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industrial hemp CBD legal

As CBD and hemp continue to grow in popularity we are receiving an increasing number of calls and emails from companies that want to distribute hemp across the country. We have written about the legality of hemp and CBD under federal law:

This post focuses on another topic: state law on CBD and Industrial Hemp.

The 2014 Farm Bill grants states the authority to regulate Industrial Hemp, which contains less than .3%  THC on a dry weight basis, through an Agricultural Pilot Program. The Farm Bill also requires that Industrial Hemp is overseen by a state’s department of agriculture. The Farm Bill is light on additional details and states have taken different approaches to regulating Industrial Hemp and CBD derived from Industrial Hemp.

Colorado cemented its place in history as a cannabis pioneer by legalizing marijuana in 2012 along with Washington. Colorado’s hemp credentials are also solid as it has dedicated more acreage to the cultivation of hemp than any other state. Cultivators are permitted to sell hemp to the public. Colorado does not oversee the processing of hemp though which makes the extraction process largely unregulated.

Unlike Colorado, Oregon regulates both the production and processing of Industrial Hemp. Oregon’s Department of Agriculture (ODA) oversees the state’s industrial hemp program. “Growers” must register with the ODA in order to produce Industrial Hemp and “Handlers” must register to process Industrial Hemp. Oregon differs from Colorado in that it does not permit its Growers to sell Industrial Hemp directly to the public. Conversely, Handlers are permitted to sell Industrial Hemp to any person. Growers and Handlers may also sell their products to licensed recreational marijuana businesses giving them access the state’s recreational marijuana market. Growers and Handlers can apply to the Oregon Liquor Control Commission (OLCC) for an Industrial Hemp certificate to transfer hemp to recreational processors. OLCC retailers can then turn around and sell these hemp-based products to Oregon consumers.

Washington recently passed a law that sets up a similar structure. You can read about this law here, as we covered it a few months ago when it was still a proposed  bill. Washington’s licensed processors will soon be allowed to use additives derived from hemp-based products that were grown outside of its licensed marijuana system. These additives may come from Washington’s own Industrial Hemp program, which has been stalled for the last few years due to budget issues, or from Industrial Hemp sourced from other sources.

California has followed a similar path to Washington in that its hemp program has failed to launch in a meaningful way. Part of the hold up has been that California requires that Industrial Hemp only be grown by those on the list of approved hemp seed cultivars. That list includes only hemp seed cultivars certified on or before January 1, 2013. Industrial hemp may only be grown as a densely planted fiber or oilseed crop, or both, in minimum acreages. Growers of industrial hemp and seed breeders must register with the county agricultural commissioner and pay a registration and/or renewal fee. We wrote about proposed changes to California’s program here.

Michigan‘s office of Licensing and Regulatory Affairs (LARA) recently issued an Advisory Bulletin that only permits the sale of CBD in licensed medical marijuana dispensaries. The Bulletin first states that CBD cannot be found in portions of the cannabis plant that fall outside the state’s definition of “marihuana” (i.e., the mature stalks, seeds incapable of germination, fiber from stalks, oil or cake made from seeds or other derivatives of the mature stalks) other than in trace amounts. The Bulletin goes onto state that Michigan’s Industrial Hemp program does not authorize the “sale or transfer” of Industrial Hemp.

This is significant as it means that CBD derived from Industrial Hemp cannot be sold and that CBD derived from marijuana can only be sold in dispensaries. The Bulletin also seems to include Industrial Hemp from other states as it concludes with the following:

Any possession or transfer of industrial hemp – or any product claimed to be “hemp”-related – must be done in compliance with Michigan’s Industrial Hemp Research Act.

The bottom line in Michigan is that to sell CBD in that state, whether from marijuana or hemp, you need to go through a dispensary.

