cannabis marijuana patent litigation

In previous posts, we’ve puzzled about why no one has filed a cannabis patent infringement case, despite the large number of patents granted for cannabis plants and compounds. See here, here, here, and here.

That all changed last week. United Cannabis Corporation (“UCANN”) has now filed what is believed to be the first cannabis patent infringement complaint. The case is United Cannabis Corporation v. Pure Hemp Collective, Inc., case no. 1:18-cv-01922-NYW, in the United States District Court for the District of Colorado.

The patent asserted is U.S.P. 9,730,911, “cannabis extracts and methods of preparing and using same.” The claims in the patent generally cover liquid cannabinol formulations using tetrahydrocannabinol (THC), cannabidiol (CBD), and various terpenes. See, for example, claim 10: “A liquid cannabinoid formulation, wherein at least 95% of the total cannabinoids is cannabidiol (CBD).”

Although the UCANN complaint does not specify which claims are being asserted, it appears that the plaintiff may focus on CBD-related claims, e.g., claims 10-15, rather than claims for THC. The complaint devotes several paragraphs to discussing FDA’s recent approval of Epidiolex, a CBD-based drug, as we discuss here and here. The complaint suggests that FDA will reclassify CBDs generally as Schedule II or Schedule III drugs. While it is clear that FDA will do a reclassification, it is not clear that it will reclassify all CBDs, rather than just the Epidiolex compound.

In any event, we expect to see more cannabis patent litigation soon, perhaps in Colorado, California, Oregon or elsewhere. Whether it will be a trickle or a flood remains to be seen, but we will be following the UCANN case closely and providing regular updates.

For more on cannabis patents, see our series here:

cannabis marijuana cyber attack security
Be prepared!

As I discussed last week, hacked devices, breached networks, and stolen proprietary information have become commonplace in the cannabis industry. Because cybercrime variants are continually emerging, no company can achieve totally assured cybersecurity. Consequently, we strongly encourage all our clients to adopt a cyber incident plan for responding to attacks before they occur. Developing a vetted, comprehensive plan of action is the best way to effectively respond to an attack and to reduce the amount of damage to your company.

This post highlights some of the best practices for preparing and responding to a cyberattack.

Before falling prey to a cyberattack, your company should:

  1. Identify Valuable Assets. Depending on your needs, it may be cost prohibitive to protect your entire business. Therefore, before creating a cyber incident plan, you should determine which data, assets, and device warrant the most protection.
  2. Develop a Plan of Action. Cyber incident plans will differ in size and structure, but at a minimum, your plan should:
    (i) Name those who have lead responsibility for different aspects of the response;
    (ii) determine ways to contact critical personnel at all times;
    (iii) identify how to preserve your most valuable assets, data, and device in a forensically sound manner; and
    (iv) develop notification plan for customers and data owners whose data would be compromised during an intrusion.
  3. Adopt Appropriate Technology and Services. Adopting off-site data back-up, intrusion detection capabilities, and data loss prevention technology will help you detect intrusions soon after they occur and help minimize the loss of valuable information.
  4. Implement Internal Preventative Policies. You must assist your employees with recognizing internal and external vulnerabilities to prevent security breaches but also to effectively react to attacks. Employee training should address issues such as safe password management, cryptographic communications, secure browsing practices and proper system configuration.

Following a breach, you will need to focus on mitigating damages and working with law enforcement. Specifically, you will need to:

  1. Assess the Nature and the Scope of the Incident. You will first need to determine whether your company is faced with a malicious act or a technical glitch.
  2. Capture the Extent of the Damage. If you detect a cyberattack, you should immediately make a forensic image—an image or exact, sector by sector, copy of a hard disk—of the affected computer(s), which will be used for later analysis and may possibly serve as evidence at trial.
  3. Implement Measures to Minimize Damage. To contain the attack and prevent it from spreading, you will need to stop ongoing traffic caused by the attacker. Some measures include rerouting network traffic and isolating all or parts of the compromised network.
    Regardless of the option you select, be sure to keep detailed records of all steps taken. This information may be relevant for recovering damages from responsible parties.
  4. Notify. The notification list includes:
    (i) Relevant Personnel: You should inform the relevant personnel (i.e., managers, IT department, security department, and legal department) of the attack and keep them informed of the preliminary analysis.
    (ii) Law enforcement: Generally, you will need to contact law enforcement authorities to assist with investigating the intrusion. Law enforcement can also help coordinate statements to the news media concerning the incident, ensuring that information harmful to the company’s interest won’t unnecessarily be disclosed.
    (iii) Customers: All 50 states have now enacted breach notification laws that require companies faced with a cyberattack to inform customers whose data was compromised by the intrusion. Accordingly, soon after the attack, you should prepare a statement that explains to the customers the scope of the breach of security and which remedial efforts were adopted.

