Earlier this year, the Washington Legislature passed House Bill 2334 (the “Bill”) into law. The Bill allows 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. The Bill essentially allows Washington processors to add CBD from industrial hemp derived in other states into Washington marijuana products.

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.

cannabis washington lcb marijuana
Start ramping up ahead of December 1.

On October 31, the LCB enacted new regulations in light of the Bill. These new rules impose some additional requirements and restrictions with regards to CBD derived from sources outside of Washington’s framework. The LCB will not allow the addition of CBD to useable marijuana flower. That means CBD additives will be limited to edibles, oils, tinctures, and other products that are derived from marijuana. Licensees will have to enter CBD products into the LCB’s traceability system, keep the records up-to-date, and the additives labeled. And licensees must also keep CBD additives quarantined from other marijuana until the CBD additives have gone through lab testing.

The LCB already requires that all marijuana and marijuana products undergo lab testing. WAC 314-55-102. CBD additives will go through additional testing under these new regulations. CBD additives that do not pass testing cannot be added to marijuana products.

In addition to the THC threshold, outside CBD must be tested for contaminants and toxins by the same accredited labs that test other marijuana and marijuana products in Washington. Licensees must submit samples of CBD additives to accredited labs. The samples must be representative of the entire product and must be one percent of the product as packaged by the manufacturer but no less that two grams. The samples must be collected in a sanitary manner, meaning the person collecting the samples must wash her hands, wear gloves, and use sanitary utensils and storage devices. Samples must be labeled with an unique identifier number, the trade name of the lab receiving the sample, the license number and tradename of the licensee, the date the sample was collected and the weight of the sample.

The CBD additives must be tested for THC to ensure that the product contains less than 0.3 percent. The additives are also tested to determine/verify the levels of THC and CBD. CBD additives must be tested for pesticides, heavy metals, residual solvents, microbiological matter, and mycotoxin.

For any questions on these new rules, give us a call. The new rules take effect December 1, 2018.

LCB washington marijuana cannabis
Some LCB policies make hurdles tough to clear.

Regulatory challenges can be substantive or procedural. Substantive challenges include things like Washington’s ban on out of state ownership and its view that licensee royalty payment constitute profit-sharing. These types of rules and interpretations are challenging because, as a policy matter, businesses aren’t allowed to pursue certain strategies that they otherwise would. Procedural challenges, on the other hand, are challenges that arise in dealing with a regulatory agency. The Washington Liquor and Cannabis Board (LCB) requires that it approve of retail packaging for infused products before that packaging can be used, and the LCB also requires that a person submit a signed criminal history statement before that person can be a true party of interest in a licensed marijuana business. These types of procedural hurdles exist for a reason – the LCB requires them to pursue its legitimate goals of enforcing its substantive regulations.

But there is another type of procedural hurdle that arises in dealing with regulatory agencies (specifically the Washington LCB). These procedural hurldes present challenges to regulated businesses, but they have no relationship with the LCB’s enforcement of its regulatory goals. Here’s one example that has been frustrating us to no end recently: the Washington LCB will not process a change of ownership and a change of location for a marijuana license at the same time. Let’s say that an entrepreneur in Tacoma finds a perfect location for a marijuana retail store and leases that space. The entrepreneur can’t apply for a new license because the state isn’t accepting applications, so the entrepreneur has to find a marijuana retail license allotted to Tacoma on the market. Once the entrepreneur finds that business and negotiates a purchase, the entrepreneur has to make some tough choices.

Because the LCB will not process a change in location and a change of ownership request at the same time, buyers have to determine the order of applications. Both orders have drawbacks. If you apply for a location change first, you will have a marijuana retail store at your location within, hopefully, a few months. However, you run the risk that, in the intervening period, the business’s sellers that still own and control the business do something to put the business at risk. They could commit regulatory violations that risk license cancellation. They could take on business debt, putting the businesses assets at risk. The buyer would be powerless to stop these actions, because the LCB does not want to see any party exert control over a licensed business until that party has been approved by the LCB to do so.

