Cannabis sexual harassmentOver the past few weeks, story after story has come to light of sexual assault and sexual harassment in the entertainment industry. But though high profile actors, directors, and producers are getting most of the press attention right now, the vast majority of workplace sexual harassment is experienced by low-wage hourly employees, often in small businesses. Employers in every industry should take advantage of the current wake-up call to make sure their policies and procedures are effective in preventing sexual harassment in the workplace. For one thing, harassment does expose a business to potential liability because of lawsuits from current and former employees. But more importantly, a hostile workplace is less likely to hire and retain the best performers, both women and men. This isn’t the 1960s any longer; a company that doesn’t have a clear sexual harassment policy is on the road to failure.

The cannabis industry is particularly vulnerable to harassment situations for two main reasons. First, marijuana businesses are still predominately made up of men. Male-dominated businesses often develop a language and culture that can be overtly hostile to women, and cannabis businesses are no different. Second, the industry is still young, and a large number of people in cannabis management do not have similar executive-level experience in other businesses. Many cannabis businesses lack any sort of policies to address workplace harassment.

Sexual Harassment Policies 

A company’s written sexual harassment policy should have a few goals. Specifically, it should

  • inform employees and contractors of the company’s objective to maintain a workplace free of harassment in all forms, including sexual harassment,
  • define prohibited conduct,
  • give examples of prohibited conduct,
  • establish procedures for reporting sexual harassment, including clarifying a duty to report and establishing confidentiality of any reports,
  • prohibit retaliation, and
  • inform employees and contractors of potential disciplinary actions for violating policy.

No matter the precise nature of the policy, training and reinforcement have to be mandatory. Just about everyone can agree that certain activity crosses the line at the workplace. But many people, especially those who have not received formal sexual harassment training, can unwittingly create a hostile workplace with actions they did not perceive to be wrong. A company’s sexual harassment culture should become stronger over time if the company takes advantage of the feedback loop of training, reporting, retraining, and reinforcement training.

Dealing with Sexual Harassment Reports

Maintaining a policy is only half the battle. Employers must make sure their policy is consistently implemented company-wide. Businesses need to accomplish two goals that can be at odds with one another. They need to provide multiple avenues for employees to report harassment, but they also need to make sure the company deals consistently with reports no matter from where reports come in. Company owners and managers must be subject to the same policy as their employees, and companies need to have an avenue to discipline owners and managers to show employees that their sexual harassment policies are applied consistently across the board.

One avenue a company can encourage, when possible, is for the person levying the complaint to address the situation with the offending coworker directly. Oftentimes, a simple misunderstanding can be cleared up that way. But if that isn’t possible or if the employees is uncomfortable doing that for any reason, the next step is generally for the employee to report the harassment to their immediate supervisor or to the company’s HR department. Multiple layers of reporting are necessary, especially when the harassment may be coming from, for example, the employee’s direct supervisor. Companies that are not large enough to have dedicated HR departments should still have employees or owners that are taking on the role of HR. Some companies even have dedicated harassment committees or ombudsmen that are generally not associated with management or ownership and that can ensure that there is an outside voice to keep HR and management honest regarding the company’s sexual harassment policy.

Once a complaint has been made, a business needs to have a consistent policy toward discipline and corrective action. This can’t be a one-size-fits-all policy. Sometimes a simple training is enough to deal with an event. Other times, the offending employee should be fired on the spot. But the correct combination of corrective action and discipline needs to be consistent.

All of this can seem difficult when you are a new company just trying to get by, but successful businesses and their owners and managers need to be able to walk and chew gum at the same time. Ignore harassment policies at your peril.