Cyberattacks can raise unique legal questions. Therefore, you should consult with attorneys who are accustomed to addressing these types of issues to assist you with decisions, such as how to interact with government agents, the types of preventative technologies you can lawfully use, your obligations to report the loss of customer information, and your potential liability for taking specific remedial measures when faced with a cyberattack.

cannabis lawCannabis has remained federally illegal at the same time states continue to legalize cannabis in one form or another. As a result of legalization, private parties enter and perform contracts, loan and borrow money, and convey leasehold property rights in ways that involve cannabis. These contracts affect and depend upon millions of dollars in assets, including real estate, thereby interweaving the cannabis industry into the economic systems that allow our free market economy to function. Courts, and especially federal district courts and courts of appeal, often must wrestle with whether and how to enforce such contracts where one body of law says they are void as illegal and another says they are perfectly valid.

Courts have generally been willing to enforce these contracts and have come up with some pretty creative arguments for doing so, perhaps because of the economic disruption that would occur if parties were suddenly permitted to walk away from contractual obligations and the consequences to city and county governments that have issued property entitlements and licenses to cannabis businesses. However, a recent appellate court decision illustrates how there are still limits on the ability to indulge, even when done in compliance with state law.

In U.S. v. Schostag, a defendant had pleaded guilty to felony possession of a firearm and attempted possession of methamphetamine and was sentenced to 120 months in prison and 5 years of supervised release. One of the conditions of his release set by a federal district court in Minnesota was that he not possess or use any controlled substance “except as prescribed by a physician.” Minnesota law allows physicians to prescribe certain forms of medical marijuana and the defendant notified his probation officer that his doctor had prescribed medical marijuana for chronic pain. The probation officer advised the defendant that, cannabis prescription or not, defendant’s consuming cannabis would violate the terms of his release because it was prohibited by federal law.

The defendant tested positive for marijuana and his probation officer reported the violation. Defendant argued he was simply following the terms of his release conditions, which allowed for him to use prescribed controlled substances. The district court, apparently acknowledging the awkwardness of the language, modified his release conditions to explicitly forbid defendant from using or even possessing marijuana with a medical marijuana prescription and gave defendant two weeks to find a legal form of pain management. Defendant appealed this decision, arguing that the court should have exercised its discretion in setting his release conditions and should have allowed him to use medical marijuana under Minnesota law.

The Eighth Circuit Court of Appeals rejected defendant’s argument, noting that under federal sentencing law, federal courts can modify release conditions but cannot do so in a way that violates federal law, including the CSA, which outlaws marijuana in all forms. The court also declined to engage in any nuanced discussion of the interplay between federal and state laws on cannabis, instead simply declaring, “the state’s law conflicts with federal law.” Though this decision seems harsh, consider the alternative: if the court had allowed the defendant to use marijuana while on federally supervised release — the conditions of which a federal court is itself responsible for setting — this would have amounted to a federal entity (the court) directly allowing for a violation of federal law. This wasn’t a contract between private parties; it was the federal government deciding whether to allow a releasee under its supervision to use a substance that is unquestionably prohibited by federal law.

Though the court in Schostag found Minnesota’s medical marijuana law to conflict with federal law, there is a colorable argument that this case is an outlier from the general trend of federal courts being unwilling to get in the way of state-legal cannabis. The federal government and its court system cannot be expected to ignore federal controlled substances law when applying federal sentencing law to those under federal custody or supervision simply because the court happens to be located in a state with contrary laws on cannabis.

An example of a similar approach occurred in Forest City Residential Management, Inc. v. Beasley where a federal district court in Michigan held that tenants in a federally subsidized housing project were not entitled to a reasonable accommodation under the federal Fair Housing Act to use medical marijuana at their rental units. Though closer to a private contract than federal sentencing guidelines, allowing marijuana use in federally subsidized housing as a legal accommodation is akin to the federal government sanctioning a clear violation of federal law within the confines of its own program.