If you instead apply for the ownership change first, you are less at risk of the bad acts of the selling party. Instead, you have to deal with getting a lease that would be in place for the time between when the ownership change is approved and the time when the new location is approved. The LCB wants to see landlord consent, and landlords often try to gouge buyers in this situation because they understand how much leverage they have. You also have to go through a sham process with the LCB when you do the ownership change application. The LCB asks for operating plan information, but you aren’t allowed to say that you don’t really plan on operating in the existing space, even if that is your plan. Instead, you are in a situation where you are just saying what you need to in order to get approved so that you can move on to the next step. LCB investigators understand this, but they still require the minimums so that they can check all the boxes off their checklists.

This type of procedural challenge is so frustrating because it isn’t tied to any policy. The LCB allows location changes, and it allows ownership changes. There is no reason that it shouldn’t be able to run both changes at the same time. But somewhere within the LCB archives, someone wrote down a policy that says investigators can’t do two things at once, and so far no one there is willing to do what it takes to change that policy. That policy has wasted enormous amounts of time and money and created enormous amounts of stress for parties on all sides, and it is part of why Washington has a reputation for being a hard state to do business. It invites actual regulatory violations, where people exert control over businesses that they haven’t been approved for, because the alternative can feel ridiculous.

For those of you with regulatory lobbyists out there, we encourage you to push the LCB on issues like this, in addition to substantive lobbying. There can and should be legitimate debate on whether businesses are allowed to sell marijuana-infused gummy bears. But for procedural challenges that have no basis in enforcing substantive rules, it’s important to keep pushing back. We want to see regulatory compliance, and the more logistically challenging the state makes it for businesses to comply with regulations, the more likely that businesses will ignore those regulations.

lcb washington cannabis marijuana
Unfortunately, a lot of this stuff is not written anywhere.

To successfully work in Washington’s regulatory cannabis industry, you need to understand the overlapping levels of laws and rules that are in the state’s regulatory arsenal. State statutes in RCW 69.50 set forth the boundaries of the regulatory system. State regulations in WAC 314-55 fill in the details of that regulatory system. Then there are official Liquor and Cannabis Board guidance documents, administrative cases, and court cases that formally interpret those statutes and rules. But there is yet another tier of rulemaking that is harder to see. This tier houses all the unwritten, often changing policies and interpretations of the LCB. If you aren’t aware of these unwritten rules, you can get yourself into a lot of trouble, including potentially losing your license — even if you think you’ve done everything by the book.

For example, did you know that the LCB has two different enforcement policies with regard to its “minor frequenting” violation? If a marijuana retailer does not check ID at its door, here’s the order of events. The minor enters the retail store and attempts to make a purchase. The store employee checks ID and sees that the minor is underage and asks the minor to leave without completing a sale. There is no violation. However, take this same set of circumstances and add an additional security ID check at the front door, in addition to the ID check at point of sale. In that circumstance, if the ID check at the front door misses spotting the date on the ID card but the minor is still turned away at the secondary ID check at point of sale, the retailer has committed a violation. If a retail business is going to have an outside security check, it has a different, stricter standard for what constitutes a rules violation than if it doesn’t have that security check. Regardless of whether that policy is bad (it is), you can’t find it anywhere in the LCB’s rules or in case law interpreting those rules.

In another example, the LCB has generally held that a financial contribution to a licensed business creates a financier relationship the entails a full criminal background check on the financier and a disclosure by the financier to the LCB of all that financier’s assets, debts, etc., all under penalty of perjury. On the other hand, if that same financier wanted instead to invest just in real estate and equipment and lease that equipment to a licensed marijuana business, no LCB disclosure or background check is required. All of that is reasonably reflected in the rules as written. However, the LCB also has a twist on that policy. If a marijuana business owner also wants to co-own the real property that is leased to the marijuana business, any other financiers or owners of that real property are considered as financiers or owners of the underlying marijuana business. Even if a property were purchased a year before the marijuana license was issued, a lender that holds a deed of trust on property that is owned by an individual that leases it to that individual’s marijuana business is considered a financier. Again, this policy is not reflected at all in any statute or regulation.

