Photo of Vince Sliwoski

Vince manages Harris Bricken’s Portland office and is a professor of Cannabis Law and Policy at Lewis & Clark Law School. He is a well-rounded attorney with expertise in a wide range of transactional law.

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

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

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

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

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

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

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

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

marijuana cannabis loan
This industry is different, you know.

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

Do Your Diligence.

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

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

Prepare to Be Vetted.

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

Demand Security.

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

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

Demand Personal Guarantees.

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

Do Market (and Legal!) Research.

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

In the past year, we have seen a remarkable uptick in individuals and businesses pursuing Oregon industrial hemp production, processing and sale. This accelerated interest has coincided with the CBD craze, and fortunately, Oregon has been working steadily to build out its hemp program over the past year or two. Today’s blog post answers some questions commonly fielded by our Oregon cannabis lawyers, and summarizes the state of the state with regard to hemp.

What is the latest, as far as program rules?

The rules have undergone steady revision for a few years now. The most recent changes are shown in the Oregon Department of Agriculture’s (“ODA”) proposed rule changes, which should take effect very soon. These updates will stem from bills passed by the legislature earlier this year, which we wrote about back in March. A few of the biggest pending changes include the requirement that industrial hemp and seed can only be transferred to another ODA registrant or qualifying Oregon Liquor Control Commission (OLCC) licensee (in accordance with certain OLCC rules), and that any hemp sold to a consumer has to be tested by an OLCC licensed lab.

How easy is it to get a hemp handler’s permit?

It’s not quite as easy as it used to be, but it’s not bad, and it’s still faster and cheaper than getting an OLCC license. In our office, we have paralegals process these applications, and both grower and handler registrations often issue in a month or less when the client is organized.

Who can ODA permittees sell to, in the OLCC system?

ODA handlers can only sell to OLCC processors with a current OLCC endorsement to receive ODA hemp. Those processors can then move the industrial hemp products along the supply chain, to OLCC wholesalers and retailers.

I’m an ODA hemp handler. How do I get an OLCC hemp certificate?

You can’t right now. OLCC stopped accepting applications for the certificates back in April. Once the ODA proposed rule changes are final (hopefully very soon), OLCC should start issuing these applications once again. As to OLCC processors, those entities can still apply for hemp endorsements to add to their licenses.

Once I get an OLCC hemp certificate, how do those sales work?

You will have recordkeeping requirements for all hemp and related products transferred into the OLCC system. This means you will have to log information in the METRC Cannabis Tracking System, like OLCC licensees. Note that hemp products in METRC are not subject to tax, unless they are later mixed with marijuana. Note also that once you transfer hemp to an OLCC processor, it has to stay in the OLCC system. This means you cannot take it back and sell it outside of METRC.

Can I legally ship Oregon industrial hemp to other states?

Oregon does not restrict such sales, but the state does not create a safe harbor from federal law, either. In fact, the new rules will provide that no one participating in the Oregon hemp program is immune from federal law enforcement, even if they are not shipping hemp interstate. So what does federal law say about shipping industrial hemp and CBD interstate? It’s complicated.

Can I apply for an ODA permit on the same tax lot as my OLCC marijuana production? 

Yes, you can. But OLCC is going to require an approved “control plan” describing how the two production facilities will be separated, and ensuring that no industrial hemp winds up on the OLCC premises.

Can I get a bank account?

Yes. Maps Credit Union has announced it will begin servicing both plant-touching and ancillary hemp businesses on August 1. There may be other options in the pipeline as well.

Where can I find more information on all of this?

Aside from checking this blog, the best place to go are the relevant portions of the ODA and OLCC websites. Unlike OLCC, the ODA hasn’t done a great job of aggregating information in FAQ format or issuing bulletins, so you may have to actually read through the administrative rules (fun!), or call ODA itself with questions.

oregon marijuana cannabis subsidyRecently, there has been some talk here in Oregon that the state is not doing enough to support licensed cannabis businesses economically. These businesses generated more than $70 million in state tax revenue in FY 2017, after all. Although that revenue does not yet approach the combined $373 million in average annual revenue for beer, wine and spirits (combined), it appears to be closing the gap quickly, despite no option for interstate sales.