Though the general trend is that federal courts are reluctant to interfere with state legal cannabis activity, that tolerance typically stops at the doorstep of federal programs operating under federal law. This is something Congress can and should change, not the judiciary. Unless and until cannabis becomes federally legal, we will continue to see courtroom manifestations of the cannabis federalism fight.

california cannabis lien assessmentCannabis regulation in California is heavily focused on local control. We write and speak about this constantly. (See here, herehere, and here). As predicted, new lawsuits are cropping up all over the state challenging the authority of local governments to take certain actions as they pertain to cannabis. Our firm has generally discouraged clients from taking a litigious approach toward government regulation of cannabis, because the often meritless lawsuits we saw in the pre-MAUCRSA era rarely resulted in victory for cannabis entities, were largely detrimental to property owners, and turned the majority of local legislative bodies in California against the cannabis industry.

However, there are constitutional and statutory limits to what governments can do, and it is a fundamental part of our duty as attorneys to ensure that the rights of voters, property owners and tax-paying citizens are protected. This post focuses on one troubling practice we are seeing in California involving cities recording excessive fines and penalties against property owners who lease (knowingly or unknowingly) to cannabis tenants.

Local Governments Are Charging Property Owners Excessive Fines And Penalties And Recording Them Against The Property As A Lien Or Special Assessment

Cities generally have two goals when it comes to code enforcement: (1) compliance and (2) cost recovery. State law provides the vehicle for local governments to achieve these goals via Government Code sections 53069.4, 38773.1 and 38773.5, which enable cities to declare activity in contravention of the municipal code a public nuisance, take action to abate that nuisance, and then recover the cost of abating the nuisance via a lien or special assessment against the property. However, this practice is frequently abused. A staggering number of cities misinterpret these laws to mean that they are entitled to impose fines (sometimes up to $10,000 or $20,000 per day!) for municipal code violations against both businesses and property owners. If these fines go unpaid, the cities record them as a lien or special assessment against the subject property. The result is a massive fee, sometimes upwards of $1 million, tacked on to an owner’s property tax bill. If that goes unpaid for three years, the local government can seize and sell the property.

This is a nightmare for property owners leasing to cannabis businesses. We have spoken to many owners in this scenario who were either unaware that cannabis activity violated the local code, or unaware that their tenants were cannabis businesses. Upon receiving a notice of violation, these owners instituted unlawful detainer proceedings, and diligently pursued eviction of cannabis tenants. Despite this, cities continued to assess fines against the property owners until the cannabis activity was completely eradicated from the property. In the end, despite immediately acting to remove their tenants, these property owners were hit with hundreds of thousands to millions of dollars in unpaid fines and penalties. Most owners in this scenario are unable to pay, and are forced to give up their properties.

This practice, in most cases, is unlawful under our analysis. The Government Code does not authorize cities to attach liens or impose special assessments to collect outstanding nuisance fines or penalties. We are actively fighting for our clients who have been wrongly assessed excessive fines and penalties and are in jeopardy of losing their properties, and we will provide updates as these cases progress. Stay tuned.

cannabis litigation mediationIn Part 1 of this series we discussed how mediation works in most cannabis disputes. Today, we discuss some strategic considerations to increase the likelihood of success in cannabis mediation.

     Know your audience(s): Unlike in litigation or arbitration, where your audience is a disinterested third party judge, jury, or arbitrator, your primary audience in mediation is the other side. After all, mediation will not result in settlement unless both sides agree. But consider the other audiences, i.e., those on your own side. Many cannabis businesses have multiple owners or decision makers. Mediation can be an excellent way for your management team to fully understand the dispute, so that the team itself can decide on a resolution that will best satisfy all the stake holders.

     Look for a resolution, not a victory: The goal in most mediation is for all parties to resolve the dispute, not for one party to emerge victorious at the other’s expense. It is the rare case where a party in mediation will find it in its best interests to completely capitulate. If you expect to get all or most of what you might get at trial, you are unlikely to succeed in mediation.

     Don’t just trade offers: Even when the principal issue between parties seems to be how much money will change hands, just exchanging numbers is not always effective in mediation. The concept of “principled negotiation,” developed by Roger Fisher and Bill Ury in the book Getting to Yes, involves considering the parties’ underlying motivations and interests, rather than just their negotiating positions. Seeking to address each party’s interests can change the dispute from a zero-sum game to one where both parties will benefit. For example, if one marijuana business is suing another for intellectual property (IP) infringement, a possible resolution could involve a cross-license agreement where each party agrees to license its IP to the other party.

