of the bill as follows:

It is the intent of the General Assembly to eliminate all penalties for possession of one ounce or less of marijuana and two mature and four immature marijuana plants for a person who is 21 years of age or older while retaining criminal penalties for possession, dispensing, and sale of larger amount of marijuana.

Individuals in Vermont who possess marijuana or marijuana plants in excess of these restrictions face criminal penalties. However, marijuana cultivated from homegrown plants does not count toward the one-ounce possession limit if stored indoors on the property where it was cultivated. Personal cultivation must be out of public view. Cannabis oils and tinctures may be hard to come by as extraction using butane or hexane is prohibited.

Like most cannabis-friendly states, Vermont will not permit the public consumption of marijuana. It also does not change state law regarding driving under the influence of marijuana. Cities and counties may impose additional penalties regarding the public consumption of marijuana. Landlords may prohibit the use or possession of marijuana in a lease and employers may require that their employees do not use marijuana as a condition of employment.

Providing marijuana to a minor can result in criminal penalties. The new bill also creates a civil cause of action for a “spouse, child, guardian, employer, or other person who is injured in person, property, or means of support” as a result of marijuana use by a person under the age of 21. These civil claims can be filed against anyone who provides or enables the consumption of marijuana.  This means that a person who provides marijuana to a minor can be liable for the minor’s driving accidents.

Vermont may not be a large state but its decision to legalize marijuana is of national significance. Other state legislatures may follow suit and legalize marijuana through the traditional lawmaking process. New Hampshire, for example, could join Vermont as its House of Representatives recently voted to legalize marijuana. Similarily, a Republican state senator in Kentucky also recently filed a bill to legalize recreational cannabis. In addition, and perhaps more importantly, Vermont’s legalization success is a signal that states are going to continue to push forward with marijuana legalization even though Jeff Sessions has raised concerns over federal enforcement.

washington marijuana cannabis
Will she or won’t she?

Jeff Sessions’ decision to rescind Obama-era guidance on the Department of Justice’s approach to marijuana enforcement was troubling for the cannabis industry. The “Sessions Memo”  withdrew earlier marijuana-specific guidance memoranda and directed US attorneys to decide which marijuana activities to prosecute “with the Department’s finite resources,” based on well-established principles that govern all federal prosecutions including, “the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.”

The Sessions Memo does not provide much additional insight as to what prosecutors should look for in determining what marijuana crimes to target. In lieu of such guidelines, it is important that stakeholders in the cannabis industry familiarize themselves with the US Attorney in their district. This post is focused on Annette Hayes, the US Attorney for the Western District of Washington.

On January 4, Hayes issued the following statement regarding the Sessions Memo:

Today the Attorney General reiterated his confidence in the basic principles that guide the discretion of all U.S. Attorneys around the country, and directed that those principles shepherd enforcement of federal law regarding marijuana.  He also emphasized his belief that U.S. Attorneys are in the best position to address public safety in their districts, and address the crime control problems that are pressing in their communities.  Those principles have always been at the core of what the United States Attorney’s Office for Western Washington has done – across all threats to public safety, including those relating to marijuana.  As a result, we have investigated and prosecuted over many years cases involving organized crime, violent and gun threats, and financial crimes related to marijuana.  We will continue to do so to ensure – consistent with the most recent guidance from the Department – that our enforcement efforts with our federal, state, local and tribal partners focus on those who pose the greatest safety risk to the people and communities we serve.

This short paragraph indicates that Hayes’ office will focus on threats to public safety, as it has for the past few years, and will act in a manner “consistent with the most recent guidance from the Department.” This statement is fairly vague and does not give a strong indication as to how Hayes will act in light of the Sessions Memo. To better understand Hayes’ opinions on cannabis, we can turn to her career as a prosecutor.

Hayes joined the U.S. Attorney’s Office in 1997 as an Assistant United States Attorney in the Criminal Division. Early in her career she was assigned drug cases including large-scale, international trafficking and cartel-related cases. In 2002, she became the Deputy Supervisor of the Complex Crimes Unit where she prosecuted cyber hacking and intellectual property cases.  In 2005, she became one of the supervisors of the General Crimes Unit, focusing on a range of federal crimes including child exploitation, drug, fraud, identity theft, immigration and violent crimes cases. Hayes took over for Jenny Durkan (Seattle’s current mayor) as the Acting US Attorney for the Western District of Washington in October 2014.

