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.

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

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

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

Senate Bill 1544  (Marijuana)

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

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

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

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

Senate Bill 1555  (Marijuana)

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

House Bill 4089  (Industrial Hemp)

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

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

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

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

Oregon marijuana josephine
Josephine County’s anti-cannabis ordinance is frozen, for now.

The last few months have been a bit of a whirlwind for cannabis producers in Josephine County, Oregon. Back in September, a coalition of producers stopped a county ordinance targeting farms in rural residential zones that would have drastically increased setback requirements, required the OLCC licensee itself to own the real property, and prohibited any farm from using private roads, easements, or owner-maintained public right-of-ways.

Celebration proved premature, as the county adopted a new ordinance on December 6, 2017 that is arguably worse. The ordinance targets all properties zoned rural residential with more than 12 mature plants and drastically curtails commercial cannabis production. For example, on rural residential lots:

  1. Cannabis production is banned on all lots or parcels of five acres or less.
  2. Cannabis production on lots larger than five acres is limited to an eighth of the size that would otherwise be allowed under OLCC rules.
  3. 100 foot setback are on all sides are required for all structures and grow canopies.
  4. The OLCC licensee must itself own the real property.

Farms hoping to avoid these requirements must have been fully licensed by the OLCC before March 6, 2018 in order to apply for a variance from these regulations.

As expected, earlier this year a group of growers filed suit against the county before Oregon’s Land Use Board of Appeals (“LUBA”). Although LUBA petitions are not easily available, LUBA issued an order on February 5, 2018 that stayed (froze) implementation of the ordinance pending further proceedings, and gives us an insight into the claims raised by the petitioners.

The petitioners were tasked with establishing 1) “a colorable claim of error in the land use decision or limited land use decision under review;” and 2) “that the petitioner[s] will suffer irreparable injury if the stay is not granted.” The petitioner met both thresholds, so let’s see how they did it.

A Colorable Claim of Error

In Thurston Hills Neigh. Assoc. v. City of Springfield, 19 Or LUBA 591 (1990), LUBA stated that the standard to establish a colorable claim of error is “not a demanding standard”. The petitioners do not need to establish they will win on the merits. Rather, they need only show “that the errors alleged are sufficient to result in reversal or remand of the decision if found to be correct.” In fact, in Thurston Hills, LUBA simply looked to whether the petitioner’s claims were “devoid of any legal merit.” In the present case, LUBA found that the petitioners claims have legal merit. Specifically, the petitioners argue:

  1. The ordinance violates 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 does not qualify. Note that this same argument was advanced against a similar ordinance in Jackson County but that LUBA and the Oregon Court of Appeals determined that Jackson County’s ordinance qualified as a reasonable regulation.

Irreparable Injury

Because the “irreparable injury” requires an injury that cannot be compensated adequately in money damages, the petitioners focused primarily on the existing strains and customer goodwill that would disappear if the county succeeds in banning their farms. LUBA easily sided with petitioners on this point, but the question got a bit trickier because the petitioners needed to also show that the county’s conduct was “probable rather than merely threatened or feared” and that “the resulting injury must be probable rather than merely threatened or feared.”

The county argued that these negative effects on petitioners were overblown because the ordinance provided an opportunity for non-compliant properties to obtain a non-conforming use application. The petitioners cleverly noted that the OLCC will likely refuse any license renewals while a licensee is undertaking the non-conforming use process, so even participating in the process itself puts the farms at risk. The court was convinced and issued a stay.

Next Steps and Predictions

The petitioners and the county will advance their arguments at a hearing today, so we will soon find out whether this ordinance qualifies as a “reasonable regulation.” Similar arguments against Jackson County were shot down, but perhaps these petitioners have identified some nuances that will win the day. In this case, with the retroactivity and notice problems identified by the petitioner we feel comfortable putting our money on the growers.

marijuana farm employment Oregon
Getting the pay right is important– and required.

Cannabis producers make up the largest number of Oregon industry licensees. As of the Oregon Liquor Control Commission’s (OLCC) February 15, 2018 report, there are 922 licensed producers and approximately 1100 producer licenses awaiting approval. In comparison, the next largest license category is retail establishments, with a total of 527 approved licenses and approximately 200 awaiting approval. Clearly, licensed marijuana farms are leading the pack.

