Photo of Vince Sliwoski

A well-rounded attorney with experience in areas such as music and trademark law, Vince heads up Harris Bricken's Portland office and is a leading practitioner in Oregon's ever-evolving cannabis industry.

marijuana cannabis supreme court
Nice work by the Court.

Back in December, we wrote about Murphy v. NCAA (“Murphy”), a case where the State of New Jersey challenged a federal law that bans states from allowing sports gambling. We explained that this case has important implications for state-legal marijuana programs, because it asks whether the Constitution’s anti-commandeering doctrine prevents the federal government from forcing states to ban certain activities. The case took a long and winding path, but on Monday, the U.S. Supreme Court ruled by an impressive 7-2 margin that federal prohibition did not preempt the state’s gambling laws. This is great news for cannabis.

We have argued on this blog that applicable law prohibits the feds from shutting down state cannabis programs. In support of this argument, we have observed that the Tenth Amendment of the Constitution (the source of the anti-commandeering doctrine), coupled with the express, anti-preemption language of the federal Controlled Substances Act, grants the states ample authority to run cannabis programs. Given the precedent established in Murphy on Monday, it is hard to imagine any other outcome if the feds were attempt to enjoin (shut down) a state licensing program for marijuana.

In reaching its opinion, the majority acknowledged that the question of whether to legalize sports gambling “is a controversial one” that “requires an important policy choice.” But that choice, the majority continued, “is not ours to make. Congress can regulate sports gambling directly, but if it elects not to do so, each State is free to act on its own.” It is hard not to see parallels with marijuana legislation there. Along those lines, the Court also observed that:

“The legalization of sports gambling is a controversial subject. Supporters argue that legalization will produce revenue for the States and critically weaken illegal sports betting operations, which are often run by organized crime. Opponents contend that legalizing sports gambling will hook the young on gambling, encourage people of modest means to squander their savings and earnings…”

Substitute “marijuana” for “sports gambling” and you have an almost perfect distillation of the broad policy arguments made by pro- and anti-cannabis prohibition camps. Because of these striking parallels, supporters of cannabis filed an amicus brief in support of the State of New Jersey. In addition, litigants in the Supreme Court’s most notable marijuana case to date, Gonzales v. Raich, were quick to opine that Murphy is easily distinguished from the former case, which dealt only with the federal government’s ability to enforce federal laws within state borders, and not with the feds’ ability to require states to pull state laws off the books.

For cannabis advocates, Murphy is an especially fun case, because it originally was brought by former New Jersey Governor Chris Christie, and the case was known as Christie v. NCAA before Phil Murphy became the state’s governor. Christie, of course, is known for his repeated attacks against state legalization of marijuana, and his disregard of states’ rights in that context. Today, however, he is applauding the Murphy decision and the “rights of states and their people to make their own decisions.” Go figure!

In any case, anyone in favor of states’ rights, including the right to ignore retrograde federal laws around marijuana prohibition, should be excited about the Supreme Court’s decision in Murphy. It stands as the latest in a string of promising federal developments signaling the of cannabis prohibition. Hopefully, the end is finally near.

Yesterday, we received a call from Congressman Earl Blumenauer’s office here in Portland, Oregon. The purpose of the call was to discuss an idea to deal with the oversupply of marijuana in the state sanctioned Oregon market. Specifically, the idea was to explore the possibility of an interstate compact with California, where Oregon would sell its excess cannabis to the Golden State, much like Oregon has sold its excess renewable energy over the years. Unfortunately, we don’t think it’s a great idea.

Could a west coast cannabis exchange really work?

We have been writing about the oversupply issue for a while (see here and here). Recently, oversupply has also begun to receive a surge in media coverage (see here, here and here). To be sure, we have a ton of clients who have been affected by depressed cannabis prices lately: These clients include not just farms but processors and retailers who are struggling to move product and cover costs, let alone turn profits. This predictably has resulted in fair bit of industry consolidation as of late, and we have been buying and selling cannabis businesses nonstop for a while now.

Various approaches have been suggested to deal with the oversupply issue in the regulated Oregon market. These approaches include having the state legislature cap the issuance of licenses, like Washington, or having the Oregon Liquor Control Commission (OLCC) curtail maximum allowed canopy sizes. To date, neither approach has gained any traction. Instead, policy makers are simply watching the market attempt to sort itself out, which means watching a significant number of operators fail, while others are swept up by out-of-state and even international investment.

So why don’t we think an interstate compact with California is a great idea? There are a few different reasons. The first is that California has plenty of cannabis in its own right: It just needs to recalibrate regulations that are currently seen as too restrictive to allow most small and mid-sized operators to enter the regulated market. The second reason is that California’s adult use program is too new: The state will almost certainly wish to keep and grow its own legal cannabis, rather than import product from Oregon while a black market thrives. But the biggest reason of all may be that an interstate compact, while exotic, is legally and politically hazardous.