We deal all the time with people who are unwittingly violating written regulations. As a layperson in a regulated industry, it is your responsibility to know those rules, but that doesn’t mean it’s easy. When companies get into trouble because of violations of the unwritten rules, however, they don’t have real notice that what they are doing is contrary to LCB policy. And it allows the LCB to implement policies without being subject to the state’s mandatory notice and comment period for new rules. I don’t think that the LCB does this on purpose — the notice and comment period creates delays and can be taxing to work through. But there are enough tools in the LCB’s belt (emergency rules, interim policies, formal guidance documents, etc.), that any time we see the unwritten rules in practice, we need to push back. Lately, we’ve been doing that a lot around here.

washington lcb marijuana candy ban

By April 3, 2019, Washington retail marijuana stores will no longer carry infused hard candies, tarts, fruit chews, jellies, and gummies due to a newly enacted ban on the production said products. The announcement came from the Washington State Liquor and Cannabis Board (“LCB”) during a recent meeting. A PowerPoint presentation from the meeting is available here.

The LCB reevaluated its stance on marijuana candies finding that infused candies are “especially appealing to children.” The LCB’s regulations (WAC 314-55-077(7)) prohibit processors from creating products that appeal to children. The LCB claims that its new policy is intended to comply with this provision.

Going forward, the following products are prohibited:

  • Candy – hard candy (of any style, shape or size) and tarts.
  • Fruit chews, jellies and all gummy type products.

The new LCB policy will also impact other products. The following infused products are allowed “with limitation on appearance”:

  • Chocolate
  • Cookies
  • Caramels
  • Mints

What does “limitation on appearance” mean? The LCB provides some examples:

  • Chocolate in its original color and not coated, dipped, sprayed or painted with any type of color.
  • Chocolate in the shape of a bar or ball. No shape or design that is especially appealing to children.
  • Caramel and fruit caramels. No color, shape or design that is especially appealing to children.
  • Cookies that do not contain sprinkles or frosting.
  • Mints that have no color (white or white with small color fleck to represent the flavor only).

Finally, the LCB lists the following “allowable infused products”:

  • Beverages
  • Baked Goods
  • Capsules
  • Chips and Crackers
  • Sauces and Spices
  • Tinctured

Though the LCB has categorized the above products, it still will consider whether any product is especially appealing to children. In making that determination, the LCB examines the appearance, the similarity to products that are marketed towards children, and color. Our Seattle office knows all too well how difficult it can be to determine exactly what the LCB will approve, given these highly subjective criteria.

If you are a Washington marijuana processor, you may have seen this coming. The LCB has been pushing back on many products based on the “especially appealing to children” limitation, signaling that more stringent policies were on the horizon. The LCB now recommends that processors cease all production of hard candy, tarts, fruit chews, colorful chocolates, jellies, and gummies, because they will not be approved. Licensees are allowed to sell their products until inventory is depleted or April 3, 2019, whichever comes first.

This change will have a significant impact on processors that have built brand loyalty by creating suddenly outlawed infused candies. Consumers will also have fewer options. We anticipate that the industry will push back on this ruling, especially because the LCB has claimed that this is to address the public health risk of children accessing infused marijuana candies, but has not provided evidence that kids are, in fact, getting their hands on these products.

The LCB will host a webinar to answer questions on marijuana infused edibles on October 16, 2018. The link will be available on the agency’s website.

If you have purchased marijuana in Washington State, you’ve probably noticed the packaging can be difficult to open and is adorned with warnings, bar codes, and lots of other information that appears in tiny font. This is by design, as the state has created robust regulations intended to protect the public from contaminated cannabis and to limit access by children. Though these regulations are important, one has to ask what impact these packaging requirements have on the environment.

Washington’s packaging and labeling requirements can be found in WAC 314-55-105. Note that this section of the Washington Administrative Code was recently amended meaning that there are two separate packaging standards. Licensees can abide by the old rules until January 1, 2019 when the new version of WAC 314-55-105 go into full effect. Until that date, licensees have the option to comply with the new rules. This post will focus on the newer version of WAC 314-55-105.