Also keep in mind that some states do not regulate Industrial Hemp at all. This should not be interpreted to mean that they will turn a blind eye to hemp products distributed within their borders. Other states, regulate CBD specifically, which can be found in Industrial Hemp, and those states limit the use of CBD to patients who have received an authorization from a physician for its medical use.

If you want to distribute Industrial Hemp across the country it is not as simple as making sure that you have a licensed cultivator. Sure, you need to know the laws of the state in which you are sourcing hemp, but that’s not enough. You need to also consider the legal landscape of the places you intend to ship and sell Industrial Hemp products.

washington cannabis license

As of April 1, 2018, Washington marijuana processors are required to hold a special endorsement from the Washington State Department of Agriculture (WSDA) to make marijuana-infused edibles (MIEs). This requirement follows from the WSDA’s appointment to share regulatory authority over MIEs with the Washington State Liquor and Cannabis Board (LCB). The WSDA’s Food Safety Program regulates, inspects and provides technical assistance to food processors generally, regarding product safety issues. Now, the WSDA will conduct similar activities with MIE processors including carrying out enforcement and recalls when necessary.

The endorsement costs $895 initially and $895 for each annual renewal. Applications must be submitted to the Washington State Department of Revenue Business Licensing Service website. Technically, processors are required to hold the endorsements as of April 1, but WSDA is providing a 30-day grace period. Therefore, the clock is ticking on any processors who have not yet acquired this mandatory endorsement.

Note that the endorsement is only available to businesses that already hold a processor license. The LCB is not currently accepting applications for new processor licenses. To add an MIE endorsement, a business or individual must currently have a processor license and only produce MIE products at a single facility. A business or individual cannot add MIE products under a Food Processor license, process MIE products at a facility that processes non-marijuana food products, or process non-marijuana food products at a facility that produces MIE products.

Prior to April 1, the WSDA had contracted with the LCB to inspect the facilities of processors making MIEs, so in some ways, not much is changing. Other than the new $895 fee, processors shouldn’t feel the impact of this regulatory change immediately. The LCB will maintain authority over marijuana activities such as processor license requirements, packaging, and labeling. Processors that are currently in compliance with food-related regulations for MIEs will not need to re-submit food safety information (e.g., floor plan, sanitation procedures) when applying for the MIE endorsement. If there are no changes to ownership, location, or products, WSDA will not require an inspection. Processors that have not produced MIEs before will have to submit additional information to WSDA and LCB. In 2015, the WSDA provided an outline of the basic requirements for processing MIEs and that document is available here.

Looking forward, processors can expect to deal with the WSDA more frequently. The WSDA now has authority to undertake enforcement action and implement recalls. On March 19, the WSDA issued a letter to stakeholders, stating that processors “may experience more frequent inspections, as well as more outreach efforts and industry engagement.” WSDA intends to inspect MIE-producing facilities within 12 months of the endorsement and may collect additional information during those inspections. Processors who make ownership, location, or product changes must submit materials to both WSDA and LCB.

If you hold a processor license that currently produces MIEs, you need to apply for this special endorsement this month to continue operating. This firm is very familiar with licensing procedures and can assist your business throughout the process of applying for this new endorsement. Feel free to contact us with any questions and stay tuned for additional updates.

marijuana washington employment
Washington’s new employment legislation hopes to close the pay gap.

More and more states are recognizing there is a pay gap between the genders. Washington is the latest state to address the gap through legislation. The near-final law, HB 1506, is commonly referred to as the Equal Pay Act. It is currently awaiting the Governor’s signature, which we can expect any day now.

Equal pay laws are complicated and understanding your obligation as an employer is critical to avoiding hefty civil penalties and  liability. Washington’s Equal Pay Act specifically notes the difficulties women can face in obtaining equal pay and moving up in companies. The Washington law attempts to address these issues by prohibiting employers from discriminating against similarly situated employees based on gender.