For 22 years and over the course of four presidential administrations, the federal government has taken a general posture of restraint as states have promulgated medical and then recreational cannabis programs. There are a variety of reasons for this, but one is surely the compelling argument that states have under the 10th Amendment of the Constitution to roll out these programs. An interstate compact for the transfer of marijuana, conversely, would be legally indefensible. Not only does the federal Controlled Substances Act, at 21 USC §801, expressly provide that trafficking in “interstate and foreign commerce” justifies federal control of certain substances, but the Supreme Court itself has held that the commerce clause creates grounds for enforcement of prohibition even within state borders.

Moreover, in order to succeed, the interstate compact would almost certainly need to be buttressed by Congressional consent, which is a formal legislative action contemplated by Article I, Section 10, Clause 3 of the Constitution. When Congressional consent is given, an interstate compact literally transforms into federal law. But how would this work if federal law makes the possession and sale of marijuana illegal? And why would Congress grant an inherently problematic consent decree, when it could simply re- or deschedule marijuana? The answer is: It would not. Given this context, any effort by two states to set up a cannabis exchange, if challenged, would go down in flames.

Given the foregoing, and given the increase in Oregon licensees coming online, the local industry is not going to shake its oversupply issue anytime soon. That is why our pragmatic politicians like Congressman Blumenauer are wise to explore paths to establish Oregon as a leading marijuana exporter. For now, though, the focus should be on building and promoting infrastructure within the four corners of the state. This will ensure that Oregon is set up to succeed in a couple of years, when the walls come down nationwide.

oregon hemp cbd
So it goes with Oregon hemp.

In the past six to twelve months, we have seen an extraordinary increase in businesses and individuals interested in growing and processing industrial hemp. This is especially true in Oregon, where Department of Agriculture (ODA) grower and handler registrations are fast, cheap and easy to acquire. In many cases, these registrants are cultivating and processing hemp in order to create cannabidiol (CBD) based products. The products can be sold state-wide without limitation, including into the Oregon Liquor Control Commission (OLCC) adult use marijuana market via hemp-endorsed OLCC processors.

Other entrepreneurs, in Oregon and elsewhere, are extracting CBD for sale interstate. This is a legally nebulous area at the federal level, although interstate sales are not prohibited under Oregon law. With CBD isolate changing hands at upwards of $4,500 per kilo, however, and given the proliferation of CBD products making their way into big box retail, many businesses and individuals feel the risk is worth taking. Perhaps for this reason, we have been getting numerous weekly inquiries as to the viability of CBD sales interstate, especially as of late.

From a state rules perspective, Oregon has taken significant steps in the past several months in building out its industrial hemp regime. We wrote about the recent OLCC rules promulgated in December, which allowed for ODA hemp registrants to sell into the OLCC market; and more recently we wrote about House Bill 4089, which tied up a number of loose ends related to the tracking of those sales. The upshot of all of this is that we now have unprecedented interplay between the OLCC and ODA markets. And as the OLCC hustles to write rules implementing HB 4089, there is a fair bit of confusion about what is actually allowed.

One question that keeps coming up is whether an OLCC processor applicant may process ODA hemp (under both ODA and OLCC rules) while waiting to receive its license from OLCC. According to our reading of the rules, recently confirmed to us by OLCC, the answer is “yes.” Much in the way that marijuana growers used to attempt to “squeeze in” a medical marijuana crop pending their OLCC inspection and licensure, ODA hemp processors can float their operations by processing industrial hemp while in line with OLCC. Note that this is allowed even for ODA processors that are not seeking a hemp endorsement in their OLCC processor applications.

Of course, ODA, local fire marshals and other state or local actors may place limitations on hemp processing operations, or may require certain approvals. And just like with medical marijuana growers converting to OLCC production, OLCC may require that all hemp and hemp-derived items be removed from the processor’s premises as a condition of passing the necessary site inspection. If you think about it, this makes sense: Under OLCC rules, a licensed marijuana processor may not have hemp on its premises except if endorsed to receive that hemp via the OLCC Cannabis Tracking System (CTS) from an ODA grower or handler. Thus, pre-existing hemp items must be removed from the OLCC applicant’s premises prior to receiving the OLCC license.

Once licensed by OLCC with a hemp endorsement, the OLCC processor may receive hemp concentrates and extracts from ODA handlers, and the OLCC processor may receive raw hemp, hemp commodities and hemp products from ODA growers. Note that any form of hemp the OLCC processor receives from an ODA registrant must 1) come with clean ODA test results; and 2) be logged in CTS. Regarding the latter requirement, this means that no sale or transfer is allowed outside of OLCC channels, or to anyone other than OLCC wholesalers and retailers.