Cannabis employment lawyerFederal wage and hour laws apply to cannabis businesses as they would to any other business. Federal wage and hour laws are governed by the Federal Fair Labor Standards Act (FLSA). The FLSA requires employers pay overtime compensation to non-exempt employees who work more than 40 hours per week. Generally, employers are required to pay overtime wages to workers who earn less than $455 per week ($26,600 annually). The FLSA provides the minimum salary requirement for paying overtime. States are allowed to enact additional protections. If the state’s protection results in higher pay for the worker, the state protections are enforced over the FLSA. Many states have additional protections and you should always check your local jurisdictions to determine overtime compensation requirements.

In May 2016, at the direction of President Obama, the Federal Department of Labor (DOL) raised the salary threshold for overtime pay to $913 per week ($47,476). Meaning employers had to pay overtime wages to workers who were making less than $913 per week. The changes caused panic among employers and employees. Employers faced significant increased labor costs because employers would now have more employees eligible for overtime compensation. Employees were afraid employers would decrease their hours to avoid the new salary minimum.

Before the changes could go into effect, several states and business advocate groups asked for a preliminary injunction to stop the changes. A Federal judge granted the injunction on November 22, 2016 and the changes never took effect. The DOL appealed the decision to the Fifth Circuit, but recently asked the Court to stay the appeal to allow the current administration to pass new rules.

In July 2017, the DOL asked for public comment concerning the wage threshold limitation. The DOL received more than 14,000 comments. On October 30, 2017, the DOL confirmed new overtime rules were coming. It is expected the new salary level will be in the low $30,000 range.

If the projections are accurate, employers will be required to pay overtime wages to non-exempt employees making under $30,000. The increased minimum threshold salary will increase the number of employees eligible for overtime compensation. The expected changes are not as drastic as the ones passed in May 2016 but they may create additional labor costs—especially in retail businesses with hourly employees. Cannabis employers who employ hourly employees should evaluate their labor expenses now to determine if their risk for increased labor costs if the minimum salary threshold is increased. Employers should make a plan now to deal with increased labor costs, keeping employees happy, and keeping their cannabis business running smoothly.

Cannabis co-packing
(Your cannabis here)

Recently, we covered the basics of cannabis supply contracts here on this blog. Supply contracts are used when Party A is selling pot to Party B in a responsible way. Today’s post looks at another form of cannabis contract: the contract packager (“co-packer”) agreement. Co-packer agreements are used when Party A is working with Party B to produce a saleable cannabis product (also responsibly). Like supply contracts, we have seen a marked increase in co-packer agreements over the past year or so, and we expect that trend to continue.

Co-packers offer packaging equipment and expertise for hire, and may also provide services related to design, labeling, purchasing, and shipping logistics. Large numbers of companies exist solely to co-pack all around the world. In state-legal cannabis, co-packers tend to pack for themselves, as well: this probably stems from the value associated with holding a state marijuana license. In addition, most marijuana co-packer agreements are limited to packaging, labeling, and sometimes, sourcing of product. These services will likely expand as states refine their program rules and the industry continues to scale.

Co-packer agreements conform with the rules of most state cannabis programs when both parties have a marijuana license. When the non-packer party does not, however, the legitimacy of a co-packer agreement may be a much closer call– depending on the way the contract is written. In any case, when the non-packer lacks a license, that party will not be allowed to handle cannabis. At that point, the question becomes whether the state will allow the non-packer to delegate all cannabis purchasing, labeling, shipping and even sales of pot to the co-packer. If this is allowed, the non-packer can legitimately profit in a state-legal cannabis program, by virtue of its relationship with the licensed co-packer.

When the non-packer is allowed to profit without a license, a co-packer agreement can be a great fit. The model is attractive for start-ups that lack the interest or wherewithal to lock down their own premises and cannabis license. The model also works nicely for large, established cannabis companies looking to leverage a brand from one state to the next, without having to wade through a foreign licensure process. We have seen co-packer agreements deployed successfully in both scenarios.

Cannabis co-packer agreements tend to be accompanied by, or heavily weighted with, nondisclosure agreements and provisions. In the case of cannabis processing, the non-packer will provide its co-packer with recipes and formulas related to the final product. In the case of a grower or producer, the non-packer may not have these concerns but may bring other trade secrets to the table. In almost every arrangement, the non-packer will have a brand to protect, which means the agreement will carefully lay out control and licensing issues.