So what constitutes discrimination in this context? Discrimination occurs when an employer pays similarly situated employees different wages because of the employee’s gender, or when the employer fails to promote or advance an employee because of their gender. Employees are “similarly employed” if the performance of their job requires similar skills, efforts, responsibility, and if the jobs are performed under similar working conditions. Job title alone is not determinative.

Employers can pay similarly situated employees different if: 1) the difference is based on a bona-fide job factor that is consistent with business necessity; 2) is not based on a gender based differential, and 3) accounts for the difference. Bona-fide factors include: education, training, or experience; a seniority system; a merit system; a system that measures earning by quantity or quality of production; or a bona-fide regional difference in compensation levels. Employers bear the burden to prove there was a bona-fide factor for the difference in pay, which means that businesses had better get it right. Note that employers may use the same bona fide factors in determining whether to promote or advance employees.

Cannabis companies are not sheltered from the new law. Although cannabis companies boast a higher percentage of female founders and executives than other industries, women still face unique challenges in the industry. Studies suggest that while women have success starting cannabis businesses, they do not retain that success. As the cannabis industry has grown, female ownership and executive percentages has also dropped. Finally, as individual companies grow, they tend to adopt more traditional business structures that results in a high percentage of males in senior roles.

Every Washington cannabis company should have a plan in place to ensure its business practices meet the requirements of the new Equal Pay Act. A good place to start is to have an expert audit your payment practices and assist in drafting a policy identifying the factors that are considered in setting wages and offering promotions. Cannabis companies in other states should also follow suit: Equal pay promotes employee retention, creates positive brand capital, and–most importantly of all–it’s the right thing to do.

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.

washington employment marijuana
Careful!

The Washington Legislature concluded its 2018 Session last week, and joined Oregon and California in “banning the box” when it comes to employment applications. Specifically, Washington’s new law, dubbed the “Fair Chance Act” (the “Act”),  prohibits employers from looking into any criminal history of potential employees at the point an applicant first applies for a job. The Act is less stringent than California’s legislation and tends to mirror Oregon’s legislation.

The Act passed through both houses of the Washington legislature on March 3, and Governor Jay Inslee wasted no time signing it into law. At this point, the only thing that would prevent the Act from taking effect is a provision which states that funding must be appropriated “by June 30, 2018, through the omnibus appropriations act.” The likelihood of that not happening is very slim. For this reason, we are advising all of our cannabis businesses clients to treat HB 2198 as the law of the land in Washington, starting now.

It is important to note that the Act does not bar employers from inquiring as to criminal history at all points in the application process. Once an employer has determined the applicant is “otherwise qualified” for the position, the inquiry may begin. “Otherwise qualified” means that the applicant meets the basic criteria for the position as set out in the job advertisement or job description. In most cases, whether the applicant is otherwise qualified can be determined from the application materials. Thus, employers in Washington may be able to ask about criminal history during interviews, but not before.

In addition to the initial screening rules, it is important to note that the Act also prohibits employers from advertising open positions in any way that excludes people with a criminal record from applying. Job advertisements that state “felons need not apply” or “no criminal background”, or that convey similar messages are prohibited. Finally, employers that are required by either federal or state law to perform criminal background checks are exempt from the law. This exemption does not apply to Washington cannabis businesses.

Ban the box legislation is trending nationwide: today, 31 states and more than 150 cities and counties have adopted a ban-the-box law regulating either public or private employers. These laws are especially important for cannabis businesses, which may, anecdotally, have a higher incidence of applicants with colorful backgrounds. Some states seem to care more about this than others: Oregon, for example, runs a background check while individually permitting cannabis employees; Washington does not.

The big take-aways here are: 1) do not ask about past criminal history on applications; and 2) consider seriously whether asking this question is necessary at all during interviews. By turning over too many rocks, you may find that an applicant has a past conviction for something like marijuana possession or distribution, and you may unintentionally violate one of Washington’s newest laws. Above all, and when in doubt, have an experienced employment attorney review your hiring techniques.