Finally, regarding ODA hemp processors–including those businesses waiting in the OLCC application queue–that’s another story. In keeping with the analysis above, those processors can sell their hemp products to anyone under Oregon law. When it comes to interstate sales and federal law, though, that’s a whole ‘nother question.

Happy 4/20.

canada public company marijuana
Coming to a cannabis business near you?

We represent investors from all over the world making plays in state-legal cannabis. The phenomenon began in earnest a couple of years ago, when Oregon became the first U.S. state to open its marijuana industry to non-residents. Some of those early deals were backed by Canadian public money, and the phenomenon of Canadian investment has only increased over time. In 2018 alone, we have closed three good-sized acquisitions in Oregon on behalf of Canadian public companies, with still more in the hopper here and in California.

The fact that Canadian money is flowing into adult-use states has received an uptick in media attention lately, especially after Toronto-based Cronos Group Inc. became the first cannabis stock to list on the NASDAQ exchange last month. Cronos Group is a large company, although it is outside of the “big four” Canadian public cannabis companies—consisting of Canopy Growth Corp, Aurora Cannabis Inc., Aphria Inc. and MedReleaf Corp.—each of which is valued at more than C$1 billion. According to Bloomberg, pot companies on Canadian exchanges have a combined market value of about C$32 billion. That’s a lot of buying power.

Most of the Canadian companies we represent are not new companies, and most of them were not cannabis companies until recently. Instead, the preponderance were junior mining companies, of all things. These stagnant prospector vehicles generally ceased operations when the Canadian mining industry faltered around ten years ago. Some of them still hold permit rights to mining claims in Canada and other countries, which remain present as curious footnotes on their listing materials. Generally speaking, though, the companies are little more than resuscitated shells that have paid ongoing listing fees on the prominent Toronto Stock Exchange (TSX) or the more limited TSX Venture Exchange (TSXV) over the past decade.

Resuscitated junior mining companies have inherent value for cannabis investment because they are already publicly listed, and do not have to undergo a full securities commission review or file a prospectus in order to access public money. They are perfect vehicles to raise money quickly. As such, many new entrants go public via a reverse takeover and use the old mining company (or oil and gas company) shell as the listing vehicle. There are probably 40 or so of these former shells now operating in the cannabis space, and our understanding is that clean shells are getting harder to find.

As far as new cannabis listings in Canada, including for U.S. companies, the go-to exchange is the Canadian Securities Exchange (CSE). That exchange lists close to 60 cannabis-related companies, many of which are U.S. entities raising cash north of the border due to the near impossibility of acquiring a spot on a U.S. exchange. As with the junior mining companies, a significant portion of the cash raised by CSE marijuana companies is being plowed into U.S. based enterprises. Other CSE-listed companies are focused on the imminent Canadian national market, and a few are making inroads in Europe, South America and elsewhere.

Given the influx of new marijuana listings on Canadian exchanges, and the uptick of industry consolidation generally, we do not expect the surge in Canadian investment to slow down anytime soon. Most of the deals we are seeing involve the acquisition of a controlling interest in a closely-held U.S. pot venture by the widely-held Canadian entity (usually through a subsidiary). Valuation is all over the board, and consideration often includes a mix of cash, debt and stock in the public entity.

Back when most of these junior mining companies were formed, it’s safe to say that no one expected they would one day be prospecting cannabis in California, Oregon and further afield. Then again, regulators in those states likely did not foresee what foreign investment might look like back when they opened the gates. In all, the Canadian listing phenomenon is another fascinating turn in the development of state-legal cannabis. You can expect many more to come.

oregon marijuana hempThe Oregon legislature concluded its 2018 session last weekend. As we wrote last month, because 2018 is an even-numbered year, this was a short session lasting just 35 days. We predicted that not all four proposed cannabis bills would pass and that is exactly what happened: the proposed legislation on “special events” for marijuana licensees quickly fell by the wayside. You can be sure someone will push that one again in 2019.

Still, three bills made it through, two of which will impact the Oregon marijuana and hemp industries considerably. These “enrolled” bills have been approved by both legislative houses, and will become law as soon as Governor Brown signs– or within 30 days of passage if she does not. Because these bills passed through two Democrat-controlled chambers, and because Governor Brown is also a Democrat who has never vetoed a cannabis bill, you can be 99.99% sure these bills will soon become law.

Each bill is linked to and summarized below. If you click through to view the bills themselves, remember that text in bold typeface is proposed new language, and text in [italicized and bracketed] typeface is language that will be removed from existing statutes.