All containers that carry marijuana must protect the substance from contamination and harmful substances. Marijuana-infused products, such as edibles, and marijuana concentrates must come in child-resistant packaging. For packages containing more than one serving (a serving is capped at 10 milligrams of THC) of a solid edible product, each serving must come in child resistant packaging. For liquid products, the packaging must include a measuring device such as a cap that you would find accompanying a bottle of NyQuil. Hash marks on the side of a package are not enough.

In addition, Washington imposes substantial labeling requirements. All products must clearly show the following warning:

Warning – May be habit forming. Unlawful outside Washington State. It is illegal to operate a motor vehicle while under the influence of marijuana.

Per the recent rule change, all marijuana products must also include Washington’s marijuana universal symbol (pictured below). In addition, the label must include the business or trade name and UBI number of the licensed producer and processor, the traceability identifying number, the number of servings (if applicable), the net weight, and THC and CBD concentrations.

Washington’s universal marijuana symbol.

The state also requires the following labeling on specific products:

  • Useable marijuana flower must include the additional warning, “smoking is hazardous to your health.”
  • Marijuana concentrates or infused products intended for inhalation must list the solvents used to create product, state the method of extraction, and disclose whether any other chemicals or compounds were used.
  • Marijuana infused products intended for consumption must also list information about extraction methods and solvents, in addition to listing food allergens and the following sentence: “CAUTION: intoxicating effects may be delayed by 2+ hours.” Additionally, edible marijuana products must include the “Not for Kids” logo, shown to the right.
  • Marijuana topical products must contain the statement: “DO NOT EAT” in bold, capitol letters.

All of this means that products come with a significant amount of packaging. Even small,

Required on edibles in Washington State.

single-serving edibles must come with enough packaging to include the two logos, written warning, and information on the licensees and product. In addition, businesses making the product also want to include their branding and marketing material, which also takes up space. That branded packaging is important for producers and processors who are trying to stand-out and earn valuable shelf-space in retail stores. Unfortunately, all of that packaging has to go somewhere and it often ends up on the street or sitting in a dump.

Last month, journalist Kristen Millares Young wrote about the waste generated by Washington’s cannabis market in an article for the Washington Post. Young highlighted that environmental groups are increasingly finding cannabis packaging on the streets, something I can personally attest to living here in Seattle. The article also highlights the problem with “doob” (as in doobie) tubes, the plastic tubes used to package pre-rolled joints. These tubes cannot be recycled, even when made of recyclable plastic, because they fall through the grates of recycling machines.

Washington’s waste problem doesn’t have a simple solution. As Young points out, a potential “fix” would for Washington to require that producers and processors use recyclable material for the purpose of packaging. However, that would add increase costs to producers and processors who are already struggling to operate in a fiercely competitive market where the number of producers and processors far outweighs the number of retailers.

Perhaps it’s time to reconfigure Washington’s labeling requirements. The newest version of WAC 314-55-105 allows producers and processors to provide some information that used to be required on the physical package online. This may allow for more streamlined packaging, putting less of a burden on Washington landfills. After all, a QAR code can provide a vast amount of information without taking up much space.

If you’re a consumer you have some options. First, you can contact the Washington State Liquor and Cannabis Board about its rules, either online or during their monthly board meetings; and you can call your state representative to voice your concerns. Second, you can purchase products that have less packaging, such as marijuana flower rather than pre-rolls packaged in tubes, and you can reward companies that do use recyclable materials by purchasing their products. Third, you can make an increased effort to recycle your discarded packages and reuse non-recyclable packages. For example, maybe save the doob tube and use it to transport your hand-rolled joint in the future.

washington residency marijuana constitutional
Could definitely be unconstitutional.

We think it is worth taking another look at whether Washington’s strict residency requirement is constitutional. Since Washington first licensed marijuana businesses in 2014, we have wondered if anyone would be willing to bear the expenses of that particular challenge. And to date, there are no Washington appellate or federal legal decisions determining the constitutionality of the residency requirement. If there were a challenge, Washington would have a tough time defending the constitutionality of the law.