In most other respects, co-packer agreements cover many of the same topics as cannabis supply agreements, including terms like scope, title and tracking, invoicing, indemnity, representations and product recall. Co-packer agreements can be built off standard forms, but final documents will be unique to the parties at issue, and highly negotiable. If it is unclear whether a co-packer agreement or its terms will jibe with state program rules, our practice as cannabis business lawyers is to bring the issue to program administrators for review and consideration. Ultimately, if the parties are able to strike a deal, the co-packer agreement is a uniquely attractive option.

International CannabisThis post is a follow-up to one I wrote a year ago about foreigners investing in U.S. marijuana businesses. What are the legal ramifications of the reverse? If marijuana business is fully legal in a foreign jurisdiction (think Uruguay or Canada in the near future), can a U.S. resident contribute cash in exchange for stock of a company that cultivates and sells marijuana in that jurisdiction? This is timely because Constellation Brands, the New York-headquartered owner of Corona beer and other holdings in the alcohol industry, agreed to buy a significant stake in Canopy Growth Corporation, a Canadian publicly traded cannabis cultivation company. Are they breaking the law? It’s not as simple a question as one might think.

Reuters ran a story on this topic a few years ago. In that piece, the DEA spokesperson and a financial institution money laundering risk specialist respectively implied and stated outright that such activity violated U.S. law. The DEA spokesperson said that the DEA would be “most interested in those types of activities.”

To our knowledge, the U.S. has never brought charges against a U.S. investor in these limited circumstances, so we don’t have any case law directly on point. But we can review the primary statutes that cannabis investors should be worried about —the Controlled Substances Act and the criminal money laundering statutes.

It is a general rule in the U.S., as stated in 2016 by the Supreme Court in RJR Nabisco Inc. v. European Cmty, that without “clearly expressed congressional intent to the contrary, federal laws will be construed to have only domestic application.” This means statutes that are silent on where they have effect will generally be interpreted as applying only to activities in the United States. And the U.S. does have laws on the books that are intended to be applied outside the United States. For example, the Controlled Substances Import and Export Act (21 U.S.C. § 959) outlaws possession of controlled substances overseas with the intent to import them into the United States. That’s one of the statutes that the U.S. used, for example, to go after Manual Noriega in the 1990s. To be clear, this statute wouldn’t apply to Canadian operations that have no intent to export marijuana to the United States and intend to only sell it within the Canadian regulated market.

Reading the text of the domestic Controlled Substances Act (21 U.S.C. § 821), there isn’t any clear indication that it is intended to apply to overseas conduct.  And in practice, we haven’t seen the United States try to claim that residents who travel to Amsterdam and use marijuana there have violated U.S. law. To the extent that the same statute exists for both possession of narcotics and manufacture of narcotics, it doesn’t look like extraterritorial application would apply.

Money laundering laws, however, are interpreted as having broad extraterritorial reach. So are U.S. investors in Canadian marijuana businesses in danger of violating those laws? 18 U.S.C. § 1957 makes it criminal for someone to knowingly engage or attempt to engage in a monetary transaction in criminally derived property of a value greater than $10,000 when such property is derived from “specified unlawful activity.” This law applies even if the offense takes place outside the United States if it involves a U.S. person or business entity formed in the U.S. “Specified unlawful activity” includes a laundry list of crimes, including violations of the Controlled Substances Act. So that doesn’t look great.

But here’s the thing — if the domestic Controlled Substances doesn’t apply because it only applies in the U.S., and if the Controlled Substances Import and Export Act doesn’t apply because there is no intention to send marijuana product to the United States, then a reasonable argument would be that the business of a Canadian licensed marijuana company would not constitute “specified unlawful activity.” And the money laundering law wouldn’t apply.