Senate Bill 1544  (Marijuana)

This was the gut-and-stuff bill we discussed last month, which ended up covering a range of issues related to medical and non-medical marijuana, and industrial hemp. Below are the highlights. Note that references to the Oregon Liquor Control Commission (OLCC) concern the adult use program, which allows recreational operators to serve the medical market nowadays. The Oregon Health Authority (OHA) references relate strictly to the medical marijuana program.

Unlike most cannabis legislation passed in Oregon over the past few years, SB 1544 does not carry an “emergency” designation. This means that its provisions are not effective on passage. Instead, the effective date of this bill is June 1, 2018, with some of its provisions operative at designated intervals thereafter.

Below, we have emphasized the big moves in bold and added brief commentary to those items.

  • Allows OLCC producer licensees who are registered to grow medical canopies to provide immature plants to OHA program participants.
  • Exempts OLCC processors from labeling and packaging requirements and standard when those processors are dealing direct with medical marijuana patients and their caregivers.
  • Requires OHA grow sites to include a U.S. Postal Service address in their application, if they have one. If not, the grow site has to cough up an assessor’s map showing the exact location of the grow site, or a tax lot number.
  • Caps the amount of immature plants that a person responsible for an OHA grow site (PRMG) can grow, at 12 immature plants that are 24 or more inches high. Requires also that OHA cap the number of immature plants that are less than 24 inches high. This is an effort to curb black market activity.
  • Reduces the amount of both mature and immature plants that can exist at an OHA site if a PMRG’s authority is revoked or suspended by OHA.
  • Exempts small OHA grow sites with two or fewer cardholders, from tracking and reporting requirements. This is to give the little guy a break.
  • Re-jiggers the Department of Revenue distribution protocol for taxes collected from marijuana.
  • Clarifies that although OHA grow sites may be subject to certain tracking requirements, they are not “commercial operations” for the purposes of state law.
  • Pushes out dates for Oregon Cannabis Commission reporting obligations.
  • Grandfathers OLCC and OHA retailers from the school proximity standard, if they were established prior to August 1, 2017 under a city or county ordinance.
  • Establishes a tough-sounding “Illegal Marijuana Market Enforcement Grant Program” administered by the Oregon Criminal Justice Commission, and earmarks about $1.25 million in grants to “address and prosecute unlawful marijuana cultivation or distribution operations.” This may be more symbolic than anything: $1.25 million is not a lot of money as far as the state budget goes.
  • Requires industrial hemp products sold by OLCC retailers to contain labels that clearly identify whether the products are derived from hemp or marijuana. Think, hemp-derived CBD products.

Senate Bill 1555  (Marijuana)

This simple bill temporarily enables the Oregon Department of Revenue to distribute a portion of marijuana tax revenues to community mental health. This is an emergency bill, effective on passage. It also sunsets on July 1, 2019, at which point things revert to the current scheme.

House Bill 4089  (Industrial Hemp)

House Bill 4089 is a multifaceted law brought by the Oregon Hemp Farmers Association. When we first saw this bill last month, we observed that although it was comprehensive in scope, it did not include a provision limiting the ability of hemp growers to sell high THC products, and it did not contain tracking provisions related to the movement of hemp into OLCC channels. Maybe Salem was listening, because the legislature fixed both issues.

Below is everything of note in HB 4089, with comments on the big moves in bold.

  • Names the hemp research program operated by the Oregon Department of Agriculture (ODA) the Oregon Industrial Hemp Agricultural Pilot Program.
  • Clarifies ODA’s authority to administer the program. Specifies that agricultural hemp seed is agricultural or flower seed for the purposes of statutes regulating labeling, testing, or certifying seeds.
  • Directs the Director of Agriculture and Dean of College of Agricultural Sciences of Oregon State University to establish a program for labeling and certifying agricultural hemp seed.
  • Provides that an accredited independent testing laboratory that has been approved by OHA or ODA may test industrial hemp and industrial hemp commodities and products produced or processed by a grower, handler, or agricultural hemp seed producer.
  • Transfers responsibility from the testing laboratory to the registered grower, handler, or processor, for entering hemp, commodity, or product into the tracking system before the hemp, commodity, or product is transferred to a laboratory for testing.
  • Requires the OLCC to track the hemp, commodity, or product when it is transferred, sold, or transported to a licensed premises, or area under the control of the premises licensee. This is an expansion of OLCC’s current obligation to track all cannabis in the state, with the exception of home grow and limited medical grow.
  • Specifies that industrial hemp products that contain more than 0.3 percent tetrahydrocannabinol may not be sold to a consumer by a person other than a retailer, and requires that the OLCC adopt rules to ensure compliance. This shores up a huge gap: until now, ODA growers could theoretically sell these products without oversight.
  • Authorizes OLCC actions regarding industrial hemp to enforce and ensure compliance with marijuana laws and provisions of industrial hemp laws that incorporate requirements, restrictions, or other provisions of marijuana laws. More oversight for OLCC.
  • Specifies that a person may not produce, process, or store homemade industrial hemp extracts. This further curtails ODA growers’ options, which were nearly limitless under existing state law.
  • Changes the description of the limit on production and storage of homegrown cannabis plants.
  • Allows ODA to adopt rules establishing a higher average tetrahydrocannabinol concentration limit for industrial hemp if a higher average concentration limit is established by federal law.
  • Revises language regarding grower retention of agricultural hemp seed for producing industrial hemp.
  • Establishes the Industrial Hemp Fund and appropriates moneys to ODA to implement, administer, and enforce industrial hemp statutes.