As she moved up the ranks, Hayes has not focused solely on drug crimes. Since taking over as US Attorney for the Western District of Washington, Hayes’ office has focused on marijuana cases involving acts of violence or the distribution of other drugs, like methamphetamine. I uncovered no examples of Hayes’ office prosecuting a licensed marijuana business. The following are some of the key marijuana-focused cases prosecuted in western Washington under Hayes:

  1. Illegal BHO Operation in Bellevue. In June 2015, Hayes announced that David Shultz had been sentenced to nine years in prison after causing a fire in a Bellevue apartment complex while manufacturing Butane Hash Oil (BHO). A man was killed as a result of the fire and several others were injured. The incident occurred in November 2013 and Hayes took over this case after replacing Durkan. Mr. Shultz was operating squarely outside of Washington’s regulatory framework.
  2. IRS Fraud. In May 2016, Hayes announced that former IRS agent Paul Hurley would serve 30 months in prison for soliciting and then accepting a bribe while auditing Have a Heart. Have a Heart worked with the FBI and local law enforcement to document the events leading to Mr. Hurley’s arrest and conviction. Have a Heart is a licensed retailer but did not face charges relating to this incident.
  3. Unlicensed Medical Marijuana. In June 2016, Hayes announced that Lance Gloor would serve a ten-year sentence for drug trafficking. Gloor owned several medical marijuana dispensaries. In 2010, police officers obtained a warrant to search Gloor’s home and found over 70 marijuana plants and a firearm. While awaiting charges in state court, Gloor allegedly opened four marijuana dispensaries in the Puget Sound area. During his trial,  the court ruled that Gloor violated court orders by contacting witnesses. In announcing the conviction and sentence, Hayes stated, “[d]espite repeated notice that his marijuana business was illegal under state and federal law, he continued to use lies, threats and intimidation to try to cover his tracks and make as much money as he could.” The court found that Gloor was not operating in compliance with state law and he did not have a license to produce, process, or sell marijuana from the Washington State Liquor and Cannabis Board.
  4. SPD Marijuana Diversion. In May 2017, Hayes announced the arrest of four Seattle Police Officers on conspiracy charges related to the delivery of hundreds of pounds of marijuana from Seattle to Baltimore. Alex Chapackdee, a 16-year veteran of SPD, was the alleged ringleader who also drove across the country to deliver marijuana on several occasions. This case is ongoing and the individuals involved have not yet been convicted.

Overall, Hayes does not appear to have the same zealous opposition to cannabis as Jeff Sessions. However, she has pursued marijuana cases that involved individuals who operated outside of Washington’s regulatory framework.  Hayes, like all of us, has relied on the Cole Memo for the last four years and is likely re-evaluating how her office will deal with marijuana in Washington. Under the Sessions Memo, we could see Hayes take a tougher approach to cannabis but her history of prosecuting marijuana crimes appears to indicate that she is not inclined to target licensed businesses.

Our Seattle office often receives calls from entrepreneurs who want to operate in Washington’s thriving recreational cannabis market. Washington is not currently accepting applications for new cannabis licenses which means there are a finite number of licenses available. This leaves one option for entrepreneurs who want to operate their own Washington’s cannabis business: buy an existing licensed business. These transactions are common but can be risky if the buyer is not careful. This post outlines some of the key issues buyers need to watch out for when purchasing a cannabis business in Washington state.

1. Prepare to buy the business, not the license. 

Generally, a prospective buyer has two options in buying a business: (1) purchase the entity itself by buying all outstanding shares or membership interests, or (2) purchase the business’ assets, such as the equipment, fixtures, property, and goodwill. When buying a Washington cannabis business, purchasing only the assets is not much of an option.