The Washington State House of Representatives is considering  House Bill 2334, which would allow licensed marijuana producers and processors to use cannabidiol (CBD) from a source not licensed by the Washington State Liquor and Cannabis Board (LCB). The bill defines a “CBD product” as “any product containing or consisting of cannabidiol” and would permit the use of CBD products from unlicensed sources so long as the CBD product has a THC level of 0.3 percent or less on a dry weight basis and has been lab tested.

Washington’s regulated cannabis market is a closed loop that works on the principle that no marijuana comes in and none goes out. Everything sold in a licensed retail store is grown by licensed producer and processed into products like oils and edible by a licensed processor. If a licensee is caught bringing in marijuana from an outside source, the LCB will cancel the license.

HB 2234 would have the most impact on processors who could add CBD to products such as marijuana oils, candies, capsules, and other infused products. Though HB 2334 is still far from being law, processors in Washington have flirted with the idea of using unlicensed CBD to create products with higher CBD concentrations. Processors who choose to enrich products with unlicensed CBD do so at their own risk.

The legal basis for claiming that using CBD from cannabis outside of Washington’s regulated market is based on the idea that not all cannabis is in fact “marijuana” and that products containing CBD derived from “Industrial Hemp” or from portions of the cannabis plant that are excluded from the federal Controlled Substances Act’s (CSA) definition of “marijuana” are legal under federal law.

Section 7606 of the 2014 US Farm Bill  (the Farm Bill) creates the framework for the legal the cultivation of “Industrial Hemp”, which is defined as cannabis with a THC concentration of less than 0.3% on a dry weight basis. The Farm Bill allows states to enact pilot programs for hemp research purposes. Washington has such a program, though it is underfunded. Hemp that is cultivated in compliance with a state’s pilot program is legal pursuant to the Farm Bill, although the sale of any products derived from this research is not explicitly allowed.

Last year, the state legislature required that the LCB study the viability of allowing processors to use hemp cultivated by licensed hemp farmers. See RCW 15.120.060. It’s also possible that a processor could use CBD derived from a hemp cultivator in another state that has implemented an Industrial Hemp program under the Farm Bill, but the Drug Enforcement Administration (DEA) has issued a Statement of Principle claiming that the interstate transfer of Industrial Hemp is outside the scope of the Farm Bill and therefore unlawful.

Processors may also claim that if CBD is derived from the mature stalks of the cannabis plant, it is not prohibited by the CSA. The CSA’s definition of marijuana “does not include the mature stalks of such plant, fiber produced from such stalks, oil or cake made from the seeds of such plant, any other compound, manufacture, salt, derivative, mixture, or preparation of such mature stalks (except the resin extracted therefrom), fiber, oil, or cake, or the sterilized seed of such plant which is incapable of germination.” 21 USC §802(16). In the early 2000’s, two cases out of the Ninth Circuit, Hemp Indus. Ass’n v. DEA, 357 F.3d 1012 (9th Cir. Cal. 2004) and Hemp Indus. Ass’n v. DEA, 333 F.3d 1082 (9th Cir. 2003) clarified that the DEA could not regulate hemp products merely because they contained trace amounts of THC. According to these rulings, some portions of the cannabis plant are explicitly outside the scope of the CSA. Thus, the court ruled that the DEA was not permitted to expand the scope of the CSA to encompass all parts the cannabis plant.

Because it was illegal to grow hemp in the United States until 2014, the Ninth Circuit decisions only applied to hemp imported from other countries. For CBD sourced from domestically grown hemp, today’s processors would need to know for certain from which part of the cannabis plant the CBD was derived to have a credible argument. If the CBD were sourced from any portion other than the mature stalks or seeds incapable of germination, then the product would be derived from marijuana and the processor could lose its license. There is also a question of whether a meaningful amount of CBD can even be extracted from mature stalks and seeds incapable of germination.