Like SB 1555, the hemp bill is “emergency” legislation that is effective on passage. When coupled with the new OLCC rules around industrial hemp passed a few months back, it’s safe to say that the Oregon hemp program is fully formed at last. Like the marijuana programs, Oregon hemp has come a long way.

When you look at a map of states that have legalized cannabis use and sale, it is hard to believe that “marijuana” remains classified as a Schedule I drug under the federal Controlled Substances Act (CSA). A decisive majority of states and voters, across the political spectrum, believe the marijuana prohibition should end. The war on drugs has failed abjectly. And yet, here we are.

Over the years, many different parties have undertaken efforts to end prohibition. A dozen times or so, private parties have filed petitions with the Drug Enforcement Administration (DEA), per CSA protocol on rescheduling. The DEA has routinely denied each petition, or declined to accept it outright. The lone exception was a petition filed by the pharmaceutical manufacturer of Marinol, to move the synthetic cannabis drug from Schedule II to Schedule III. That one was granted.

Other efforts have been made in the court system. These efforts are too numerous to detail at present, but they too have failed. Even a ruling by DEA’s own administrative law judge that cannabis should be reclassified was swatted away by the agency—and that was nearly 30 years ago. Nevertheless, a group of plaintiffs is at it again. It seems that today, almost fifty years after marijuana was placed on Schedule I of the CSA, people are less tolerant of prohibition than ever before.

The lawsuit at issue was filed by a group of five plaintiffs. The first is 12-year-old Alexis Bortell, who uses cannabis oil successfully to treat life-threatening seizures. Her family had to relocate to Colorado from Texas, because she could not acquire oil under Texas law. The second is 6-year-old Jagger Cotte, who treats with cannabis for Leigh Syndrome, a horrible, terminal neurological disorder. Third is former NFL linebacker Marvin Washington, who makes cannabis-based products for head trauma. Fourth is Iraq War veteran Jose Belen, who suffers from post-traumatic stress disorder and was given the option of “opioids or nothing” from the Veteran’s Administration. The final plaintiff is the Cannabis Cultural Association, a nonprofit seeking to reverse the racially disparate impact of cannabis prohibition. In lawyer terms, these are “sympathetic plaintiffs” all the way through.

The lawsuit targets marijuana’s status as a Schedule I drug under the CSA, and it asks the court to declare this status unconstitutional under the Due Process Clause of the Fifth Amendment, the Right to Travel, and the Commerce Clause. It also seeks a permanent injunction restraining the federal government from enforcing the CSA as relates to marijuana, and other relief. The named defendants here include none other than Attorney General Jeff Sessions, the Department of Justice, DEA, and the United States itself. Earlier in the litigation, plaintiffs sought a temporary restraining order against the feds with respect to enforcement of the CSA as to cannabis, but that motion was denied.

Notwithstanding that early setback, the lawsuit itself is well conceived and expertly written. It was filed in District Court, which is an unusual venue and interesting gambit by the plaintiffs. Typically, challenges to marijuana’s status under the CSA have been brought in administrative fora, where venue is not in dispute. Here, however, plaintiffs argue that the administrative process has proven to be so dysfunctional—and plaintiffs’ requests so urgent—that district court is a viable alternative. Thus, much of the oral arguments presented recently by both sides centered around whether the plaintiffs’ case could continue. If the judge can find a creative justification for that to occur, he seems to be leaning strongly toward plaintiffs on the merits.

If the plaintiffs somehow prevail, Sessions et al. would likely appeal the ruling to the U.S. Court of Appeals for the Second Circuit. Unfortunately, that court has previously held that marijuana’s Schedule I status is constitutional. In addition, another U.S. District Court judge in New York recently rejected a constitutional challenge to the Schedule I status of marijuana, albeit in a criminal matter. In the big picture, the odds are somewhat long for this particular case.

Even if plaintiffs do not prevail, their efforts have received a ton of valuable press from the outset. The fact that taxpayer dollars are being spent to battle a 12-year-old epileptic girl, a dying child, a traumatized veteran, and others, is a terrible look for the feds. Our strong hope is that this lawsuit and the relentlessly rising tide of public opinion will force Congress to finally act. Voters are no longer interested in prohibition, which is morally and legally indefensible. It’s time for a change.

cannabis subordination loan
Best if landlord, tenant and lender talk out that cannabis loan ahead of time.