Comparing marijuana and alcohol receipts in Oregon is an awkward proposition, given the fact that Oregon marijuana revenues are collected through sales tax, whereas beer and wine vendors pay the state an excise tax, and liquor is distributed and sold by the state itself. At the end of the day, though, the economic impact of regulated cannabis will continue to gain on–and eat into–the alcohol economy, both in Oregon and nationwide. That is especially true if we factor in industrial hemp.

So what is the state doing to subsidize cannabis businesses in Oregon? Not much. The state did pass House Bill 4014 a few years back, which allows cannabis establishments to deduct business expenses allowable under the federal tax code when filing state returns; but that modest gesture pales in comparison to the institutional support given to craft beer and wine. Specifically, here are a few of the ways the wine industry is supported and subsidized by the state of Oregon:

  • The state created the Oregon Wine Board (OWB) to promote development of the wine industry within the state, and coordinate both domestic and report marketing efforts for the industry. OWB receives administrative support from the Oregon Department of Consumer and Business Services, and spends around $2.2 million annually on promoting the Oregon industry.
  • The state created the Oregon Wine Research Institute, housed at Oregon State University, to support Oregon grape growing and wine production.
  • Oregon statutes offer a tax exemption for the first 40,000 gallons, or 151,000 liters, of wine sold annually by any producer in Oregon, which effectively exempts 90% of them from paying any state excise tax.
  • The state offers grants for vineyards in an effort to increase tourism, as well as OWB grants related to viticulture and enology.
  • Oregon winery license fees are paltry compared to cannabis license fees. (Both licenses are issued and billed through the Oregon Liquor Control Commission.)

The above list is not exhaustive: It represents about five minutes of Google research. And at first glance, the favoritism shown to alcohol by the state feels unfair: As with the local wine industry, the Oregon cannabis industry has a world-renowned product, crowned with distinctive appellations. So why doesn’t the state do much for cannabis, aside from fulfilling its democratic mandate to roll out the program, and defending that program from the feds?

There are probably several factors at play:

  • “Marijuana” remains a Schedule I controlled substance at the federal level. While states may see a path forward to licensing cannabis businesses under the Tenth Amendment (see here and here), actually using public dollars to support specific businesses may feel like a bridge too far.
  • More people oppose the cannabis industry than the alcohol industry, so subsidies would likely face strong pushback from a vocal segment of the population.
  • Many of the Oregon wine subsidies listed above were enacted in periods of greater budget stability for the state, back when timber revenues and related federal subsidies were a real thing, and the state pension system was not $22 billion in the hole. Today, those alcohol subsidies are entrenched (although recent efforts at further subsidies have failed.)
  • The Oregon cannabis lobbies are smaller than alcohol lobbies.
  • The creation of a cannabis regulatory regime has been a heavy legislative lift over the past few years here in Oregon, crowding out other conversations related to cannabis.

With all of that said, Oregon could probably do more for the cannabis industry, and it could be more creative. California has at least explored the idea of a state-chartered bank. Along those lines, Washington has helped its legal businesses to open bank accounts, and Hawaii has announced a cashless system for buying medical marijuana. None of these actions are subsidies, but they do make business operations easier and they ultimately contribute to economic efficiency.

Other jurisdictions have gone even further. Colorado, for example, has had a research grant program going back to 2014. And certain cities, like Oakland and San Francisco, have offered bona fide, traditional subsidies like free rent and incubator programs for select marijuana entrepreneurs. So it is possible to funnel public funding into cannabis businesses — at least certain types of businesses, in certain cases.

Oregon will kick off another legislative session in early 2019. Most likely, the state will discuss important regulatory issues, like our U.S. Attorney’s concern with oversupply, alongside the usual re-tread items, like social consumption and event permits. Although these new business permissions would be marginally helpful, hopefully there is also room for discussion on how the state can support its regulated cannabis industry more directly, as it does with alcohol. Then, when federal prohibition ends in a couple of years, we will want it looking something like this.

cannabis capitalization license
Prepare to describe how the sausage was made.

