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.

Oregon Josephine County marijuana
Josephine County skipped a step.

In the past six months, we have closely followed the efforts of Josephine County, Oregon, to ban cannabis farming in its rural residential 5 (RR-5) zone (see our coverage here and here). Just last week we mentioned that a coalition of local growers (“Petitioners”) challenging the local ordinance finally had their day in court, presenting their case to Oregon’s Land Use Board of Appeals (“LUBA”). In brief, the challenged ordinance, adopted in December, banned marijuana production on RR-5 lots smaller than five acres, and seriously curtailed production on larger lots. The Petitioners challenged the ordinance on three grounds, alleging:

  1. The ordinance violated ORS 215.130(5) because it does not allow farms operating at the time the ordinance was adopted to continue operating. (ORS 215.130(5) essentially prohibits a county from adopting an ordinance that retroactively bans existing lawful uses.)
  2. The county failed to give mandatory notices to the owners of any properties that would be limited or prohibited from any previously allowed uses.
  3. Local jurisdictions are only allowed to place “reasonable regulations” on commercial cannabis production, and this ordinance did not qualify.

Yesterday, LUBA issued its opinion in favor of the Petitioners, and sent the County back to square one on the ordinance. The Petitioners deserve a hearty congratulations, but the fight is far from over. This is because LUBA kicked the case back to the County after determining that the County failed to provide the mandatory pre-hearing notices required for any proposed zoning change. As a result, LUBA did not reach the merits of whether 1) the ordinance violated ORS 215.130(5) because of its retroactive application or 2) whether the ordinance went beyond the County’s right to impose “reasonable regulations” on cannabis production. LUBA simply found that the County acted without the required public input.

By kicking the case for a procedural error, LUBA left the door open for the County to continue to pursue this or a similar ordinance. That isn’t to say that the County is going to have an easy time of it. LUBA’s Opinion requires the County to comply with the notice requirements and hold at least one more public hearing. This is no easy feat, as the County will need to issue individual written notice, by mail, to the owners of all 16,000 RR-5 lots.

Although public scrutiny will no doubt increase, we expect the County to continue to push forward in its misguided attempt to regulate away its fledging cannabis industry, as well as all the taxes and jobs that will go with it. In a County that has struggled to provide even basic services following the timber revenue dive, that seems like a shame.

marijuana prohibition
“Cannabis will eventually be legalized nationwide, but it is a lot more likely to occur in voting booths than in a court.” – Canna Law Blog, Jul 26, 2017

We’ve written extensively on a federal lawsuit filed by five plaintiffs against Attorney General Jeff Sessions challenging the constitutionality of the federal government’s continued classification of cannabis as a Schedule 1 drug under the Controlled Substances Act (CSA) (here, here, and here). While we were cautiously hopeful, the Judge dashed those hopes yesterday when he granted the government’s motion to dismiss the case, styled as Marvin Washington et. al. v. Jefferson Beauregard Sessions, III, et al.

In a nutshell, the plaintiffs sought a ruling that the continued classification of cannabis has no rational basis because cannabis clearly has a medical use. (Recall that the standard for Schedule I includes “no currently accepted medical use in treatment”). Although this is certainly true, it was not enough to win the day due to a few insurmountable and incredibly frustrating procedural hurdles.

Exhaustion of Administrative Remedies

Generally, parties must exhaust available administrative remedies before they can seek relief in federal court. The Judge found that these plaintiffs failed to exhaust an available remedy under the CSA: Interested parties can petition the DEA to reclassify drugs after an on the record hearing. 21 USC Section 811(a). If the parties receive an adverse ruling, they can seek judicial review of the DEA’s determination in an appropriate state circuit court.

Because the plaintiffs failed to follow this administrative procedure, the Court determined that dismissal was warranted.

Precedent Requires Dismissal

Although the case was dismissed for failure to exhaust, the Judge’s order states that “[e]ven if the Court were to reach the merits of plaintiffs’ rational basis claim, I would be bound by precedent to reject it.” The Judge then notes that the Second Circuit has upheld the constitutionality of the CSA, which is binding on the Judge, as has every other court that has reviewed it.

The Judge states that “[e]ven without the benefit of precedent, it is clear that Congress has a rational basis for classifying marijuana in Schedule I, and executive officers in different administrations have consistently retained its placement there.” In other words, because of potential harm caused by cannabis consumption, it can’t be said that Congress’ initial decision to classify cannabis as Schedule I was irrational at the time.

Classification Cannot be Unconstitutional if there Remains an Administrative Option to Modify Classification

Tying back to the exhaustion of remedies issue, the Court further explains that “any constitutional rigidity is overcome by granting the Attorney General, through a designated agent [the DEA], the authority to reclassify a drug according to evidence before it and based on the [Schedule I criteria]. There can be no complaint of constitutional error when such a process is designed to provide a safety valve of this kind.”