Commercial cannabis leases are different than other commercial leases in many important ways. In other respects, however, they can be quite similar. One item that tends to fall into the latter category is the creation of a landlord’s lien on the tenant’s personal property in the event of an uncured tenant default. For example, if a marijuana producer fails to pay rent, the landlord acquires an ownership interest in that producer’s lights, fans, security equipment, and even the cannabis itself. If the lease is drawn up correctly, the landlord would then be able to seize these assets and liquidate them, in accordance with state law.

When representing landlords, this type of provision makes it into every type of cannabis lease we draft. When representing tenants, we often try to narrow this right, especially in situations where the tenant may be taking on debt. Why? Because lenders often insist on priority rights in the event that a pot business cannot repay a loan. In many cases, the lender will come prepared with a “Waiver and Consent Agreement” or a “Subordination and Consent Agreement.” The tenant is tasked with acquiring its landlord’s signature on this contract, so that if there is a default under the lease, the landlord does not preempt the lender’s rights in the tenant’s property (which serves as collateral for the loan).

From the landlord’s perspective, subordinating its lien on the tenant’s personal property is preferred to a total waiver of the lien. The lender won’t care either way, so long as it receives a primary security interest in the cannabis and everything else. For that reason, most of the time the parties will end up with the landlord agreeing that its lien is subordinate to the lender’s right, but not totally extinguished (“waived”). That way, the landlord is assured that its tenant will receive the cash needed to operate, and will retain the right to hop in line behind the lender and lien on any assets, as needed.

Landlords should be aware that the waiver or subordination agreement will typically allow the lender to enter the leased premises and remove the trade fixtures and even the marijuana itself, subject to state rules. On this point, the landlord will want to require that the lender minimize disturbance with respect to any other tenants on site, and require that removal occur prior to the end of the lease term. Once the lender is in the space, the landlord will want to ensure that the lender is required to comply with state marijuana rules, provide evidence of insurance, and keep the premises open for inspection, among other items.

There are a host of other concerns that a boilerplate consent or subordination document will create in the context of a cannabis loan to a tenant operator. These range from specific items, like the landlord’s obligation to notify the lender of a tenant’s default, to general items, like restrictions on the ability of a landlord and tenant to amend the lease agreement. Depending on which chair you are in—landlord, tenant or lender—these items will have different repercussions and should be negotiated with that in mind.

Each party’s goal, as always, will be to minimize risk and to maximize the ability to make and receive payments, in accordance with state and local rules. If you understand the basics of cannabis leases, lender subordination agreements, and your state’s disclosure requirements for cannabis lenders, you should be able to propose a contract solution that works for everyone. That way, in the event of a default under a loan or lease, the parties won’t have to fight over what happens next.

oregon marijuana cannabis
Just the facts on pending Oregon cannabis laws.

The Oregon legislative session began on Monday. Because 2018 is an even-numbered calendar year, this session is a short session, lasting just 35 days. That fact hasn’t stopped Oregon democrats from targeting ambitious policy objectives like cap-and-trade, along with a host of other items that will likely not get done. As to cannabis, there won’t be much movement, despite persistent rumors and calls for a limitation on license issuances, and the calls for an uptick in enforcement dollars.

Last year, Oregon kicked off the legislative session with 30 or so draft cannabis bills. This year, we have four. Two of them are likely to go nowhere and two may pass if things go well, but with significant modifications. The aptly named Joint Committee on Marijuana Regulation dissolved last session, which means that cannabis will get even less attention than before. Still, its former co-chair and Senate Majority Leader Ginny Burdick presides over the rules committee, and for that reason alone, we expect these bills get some play.

Below is the 2018 list, including links to each bill. As a reminder, text in bold typeface is proposed new language, and text in [italicized and bracketed] typeface is language that would be removed from existing statutes.

Senate Bill 1544

This bill would remove the 24-inch height limitation on immature plants produced for medical purposes. (Today, medical growers can theoretically have infinite starts.) It would also change the possession limit on immature marijuana plants for registered medical growers and for those responsible for medical grow sites. Finally, the bill proposes to exempt processors from testing requirements in the limited context of processing for a medical marijuana cardholder or that cardholder’s caregiver.

Will this bill pass? It’s possible, but if it does, it will probably look a lot different than it does today. SB 1544 is the “gut and stuff bill” we previously anticipated: it is rife for amending and may look different a few weeks from today. The changes related to medical starts are likely to stay, because this is something the feds are said to have noted as missing from the medical program. We may also see clean-up of language clarifying whether a person can be a designated grower for his or her own home grow under Oregon Health Authority (OHA) rules, and other minor issues. But the chance of consensus on multiple, high-impact issues is small.