Cannabis farm workers are sometimes subject to additional statutes, rules, and regulations that do not apply to non-farm workers. For this reason, if you are an Oregon marijuana producer, it is important to be familiar with agricultural rules as well as the OLCC marijuana rules. One especially important area to be aware of is hourly payments for cannabis farm workers. Underpaying farm workers can have disastrous consequences, and overpaying workers simply because you do not understand the rules is a poor business model.

Certain cannabis farm workers are exempt from overtime payment requirements. For example, employees engaged in agricultural work 100 percent of the workweek are exempt from overtime pay requirements. Agricultural work is broadly defined to include farming in all its branches, including, but not limited to the cultivation and tillage of soil, the production cultivation, growing and harvesting of any agricultural or horticultural commodities and any practices performed by a farm or on a farm as an incident to or in conjunction with farming operations. If an employee handles or otherwise works on tasks that are not associated with farming, that employee must be paid over time for any hours worked in excess of 40.

Oregon employers can sometimes also be exempt from paying minimum wage to agriculture employees. Both federal and state laws provide minimum wage exemptions for small farms. A cannabis producer employer must ensure the cannabis farm employee is exempt under both federal and state minimum wage requirements to avoid liability.

Under the federal Fair Labor Standards Act, agricultural employers do not have to pay minimum wage to employees if the employer did not employ more than 500 man-days of agricultural labor in any calendar quarter of the preceding year. A “man-day” is defined as any day during which and employee performs agricultural labor for at least one hour. So for example, if you employed two cannabis farm workers on October 20, 2017 to cultivate plants and each worked a total of 4 hours, that is equivalent to two man-days.

In Oregon, employers do not have to pay minimum wage to agriculture employees if the employer did not employ more than 500 piece-rate work days in any calendar quarter in the preceding year. Piece-rate work is defined as pay calculated on the basis of the quantity of crop harvested. Again, the employee must be exempt under both federal and Oregon minimum wage requirements here.

It is important to accurately classify your cannabis farm workers. Violation of wage and hour laws can come with hefty fines. If you are unsure if your workers are exempt from minimum wage or overtime requirements, have an attorney or other qualified individual review your pay practices, and make sure your employee handbook is in line with current federal, state and local law.

Oregon marijuana cannabis
OLCC audit results were nothing to write home about.

Earlier this month, the Oregon Secretary of State’s office released a formal audit report (“Report”) of the Oregon Liquor Control Commission’s (OLCC) information technology systems as they relate to Oregon’s recreational cannabis regulatory enforcement. The Report, titled “Oregon Liquor Control Commission: Cannabis Information Systems Properly Functioning but Monitoring and Security Enhancements are Needed“, focused on two separate but related issues: 1) the OLCC’s Marijuana Licensing System (MLS) and Cannabis Tracking System (CTS), and 2) general IT security concerns and disaster recovery procedures. The Report and the OLCC’s formal written response (“Response”) paint a picture of an underfunded agency doing its best to establish appropriate procedures and processes in the face of a unique emerging marketplace, unexpected demand for licenses, strict statutory deadlines, an an ever-changing regulatory framework. It is also apparent that the Secretary of State and the OLCC worked well together during the audit process, as each party complements the other on transparency, professionalism, and common courtesy.

The audit was initiated to determine whether:

  • the OLCC has sufficient technical controls in place to ensure that the MLS and CTS are supporting effective regulation of the recreational cannabis industry; and
  • the OLCC has implemented sufficient security procedures to protect against known technical and physical threats.

Today we will focus only on issues raised relating to the MLS and CTS.

Marijuana Licensing System (MLS) and Cannabis Tracking System (CTS)

The Report and the Response provide an interesting look at how these two independent but related systems came to exist. When Oregon passed Measure 91 and then HB 3400 (2015), the OLCC was charged with creating and enforcing a regulatory framework for an entirely new industry with tight deadlines and insufficient resources. The OLCC reasonably decided that the only practical solution was to hire third-party contractors to provide Software as a Service (SaaS) solutions. The OLCC hired the company that created Colorado’s seed-to-sale tracking system to customize Colorado’s system to serve Oregon’s needs, resulting in the CTS, an online portal that allows OLCC licensees to input data about harvests, sales, etc. The OLCC hired a separate company to create its license application and renewal software, the MLS.

After hiring these vendors, OLCC was forced to repeatedly overhaul these systems in response to extensive legislative rewrites to the recreational program in 2015, 2016, and 2017. In recognition of these difficulties, the OLCC requested funding for a full time Chief Information Officer in the 2017 legislative session, but was denied. The Report and the Response both highlight the importance of filling this position, and the OLCC will be asking for additional funding from the legislature again this session.