Therefore, Constellation Brands has a solid argument that it isn’t violating U.S. law by making an investment into the Canadian marijuana industry. There a bunch of caveats here, and there’s no way for a blog post to have a full legal analysis, and the DEA may well disagree with this interpretation even if it were an airtight legal analysis. Most U.S. banks will still shy away from offering any services connected with marijuana businesses even in countries that have legalized completely, including Uruguay. But at the end of the day, prosecutors would have an uphill climb if they truly wanted to go after a U.S. resident for investing in a foreign marijuana business that intends to serve that foreign market and is fully compliant with the laws of that nation.

California cannabis lawyers
Cue California cannabis cautions

With temporary licensing on the horizon, California’s cannabis industry is obviously on the cusp of really big things. With this green rush, our California cannabis business attorneys have been brought on to work on all kinds of M&A deals and a bevy of MAUCRSA and local law regulatory compliance issues. These projects have exposed us to many who pitch various and sundry goods and services, claiming to offer “new paradigms” and “value adds,” but actually offering little to nothing.

In this post, I set out the five most common predatory practices we’re seeing in the Golden State cannabis industry so you can spot them when they’re coming at you and avoid them.

  1. Brokers. Whether it’s for M&A, financing, or finding real estate, many brokers are all too willing to sell cannabis companies down the river when it comes to compliance and just plain common sense. Far too many brokers neither know nor care about local or state law and they work only at cramming a deal down the parties’ throats to ensure they get their coveted commissions. Far too often we are getting brought into deals that involve unenforceable contracts or situations that will get one or both parties in trouble for failing to comply with local or state licensing, permitting, or operational laws or regulations.
  2. Lawyers. California cannabis businesses need to be careful in choosing their cannabis regulatory or business counsel. For twenty years there’s been no government oversight over medical cannabis operators and this has allowed some attorneys to unduly profit at the expense of their clients and their own ethical duties. And just because regulation is coming does not mean that some of these attorneys will stop their reckless, unethical, or incompetent ways. I’ve written before about how to avoid “OG legal advice,” but it goes further than that. If your cannabis attorney is willing to take a financial interest in your business but is not providing you with the requisite conflict waiver and opportunity for you to consult with outside legal counsel, that should be a huge red flag. If you know more about state and local regulations than your cannabis lawyer, that’s another red flag. If your cannabis attorney is trying to “lock” you into a long-term fee agreement that you can’t cancel at any time, that’s a massive red flag (yes, I have seen at least one self-proclaimed cannabis attorney with this sort of fee agreement). If your cannabis lawyer is encouraging you not to be transparent or not to get things in writing or is steering you away from basic business and corporate duties to try to hide things and/or assets, this is yet another red flag. These predatory attorneys will eventually be knocked out of California’s cannabis industry one or the other, but until then it’s buyer beware.
  3. Consultants. Out of all groups on this list, this one is generally the worst. Not only is it increasingly difficult to determine the value most cannabis consultants provide, there are way too many cannabis consultants running rackets because they themselves are blocked from pursuing licensure with the state or a given city or county. We also have seen more than our share of consultants trolling for cash by playing off the naiveté of would-be cannabis licensees. I recently reviewed a proposed agreement with a consultant who wanted seven figures per year for getting a company “through the political process” to receive a cannabis license, yet didn’t include any enumerated services nor any end date. Seeing as how California’s Bureau of Cannabis Control has made clear that state licensing procedures will not be a difficult undertaking, the idea of politicking for licenses makes no sense and paying for such politicking makes even less sense. Don’t be fooled.
  4. Accountants. There’s nothing like talking to a would-be client who has no clue what 280E is yet is working with an accountant/CPA who claims to know cannabis taxation issues and charges premium rates for that “specialized advice.” You need to make sure your accountant/CPA truly knows how to navigate 280E, but above all you want your accountant to be a competent tax professional. All too often we run into accountants who claim to be experts for cannabis businesses that do shoddy jobs on standard accounting or are impossible to reach when their clients need them. In other words, choose your accountant/CPA wisely.
  5. Cannabis conferences and trade groups. Every time we turn around, there’s a new cannabis conference or trade group in California (or elsewhere). Folks have figured out that they can make serious money off the “Green Rush” by throwing events in major cities without much knowledge about anything cannabis-related, or that they can better market themselves and their personal agendas through setting up trade organizations. Few of these conferences have any educational value and most choose their speakers based on who pays for “membership” or “sponsorship.” Having paid to play, the speakers use these conferences mostly just to shamelessly pitch themselves or their products. We have heard of many expensive yet wildly disorganized conferences with speakers who were super stoned and conveyed nothing of value or importance. On the trade group front, watch where you put your money since many of these organizations are neither unified or even organized when it comes to any kind of meaningful mission for change. Be especially wary of self-appointed and deceptively misleading “task forces” that are not actually compiled and appointed by a given city or county, but rather set up to showcase the goods or services of the person or people who formed them. In other words, do your due diligence.