Over the past few years, we have had many cannabis clients call us during the license application process and ask some version of the following: “The state is asking me to disclose the capitalization of the company. What should I write?” From a lawyer’s perspective, the answer to this question is usually something very simple, such as: “The capitalization of the company should be disclosed as the amount and type of capital you used to start the company.” Makes sense, right? But there is often more to this question than meets the eye.

In most cases, cannabis businesses are built differently than other businesses, as far as funding sources and mechanics. Therefore, we get the capitalization question from business neophytes, seasoned entrepreneurs, and everyone in between. When we dig a little deeper, there may be any of several reasons the question surfaces during the licensing process, some better than others. I’ll run through each of them below.

The owners had to start this business without access to financial services, and therefore do not have bank records of capitalization.

It’s true that most cannabis companies start off unbanked, whether the business starts “from scratch” or is transitioning out of medical or grey market operations. This creates a documentary hurdle in many cases: Unlike with a new generic venture, the cannabis business owners are unable to fund a bank account (creating a record of capitalization) and begin writing checks for business expenses. Therefore, most cannabis businesses have to be extra diligent in tracking business funding and expenses through internal recordkeeping. These records should be immediately producible in the event of a state inquiry, IRS audit, member dispute, potential investor inquiry, or for any number of reasons.

The owners were in a rush to apply for the license, and don’t really care about business formalities. 

If you want to make your lawyer nervous, tell her that you only need a company name because it’s a cannabis licensee requirement. If the lawyer is worth your time, the first thing she will tell you is that you should always run your marijuana company like a real business. That means writing things down and using appropriate forms to do so. Failure to follow basic business formalities can land owners in a world of hurt if anything goes sideways; and in such a case, a company shell will be no defense at all to personal liability.

The owners are nervous to disclose funding and funding sources on the public record.

This is a legitimate concern. Every state has public records laws, and depending on how those laws intersect with cannabis program rules (and administrative policies), public disclosure of funding and funding sources may be unavoidable in response to nosy, third-party requests. If someone makes a public records request related to a licensee file in Oregon, for example, records of funding sources and amounts will be made available (other sensitive information, like security plans, will be redacted). There may be no ideal workaround here, other than describing the source of funds in a general sense, and hoping that further information is not required.

The owners are not sure how much capital will be required to get through the license application process.

This is also a legitimate question. Regardless of business projections, the simplest course is usually to list all financing the business has received to date, and to update the licensing authority if and when new or existing parties with financial ties to the business provide or pledge funds.

The owners are not sure if a funding source or a promised source of funds constitutes capitalization under relevant administrative rules.

This is an area where it is critical to know the rules and how they are interpreted by the governing agency. The question of who and what constitutes a “financial interest” holder in a business is often unclear and varies from state to state. In Washington, for example, the two groups that must report to the Liquor Control Board are “true parties of interest” and “financiers.” In California, it’s “owners and financial interest holders.” And in Oregon, it’s anyone with a “financial interest.” Each of these terms is defined in each state’s ever-evolving administrative rules (for example, Oregon only recently required disclosure of lenders). It’s important to get guidance on these issues because the penalties for nondisclosure can be severe — often including denial or loss of licensure.

The owners are not sure whether a licensing authority prefers to see a certain kind of capitalization (e.g. cash, sweat equity, debt, convertible debt) or if some ratio of the foregoing may be ideal.

In our experience to date, licensing authorities in Oregon, Washington and California do not really care how you have funded your business, as long as the source of funds is legitimate. That said, state reporting should be consistent with company records and tax filings, because the IRS definitely cares how the sausage was made and how you report that information. For example, the IRS may consider a company that is capitalized predominantly with straight debt to be “thinly capitalized.” In determining this, the Service looks at other businesses in the same industry for their debt-to-equity ratios. An old rule of thumb is also that any company with a debt to equity ratio greater than 3:1, or 4:1, is too thinly capitalized. How this analysis might be applied to cannabis businesses is an open question.