In a nutshell, the CTS is Oregon’s licensee portal where licensees are required to self-report information about inventory, transfers and sales. The MLS is the OLCC’s online system for tracking license applications and licensee status.

We identified several weaknesses associated with OLCC’s new IT systems used for marijuana licensing and tracking. They include data integrity and maturity issues, and insufficient processes for managing marijuana computer programs and vendors. Until these issues are resolved, the agency may not be able to detect noncompliance or illegal activity occurring in the recreational marijuana program. – The Report

The Report identifies five general weaknesses in the CTS and related enforcement:

  1. the CTS relies on self-reported data that is inherently susceptible to inaccuracies;
  2. the CTS allows users to enter measurements in either metric or imperial resulting in additional errors;
  3. existing licensees are potentially abusing a policy that allows new licensees to introduce cannabis into the recreational regime from any source;
  4. inadequate data quality hampers the OLCC’s ability to monitor the Oregon market as a whole;
  5. the OLCC lacks sufficient trained staff for regular on-site inspections.

Even with the additional staff, OLCC may not be able to ensure an appropriate amount of scrutiny for marijuana businesses. Both Alaska and Nevada have approximately one inspector for every 18 recreational marijuana licenses. Currently, Oregon only has one inspector position for every 83 recreational marijuana licenses. – The Report

The Report also notes that the OLCC doesn’t take sufficient steps to monitor their third-party SaaS providers, has inadvertently stored test data in the active MLS database, and has insufficient controls over user accounts. Finally, the Report notes that the MLS and CTS are not set up to automatically update each other. For example, a licensee with revoked status in MLS could still have active status in CTS.

In its Response, the OLCC generally agrees with all of the Report’s findings and states that, subject to obtaining additional funding from the legislature, it will work diligently to implement the Report’s recommendations. The OLCC refers to the MLS and CTS as “state-of-the-art imperfection” and notes that while issues exist, the CTS system has already identified thousands of discrepancies that have led to investigative and enforcement actions, and that even bad data is meaningful.

Citizens and policy makers need to know that as important as the issues identified in this audit are, the OLCC is not dependent on the CTS system alone to identify licensees that are attempting to use the state system as a cover for diversion. The CTS system is one fundamental tool for successful enforcement and compliance . . . the audit recommendations focus on improving the overall effectiveness of the system which the audit acknowledges is properly functioning. – The Response

The take away here is that the CTS system is not broken. It is currently helping to limit diversion and promote public safety, but like any system, it can and should be improved. On the whole, the public and licensees should expect that the OLCC will be implementing regular, random on-site inspections to support the CTS, and refining the CTS system to eliminate opportunities for confusion or deliberate deception. Hopefully the legislature will recognize the importance of a robust and technically effective OLCC to the industry as a whole, and will provide the OLCC with sufficient funding to retrofit its systems and hire a Chief Information Officer.

oregon cannabis processor
Licensees and employees only: them’s the rules!

Our Oregon marijuana processor clients often approach us with requests to draft agreements that will allow third-parties to process cannabis in the client’s licensed premises. Typically, the processor is not operating at capacity and would like to supplement income by charging fees to keep the premises open around the clock. Previously, we have explained that this arrangement only really works if the third-party is also a licensed OLCC processor, pursuant to Oregon’s new alternating proprietor rules (OAR 845-025-3255). However, we are most often approached with proposals to have non-licensee third-parties enter the kitchen and physically create cannabis products that will be owned and sold by the licensee.

Here is a more concrete example: Kelly’s Kitchen is an Oregon Liquor Control Commission (OLCC) licensed processor. Kelly meets Cindy, who has developed a recipe, labels, and packaging. Cindy doesn’t want to go through the OLCC application process, she just wants to make her Bud Brownies. Kelly invites Cindy to personally make her brownies on Kelly’s property, and Kelly agrees pay Cindy for each unit sold. The prevalence of these arrangements suggests that the industry has been treating this as a grey area. However, we recently reached out to the OLCC and received confirmation that this is black and white: The OLCC will view Cindy as illegally processing cannabis without a license, even if Kelly always retains ownership of the cannabis and resulting product. This arrangement can also put Kelly’s license at risk. No arrangement that allows non-licensees to personally process cannabis within a licensed premises is allowed under the rules.