Oregon cannabis employeesWant to know what a competing Oregon cannabis business is paying its employees? Don’t ask job applicants.

Oregon passed expansive equal pay legislation in 2017 and a key provision banning employers from asking applicants about past salary and compensation went into effect this month. The Oregon Equal Pay Act makes it an unlawful employment practice for an employer to seek the pay history of an applicant. Similar to the “ban the box” legislation (discussed here), Oregon employers can inquire about past compensation only after making a job offer that includes an offer of compensation. Employers are also banned from seeking compensation history from an applicant’s past and current employers and from screening applicants based on past salary.

Oregon cannabis companies should review their applications and standard interview questions to remove any questions about past compensation and if you work with a recruiting agency, you should make sure their screening processes comply with the law as well.

The Equal Pay Act also expands Oregon’s equal pay requirements by prohibiting disparate wages for work of a “comparable character” for members of a protected class. Protected classes include persons distinguished by race, color, religion, sex, sexual orientation, national origin, marital status, veteran status, disability, or age. Work of a comparable character does not simply mean the same job title or similar duties. Instead, it requires an analysis of the knowledge, skill, effort, responsibility and working conditions the position requires. The law though does allow for unequal pay for the performance of work of comparable character if the pay difference is based on any of the following:

  • A seniority system
  • A merit system
  • A system that measures earnings by quantity or quality of production, including piece-rate work
  • Workplace locations
  • Travel
  • Education
  • Training
  • Experience

The equal pay provision does not go into effect until January 1, 2019. This allows employers time to assess their compensation practices and adjust wages as necessary. Employers are not allowed to reduce the compensation of any employee to comply with the law.

Once the law goes into effect, employees can file complaints alleging violations with Oregon Bureau of Labor and Industries and BOLI may award up to two years of lost wages. Beginning January 1, 2024, employees can bring civil actions against their employers. Courts can award lost wages, attorneys’ fees and costs, injunctive relief, compensatory damages (money awarded to a plaintiff to compensate for a loss), and punitive damages (money awarded to a plaintiff to punish the defendant). Employers can avoid compensatory and punitive damages by showing they completed an equal pay analyses within three years before the date the employee filed the action.

If you are an Oregon cannabis business with employees, there is plenty you can and should do now to bring your company in line with existing  laws and to set yourself up for compliance with future laws. First and foremost, evaluate your hiring practices and ensure you are no longer asking your job applicants about their pay history. If you have friends in the cannabis business, limit discussions about what they pay employees. In preparation for enactment of the equal pay provision, analyze your pay practices. Are your employees in comparable positions being paid the same amount? If not, ask yourself whether there is a bona fide reason for the pay disparity and if there is not, consider raising the wages of the person with the lower wages before the law goes into effect.

