Unlike other states with recreational cannabis, Washington does not allow for home cultivation of recreational cannabis. However, that could change soon as SB 5131 requires the Washington State Liquor and Cannabis Board (LCB) to study the viability of home cultivation. The LCB will hold a public hearing on Wednesday, October 4, 2017, at 10:00 AM on whether the State should allow home grows of recreational marijuana.  Written public comments may be submitted through October 11 at rules@lcb.wa.gov or hard copy at PO Box 43080, Olympia, WA 98504.

The LCB will hold a public hearing on Wednesday, October 4, 2017, at 10:00 AM on whether the State should allow home grows of recreational marijuana.  Written public comments may be submitted through October 11 at rules@lcb.wa.gov or hard copy at PO Box 43080, Olympia, WA 98504.

The LCB must consider home cultivation in light of the Cole Memorandum, the Obama-era policy statement from the Department of Justice that tacitly permits states to legalize marijuana so long as those states enact strong and effective regulations. The Cole Memo outlines eight enforcement priorities:

  1. Preventing the distribution of marijuana to minors;
  2. Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
  3. Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
  4. Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
  5. Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
  6. Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
  7. Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
  8. Preventing marijuana possession or use on federal property.

The LCB has opposed home cultivation in the past. In 2015, Washington lawmakers considered a bill that would have allowed cultivation of up to six cannabis plants. In response, the LCB sent a letter outlining the Board’s concern that unregulated home grows would increase the occurrence of all eight enforcement priorities outlined in the Cole Memo.

The LCB worries that home cultivation will lead to diversion. Washington producer, processors, transporters, researchers, and retailers must all use “seed-to-sale” traceability software. As the name suggests, a cannabis plant is monitored throughout its life to prevent cannabis from being diverted to other states, to minors, or to the black market.

The LCB is seeking public input on three proposed options:

  1. Tightly Regulated Recreational Marijuana Home Grows. This option would impose a strict regulatory framework. Home cultivators would need a permit to grow legally. Permit holders could then purchase plants from licensed producers. Each household would be allowed four plants and all plants would be tracked in the same traceability system used to monitor commercially grown cannabis.  The LCB would impose requirements to ensure security, preventing youth access, and preventing diversion. Both the LCB and local authorities would monitor home grows. Cannabis processing would be subject to the same restrictions as apply to medical cannabis (e.g., no combustible processing).
  2. Local Control of Recreational Marijuana Home Grows. Like Option One, this option would require a permit, require safeguards to prevent diversion, limit each household to four plants, and allow permit holders to purchase plants from producers. Option Two would not require home cultivators to use the State’s traceability system. It also would give greater authority to local jurisdictions to create more restrictions and to authorize, control, and enforce the home grown program.
  3. Recreational Home Grows are Prohibited. The third option is to maintain the status quo and prohibit home cultivation.

The LCB must report its findings to Washington’s legislature by December 1, 2017. Lawmakers provided the LCB with no additional funds, meaning the Board must conduct its study without expanding its budget. There is no guarantee that anything changes but this is could be the beginning of recreational home cultivation in Washington.

Receiver time?

Back in 2014, we wrote that bankruptcy is not an option for marijuana businesses. That issue has been litigated here and there since then, but as of today, cannabis businesses are no better off than before. The hard reality is this: all bankruptcy cases are handled in federal courts under rules outlined in the U.S. Bankruptcy Code. Those courts have held that it would be impossible for a U.S. Trustee to control and administer a debtor’s assets (cannabis) without violating the federal Controlled Substances Act.

Bankruptcy laws are designed to afford a fresh start to honest but unfortunate debtors, while providing equal treatment to creditors. Without recourse to bankruptcy, parties can only: (1) liquidate without court supervision, or (2) explore state court receivership. Liquidating without court supervision offers no protection to pot business creditors. State court receivership does afford protections, but adds complexity because states closely regulate who is allowed to possess and sell marijuana (through licenses). For a while, it was an open question as to whether a state court receivership would actually work in the cannabis context. Recently, one actually did.

In the case at issue, a landlord (creditor) had leased space to a licensed marijuana business tenant (debtor). The tenant failed to pay rent, and the landlord evicted the tenant and acquired a judgment for unpaid rent. Because RCW 7.60.010 et seq. provides that a Washington state court may appoint a receiver over a marijuana business, the landlord convinced the court to issue an order appointing a receiver to sell the tenant’s cannabis and satisfy the judgment. The landlord then successfully navigated the licensure issue with the Washington State Liquor and Cannabis Board, sold the pot, and collected on its judgment.

Washington is not the only pro-cannabis state with statutes and administrative rules that seek to bridge the bankruptcy gap by allowing creditors to seize and sell cannabis. In Oregon, OAR 845-025-1260 provides “Standards for Authority to Operate a Licensed Business as a Trustee, a Receiver, a Personal Representative or a Secured Party.” Our Oregon and Washington cannabis lawyers have assisted numerous clients in acquiring and perfecting security interests under the relevant rules. We expect California to adopt a similar regime.

One of the reasons creditors get such high rates of interest for loans to cannabis businesses—in addition to the fact that banks won’t lend to them—is because many pot businesses lack lienable collateral. For many of them, the net worth of the business is mostly tied up in the cannabis itself. It is now clear that, at least in Washington, the cannabis can be liquidated by a third party, whether or not the pot was initially proferred by the debtor as collateral for a loan. In that way, cannabis businesses are being treated by progressive states much like non-pot concerns.