The OLCC’s view should not come as a surprise when you consider the significant restrictions in the new alternating proprietor rule that allows multiple OLCC licensed processors to share kitchen space:

  • The kitchen must have a pre-approved schedule posted on its front door showing when each processor will be using the kitchen.
  • The kitchen must have a separate secure area for each processor to store its cannabis products.
  • Any concentrates produced under an alternating proprietor arrangement can only be used within that processor’s edibles or topicals.

In effect, Cindy and Kelly are trying to bypass these restrictions, and the processor licensing regime as a whole.

The only viable alternative to alternating licensed proprietors appears to be a standard intellectual property licensing agreement, whereby Cindy would license her recipe, branding, and packaging to Kelly as co-packer. Kelly or her employees then process the brownies and sell them retailers or wholesalers without Cindy’s involvement. Cindy will likely expect to be paid based on the number of brownies that Kelly manages to sell. However, anyone considering this arrangement needs to carefully look at the OLCC’s financial interest disclosure requirements.

The definition of financial interest is fairly broad and includes anyone “having an interest in the [licensed] business such that the performance of the business causes, or is capable of causing, [an individual or entity] to benefit or suffer financially.” The OLCC will view Cindy as a financial interest holder because her compensation depends on Kelly’s success in moving the product. This isn’t the end of the world, but it does mean that Kelly must submit a Change in Financial Interest form and receive approval from the OLCC before Kelly begins making Cindy’s brownies. All this means is that Cindy will likely need to be fingerprinted and pass a background check.

We expect that we will continue to be approached by clients that want to invite non-licensees into their licensed premises to make products, but now we can confidently say that this common industry practice violates OLCC rules. Be warned!

Oregon RICO marijuana
This is not the racketeer you’re looking for.

In this series (Part 1, Part 2, and Part 3) we have been looking at two RICO cases filed in District Court in Oregon against cannabis producers. The first, McCart v. Beddow, appears to have settled pursuant to a confidential settlement agreement. The second, Ainsworth et. al. v. Owenby et. al., is just getting started. The common thread here is that the pro se (self-represented) plaintiff in McCart v. Beddow, is an attorney who is now representing the plaintiffs in Ainsworth.

Due to this common thread, we think we can draw some likely conclusions about the contents of the confidential McCart settlement from the issues raised in the Ainsworth complaintNote that the Ainsworth complaint was filed just about two months after the McCart defendants filed their motions to dismiss. As discussed below, it is clear that the Ainsworth complaint learned some valuable lessons from the motions to dismiss. Let’s engage in a bit of idle speculation:

Dispensaries can breathe a sigh of relief.

The McCart lawsuit named each and every OLCC licensed retailer that purchased the defendant farm’s product. In sharp contrast, the Ainsworth complaint doesn’t name any such “dispensary defendants.” Given that one of the goals of these RICO cases is to get a windfall under RICO’s treble damages clause, it is probably safe to assume that the McCart dispensary defendants didn’t end up being a pot of gold at the end of the RICO rainbow. Perhaps the attorney now agrees with our initial assessment: “It seems unlikely the Dispensary Defendants in this case had anything to do with operating or managing the enterprise. They appear to have merely been customers, in which case they shouldn’t have liability here.” This suggests that dispensaries are unlikely to be targets of future RICO suits based on the conduct of their suppliers.

The protections of ORS 30.936 (Right to Farm Act) played an important role in the McCart settlement negotiations.

As we explained in a previous entry in this series:

“ORS 30.936(1) . . . provides farmers in farming areas with immunity from suit for any trespass or nuisance claims, defined elsewhere as claims ‘based on noise, vibration, odors, smoke, dust, mist from irrigation, use of pesticides and use of crop production substances.’ Since RICO case law suggests that harms to property interests should be determined by state law, plaintiffs’ diminution of value claims are likely dead on arrival.”

The Ainsworth complaint takes pains to avoid the protections of 30.936. For example, paragraph 91 reads:

“Defendants are not entitled to ‘right to farm’ immunity pursuant to ORS 30.936 because Defendants’ use of the [Defendant] Property does not comply with applicable laws. For example, the [Defendant] Property is zoned ‘rural residential’ and therefore Defendants’ use of the [Defendant] property to produce and process marijuana commercially violates Linn County Ordinance 940.400(A) and 940.500(A).”