The Washington State Liquor and Cannabis Board (LCB) does not treat a license to produce, process, or sell cannabis as a transferable asset. This means that a buyer must purchase the business that holds a license, rather than purchase the license itself (it is possible to buy a partial share in a business but this post focuses on scenarios where the buyer takes full control over a licensed entity). There are some exceptions to this rule. For example, when a buyer targets a sole proprietor it is possible to assume the license. However, in most cases, the buyer must purchase the entity rather than the assets.

By buying an entity, the buyer takes on all contracts, debts, and anything else registered under the business’ name. This requirement means that a buyer faces increased liability and therefore must carefully evaluate the target business.

2. Do your homework and know what you’re buying. 

As with the purchase of any business entity, a potential buyer should perform thorough due diligence before closing. (See our articles on that here and here.) Washington’s Uniform Commercial Code database is available online and can be used search what creditors have filed against a debtor in the state providing useful information about the target entity’s debts. Buyers can also perform federal, state, and county lien searches to determine whether there are encumbrances taken out against the target company. A buyer may also search a licensee’s violation history on the LCB’s website, though this information may be limited. If time permits, a buyer can make a public record’s request for the license to uncover a full history of investigations, violations, and other pertinent information.  Such requests take a few weeks or months to process so they may not be available if time is a factor.

The buyer should request all relevant seller company documents and require the seller to list all other debts that could impact the business, including wages owed to employees or debts owed on unfulfilled contracts. Once these debts are outlined, a buyer’s attorney can draft a warranty or indemnity stating that the seller will pay for any outstanding debts that arose before the sale.

3. Know what you’re paying and when you’re paying it. 

After due diligence, the parties must agree to terms of the sale, including the purchase price. For background on how to value a cannabis business take a look at the following posts:

Once the parties are settled on the purchase price, it’s time for an attorney to draft the purchase and sale agreement.

In drafting a purchase and sale agreement, timing is everything. This is because the LCB must approve of anyone who is a true party of interest in a cannabis business. The definition of a true party of interest is broad and includes the following individuals in a given entity:

  • Sole Proprietorship: The sole proprietor and his or her spouse;
  • Partnership: All partners and their spouses. This includes general and limited partners in LPs, LLPs, and LLLPs;
  • LLC: All members and managers and their spouses;
  • Corporations: All stockholders and corporate officers and their spouses. This includes both publicly and privately held corporations; and
  • Multilevel ownership structures: All persons and entities that make up the ownership structure and their spouses.

The definition also includes any person or entity that expects a percentage of gross or net profits (excluding financial institutions) or who exercise control of the licensed business in exchange for money or expertise. Additionally, the LCB requires disclosure of financiers, which includes anyone lending or gifting money to a licensed entity.

Ownership of a cannabis business must not transfer until the LCB approves of the new owner. An undisclosed true party of interest or financier is a major penalty that results in a cancellation of license. This means that the buyer will not “get the keys to the company” until the LCB signs off. To deal with this, we often recommend using a conditioned contract where payment is made in increments over time based on certain events.  Buyers may elect to put money in escrow with instructions to distribute funds upon LCB approval. However, buyers should prepare to pay the seller a fee in exchange for the option to purchase the business after LCB approval.

4. Prepare for Licensing. 

After the purchase and sale agreement is executed, the LCB will investigate the buyer to determine whether he or she is qualified to own a cannabis business. The LCB investigates the buyer’s finances, requires the buyer show proof that he or she is a Washington resident, and requires the buyer submit fingerprints for a criminal background check. In addition, the buyer must provide detailed information on the source of funds used to purchase the business. This process starts with a phone call where the buyer outlines the details of the transaction. Then the LCB sends out a document request so that the buyer can provide documents to show the details of the transaction. These document requests often require that the buyer submit the purchase and sale agreement, proof of the source of funds which can include bank statements, a list of the buyer’s previous jobs and places of residence, and other personal information.

Conclusion. The process of purchasing a cannabis business can seem difficult, but a buyer with adequate preparation and counsel can get through the process without too much of a headache. Washington’s cannabis market is booming and the limited number of licenses makes a marijuana business a potentially valuable asset. If you have questions about how the process works, contact one of the cannabis business lawyers in our Seattle office.