Senate Bill 1555

This one has been moving along, with a few amendments already made. It will not impact Oregon cannabis industry players much, however, as it merely modifies the percentage allocation of marijuana tax revenues among various state beneficiaries. This one is an “emergency” bill, for what it’s worth, which means it would take effect immediately on passage.

House Bill 4110

This bill would allow the Oregon Liquor Control Commission (OLCC) to issue temporary “special events” licenses to qualified marijuana processors, producers, retailers and wholesalers. People have advocated for event licensing seemingly forever, but this is not an issue where consensus is easily gathered. For that reason, and because the session is so short, we give this bill a very low chance of going anywhere. If it surprises us, though, this one is also an emergency bill and would take effect immediately.

HB 4089

This is another emergency bill, but it relates to industrial hemp and not marijuana. It’s a big, multifaceted bill that was brought by the Oregon Industrial Hemp Farmers Association, and, like the recent OLCC rule amendments, it does a lot to shore up the state’s hemp program. As with SB 1544, we anticipated this bill a few weeks back. Here are the highlights:

  • Provides for OHA labs to test industrial hemp and related commodities;
  • Authorizes OLCC to enforce provisions of hemp laws that incorporate provisions of marijuana laws;
  • Changes the description of the limit on production and storage of homegrown cannabis plants;
  • Allows the Oregon Department of Agriculture (ODA) to adopt rules establishing higher average THC limits for industrial hemp if a higher average concentration limit is established by federal law;
  • Establishes a university pilot program to label and certify hemp seed; and
  • Establishes an Industrial Hemp Fund and appropriates money for administering hemp statutes.

For all it does, however, HB 4089 may be more notable for what it does not cover. Those items include:

  • A provision limiting the ability of hemp growers to sell high THC products;
  • A bill-of-lading, transport, or manifest requirement for ODA permittees similar to that for OLCC licensees; and
  • Tracking provisions related to the movement of hemp into OLCC channels.

We expect the legislature to look at these possible additions to HB 4089 and more, and we expect this bill to pass in some form. For now, though, it’s time to kick back and watch. We will report with a summary next month, at the end of the session.

virginia, new jersey, oklahoma, michigan marijuana

Last week, we were pleased to cover Vermont’s big move to legalize cannabis state-wide, effective July 1. The Vermont effort was impressive for a couple of reasons: 1) it became the first state to legalize adult-use (recreational) cannabis through the legislature; 2) its cannabis bill passed just days after Jeff Sessions announced Department of Justice rescission of the Cole Memorandum; and 3) Vermont is an east coast state, contiguous to populous New York and freewheeling New Hampshire. (The latter state also has been looking hard at adult use cannabis.)

With 2018 not long underway, it is likely that we will see at least a few other states break away from prohibition and adopt some form of cannabis legalization this year. Today, we identify four states with the best opportunities to make some noise, notwithstanding Attorney General Jeff Sessions’s feckless attempts to formally resuscitate the failing war on drugs. These four states would add to the nine with approved recreational use programs, and the 28 with medical cannabis programs.

Before we dive in, it is important to note that 26 states offer initiative and/or veto referendum rights to their citizens. If a state is not on this list, the odds of cannabis legalization are probably longer in that jurisdiction. This is because state legislators outside of Vermont have typically been non-forward-thinking when it comes to cannabis. A recent example would be California, where it was long apparent that adult use cannabis would become a reality, but the state legislature could not or would not summon the courage take up the issue, leaving it to the initiative process.

Without further ado, here are the four states most likely to make a run at ending prohibition this year.

New Jersey

New Jersey would be a great state to roll, if only because it was Chris Christie territory until recently, and Christie may be the one public official more ridiculous about cannabis than Jeff Sessions. With Christie now gone, though, Governor Phil Murphy has promised to sign any reasonable legalization bill that makes it to his desk, including for recreational weed. New Jersey does not allow its citizens to bring direct initiatives, so legalization will have to come through the legislature, as with Vermont. Currently, a couple of bills are in the works and optimism is high that full access adult-use legalization will pass this year.

Oklahoma

Oklahoma and cannabis is an interesting story. Not long ago, Oklahoma teamed up with Nebraska to sue Colorado in an effort to shut down its neighbor state’s adult use program. That effort fizzled, and now Oklahomans are set to vote June 26 on a qualified referendum to legalize medical cannabis use. In a fun twist, the date was fixed just hours after Sessions announced the change in Department of Justice policy as to cannabis.