Plaintiffs are correct that Ordinances 940.400 and 940.500 appear to bar marijuana production on the Defendants’ property, but that only suggests that Defendants must have been grandfathered in when Chapter 940 (Marijuana Code) was adopted. Otherwise, they presumably would not have been able to receive state authorization to cultivate cannabis. If the Defendants’ use was grandfathered in, then the Ainsworth trespass and nuisance claims should still be barred by ORS 30.937, which extends the farming immunity to any “preexisting nonconforming use” as a farm.

Lessons Learned

Like with the McCart complaint, we can also analyze the Ainsworth complaint to draw some broader lessons for cannabis businesses that want to avoid similar lawsuits.

As quick reminder, we identified two initial lessons from the allegations in the McCart case:

  • Don’t be a jerk.
  • Control the odors.

Taking the allegations at face value, the Ainsworth defendants violated both of these rules. Like in McCart, there are (as yet unsubstantiated) allegations of harassment (although much less severe than in McCart). Also as in McCart, a major sticking point for the Ainsworth plaintiffs is the “unmistakeable skunk-like stench” that “pervades” the neighborhood, “stagnates” in the Plaintiffs’ yards, and “completely overpowers the gentle and pleasant scents of [one of] the [Plaintiffs’] flower gardens.” These lessons still clearly apply: Be a good neighbor, and control the odors.

We can pull a few new lessons from the Ainsworth complaint:

  • Avoid smoke. The Ainsworth complaint alleges that the Defendants regularly burned cannabis debris in their yard, causing smoke to trespass onto their neighbors’ property. Producers seeking to avoid similar lawsuits should think twice before lighting bonfires.
  • Limit noise. The Ainsworth plaintiffs complain of the noise caused by the industrial fans in the defendants’ greenhouses. Producers would be wise to take any reasonable steps to limit noise pollution.
  • Try to limit traffic. Both McCart and Ainsworth complained about the increased traffic caused by the cannabis farm at all hours of the night. It seems the ideal farm will have direct access to a major road instead of access through residential roads. Barring that, producers should at least try to limit after-hours traffic.
  • Don’t live next to a county commissioner. One of the plaintiffs is Linn County Commissioner John Lindsey. One would expect that Mr. Lindsey will recuse himself from any future attempts to rewrite Linn County’s cannabis ordinances.

The Ainsworth defendants have only recently lawyered up, so it may be a few weeks before we can see their answer to these charges. We’ll keep you updated.

marijuana oregon cananbis
Follow the rules or risk having to close your doors–permanently.

Recreational cannabis is highly regulated. In Oregon, the Oregon Liquor Control Commission (OLCC) is the agency tasked with implementing and enforcing the recreational cannabis rules. The rules are complex and frequently change (see posts on that here, here, here, and here) meaning compliance can be difficult even with the best of intentions. For that reason, marijuana businesses should set up a comprehensive compliance plan to avoid violating OLCC rules. But what happens when a rule is violated?

When the OLCC determines a cannabis business or its employee has violated a rule, it issues what is known as a “charging document.” The charging document will list what rule has been violated and the penalty the OLCC plans to assess. The rules identify six categories of violations. The categories identify different levels of egregiousness and the OLCC, while not required to assess a penalty, has adopted guidelines for the kinds of penalties cannabis businesses can expect:

Category I: These are considered the most egregious violation and can result in license revocation. These violations include things like failure to verify the age of a minor, intentional false statements made to the OLCC, or intentional destruction or concealment of evidence

Category II: These are violations that create a present threat to public health or safety and include things such as being under the influence of intoxicants while on duty or failure to permit a premises inspection. These violations can result in a 30 day suspicion of a license or up to $4950 penalty.

Category II(b): This is a special category reserved for the unintentional sale of marijuana to a minor. It results in either a 30 day license suspension or up to $4950 penalty.

Category III: These violations create a potential threat to public health or safety and include things such as allowing a minor to enter a prohibited area or permitting sales by an employee without a marijuana workers’ permit. Category III Violations can result in a 10 day suspension or a $1650 fine.

Category IV: These violations create a climate conducive to abuses associated with the sale or manufacture of marijuana items and include operating a business after lawful hours for the sale of marijuana or removal of required signs and notices. These violations can result in a 7 day suspension or a $1115 penalty.

Category V: These are the least egregious violations and include things such as permitting marijuana items to be given as a prize or failure to notify the commissions of temporary closure of a licensed business. Category V violations can result in a 3 day suspension or up to a $495 penalty.