 

Washington Cannabis
Washington homegrown cannabis

The Washington State Liquor and Cannabis Board recently issued a report on recreational cannabis home grows to the Washington State Legislature without making a specific recommendation as to whether the state should legalize recreational home cultivation. Instead, the LCB analyzed the following  three proposed option (which options we discussed here):

  1. Tightly Regulated Recreational Marijuana Home Grows. This option would impose a strict regulatory framework. Home cultivators would need a permit to grow legally. Permit holders could then purchase plants from licensed producers. Each household would be allowed four plants and all plants would be tracked in the same traceability system used to monitor commercially grown cannabis.  The LCB would impose requirements to ensure security and to prevent youth access and diversion. Both the LCB and local authorities would monitor home grows. Cannabis processing would be subject to the same restrictions as apply to medical cannabis (e.g., no combustible processing).
  2. Local Control of Recreational Marijuana Home Grows. Like Option One, this option would require a permit, require safeguards to prevent diversion, limit each household to four plants, and allow permit holders to purchase plants from producers. Option Two would not require home cultivators to use the State’s traceability system. It also would give greater authority to local jurisdictions to create more restrictions and to authorize, control, and enforce the homegrown program.
  3. Recreational Home Grows are Prohibited. The third option is to maintain the status quo and prohibit home cultivation.

The Board weighed the benefits and drawbacks of each measure. A tightly regulated system provided in the first option would address concerns over traceability and public safety but would require allocating significant resources to monitor home grows. The second option would allow local governments to control home cultivation but could result in inconsistent and confusing rules and regulations across the state. The third option would mean the state would not need to implement a new system but would continue allocating resources to prohibit home cultivation.

The LCB contacted cannabis regulators from Colorado, Oregon, and Rhode Island. Colorado and Oregon allow for recreational home cultivation (along with all other states that have legalized recreational marijuana) and Rhode Island permits medical home cultivation with tight regulations. Colorado’s constitution provides a right to home cultivation. The Colorado State Legislature expressed concerns about large home grows as the law originally allowed for up to 99 plants in a home and in 2017, Colorado limited that number to 12 plants per home. Oregon citizens can grow up to four plants generally but can grow more after obtaining a permit or a doctor authorization. Oregon recommended a low number of plants if recreational grows are allowed. Rhode Island expressed concerns over diversion and created a strictly regulated home grow system where all grows must be permitted and plants traced in the traceability system.

The Washington Board also spoke to the Association of Washington Cities, Washington State Association of Counties, the Washington Association of Sheriffs and Police Chiefs, the Department of Social and Health Services, Department of Health, Washington Healthy Youth Coalition, and received public comment through a public hearing and written comments. The LCB reports that law enforcement generally opposed implementing a home cultivation program as it could create public health and safety concerns, including diversion of legally grown product to the illicit market. Law enforcement officials also expressed concern over whether the state could regulate home grows as individuals are afforded privacy protections in their homes that can prevent law enforcement officers from inspections. Other state agencies expressed concerns about children accessing cannabis grown in their homes.

The report emphasizes Washington’s compliance with the Cole Memo through a tightly regulated system, stating that recent changes made by the legislature continue “to add public safety measures to the system rather than making it more lax.” It summarized the viability of home grows as follows:

If the maximum plant number is kept very low, the less of an overall impact there may be to a regulated system and diversion to feed the illicit market and marijuana being exported to other states. While the majority of people may likely follow the rules, there may be those who will intentionally not stay within legal requirements with the goal of engaging in the illicit market.

The Board also emphasized the need for clear regulation if the State allows recreational home cultivation:

The more clearly and simply the parameters are drawn – how many plants a person may have, definitions of a plant and the level of maturity of plants a person may have, restrictions on when a person is illegally growing vs. legally growing – the less overall impact to the regulated system and the greater the enforceability of home grows, thus supporting the tenets of the Cole Memo. This greater enforceability does not completely abate enforcement concerns.

The LCB’s analysis will now be used by the Washington State legislature to implement a program to legalize home cultivation or to uphold the status quo. Washington’s legislative session starts in January and we’ll continue to write about the status of homegrown cannabis in the Evergreen State.

Right now the jury is definitely still out.