Processors who are using CBD additives do so at their own peril. Neither of the above legal theories provides much security as the licensee is counting on the fact that the LCB will accept this complex legal analysis and determine that the licensee is not using unlicensed cannabis. HB 2334 would provide some clarity and create a legitimate method to use unlicensed CBD. HB 2334 could also create an incentive for more farmers to participate in Washington’s fledgling hemp market. Finally, the bill would likely result in an increase in high-CBD products that some consumers–especially medical cannabis users–feel Washington’s market lacks.

For the bill to become law, it would have to pass the House, pass the Senate, and be signed by the Governor. It’s still too early to tell with HB 2334 will make it, but it’s worth keeping an eye on for now.

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.

washington marijuana cannabis
Big ups to Bob.

Washington State Attorney General, Bob Ferguson, appears ready to defend his state’s marijuana program against Jeff Sessions and Donald Trump. Last week, Ferguson spoke to the Columbian’s editorial board about upcoming challenges for the Evergreen State. Naturally, the topic of marijuana came up.

Ferguson stated that his office was prepared for a legal fight over marijuana legalization in Washington, although he said, “we hope it doesn’t come to that.” Due to recent actions by US Attorney General Sessions, however, it seems likely that it “could come to that.” If it does, Ferguson told the Columbian that he would not hesitate to act:

Hypothetically speaking, right, there could be a business that’s licensed in Washington state selling marijuana that’s following state law. Let’s assume they’re following state law to a T—that’s important—and the feds go in and try to shut that business down, they seize the marijuana or the proceeds. If in my view, we’ve got a legitimate business, playing by our rules here in Washington state and the federal government comes in to try to shut that down, we’d be interested in that.

Ferguson also said that he would be willing to get involved if the federal government takes any “adverse action” against a marijuana businesses compliant with state law.

Earlier in January, Sessions rescinded Obama era guidance regarding federal enforcement priorities for states that legalized cannabis and replaced with the single-page Sessions Memo. Now, US Attorneys across the country, like Washington’s Annette Hayes, are authorized to use their own discretion when deciding whether prosecute federal marijuana crimes in their respective states.

Prior to Ferguson’s interview, the Washington State Liquor and Cannabis Board sent out an email on behalf of his office asking for Washington residents to share “if they experienced a change in your business practices or customer relationships that you believe is connected to the Sessions Memo.”

Clearly, this issue has been on Ferguson’s mind for a while. In his interview, Ferguson also emphasized the fact that Washington repeatedly reached out to Sessions to discuss Washington’s cannabis law and policy. In each case, Sessions declined. Ferguson also pulled no punches in deriding Sessions for sending him and Governor Jay Inslee a factually inaccurate letter on Washington’s marijuana program, which failed even to acknowledge that the state had merged its medical and recreational programs:

I think the first thing he accused us of was not having a system that had combined our medical and recreational marijuana systems together, relying on that old report—but, of course, since that report came out, we had! To me that’s embarrassing that the US attorney general, on an issue of that importance, is writing a letter to a governor and attorney general of another state and he’s just got his facts wrong. That’s a problem, I think. I think this is a problem in trying to move forward on these issues.

Ferguson wisely said that he was not willing to discuss legal strategies, but acknowledged that a legal fight could center on “whether federal law preempts state law when it comes to marijuana.” Under the US Constitution, federal law preempts state law when the two directly conflict, but there are strong arguments by states like Washington that their adult use cannabis programs are not in “positive conflict” with federal law. We explained how that works here.

Washington has consistently proven that it is not afraid to challenge the Trump administration. Sessions brought great uncertainty to the marijuana industry, but Washingtonians should feel confident that their Attorney General will fight to protect the will of Washington voters. Hopefully, Ferguson never has to take up his promise, but it’s reassuring to know he is willing to do so.

washington marijuana cannabis
Will she or won’t she?