The hard truth is that your canna-business is going to get embroiled in litigation sooner or later. Whether it is a dispute among partners, a dispute with a supplier or a commercial landlord-tenant dispute, the regulatory framework around cannabis will change how your business approaches litigation. With that in mind, we intend to expand our current series on cannabis IP litigation (here, here, and here) into litigation of all kinds. Today we will begin with a bit of general information about dispute resolution in these Litigious States of America.

Litigation is not a pleasant experience. It is expensive, time-consuming and incredibly invasive. Even the smallest dispute can cost tens of thousands of dollars to resolve. Once you are in a lawsuit, your opponent will have the legal right to demand you turn over all documents, emails, text messages, recordings, and records tangentially related to the legal and factual issues in dispute (usually defined as “reasonably calculated to lead to the discovery of admissible evidence”). Your lawyer will ask you to dig through your old physical records, computer files, emails, and text messages for anything that could be relevant. This will usually lead to every judge’s least favorite part of litigation: discovery disputes.

Once the lawyers finish sparring over what documents will or will not be turned over, you will experience the unique joy of a deposition. In today’s practice, it is a near certainty you will be required to sit in a room for up to seven hours (and in some states, even longer) while your opponent’s attorney questions you under oath, trying to dig out from you every bit of information you may have and/or to catch you in a lie. You will be asked questions about conversations and documents you haven’t thought about in years, and whatever you say can and will be used against you.

Though most civil disputes end up settling, there is always a chance your case will go all the way to trial. And if you thought your deposition was unpleasant, you will realize that is nothing as compared to the trial. Everyday you will spend hours in a courtroom, only to go back to your lawyer’s office at night to prepare for the next day. And at the end of it all, you will ultimately be subject to the whims of a jury of your peers who can sometimes be more persuaded by emotion than by the facts or the law.

In light of the financial and emotional burden of litigation, it is critical your litigation decisions focus on what is best for your business. Litigants do not benefit by making decisions based on emotion. To help you make those decisions, this series will address some of the common questions and misconceptions our cannabis litigation team sees/hears so often from our own cannabis clients about litigation, and specifically litigation in the cannabis industry.

Check in next week when we discuss one of the biggest areas of potential frustration with litigation: timing.

 

Cannabis taxesOn September 27, 2017, the Trump Administration introduced its framework for tax reform, known officially as the “Unified Framework for Fixing our Broken Tax Code.” Not surprisingly, the proposal leaves the details to Congress. Though the current proposal is short on detail, cannabis businesses should be aware of the impact the overall rate may have on their choice of legal entity.

Up front caveat: there is no chance Congress will pass a tax bill that exactly matches the current proposal. The proposal doesn’t have enough detail, for one. But more important is that the Congressional meat grinder of wheeling and dealing and lobbying generally ends up yielding a product that differs greatly from initial proposals they receive from the White House. Regardless, it’s useful to get an idea of what direction the administration and Congress are likely to push taxes.

Tax Proposal Highlights. The centerpiece of the current tax proposal is to dramatically reduce tax rates, as per the below.

Business Form

2017 Tax Rate

Proposed Tax Rate

Sole Proprietor 10%-39.6% 25%
Partnership/LLC 10%-39.6% 25%
S Corporation 10%-39.6% 25%
C Corporation 15%-39.0% 20%

The current proposal will change how entities treat the costs of equipment and other capital assets under the tax code. Under current law, businesses cannot deduct the full cost of capital equipment — the cost is deducted over a period of years through scheduled depreciation. The new proposal would, at least for a limited time, treat capital expenses the same as operating expenses, allowing companies to deduct the full cost of capital equipment in a given year. This could be a significant benefit to cannabis growers and producers, who can categorize most of their capital equipment as costs of goods sold. Retailers, on the other hand, are unlikely to benefit because deductions for their capital equipment expenses are generally barred by IRC §280E.

In determining the legal structure for your cannabis business, you have two fundamental choices. Do you form a corporation, which is subject to federal income tax itself, or do you form a “pass-through-entity” (typically a limited liability company) where the entity pays no tax, but profits or losses are allocated to the company owners, and those owners must pay individual taxes?