It must be incredibly frustrating for these plaintiffs, as the Judge at the hearing and in the order to dismiss recognized that cannabis has an accepted medical use. How then, can it remain as a Schedule I drug which requires a “high potential for abuse, no currently accepted medical use in treatment, and a lack of accepted safety for use of the drug under medical supervision”? Unfortunately, this Judge believes his hands are tied.

The Equal Protection Claim Based on Racial Animus was Also Dismissed

In connection with this lawsuit, the Cannabis Cultural Association (CCA), brought claims on behalf of its members that the scheduling of cannabis violates the Equal Protection Clause because it was passed with racial animus. The Judge also dismissed this claim on procedural grounds, holding that the CCA and its members did not have standing to bring this claim because a favorable decision was unlikely to redress the CCA members’ injuries, which were based on the negative effects of previous cannabis convictions. These plaintiffs failed to establish that a favorable decision would undo their prior convictions.

In looking at the merits, the Judge also found insufficient evidence that Congress originally included cannabis as a Schedule I drug because of racial animus. Although the plaintiffs pointed to numerous statements made by the Nixon administration to that effect (see here for a particularly egregious example), the Judge said that these statements would not support a finding that Congress acted with discriminatory intent.

As we said when this case was filed, “though it will be interesting to watch this lawsuit proceed, it seems unlikely it will be the vehicle that finally ends federal prohibition. Cannabis will eventually be legalized nationwide (we see that happening within five years), but it is a lot more likely to occur in voting booths than in a court.” So get out there, vote, and hold your representatives accountable. Congress has to act.

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

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

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

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

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

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

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

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

audit marijuana cannabis
Can your cannabis business survive state scrutiny?

Like all business, cannabis businesses are subject to audit by state taxing authorities and other agencies. These audits tend to proceed differently with cannabis business, though, given the unique regulatory approach states take with marijuana. If a regulatory audit turns up issues, then fines and even loss of your business’s license could follow. This post outlines the top issues in preparing for, and managing, a regulatory audit of your cannabis business.

Plan Ahead

Every state with a regulated cannabis market has specific record keeping requirements.  Prepare for future audits by keeping meticulous records. Like other businesses, a marijuana business must keep detailed records regarding all aspects of the business including: sales, inventory management, purchases, taxes, employment, environmental compliance, legal and transportation. Unlike other businesses, a cannabis business is required to keep all source documentation. For example, purchases of goods and services must not only be supported by master goods and service contracts, but transaction level invoices; bank statements must include check and deposit slip detail.  When in doubt, keep as much detail as possible.

As stated HERE and HERE, it is wise to conduct periodic self-audits to identify any weakness in record keeping or any other compliance issues. Self-audits allow a cannabis business to address issues as early as possible. Self-audits also assist a business is constantly improving not only its regulatory compliance but improving customer service and profitability.

Each state differs in how long records must be maintained. Washington requires that records be archived for three years while California requires records be archived for seven years.  However long a state requires a cannabis business to archive records, it is a best practice to archive records in electronic format where possible, alongside retention of hard copy data.

Don’t Panic

Cannabis regulators will notify you by letter that your cannabis business is under audit. Included with that letter will be a list of records to provide. All states with regulated cannabis markets have wide latitude to inspect records and your physical business location. For example, Washington regulations require a cannabis business to archive a wide variety of documents and mandate that such records “must be made available for inspection if requested by an employee of the WSLCB.” In general, a cannabis business will have no standing to challenge a cannabis regulatory agency right to demand and to inspect records. Your time and money will be best spent gathering the records requested.

Typically, records must be produced in a very short time frame, so a cannabis business should immediately begin to gather the documents requested. Typically, information must be requested from CPA’s bookkeepers and attorneys, so give your business as much time as possible to get this information.

Disclosure and Truthfulness

Most states have strict sanctions for a cannabis business that fails to provide documents to the regulators. For example, a determination of a failure to provide documents in the State of Washington will result in the cancellation of a license. As expected, most states have strict sanctions for misrepresentations of fact to cannabis regulators. Again, a determination that a cannabis business has misrepresented facts will result in the cancellation of a license. A cannabis business must be aware that every document provided and statement made to the regulators is “on-the-record”. A cannabis business should never speculate or guess in responding to inquiries made by the regulators.

Understand the Appeal Process and Your Rights

Although your cannabis business has an affirmative duty to provide accurate information to the regulators, you do have legal rights and protections.

If the enforcement officer identifies a potential violation, the enforcement officer must follow a specific notice procedure. In Washington, the enforcement officer must issue an Administrative Violation Notice (AVN) and deliver the notice to the cannabis business, or the businesses agent or employee.