There are two important constitutional concept here: the Dormant Commerce Clause (the DCC) and the Privileges and Immunities Clause (the PIC). We first wrote about one of these, the DCC, three years ago. The DCC is a body of law (all made by judges) that seeks to enforce free-trade rules among the states. The idea is that Congress has the sole authority to regulate interstate commerce, and state laws that blatantly interfere with interstate commerce are potentially unconstitutional. Our analysis of this issue is largely the same as it was in that blog post three years ago. To determine if a law violates the DCC, one first determines whether the law interferes with interstate commerce. Washington’s residency restriction likely does so because it stops out-of-state participants from engaging in commerce in Washington. If a state law discriminates against out of state residents, it is very likely unconstitutional. It can only survive if the state can show that the law is the least restrictive means by which it can achieve a non-protectionist purpose. In the case of Washington’s marijuana residency requirement, there are lots of other states without such a requirement, and they are doing fine.

It looks like the book could be open and shut with the DCC, but people are still hesitant to bring that case. The DCC is tough to understand in practice: It’s a constitutional restriction by inference and counterfactual. So if law by logical proof isn’t your thing, the PIC provides an alternative compelling constitutional argument that Washington’s residency restriction would lose a court battle. The PIC —  Article IV, Section 2, Clause 1 of the U.S. Constitution — says: “The Citizens of each State shall be entitled to all Privileges and Immunities of Citizens in the several States.” The PIC seeks to prevent discrimination by one state against another state’s residents. In addition to protecting civil liberties, the PIC also protects fundamental economic interests.

The weakness in the PIC arguments is that the right to own a marijuana business may not be considered a fundamental economic right that the PIC protects. In past cases, the PIC has successfully knocked out state residency requirements for attorney bar licensure and for employment, but the PIC has failed to stop a state from only giving hunting licenses to its residents. Cases seem to say that commercial activity, as opposed to recreational, is fundamental, but it would be reasonable for the discriminating state to argue that the right to own a federally illegal marijuana business cannot, by definition, be fundamental enough to get this constitutional protection.

The federal illegality of marijuana, of course, is the elephant in the room. There seems to be a misconception that federal courts would never protect a would-be marijuana business owner in a legal battle with the state. That fear, however, is a misreading of constitutional law. Marijuana’s illegality does get in the way of a lot of general legal enforcement. Contracts with an illegal subject matter can be found void as a matter of law. Federal bankruptcy courts will not process marijuana company filings because they cannot appoint a trustee to manage marijuana assets. And in cases where parties seek injunctive relief, courts can use the “clean hands” doctrine to say that they will not issue injunctions to help marijuana businesses because those businesses have not come to the court with sufficiently “clean hands” to receive the benefit of equitable rulings.

However, the Constitution is not a contract or an equitable ruling. The Constitution protects us from state and federal overreach in all circumstances, regardless of what we have done and regardless of what we are doing. To put it another way, let’s say that Washington had a law that said women not allowed to own a marijuana business. Does anyone think that a federal court would not overturn that law? Of course it would. It doesn’t matter that marijuana is federally illegal; the state cannot violate the Constitution with illegal preferences. Similarly, both the DCC and the PIC are constitutional protections. A litigant against the state of Washington seeking to overturn the residency requirement would win or lose on the merits. Even a federal court would not throw out a case simply because marijuana businesses were involved.

WSLCB washington cannabis
WSLCB seems to want it both ways on “residency.”

Despite lobbying efforts to the contrary, Washington has maintained its strict state residency requirement for Washington cannabis business owners. If a person wants to own 0.001% of a cannabis business, the Washington State Liquor and Cannabis Board (WSLCB) requires that person to be a Washington resident and to go through about 1,000 hoops before it authorizes the licensed cannabis business to issue that ownership interest. In general, cash-starved producer-processors looking for investment and out-of-state investors have pushed for the law to change, while more established retailers and certain producer-processors prefer the lack of out-of-state competition. The residency issue is resonating in Olympia, with many legislators openly discussing lifting or altering the state restriction on out-of-state ownership.