C Corporations. C Corporations are liable for federal income tax at the entity level. Shareholders are not individually liable for those taxes, but they are liable for taxes paid on dividends they receive. This is the dreaded “double taxation” people refer to when criticizing the corporate tax system. But if the corporate tax rate for C Corporations is reduced to 20% across the board, C Corporations may become very attractive to cannabis businesses.

C Corporations can offer additional benefits. If the IRS audits a C corporation, additional taxes assessed are a liability of the corporation, not a personal liability of the shareholders. Compare to a partnership, where even if a partner were completely innocent of any blame in a situation where prior year profits were understated, that partner would be individually liable for any assessment of unpaid taxes. The IRS treats shareholders active in a C corporation as employees and thus not subject to the 15.3% self-employment tax. C Corporations also typically offer greater flexibility regarding employee benefits and incentive compensation.

Limited Liability Companies. Limited liability companies have become the most common entity choice for those starting a business, cannabis or otherwise. They protect their members from personal liability like a corporation, and they also provide considerable management flexibility, lacking the mandatory formal structures of corporations.

For income tax purposes, the LLC is a chameleon and may take on many forms. An LLC with a single individual member is treated as a disregarded entity — individual members report business operations directly on their personal tax returns. Under the current tax proposal, a sole proprietor’s (or single member of an LLC’s) income from his or her business activity would be taxed at 25%, however, it also indicates that a “wealthy individual” may not avoid “the top personal tax rate.” But the proposal does not have any details on how exactly that exception would be included in a final tax bill.

An LLC with more than two members is treated as a partnership and tax is imposed at the partner level, with the partners’ share of income or losses reported on their personal income tax returns. Again, under the proposal, each partner’s tax rate is capped at 25%.  Presumably, a partner that is a C Corporation will be taxed on 25% of its pass-through income.

Finally, an LLC may “check-the-box” and elect to be treated as C or S corporation. S Corporations are pass-through-entities and S Corporation shareholders are taxed at the shareholder level similar to partners in a partnership. The income of an LLC that elects to be treated as a C corporation would presumably be taxed at the 20% corporate tax rate.

One benefit of a pass-through-entity is that a partner is not subject to double taxation as cash distributions to a partner may be received tax-free. In addition, an LLC/partnership generally may be dissolved with a lower risk of triggering recognition of income on the liquidation. For example, let’s say that a C corporation buys a piece of real estate for $400,000, and two years later the real estate has appreciated in value to $600,000. The shareholders’ original investment in corporate stock is $300,000. If the corporation dissolves and the shareholders receive the real estate, they have to pay tax on the fair market value of the property ($600,000) less their original stock investment ($300,000). So, the shareholder must pay tax on a gain of $300,000. But in an LLC/partnership, the liquidation of the partnership would not be a taxable event, so the partners would not immediately pay tax on that value. 

There are a few drawbacks to partnerships in the cannabis space. As discussed earlier, partners have individual liability for tax that the partnership owes, so all partners must be diligent to ensure they are making sufficient tax payments. Additionally, because of some quirks in the partnership tax code, IRC 280E has the effect of making a partner that is selling its interest pay more tax on the sale of that partnership interest than a similarly situated shareholder in a C corporation would pay. Finally, members/partners must pay employment taxes at the 7.65% rate, whereas the C Corporation pays a shareholder employee’s share of such taxes. 

If you are making an entity selection decision soon, keep an eye on Congress. The tax code can be hard to understand, and the media doesn’t always concentrate on details that can have a dramatic effect on things like business entity selection. Any major tax reform will create a lot of confusion and will change some common assumptions, so stay vigilant.

Get Legit.