     Mediation is a process: It is not uncommon for parties to engage in two or more rounds of mediation before reaching a settlement. During litigation, there are several critical points at which mediation might take place. Early mediations are attractive, because the parties will not have spent time and money litigating. But the parties will be handicapped because they will not have the documents and other information that becomes available during discovery. For this reason, some parties choose to voluntarily exchange critical information, e.g., sales data, very early in a case to enable a more informed mediation. In general, as the parties spend more time and money on litigation they will be less likely to settle. However, certain expensive litigation events, such as expert discovery, summary judgment, and especially trial, may encourage parties to mediate later. Consider your mediation strategy at the beginning of a dispute, and be ready to reconsider your strategy as the case develops.

     Get Authority: Each party must bring to the mediation the person or people who have actual power to decide the case that day, preferably in person. This often include a representative from any insurer who might contribute to a settlement. Most experienced mediators will insist upon this.

     Get it in writing: If a settlement is reached, even if it is partial, that agreement should be reduced to writing and signed by all parties before they leave the mediation session. It is essential that this writing capture the agreed-upon terms, even if the parties contemplate drafting a more detailed agreement later on. It is also essential that this writing be enforceable. An oral agreement, while potentially enforceable, is likely to lead to more litigation, thereby undermining the objective of settling the case.

The majority of cannabis disputes are likely to go to mediation at some point. Making the most out of your mediation can help you get, at least some, satisfaction.

Mediation and arbitration are the two major “alternative dispute resolution” (ADR) techniques used in business disputes. We’ve discussed arbitration in cannabis cases in several previous blog posts, here, here, here, here, and here. Although arbitration gets more attention these days than mediation (see the Supreme Court’s recent arbitration decision), mediation is probably the most commonly used form of ADR in cannabis businesses.

Some basics:

Arbitration is essentially stripped-down litigation, in which a third party lawyer or judge decides issues of fact and law, in a setting that in some cases is less formal and costly than going to court. Both litigation and arbitration are usually binding. Both result in an order than can be enforced like any other court order, e.g., by garnishing the losing party’s assets.

Mediation differs from arbitration in that the mediator cannot require the parties to resolve the dispute. Her role is to help parties work together to find a solution to their problem, that they both can agree on. If mediation is successful, the parties often enter into a written settlement agreement, resolving the dispute.

How mediation works in a cannabis dispute:

For our discussion, imagine a dispute between co-owners of a marijuana dispensary. Hopefully, the owners have a solid operating or shareholder agreement with a dispute resolution clause requiring mediation before litigation can be filed. Even without such a clause, once a dispute arises, the owners can make an on-the-spot agreement to mediate.

The parties must next choose a mediator. In a business dispute, it is important to choose someone who is not only an experienced mediator, but also has experience in the subject matter of the dispute. One of the responsibilities of a mediator is to give each party its real world options if those parties settle, or fail to settle, the dispute. Particularly in a cannabis case, with overlapping local, state and federal laws that are changing sometimes every week, a mediator must have knowledge not only of the applicable laws, but of the business environment.

It is important that the mediator be completely disinterested in the outcome. The mediator’s primary objective is not in benefitting either side, but in settling the dispute, if possible.

Mediating parties are often represented by counsel, although this is not necessary, especially early on in the process. Each party must present the mediator with its version of the facts and what outcome it is seeking. This can be done in written submissions before the mediation, or in oral discussions at the mediation itself. Each party can choose to share their correspondence with the mediator, or not, depending on that party’s mediation strategy.

The mediation will usually take place in a location where each party can have private discussions with the mediator. Once a party has explained its side, the mediator can ask questions, probing areas of agreement or disagreement. A good mediator will not just ferry offers between the parties, but will privately advise each side about its goals and how they can be achieved. A very good mediator will give each side candid advice about the likelihood of success before an arbitrator or a court, and will advise not only on the out of pocket costs but the opportunity costs that occur when a party chooses to spend its time litigating rather than running its business.

Mediations are often set for a single day, although multi-day mediations are common in complicated cases. Once initial information is exchanged, the mediator will work towards a solution that each side can live with, moving back and forth between each party’s room. If a solution is reached, the mediator should put at least the most important points of the solution in writing, and have each party sign the agreement.