The OLCC determines the proper sanction by taking into account the egregiousness of the violation, the number of violations in the past two years, and any mitigating factors. Mitigating factors include: (1) making a good faith effort to prevent a violation and (2) extraordinary cooperation in the violation investigation, demonstrating the licensee or permittee accepts responsibility.

If you ever receive an OLCC charging document, it is important to understand that the inquiry has only just begun. The OLCC charging document is not a final finding. The business has the opportunity to contest the charging document and request an administrative hearing. If the charging document alleges a category I or a category II violation, a written answer must be filed along with the request for hearing. The written answer requires more than just a general denial and should specify specific defenses to the allegation in the charging document. It is absolutely critical to make this submission timely, and to be comprehensive and persuasive in reply.

Contested case hearings are similar to trials but not quite as formal. The parties are allowed to be represented by attorneys. Evidence can be submitted and witnesses can be called to the stand. Administrative law judges (ALJs) preside over the contested case hearing. After the hearing is completed, the ALJ will issue a proposed order. The proposed order will include a evidentiary background and findings about whether the cannabis business has violated a rule. The OLCC will review and issue a final order. The final order either adopting the ALJ’s findings or rejecting the findings. The cannabis business can appeal the final order to the Court of Appeals. The final order will include information regarding appeal procedures and timelines.

Rule violations can and do occur. Cannabis businesses should have comprehensive plans in place to stay in compliance at all times. When a rule violation does occur, know that qualified attorneys can help you navigate the administrative hearing process.

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

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

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

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

Senate Bill 1544

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

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

Senate Bill 1555

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

House Bill 4110

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

HB 4089

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

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

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

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

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

hemp oregonIn the three previous entires to this series (here, here, and here), we have discussed the major changes in the packet of rules amendments that the OLCC adopted at the end of 2017. Those changes cover promotional events, lender disclosures, and canopy size changes for marijuana grows. Today, we want to talk about the new rules for industrial hemp.

Industrial hemp regulation has been going through a series of rapid shifts since 2016, when the Oregon legislature adopted a two-tier system that allowed for the registration of industrial hemp growers (producers) and handlers (processors). At the time, only hemp handlers could sell industrial hemp products. This changed last year, when Governor Kate Brown signed into law SB 1015, which allows industrial hemp to enter into the recreational cannabis supply line.

Just before the new year, the OLCC adopted amendments to its administrative rules on cannabis that implemented SB 1015, providing much needed guidance on the new hemp regime. First and foremost, the term “industrial hemp” refers to any cannabis plants with a THC concentration below 0.3 percent, mirroring the definition under federal law. Hemp growers and handlers can apply to the OLCC for an industrial hemp certificate ($500 per year, plus a $250 application fee) to transfer hemp to recreational processors, and handlers can also receive a certificate to transfer their hemp concentrates and hemp extracts to recreational processors.

In turn, recreational processors can apply for a special “endorsement” that will allow them to accept hemp and hemp products from the handlers and growers, create hemp concentrates or extracts with a THC concentration below 5 percent, incorporate hemp concentrates or extracts into “marijuana items,” and sell those products to other OLCC processors, wholesalers, and retailers. OLCC retailers can then turn around and sell these hemp-based products to Oregon consumers.

None of this answers the question that we receive most often from industrial hemp producers: “Can I sell my industrial hemp products outside of Oregon?” It goes without saying that OLCC retailers must sell locally, so any hemp products transferred into the recreational supply chain can only be sold in Oregon. Hemp outside of the recreational chain is regulated by the Oregon Department of Agriculture (ODA). The ODA’s rules are surprisingly wide open when it comes to the sale of industrial hemp products. Under OAR 603-048-0100, a hemp handler can sell hemp products “to any person.” The ODA’s rules make no reference to whether that sale must occur in Oregon.

While interstate sales of hemp products may be legal in Oregon in certain circumstances, federal law on the issue is anything but clear. The DEA has taken the position that any concentrate or extract derived from the flower, leaves, or resin of any plant of the cannabis family, regardless of relative THC concentration, is a prohibited Schedule I drug. In contrast, the mature stalks of such a plant and fiber from such stalks, as well as oils or cake derived from hemp seeds or stalks are not included in the federal definition of marijuana, and are not subject to federal prohibition. There is currently a lawsuit pending before the Ninth Circuit Court of Appeals that challenges the DEA’s position, and we can hope that the court will provide a bit of guidance in this area. For now, we still advise our clients to keep their products in Oregon.

Note: Portions of this post were originally published in the Portland Mercury and are republished here with permission.