In the old days, people rarely wrote things down when they sold cannabis. Selling the flower was risky, and leaving a paper trail riskier still. With the advent of medical marijuana programs, though, cannabis supply contracts became routine. Such agreements may be styled as “patient-caregiver agreements” or “patient-grower agreements,” and state agencies may even require their use. These limited scale agreements are often between two individuals for small sums of marijuana and cash. In the world of pot contracts, those deals are beta.

Today, four states have scaled adult-use (“recreational”) cannabis programs (Washington, Oregon, Colorado and Alaska), with four others close behind (California, Nevada, Massachusetts, Maine). In these states, trading in cannabis is no longer limited to patient-caregiver transactions. Instead, it involves licensed agribusinesses bringing statutorily designated “crops” to increasingly differentiated markets. For this reason, cannabis distribution agreements have become a key contract for many of our clients.

Below are ten critical terms in any cannabis distribution agreement. This list is by no means exhaustive, but is curated to show how unique these agreements are and should be:

  1. Distribution Grant. This term covers the territory in which the cannabis can be distributed by the purchaser, as well as other items, like whether sub-distributors are allowed and what their roles may be. The key consideration here is ensuring that cannabis is kept within state borders, pursuant to whatever tracking system may be required.
  2. Term and Termination. Terms tend to be short in cannabis distribution agreements and with multiple renewal options, to account for price fluctuation and general market dynamism. Termination may be allowed for a variety of specific reasons, or for no reason at all. Specific reasons may include cessation of business operations, contract breach, business impracticability, regulatory violations, etc.
  3. Testing Obligations. States with robust regulatory systems require cannabis be tested for pesticides and other contaminants. Therefore, the distribution agreement should designate which party is responsible for testing and its associated costs, and what happens in the event of a failed test.
  4. Inspection.  Marijuana is a perishable and essentially fungible commodity, and the purchaser will want a right to inspect upon delivery, and sometimes for a window of time thereafter. Sellers will want to limit this right as much as possible because once the marijuana is out of sight, the seller has no control over the care and treatment of the product.
  5. Purchase Orders and Payment. Your standard cannabis distribution agreement will detail the method a purchaser must use to communicate its product needs to the seller, how invoices are presented, and at what point payment must be made. Sometimes, the agreement will contain a requirement for one party to notify the other of market changes; i.e. of the wholesale market rate per pound of marijuana.
  6. Sales and Marketing. Sellers will want purchasers to comply with all advertising and sale regulations and make good faith efforts to market the sellers’ marijuana among shelves of competing products. In many cases, trademarks will be in play, and sellers will have specific parameters around how a name and logo may be used in association with these efforts.
  7. Representations and Warranties. Distribution agreements in all industries are chock full of representations and warranties, but cannabis agreements take this concept to the next level. In a cannabis distribution deal, warranties will cover everything from program compliance concepts to product safety.
  8. Confidential information. Because cannabis companies have fewer options to protect intellectual property through formal registrations than companies in other industries, the industry relies heavily on non-disclosure and trade secrets.  When one party is selling cannabis to another, the parties are bound to learn a bit about each other, especially where site visits are involved. In many cases, the distribution agreement itself may even be designated as confidential.
  9. Limitation of Liability. This section is often heavily negotiated, as the parties attempt to carve out who would be responsible for what unfortunate event, and to what degree. It takes little imagination to dream up things that could go wrong in a cannabis distribution deal, from product recalls to intellectual property infringement. Here, each party will seek indemnification for anything beyond its control.
  10. Federal Law Concepts. Federal illegality will flow through nearly every section of the pot distribution agreement, from licensing to termination to dispute resolution protocols. When reading through each contract term, both lawyer and client should ask “how might federal illegality affect this provision?”

At the end of the day, like all cannabis industry contracts, agreements for the distribution and sale of pot are unique. Generic distribution agreements may do more harm than good when trading in cannabis, and although courts may recognize the existence of oral contracts, no legitimate business will move its goods without a tailored, written agreement.

In that sense, the old days are gone. It’s time for a new approach.

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

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

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

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

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