If the mediator does not believe that the parties will settle now, she may call off the mediation for the day. She may also ask the parties to agree to meet again to continue the mediation, or to take additional steps, such as exchanging information, before reconvening. It is not uncommon to mediate at several points in the dispute resolution process, as each party gets more information about its own and the other party’s position. It may take several mediations to reach a settlement.

Next week, we will examine how a party can increase its likelihood of success at a mediation. While you can’t always get what you want….

cannabis marijuana josephine county oregon
Josephine County is ALL IN on prohibition.

For the past several months we have been following Josephine County’s efforts to regulate away its cannabis industry, specifically in rural residential zones. This saga has taken many twists and turns (see here, here, here, and here), but this week brought perhaps the biggest twist yet: Josephine County has sued the State of Oregon in a suit that could effectively invalidate its cannabis program.

The legal skirmishes began back in December, when Josephine County passed an ordinance to severely curtail cannabis production on over 16,000 rural residential properties. A group of growers appealed the ordinance to Oregon’s Land Use Board of Appeals (LUBA), raising a procedural argument (improper notice to affected properties) and two substantive arguments (the county cannot ban pre-existing lawful uses and the ordinance exceeds the county’s ability to impose reasonable time, place, and manner regulations on cannabis production). Last month, LUBA ruled against the county, solely on the procedural issue. Josephine County failed to provide proper notice of the public hearings where the ordinance was discussed. As a result, LUBA did not reach the substantive merits. As expected, Josephine County elected to appeal the procedural question.

Surprisingly, Josephine County also decided to take the drastic step of filing a lawsuit against the State of Oregon in federal court. We gave our initial take on this aggressive move in news coverage here and here. In short, Josephine County wants the federal court to:

  1. Declare that cannabis production cannot qualify as a pre-existing “lawful use” because of federal prohibition;
  2. Declare that counties can place any restrictions they want, including a full ban, on cannabis businesses because state legal regimes are pre-empted by federal law;
  3. Declare that Oregon’s medical and recreational regimes unlawfully restrict the county’s police powers in light of federal prohibition;
  4. Enjoin the State from bringing official misconduct charges against any local or county official that ignores their duties under state law.

This is a stunning overreach, as a victory could presumably give counties the ability to even ignore Oregon’s decriminalization statutes. As a county that allegedly wants to crack down on bad actors and the black market, and is apparently struggling to provide basic services, Josephine County should be welcoming law abiding, tax paying cannabis farms with open arms. Instead, I am reminded of my young daughter breaking her own toy when she doesn’t get her way.

This lawsuit raises core constitutional questions, involving states’ rights to promulgate cannabis programs despite the federal Controlled Substances Act, and over the objection of local jurisdictions. In the past, we have seen prohibitionist states attempt to invalidate neighboring states’ cannabis programs, to no avail. This may be the first time, however, that a county in an adult use state has filed such a lawsuit against its sovereign. We will be monitoring this case closely, as will the Oregon cannabis industry at large and other prohibitionist counties nationwide.

Did San Mateo’s new ordinance moot the CEQA issue?

Last month, we blogged about the writ petition brought against the County of San Mateo by petitioners who alleged non-compliance with the California Environmental Quality Act (“CEQA”).

CEQA requires environmental review of discretionary projects to inform the public and government decision makers of the environmental consequences of their decisions. The law must be interpreted in such manner to afford the fullest possible protection to the environment within the reasonable scope of the statutory language. Unless exempted, all discretionary projects must receive environmental review pursuant to CEQA.

Under CEQA, the “lead agency”—the public agency principally responsible for approving a proposed project—is responsible for preparing the environmental documents for a project, including any negative declaration or environmental impact report (EIR). If a project is not exempt from CEQA, the lead agency must prepare an initial study to determine whether the project will have a significant impact on the environment, or skip the initial study and conduct an EIR if it is obvious that an EIR is required.

The County of San Mateo’s challenged ordinance allowed cannabis cultivation subject to ministerial approval of license applications. This means there was no deliberation or discretion involved, and the County could issue licenses over the counter, if an applicant checked all applicable boxes.