While the overall topic of the residency requirement is often discussed, one issue that doesn’t get as much attention is how the WSLCB is currently defining residency. And that’s because they don’t— at least not directly. The WSLCB’s marijuana regulations define the term “residence” as a place where a person physically resides, but that is only in the context of the rule that marijuana licenses cannot be issued to businesses whose location is at a personal residence. The section talking about the residency requirement, WAC 314-55-120(10) uses the terms “resided” and “residency requirement,” but the rules do not define those terms.

Neither does RCW 69.50, the section of Washington’s legislative code that contains its statutes related to regulated marijuana businesses. RCW 69.50.331(1)(b)(ii) contains the legislative requirement that someone must have “lawfully resided in the state for at least six months prior to applying” for a marijuana business license. Whether the drafters of that section meant “resided in Washington without breaking any laws” or “would be considered resident of Washington as a matter of law”, we cannot really say. The statute does not contain any significant guidance on what does and does not constitute residency.

When Washington first opened for licensing, the interpretation of these sections was key. Back then, in 2013 and 2014, the residency requirement was only three months, and entrepreneurs looking to take advantage of the market had been trying to figure out the least that they could do to establish residency in order to qualify for the new licenses. When people asked the WSLCB what constituted residency, they were deferred to other state agencies that had defined residency. I personally have been on multiple phone calls with WSLCB investigators where they deferred to the Department of Revenue’s (DOR) definition of residency.

The problem with deference to the Department of Revenue is that the WSLCB generally acts like it wants a narrow definition of residency, whereas DOR wants a broad definition of residency. DOR wants people to be considered residents because that means that they owe sales tax and/or use tax on their purchases. Even the WSLCB’s old rules FAQ still has a link (albeit a broken one) to this Access Washington webpage saying that there are many ways that one can show that he or she is a Washington resident, including registering to vote and obtaining a Washington driver’s license.

Although it provides resources that make it seem like it is easy to prove residency, the WSLCB’s enforcement officers and investigators continue to treat residency as a strict requirement that one physically inhabit Washington virtually every day of the year. We have an administrative case happening right now where the WSLCB claims that our client is not a Washington resident, even though that person owns residential property in Washington and gets all of his or her mail there, is registered to vote in Washington, and maintains a Washington drivers license (and no other state licenses or IDs). They can’t point to a single written definition of residency that this client violates, but they continue to fight on this point.

This isn’t all about one case, one client, or even one issue. The WSLCB is showing time and time again that it likes to live in the zone of vaguely written or non-existent regulations and stringent enforcement of the WSLCB’s interpretations of those vaguely written or non-existent rules. Unless you assume that the WSLCB has malicious intentions in drafting and enforcing its rules in this way (which we do not assume), it does not make sense that they would not adopt a stringent definition of residency if they want to enforce it that way. But until the WSLCB amends its rules by adopting an actual definition of residency, it will continue looking like it is speaking out of both sides of its mouth.

washington family medical leave cannabis

The Washington Family and Medical Leave Act (“WFMLA”) is getting some major changes beginning in 2019. Why does this matter to Washington cannabis businesses? Because all of those businesses, regardless of type or size, will be required to collect and pay premiums under the revised law beginning January 1. These companies will also be required to provide wage replacement for eligible employees beginning in 2020.

Last year, the Washington legislature became just the fifth state to approve paid family and medical leave. Paid family and medical leave is a statewide insurance program that will provide eligible employees with partial wage replacement while on qualifying leave. Paid family and medical leave will be paid from a state fund, funded by premiums collected by employers. Premium collection begins January 1, 2019. The premium is equal to 4% of an employee’s wages, and the burden is shared between the employer and the employee.

Like with FICA and federal income tax, the employer is responsible for collecting the employee’s portion of WFMLA tax through payroll. If you want to be a model cannabis business, the law allows employers to cover the employee portion of the premium. Note that employers with less than 50 employees are not required to pay their portion of premium, but must still collect the employee’s portion and remit it to the state.