When it comes to capitalizing a cannabis company, primary goals should be: 1) structuring and running a legitimate business, and 2) accurate state and income tax reporting. Unfortunately, the former is more challenging in marijuana than in other industries, and the latter takes some knowledge of administrative rules and policy. But it can be done with a little planning and study, and it can be done correctly. At the end of the day, the license will follow.

No shortage of cannabis news in Oregon.

Here we are a few years into legalization of recreational cannabis sales in Oregon, and it’s never a dull moment. Over the past week or so, there were three significant developments around the state with respect to marijuana law and policy. We summarize each below.

     1.     The OLCC hit “pause” on accepting license applications.

A few weeks back, we covered the dramatic Oregon Liquor Control Commission (OLCC) announcement that it would “pause acceptance of marijuana applications” effective June 15th. The apparent goal was to ensure that our licensing paralegal, Meghan Saunders, would receive hundreds of urgent client emails and phone calls over a two-week period. And she definitely did.

The official explanation, of course, is that the agency was simply too far behind to perform adequate services for existing applicants and licensees. That is the explanation OLCC Executive Director Steve Marks gave in the May 30th announcement, and it’s the explanation OLCC Policy Director Jesse Sweet gave at the seminar that he and I co-chaired on June 7th. All in all, it seems like a reasonable explanation.

Fortunately, some of the pressure from the initial announcement was alleviated on June 8th, when OLCC clarified that it would consider an application to be timely received for deadline purposes, even if it did not include an approved Land Use Compatibility Statement (LUCS). The pause ultimately took effect last Friday as promised, but not before dozens of our clients submitted last ditch applications (with and without LUCS) and made their way into the forward moving queue. In all, OLCC reports that an astonishing 1,001 additional applications were received in the two week period between its big announcement and the June 15thdeadline.

If you are looking for more evidence that people are extremely interested in being involved in the Oregon marijuana industry, the OLCC reports that as of yesterday morning a grand total of 1,915 active licenses currently exist in the state (over half of them producers), with another 766 applicants assigned to investigators, 530 ready for assignment and 1,070 businesses in line but without an approved LUCS. There are also 30,018 active marijuana worker permits statewide, with another 17,217 approved and awaiting payment. Despite intense competition and price instability, people keep on coming.

     2.     Billy Williams went to court.

Last month, we wrote about the Williams Memo, a policy document authored by Oregon U.S. Attorney Billy Williams regarding his concerns about overproduction of marijuana in Oregon and black market activity. We observed that industry seemed unfazed by the memo, because it would be too costly, too politically hazardous, and ultimately, too late for U.S. Attorneys to attempt to shutter Oregon’s state-sanctioned cannabis programs.

Mr. Williams and others instead have begun working around the edges, drawing lines in the sand on policy and going after bad (black market) actors. Last week, Mr. Williams filed two federal criminal lawsuits concurrent with law enforcement raiding a licensed Corvallis retailer for allegedly selling pot across state lines, and running an illegal credit card scheme. The raid was led by DEA in concert with Corvallis police, and based upon information gathered by the FBI and the U.S. Postal Service. Those agencies, in turn, began their investigations back in December 2016.

For anyone thinking running a state licensed cannabis business is cover for committing state and federal crimes – including the export of marijuana beyond Oregon – hopefully last week’s news will serve as a wake-up call. And hopefully, Billy Williams and the feds continue to chase these people down.

     3.     Josephine County lost again.

Josephine County has had a rough go with cannabis, especially as of late. We covered its half-baked efforts to curb marijuana farming through restrictive zoning ordinances here, here, here and here, and examined the problematic dynamics in southern Oregon cannabis production more generally here and here. Last week, the Oregon Court of Appeals rejected the County’s appeal of a decision that it had failed to give land owners proper notice of the County’s proposal to ban cannabis farming on smaller, rural residential lots.