The AVN must include:

  • A narrative description of alleged violations;
  • The dates of violations;
  • A copy of the relevant statutes or regulations;
  • An outline of the licensee’s options;
  • Identify the recommended penalty; and
  • Identify any aggravating or mitigating circumstances adjusting the penalty.

Requesting a Stay

If the regulators suspend a license, the licensee must promptly initiate an adjudicative proceeding before an Administrative Law Judge assigned by the Washington office of Administrative Hearings. A hearing must be held within 90 days of the date of suspension.

In Washington, a cannabis business must petition for a stay of suspension within 15 days of service of the suspension order.  A hearing must be conducted within 14 days from receipt of the filing of the petition for stay.

Other Remedies

A Washington cannabis business has 20 days from receipt of the AVN to:

  • Accept the recommended penalty; or,
  • Request a settlement conference; or,
  • Request an administrative hearing;

Missing this key 20-day period will result in a range of sanctions from penalties to revocation of the cannabis business license.

One of the key tactical decisions is whether to request a settlement conference or to move directly to requesting an administrative hearing. Although a settlement conference offers an opportunity to resolve issues in a more informal manner, there may be instances where moving directly to an administrative hearing is wise. This tactical decision should be considered carefully in consultation with counsel, and is highly dependent on the facts and circumstances of each case.

Conclusion

Although a regulatory audit is intimidating, your cannabis business can best prepare for such an audit by aggressively implementing best practices, performing internal compliance audits, and keeping meticulous records. Remember, states that have legalized adult cannabis use, such as Washington, are under scrutiny by the federal government. Increased federal scrutiny puts pressure on states to enforce their local cannabis laws, and a key part of such enforcement is through regulatory audits. For all of these reasons, your cannabis business would be wise to plan for an audit by state regulators.

marijuana RICOWe’ve previously discussed several civil cases in Oregon where private parties sought to shut down cannabis grow operations under RICO (Racketeer Influenced and Corrupt Organizations Act), claiming that the grow was part of a criminal conspiracy that would drive down property values (see our RICO series here, herehere and here).

Today, we have an update on two marijuana RICO cases elsewhere the country, one in Colorado, and the other in Massachusetts.

Colorado: In a previous post, we discussed Safe Streets Alliance v. Alternative Holistic Healing, LLC, a case from Colorado. This case is notable because the 10th Circuit Court of Appeals has already issued an opinion addressing several key legal issues, giving the litigants the go-ahead to try their case. In dicta, the 10th Circuit noted that at trial, it was possible that a judge or jury would determine that the plaintiff’s land was actually more valuable because of its suitability for cannabis cultivation. Although the 10th Circuit’s opinion only technically applies in the states of Colorado, Kansas, New Mexico, Oklahoma, Utah and Wyoming, other trial and appellate courts will consider the opinion as “persuasive” authority, in other RICO cases.

This case is now scheduled for trial beginning in late August 2018. Assuming this case does not settle, and regardless of the verdict, the result will likely have far-reaching impact on potential RICO actions nationwide. As to the trial itself, many issues will be raised, from admissibility of evidence to expert testimony. One or more of those issues will likely be appealed again to the 10th Circuit. Future litigants are likely to use the trial record as a guide to bringing and defending these RICO cases.

Massachusetts: In Crimson Galeria v. Healthy Pharms, the plaintiff, a Harvard Square property owner, claims that Healthy Pharms, a neighbor and prospective cannabis operation, will diminish the value of plaintiffs’ property. As claimed in the lawsuit, “amongst other matters, marijuana businesses make bad neighbors, which include without limitation, emitting pungent odors, attracting undesirable visitors, increasing criminal activity, driving down property values, and limiting the rental of premises.” As with the Safe Streets case, one wonders whether suitability for cannabis sale actually increases the value of the land.

The lawsuit also alleges that local and state government agencies, including the state Department of Public Health and the city of Cambridge are “facilitating and encouraging violations of the federal drug laws by licensing and permitting marijuana businesses.” One of the plaintiffs’ claims is that the federal Controlled Substance Act (CSA) “preempts the practice of state and local officials in Massachusetts of issuing licenses to operate marijuana businesses.” The 10th Circuit addressed similar preemption arguments, ultimately finding that the plaintiffs had no claims on which relief could be granted. But Massachusetts is in the 1st Circuit Court of Appeals, and the 1st Circuit judges will not be bound by the Safe Streets opinion (although they almost certainly will consider it).

It is at least theoretically possible that the 1st Circuit could find differently than the 10th Circuit, causing a circuit split that would have to be decided by the U.S. Supreme Court. That would be a doozy.