Employees become eligible for paid family leave once they have worked 820 hours for a Washington-based employer during the previous year. Employees can take paid leave for their own medical condition, bonding with a child, caring for family members, and certain military-related events. Eligible employees can receive up to 12 weeks of wage replacement with a weekly minimum of $100 and a weekly maximum of $1,000. The amount of wage replacement the employee receives is based on the employee’s earned wages, the state median income, and other factors. Employees can begin applying for benefits on January 1, 2020.

But what about the paid sick leave marijuana employers are required to provide in Washington? The WFMLA does not affect the requirement for employers to provide paid sick leave to employees in Washington.  Paid sick leave, unlike paid medical and family leave, does not require the payment of premiums. Further, employees accrue at least one hour of paid sick leave for every 40 hours worked under the Washington sick leave law.

Cannabis businesses should get ready for the new premium assessments beginning January 1, 2019, and budget for those new costs now. If you’re worried about compliance, our cannabis business and employment attorneys here at Harris Bricken can help you formulate a plan to ensure you comply with WFMLA and related laws.

washington amnesty WSLCB
Coming soon to WSLCB.

We recently wrote about the Washington State Liquor and Cannabis Board’s consideration of a marijuana licensee amnesty program for licensees with undisclosed true parties of interest a couple of weeks ago. In that post, though we criticized the WSLCB for not doing more to put marijuana licensees in a position to succeed, we didn’t have much to say about the amnesty program itself. Other than the fact that the board was discussing offering leniency to companies with undisclosed true parties of interest, not many other details had emerged.

Since then, a few more details have emerged, including a draft notice to Washington marijuana stakeholders announcing the program. It is important to note that as of the writing of this post, the leniency/amnesty program has not yet been finalized, and details are subject to change. That said, here is what is proposed so far:

The program is targeted at licensees that have owners or financiers that have not been disclosed to or approved by the WSLCB. Applications for amnesty/leniency will be denied when:

  1. Owners do not reside in Washington;
  2. Financiers are not U.S. residents;
  3. Owners or financiers have disqualifying criminal history;
  4. Licensees are currently under investigation for hidden ownership;
  5. Entity and/or principal within entity exceeds marijuana licenses allowed; or
  6. Entity and/or principal has interest in cross-tiered marijuana licensee (can’t own both a retailer and a producer/processor).

Licensees will have one month, starting as early as August 1, to apply to the WSLCB on a form provided by the WSLCB for the leniency program. Once the WSLCB receives the form and contacts the licensee there will be a seven day period to complete the initial interview and another fourteen day period to provide all required documentation for all prior undisclosed true parties of interest or financiers.

The WSLCB defines ownership broadly. A legal owner of any shares or membership interest in a licensed business counts, but so do many other business relationships. The WSLCB currently mandates that spouses, even for marriages after initial licensing, be disclosed and vetted by the WSLCB. They also consider anyone who has the right to receive any percentage of the gross or net profits from a licensed business. The WSLCB still tells licensees that any payment of sales commissions to sales agents violates true party of interest rules, despite an administrative law judge ruling otherwise and the WSLCB signing off on that ruling a couple of years ago. Trademark licenses and consulting agreements can create ownership. The WSLCB has still not engaged in substantive rulemaking to implement RCW 69.50.395 that specifically allows for trademark licenses. Instead, they have developed an ad hoc approval process for trademark agreements, where non-attorneys at the WSLCB make judgment calls about whether standard trademark license provisions do or do not create the type of “control” that would render someone a true party of interest under WAC 314-55-035.

Our experience makes us think that there are a lot of marijuana businesses that have hidden ownership problems. The majority of them are not bad actors – they are simply people who either don’t understand that an agreement they signed technically creates an ownership interest as the WSLCB sees it or they have done things in the wrong order, transferring ownership before receiving WSLCB approval. So it is welcome that the WSLCB is moving along on potentially offering amnesty/leniency to the these businesses instead of shutting them down. While that doesn’t fix many of the underlying issues that we have been pointing out, it is still a band-aid that will prevent catastrophe for companies smart enough to take advantage of it.