The decision being appealed was handed down by the Land Use Board of Appeals, a somewhat obscure Oregon court that rules on the validity of governmental land use decisions. In theory, the County could petition the Oregon Supreme Court for certiorari, and seek a reversal of last week’s Court of Appeals decision. But it seems unlikely that the Oregon Supreme Court would take the case, and less likely still that the County would win.

In that sense, the County is in the same position as with its seemingly desperate federal court lawsuit to quash all cannabis production entirely, and hearken back to the days of prohibition. We expect them to lose that one, too.

Yesterday afternoon, the Oregon Liquor Control Commission (“OLCC”) published a news release titled “OLCC Will Pause Acceptance of Marijuana License Applications.” This “pause” takes effect Friday, June 15th. The agency’s sudden announcement was a big surprise to almost everyone, and we received a flood of emails and phone calls throughout the afternoon.

Personally, I cannot remember receiving so many urgent calls and emails related to an administrative or political development at any point in the past seven years of working with cannabis businesses. That includes industry shakeout after recent seismic events like the election of Donald Trump, the appointment of Jeff Sessions as U.S. Attorney General, and Mr. Sessions’ rescission of the Cole Memo. In all, the OLCC announcement caused a major stir.

This post will address questions along the lines of those we received yesterday afternoon, in an attempt to give some consolidated thoughts as to what is going on with Oregon marijuana licensing.

The OLCC announcement says it will “temporarily shift licensing staff to exclusively process recreational marijuana license renewals and applications…”. Does the word “applications” refer to new applications, as well as change in ownership applications? What about “applications” for changes in financial interest?

We have confirmed with OLCC that the announcement refers only to new applications. We also have confirmed that the agency will continue to accept new applications after June 15th cut-off. However, OLCC will not move those applications forward in the queue or begin to process them. The focus will shift entirely on applications submitted prior to June 15th, changes within existing licenses, and renewals.

How long is the pause?

We don’t know. And OLCC probably doesn’t even know at this point. Conceivably, it could last through the next legislative session, beginning in early 2019, when the OLCC may look to the legislature to set some parameters on new license issuances. At a minimum, it seems likely that the pause will extend into the fall, given the application backlog and given the fact that the announcement states OLCC’s intent to put “additional resources into the field for compliance activity, with a focus on targeting Oregon’s 2018 fall outdoor harvest.”

Can the pause go on indefinitely?

Probably not, unless the legislature changes something. In our discussions with OLCC over the past few years, the agency has always acknowledged that the current statutory structure prevents it from capping the number of licenses it awards. Thus, under current law, the only way OLCC can limit the amount of marijuana being produced in Oregon is through controlling canopy sizes (which it has not sought to do).

Is OLCC going to ask the legislature for further statutory controls for licensing in 2019?

It seems likely, yes.

I am closing a large real estate transaction next week! There is no way I can get a LUCS and everything else I need to apply by June 15th. Am I screwed?

You might be. If you aren’t willing to forfeit your earnest money and walk away, the best you can do is close the deal and apply for a license, and wait and hope for OLCC to re-start its conveyor belt.

Is there any chance OLCC will extend this abrupt deadline?

Anything is possible but that seems unlikely. It’s also possible that we could see a carve-out for prospective applicants who can somehow prove compelling circumstances or financial hardship due to the abrupt deadline. But that also seems unlikely, and it’s hard to know how those parameters would even be set.

Why are they really doing this?

The reasons stated in the news release are compelling. Given all of the mergers and acquisitions going on in the Oregon industry, our Portland office processes a large amount of change-in-ownership, loan clearance, and other types of transactions with OLCC. We can confirm that the process has become painstakingly slow for businesses and investors, despite OLCC’s best efforts. Applications for new businesses are also very slow. In addition, the announcement references the need to “put additional resources into compliance activity” as stated above. That’s a good idea generally, but there is doubtless some political pressure behind this objective, too.

What do we do next?

More information will be available in the coming days and weeks. So sit tight and stay tuned. Alternatively, you can always head to California. They have the opposite problem.

Seems like a good approach.