As we explained in our last post, the County issued a negative declaration with the challenged ordinance following an initial study, determining that there was not substantial evidence that the ordinance would have a significant effect on the environment. Petitioners disagreed, claiming the record contained substantial evidence supporting myriad arguments that the ordinance would adversely impact hydrology and water quality, sensitive species and habitat, air and light pollution, climate change, and other effects.

Further, as ministerial licenses, each cannabis cultivation project under the challenged ordinance would have been exempt from CEQA and none would require their own environmental analysis. That fact alone seems like an end-run around the law.

At the end of February, petitioners and the County held a settlement conference. Shortly thereafter, the County repealed and replaced their cultivation ordinance with one that subjects each cultivation project to discretionary approval. Now, each cultivation project will be subject to CEQA unless otherwise exempt.

MAUCRSA provides a temporary exemption to CEQA to cities and counties adopting a cannabis ordinance subject to specific conditions.  So long as a city or county ordinance requires discretionary review and approval of permits, licenses, or other authorizations to engage in commercial cannabis activity, and includes any applicable environmental review pursuant to Division 13 of the Public Resources Code, the adoption of the ordinance itself is exempt from CEQA. Bus. & Prof. Code, § 26055(h). This exemption expires July 1, 2019.

Arguably, the County of San Mateo’s new ordinance is exempt from CEQA pursuant to Business and Professions Code section 26055(h), and the petition is moot. There are no future hearings on calendar, but the writ petition is still pending. We will keep you posted on any developments: The viability of San Mateo’s approach could have a significant impact on the approach taken by other local jurisdictions with respect to California marijuana licenses.

marijuana bankruptcy lease
Bankruptcy cases have been hard, when cannabis is involved.

A recent unpublished decision out of the Ninth Circuit Bankruptcy Appellate Panel presents an interesting set of facts and a decision that may leave one questioning which direction the bankruptcy courts might be headed in the era of legalized cannabis. An elderly Nevada resident owned some commercial property at a shopping mall in South Lake Tahoe, and had been leasing it for several years to a medicinal cannabis dispensary (the lease specifically authorized the tenant to operate a “dispensary”). After several years of state-legal operations, an argument arose over an alleged option agreement to purchase the property, and the tenant sued to force a sale of the property. The bank holding the mortgage recorded a default shortly thereafter and began foreclosure proceedings.

The owner then filed for Chapter 13 bankruptcy, which is a form of debt reorganization that allows a debtor to pay creditors on a court-approved payment plan. Her proposed plan called for her to sell off the commercial property occupied by the dispensary but continue renting it in the meantime, so she filed a motion to reject the lease and the option agreement, and proposed a payment plan that included giving the bank rental income from the dispensary. The city also joined in, asking the court to reject the lease on the grounds that the tenant’s permit to operate the dispensary had expired due to the owner’s failure to provide written consent (a good plug for including a landlord cooperation clause in commercial cannabis leases).

The tenant fired back with an interesting approach: he moved to dismiss the bankruptcy petition altogether on the grounds that the owner’s acceptance of his cannabis dispensary’s rent payments violated the federal Controlled Substances Act (CSA). None of the motions were heard, though, because the lower bankruptcy court decided to dismiss the petition on its own, declaring that the owner had “committed a crime” by accepting rent from the dispensary while the bankruptcy case was pending.

On appeal, the bankruptcy appellate panel vacated the lower court’s decision and remanded, because the court had failed to articulate any findings or legal basis justifying the conclusion that the owner was violating the CSA and that violation was grounds for dismissal. The appellate panel in its opinion discussed the importance of establishing knowledge and intent to lease the property for marijuana cultivation in order to prove a CSA violation by an owner, and in turn to use that violation as a basis for rejecting a bankruptcy petition. In sum, the appellate panel highlighted the high bar that a court must clear to be able to use accepting cannabis rents as a reason to deny a property owner’s bankruptcy petition, even were the rents are accepted after the petition was filed.

While the owner’s bankruptcy case may have lived to fight another day, nothing about the case invalidates the CSA or even precludes using it as grounds for dismissing a bankruptcy petition. But the case highlights the ongoing conflict that federal courts are confronting due to the status of state-legal cannabis as being federally illegal. The lesson of the case is nicely framed in the concurring opinion: “With over twenty-five states allowing the medical or recreational use of marijuana, courts increasingly need to address the needs of litigants who are in compliance with state law while not excusing activity that violates federal law.”

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

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

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

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

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

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

(Citations and quotations omitted.)

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

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

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

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

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