We’ll post again as soon as we get word that this program is due to go live. In the meantime, check out the following for some recent thoughts on WSLCB program administration and enforcement.

Washington State Cannabis Lawyer
Talking with Washington State cannabis enforcement officers is like playing with fire

Many of my firm’s recent Washington State cannabis enforcement cases contain a commonality. During the investigation stage, Washington State Liquor and Cannabis Board (WSLCB) enforcement officers tell licensees that their main goal is to achieve compliance. They say they aren’t looking to get anyone’s licenses cancelled — they are just trying to get a full picture so they can help licensees come into compliance with the rules. As we have stated in prior posts, many seemingly benign actions can give rise to license cancellation. But despite these assurances, licensees often find themselves blindsided by cancellation notices after they thought they were participating in a project with their officers to achieve compliance. When the licensees press their enforcement officers, the officers blame “politics” at the WSCLB offices in Olympia. It’s as though the WSLCB enforcement officers are playing the role of the car salesman going upstairs to fight for a price reduction only to be rebuffed by faceless management.

What is really going on here? As with everything else in the cannabis industry, it’s complicated. One thing to remember is that there is a real split in the WSLCB between its licensing division and its enforcement division. “Licensing” people are your standard bureaucrats, throwing up a varying array of obstacles to opening a cannabis business while assessing whether a businessperson and his or her plans merit a license to produce, process, or sell marijuana. “Enforcement” people are, for lack of a better word, cannabis cops.

Being cops, they see their role as rooting out activity contrary to law, and they will portray themselves however they deem necessary to get as much information as possible. Their behavior can range from be-your-buddy good cops to intimidating and threatening bad cops. The same officer often finds himself or herself playing both roles in some circumstances all geared to getting licensees to reveal behavior that may violate the rules. Institutionally, police forces often pressure their officers to continuously find bad behavior and officers that aren’t reporting enough violations face consequences at work for falling behind. We would be naïve to think WSLCB officers don’t face these same internal pressures.

The status of WSLCB officers as regulatory enforcement police puts licensees in a tough position. Most of the public knows that if they are accused of a crime by a regular police force, they shouldn’t say anything and should ask to speak with an attorney. But there is a fundamental difference between criminal enforcement and regulatory enforcement. The right to remain silent and the right to speak with police only with an attorney present are criminal rights. Marijuana business licenses, however, are privilege licenses. If you don’t toe the line, regulators can take that license away. For example, WAC 314-55-050(7) says that the WSLCB can cancel a marijuana license if a licensee denies a WSLCB enforcement officer access to any place where licensed activity takes place or fails to produce any required record licensees are supposed to keep.

Licensees need to keep both of these fundamental facts in their minds when dealing with WSLCB enforcement officers. The licensee has to understand that regardless of what they say, the goal of the WSLCB officer is to find bad acts and either fine the licensee or shut them down. But the licensee cannot ignore or shut out information requests from enforcement officers. Strategically, walking this tight rope requires licensees answer every question from an enforcement officer honestly and never lie, while also avoiding answering more than is asked. It’s not always possible to have an attorney present when dealing with an enforcement officer, but lawyers — especially those experienced in dealing with the WSLCB do help in these situations. Primarily, they know how to consistently frame a business’s activities as compliant within the framework of the rules (assuming the activity really is arguably compliant). Licensees often get themselves into trouble when talking to enforcement officers without an attorney present because they forget the fundamental truth — WSLCB enforcement officers are looking for a reason to submit a violation notice.

If the WSLCB wanted, it could institute a more collaborative relationship between officers and cannabis licensees. At WSLCB meetings, the WSLCB’s enforcement and licensing directors often make it sound as though the goal of enforcement personnel is to achieve compliance more than to shut down cannabis businesses. Actions to date, however, don’t back that up. So long as it appears that issuing violation notices is the primary goal of WSLCB enforcement officers, cannabis licensees need to approach each interaction with an enforcement officer as potentially adversarial because to do otherwise is to put your cannabis license at risk.