Oklahoma’s ballot initiative is known as State Question 788, and it would allow the use, cultivation and distribution of medical cannabis to qualified patients. The initiative’s writers are off to a good start: they already defeated an effort by the state attorney general to re-word the ballot title in an allegedly misleading manner. For a fuller explanation of that episode, and of how this particular initiative will work, go here.

Michigan

Michigan is another initiative state, and it appears to have enough signatures for adult-use program inclusion on the 2018 ballot. Michigan has had a medical use program in place for a decade, and appears to be the first Midwestern state ready to go all in on 21+. As of January 25, the initiative’s main committee had raised nearly $1.3 million from a variety of donors, and it appears likely to have obtained sufficient signatures to make it to ballot on November 6, 2018.

As to the details of the proposal, the Initiative seems modeled off of working programs in a few of the western states. Per Ballotpedia:

Individuals would be permitted to grow up to 12 marijuana plants in their residences. The measure would create an excise sales tax of 10 percent, which would be levied on marijuana sales at retailers and microbusinesses. The initiative would allocate revenue from the taxes to local governments, K-12 education, and the repair and maintenance of roads and bridges. The measure would also legalize the cultivation, processing, distribution, and sale of industrial hemp. Municipalities would be allowed to ban or limit marijuana establishments within their boundaries.

Virginia

Virginia is bringing up the rear on this list, as its efforts are focused on decriminalization and nothing more. Two proposed Senate bills contained fines for simple possession, but those were shot down yesterday by Senate Republicans. In their place, the same panel approved a cautious bill that lets first-time offenders for simple marijuana possession get their charges dismissed. The panel also voted in favor of legislation that would allow doctors to recommend CBD or THC-A oil to patients. We certainly applaud keeping people out of jail for cannabis use, and allowing doctors to recommend cannabis, but Virginia could do better.

oregon marijuana cannabis
Local grower tax: good idea?

The regulation of state-legal cannabis differs from any other commodity. One of the more interesting and consequential differences is the degree of autonomy and control that states tend to give local jurisdictions (cities and counties) with respect to commercial cannabis activity. Local jurisdictions are often allowed to tax cannabis sales, for example; to license marijuana businesses; and to opt out of marijuana activity altogether. This is different than what is allowed or accepted with standard commodities (think: apples, flowers or chewing gum), or even with restricted commodities (alcohol, tobacco or lottery tickets). The reason that local jurisdictions have such wide latitude regarding marijuana is simple: federal prohibition.

Along these lines, the Association of Oregon Counties (AOC) recently offered an unusual proposal for the local regulation of cannabis. The proposal is called the “Southern Oregon Marijuana Initiative” (the “Initiative”) and it would amend Oregon statutes to allow the five most economically distressed Oregon counties to impose a marijuana production tax on licensed growers, in order to fund law enforcement efforts vis-à-vis the local black market. (For some background on the Oregon cannabis black market, and Oregon’s cannabis oversupply issue, see our coverage here).

The Initiative follows an attractive logic model. It observes that the counties at issue have suffered tremendous fiscal hardship since the local timber industry faltered. The counties also comprise a banana belt for cannabis, with perfect soil and climate, and an established and pervasive culture of illegal cannabis farming. The Initiative thus observes that:

“the marijuana industry has largely replaced the timber industry as the natural resources economic engine in Southern Oregon. However, unlike the timber industry, the marijuana industry does not substantially contribute to public services in Southern Oregon, including, but not limited to, the very law enforcement and code enforcement services needed to help the industry survive and thrive….”

It is indisputable that the counties cited by AOC suffer from a lack of public services, from law enforcement to libraries. This problematic reality, along with the following factors, conspire to make the AOC pitch all the more timely: 1) recent pressure on state-legal marijuana from the federal Department of Justice; 2) Oregon U.S. Attorney Billy Williams’ stated concern with overproduction and black market production; and 3) the lack of state budget allocation for increased enforcement against illegal cannabis operators. Against this challenging backdrop, local actors like AOC are proposing creative local regulation, in an attempt to fill the void.

Whether the Initiative has any chance of finding its way into law is an open question. In our view, however, it likely to fail. Southern Oregon pot growers have well known lobbies that will likely oppose the Initiative for a myriad of reasons, from taxation to a broad desire to combat further regulation. Also, with the short legislative session beginning February 5, there will be few opportunities for movement on cannabis legislation (right now, we are looking at a possible hemp bill and a gut and stuff marijuana bill, which may or may not amount to anything).

Still, it is fascinating to see the effect that federal prohibition has had on the law and policy efforts surrounding cannabis, all the way down to sparsely populated locales. The recent federal emphasis on overproduction and illegal export has only accelerated these conversations. Although it is well established that supply-side drug control has never worked, the federal government has nonetheless told its lawyers: “feel free to enforce the laws of prohibition.” It seems that local jurisdictions—including those awash in cannabis—may be thinking along those lines as well.