Once upon a time, the cannabis industry had something called the Ogden Memorandum. That was back in 2009, prior to any state legalizing cannabis for recreational use. The Ogden Memo gave prosecutorial guidelines to U.S. Attorneys in medical marijuana states. Many people read the Ogden Memo too cavalierly for the feds’ liking (to wit, over 1,000 new Colorado dispensaries opened that year), and Eric Holder’s office attempted to cool industry expectations with the first Cole Memo in 2011. A few years later, after Colorado and Washington legalized adult use cannabis, we got the second Cole Memo and its famous eight federal enforcement priorities to help guide state lawmaking. The second Cole Memo, which everyone just called the “Cole Memo”, lasted an astonishing 4.5 years until Jeff Sessions rescinded that guidance in early 2017, with a memo of his own. The Sessions Memo effectively reset everything to a primitive ground zero, lecturing that “marijuana is a dangerous drug and marijuana activity is a serious crime.”

Aside from disrupting longstanding federal policy framework on cannabis, the Sessions Memo directed federal prosecutors “to weigh all relevant considerations” in bringing prosecutions for violations of the federal Controlled Substances Act. As of last week, one such prosecutor gave explicit indications as to what relevant considerations will take priority in his district. That U.S. Attorney was Billy Williams of the District of Oregon. So now we now have the Williams Memo.

The Williams Memo is a thoughtful if somewhat awkward document. In the classic posture, it reserves prosecutorial discretion and promises nothing to anyone. Instead, it explains that lawyers in Mr. Williams’ office will primarily focus on five enforcement priorities when deciding whether to enforce the draconian federal laws against cannabis operators. Those priorities are:

  • Overproduction and interstate trafficking;
  • Protecting Oregon’s children;
  • Violence, firearms, or other public safety threats;
  • Organized crime – including tax evasion and money laundering; and
  • Protecting natural lands, natural resources, and Oregon’s environment.

The one that has state compliant operators a little worried is “overproduction,” given that the Oregon legislature has not capped marijuana licenses and does not require verticality in licensees. When I say “a little worried” I mean very little: So far, of the large number of Oregon cannabis and cannabis-adjacent clients my firm represents, I’ve heard from exactly zero of them with concerns over the Williams Memo. The only people I’ve heard from are reporters.

Still, the Williams Memo is important because it could serve as a template for U.S. attorneys in other states, and it illustrates the curious and uncomfortable bind that U.S. attorneys in states like Oregon find themselves. These attorneys are not going to attempt to shutter licensed and compliant cannabis businesses. It would be too costly, too politically hazardous, and ultimately, too late. On the other hand, when you have serious issues of overproduction, and especially interstate leakage, federal actors appointed by “tough on crime” executives may feel compelled to say something. So Williams did.

For states like Oregon, the hardest part about overproduction is that it is driven by significant and unrelenting demand beyond the four corners of the state. This means that if Oregon were to cap marijuana licenses tomorrow, or to shrink the pool of available licenses to a very small number over time, black market activity would persist. Prices for illegal marijuana would rise within Oregon, but there is nothing to suggest that demand would decrease elsewhere. Said another way: As long as there is demand for Oregon marijuana nationwide, Oregon marijuana will ship nationwide.

Federal drug enforcement policy in the U.S. has always focused on the supply side, with abysmal results. (If you’d like to understand the economics of this, there are many years of data and interpretation, e.g. here, here and here.) Still, the federal government refuses to abandon or adequately reform its supply-side policies. For its part, the Oregon legislature recently enacted SB 1544, which funds interdiction of illegal grows at the state level, but the level of funding is unlikely to kneecap black market activity in any real sense. Southern Oregon especially will always be a banana belt for cannabis.

Given market dynamics and the failures of federal prohibition, the Williams Memo does a nice job of walking the line between what Williams’ bosses probably want and what Oregonians definitely want, as demonstrated by Measure 91 and elsewhere. Ultimately, this memo is unique in that is was penned by a U.S. District Attorney, but it’s nothing new. And it really shouldn’t matter much for state-compliant businesses.

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 end 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.