Jeff Sessions’ decision to rescind Obama-era guidance on the Department of Justice’s approach to marijuana enforcement was troubling for the cannabis industry. The “Sessions Memo”  withdrew earlier marijuana-specific guidance memoranda and directed US attorneys to decide which marijuana activities to prosecute “with the Department’s finite resources,” based on well-established principles that govern all federal prosecutions including, “the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.”

The Sessions Memo does not provide much additional insight as to what prosecutors should look for in determining what marijuana crimes to target. In lieu of such guidelines, it is important that stakeholders in the cannabis industry familiarize themselves with the US Attorney in their district. This post is focused on Annette Hayes, the US Attorney for the Western District of Washington.

On January 4, Hayes issued the following statement regarding the Sessions Memo:

Today the Attorney General reiterated his confidence in the basic principles that guide the discretion of all U.S. Attorneys around the country, and directed that those principles shepherd enforcement of federal law regarding marijuana.  He also emphasized his belief that U.S. Attorneys are in the best position to address public safety in their districts, and address the crime control problems that are pressing in their communities.  Those principles have always been at the core of what the United States Attorney’s Office for Western Washington has done – across all threats to public safety, including those relating to marijuana.  As a result, we have investigated and prosecuted over many years cases involving organized crime, violent and gun threats, and financial crimes related to marijuana.  We will continue to do so to ensure – consistent with the most recent guidance from the Department – that our enforcement efforts with our federal, state, local and tribal partners focus on those who pose the greatest safety risk to the people and communities we serve.

This short paragraph indicates that Hayes’ office will focus on threats to public safety, as it has for the past few years, and will act in a manner “consistent with the most recent guidance from the Department.” This statement is fairly vague and does not give a strong indication as to how Hayes will act in light of the Sessions Memo. To better understand Hayes’ opinions on cannabis, we can turn to her career as a prosecutor.

Hayes joined the U.S. Attorney’s Office in 1997 as an Assistant United States Attorney in the Criminal Division. Early in her career she was assigned drug cases including large-scale, international trafficking and cartel-related cases. In 2002, she became the Deputy Supervisor of the Complex Crimes Unit where she prosecuted cyber hacking and intellectual property cases.  In 2005, she became one of the supervisors of the General Crimes Unit, focusing on a range of federal crimes including child exploitation, drug, fraud, identity theft, immigration and violent crimes cases. Hayes took over for Jenny Durkan (Seattle’s current mayor) as the Acting US Attorney for the Western District of Washington in October 2014.

As she moved up the ranks, Hayes has not focused solely on drug crimes. Since taking over as US Attorney for the Western District of Washington, Hayes’ office has focused on marijuana cases involving acts of violence or the distribution of other drugs, like methamphetamine. I uncovered no examples of Hayes’ office prosecuting a licensed marijuana business. The following are some of the key marijuana-focused cases prosecuted in western Washington under Hayes:

  1. Illegal BHO Operation in Bellevue. In June 2015, Hayes announced that David Shultz had been sentenced to nine years in prison after causing a fire in a Bellevue apartment complex while manufacturing Butane Hash Oil (BHO). A man was killed as a result of the fire and several others were injured. The incident occurred in November 2013 and Hayes took over this case after replacing Durkan. Mr. Shultz was operating squarely outside of Washington’s regulatory framework.
  2. IRS Fraud. In May 2016, Hayes announced that former IRS agent Paul Hurley would serve 30 months in prison for soliciting and then accepting a bribe while auditing Have a Heart. Have a Heart worked with the FBI and local law enforcement to document the events leading to Mr. Hurley’s arrest and conviction. Have a Heart is a licensed retailer but did not face charges relating to this incident.
  3. Unlicensed Medical Marijuana. In June 2016, Hayes announced that Lance Gloor would serve a ten-year sentence for drug trafficking. Gloor owned several medical marijuana dispensaries. In 2010, police officers obtained a warrant to search Gloor’s home and found over 70 marijuana plants and a firearm. While awaiting charges in state court, Gloor allegedly opened four marijuana dispensaries in the Puget Sound area. During his trial,  the court ruled that Gloor violated court orders by contacting witnesses. In announcing the conviction and sentence, Hayes stated, “[d]espite repeated notice that his marijuana business was illegal under state and federal law, he continued to use lies, threats and intimidation to try to cover his tracks and make as much money as he could.” The court found that Gloor was not operating in compliance with state law and he did not have a license to produce, process, or sell marijuana from the Washington State Liquor and Cannabis Board.
  4. SPD Marijuana Diversion. In May 2017, Hayes announced the arrest of four Seattle Police Officers on conspiracy charges related to the delivery of hundreds of pounds of marijuana from Seattle to Baltimore. Alex Chapackdee, a 16-year veteran of SPD, was the alleged ringleader who also drove across the country to deliver marijuana on several occasions. This case is ongoing and the individuals involved have not yet been convicted.

Overall, Hayes does not appear to have the same zealous opposition to cannabis as Jeff Sessions. However, she has pursued marijuana cases that involved individuals who operated outside of Washington’s regulatory framework.  Hayes, like all of us, has relied on the Cole Memo for the last four years and is likely re-evaluating how her office will deal with marijuana in Washington. Under the Sessions Memo, we could see Hayes take a tougher approach to cannabis but her history of prosecuting marijuana crimes appears to indicate that she is not inclined to target licensed businesses.

washington cannabis marijuana
Is Washington doing enough for the little guy?

Lester Black has a good article up at FiveThirtyEight about the Washington marijuana market. Washington’s mandatory data transparency presents a fantastic opportunity for the kind of market analysis that is challenging in other industries that don’t have access to that type of data. In this context, the data reflects what a lot of Washington marijuana producers already know: The market out there is incredibly tough. Even though Washington’s window for marijuana licensing was only open for a month in late 2013, there is still enough product cultivated and sold in Washington that wholesale prices continue to drop, over four years later. This makes it hard for small businesses to compete.

Washington’s legislative and regulatory systems try to prop up small, local businesses a few different ways. The mandate that all business owners reside in Washington is a big one, of course. But we also have consolidation limits. An individual cannot have in ownership interest in more than three licensed producers and/or three licensed processors. On the retail side, no one is allowed to own more than five retail stores.

Those anti-trust pot market provisions have worked to some extent in providing initial market entry to a lot of different people. Entering a market and surviving a market, however, are very different. When the Washington market was first coming online, wholesale prices of more than $5.00 per gram were common. The average wholesale price in September was half that, at $2.53. Some amount of price decline was always expected, but small businesses that based their cost structure on that higher price point are struggling to make things work.

In any market with unexpected decreases in profits based decreased demand, increased competition, cost spikes, etc., well-financed business actors will be better able to survive than businesses that don’t have access to capital. Of course, if a business has so little money that it can’t pay its bills, it won’t survive. But access to capital provides additional advantages. You can get better financial planning advice from the outset so you know how best to plan for 280e. You are less likely to be swindled by consultants or other vendors with backloaded payment contracts. You have better access to credit. The list goes on.

The most eye-opening aspect of Black’s article may be the section on nationwide cannabis demand. According to Jonathan Caulkins of the Drug Policy Research Center at RAND, you can grow all of the THC consumed in the United States on 10,000 acres of farmland. That isn’t really that much, and it helps clarify why Washington producers continue to struggle. Even with its fixed number of production licensees, Washington likely has too much licensed production capacity for its in-state demand.

Where does that leave small Washington producers? They have a few different routes to success. One is to become large Washington producers, winning a race that so many others are losing. Another is to hope that marijuana demand trends upward — something that state regulators wary of DEA intervention hope does not happen. There is also the chance that marijuana goes legal nationally, opening up a much larger market without established players. Otherwise, no matter how much the state fights it, the industry will continue to trend toward consolidation with larger, better financed businesses surviving longer than small companies can hang in there.