That we finally have had one successful state court receivership probably won’t nudge circumspect lenders to reach out to the cannabis industry. However, cannabis businesses can feel encouraged that their number one asset (their cannabis) may have marketable value when looking for loans; and lenders can feel hopeful that if everything falls apart, there may be liquidation value in the cannabis crop. None of this “solves” the bankruptcy issue, but it’s a step in the right direction.

Cannabis business lawyers
Why so few cannabis warehouses?

Among several changes to marijuana laws that SB 5131 enacted in July, Washington’s license cap on retailers moved from three licenses to five licenses. The Washington State Liquor and Cannabis Board at first wanted to delay implementation of the new license allotment to 2018, but has now consented to begin processing license acquisition applications immediately. This isn’t for new license issuance — that window is still closed. But existing retailers that own three licenses can now acquire two more.

As market consolidation occurs in Washington’s retail cannabis space, our cannabis business lawyers have been working with retailers on the problem of inventory management in the marijuana space. Inventory issues represent a misunderstood but glaring headache for marijuana businesses across the state.

Any time a retail operation has more than one location, that operation wants to run its inventory processes as efficiently as possible. Many multi-location retail operations in other industries utilize centralized warehousing as a key cog in their inventory management systems. Having a single regional warehouse able to directly supply many retail stores has significant benefits. First, the per square foot price of storage at a warehouse location is significantly cheaper than at a high-traffic retail area. Additionally, if a retailer controls the warehouse, it effectively separates itself from the friction point of dealing directly with suppliers. All outside vendors can deliver to the warehouse and the warehouse can distribute the goods to the individual retail stores at a time and method convenient for the retail stores — delivery becomes less of a hassle and negotiation.

But, as always, this is significantly more challenging in the cannabis space. The state’s tied-house rules and tiered licensing severely limit the movement of marijuana product and who can control it at any stage in that process. A single retail license works for a single retail location   — a licensed retailer cannot maintain a separate warehouse and a retail store with a license. Every retail location must negotiate and organize shipments from licensed processors that, because of the tiered licensing rules, are third parties. If I own five retail locations and I want to stock them all with a specific product, I must organize five different shipments of that product.

There are two different fixes to this predicament. One is to take advantage of WAC 314-55-079(8), which states: “A marijuana retailer may transport product to other locations operated by the licensee or to return product to a marijuana processor . . . .” So if I own four retail locations, I have a little bit of flexibility. I could maintain a networked internal distribution model, where each location transports to each other location when necessary. Or, I could use one location as my de facto warehouse. If I have three retail stores in the city and one out in the county, I could expand the county’s inventory space, direct all deliveries there, and manage distribution from that central location.

There’s a catch, of course. This rule only applies if all the retail stores are owned by a single entity — a real liability concern. Most companies with multiple retail cannabis locations that each carry their own liability insurance hold the locations in separate business entities. This limitation of liability strategy is a core component of U.S. corporate law. If there is a massive tort or contract claim against a single retail location held in its own entity, the plaintiffs have access to every asset and insurance policy of that specific entity, but they don’t have any claim to the parent company or to other affiliated retail entities. Managing liability exposure through different business entities can represent the difference between a disastrous occurrence killing your profits for a year and killing your business forever. Retailers in that context must undertake a cost benefit analysis by figuring out whether the liability risk is worth the gain from increased inventory management efficiency?

The other solution is to negotiate a form of symbiotic relationship with a licensed processor. As stated, before, tied-house rules limit the ability of retailers and processors to engage in many business arrangements. Retailers cannot borrow money from, get discounts from, or receive gifts from licensed processors. They cannot enter any binding agreement where the purchase of one product is contingent upon the purchase of another product.

However, the rules don’t prohibit communication between cannabis retailers and processors and they don’t prohibit processors from making purchases based on the needs of retailers with which they do business. In theory, then, a processor could know the demand schedule of a retail group with whom it does business and act as an intermediary purchaser for that retail group. The retail group would probably end up paying a higher price for the product, as it would be adding an additional middle-man to the transaction, but this model pulls in some of the benefits of centralized warehousing. This system does present some risk to both parties, though, as their ability to enter contingent contracts is severely limited. A processor making a bulk purchase it assumes the retailer is going to buy may find itself in deep financial straits if the retailer chooses to buy elsewhere.

There are a few rule changes that could make things easier for retailers here in Washington State, but the WSLCB’s goal isn’t necessarily to make things easy for marijuana retailers. Outside of increased lobbying, cannabis business owners will need to continue doing the best they can within the system we have.

Washington State Cannabis LawyersThe Washington State Liquor and Cannabis Board (LCB) yesterday rescinded its interim policy prohibiting a business or individual from owning multiple cannabis producer licenses. Now, a business and its principals can own up to three cannabis production licenses, which is up from just one license.

Though the LCB’s own rules (WAC 314-55-075) state that “any entity and/or principals within any entity are limited to no more than three marijuana producer licenses,” as of 2014, it restricted cannabis producers to no more than one producer license. Our Washington State cannabis lawyers never liked that restriction as we thought it encouraged illegal grows and bad behavior. See Washington LCB Producer License Roll-Back May Encourage Black Market Growers

The LCB announced its decision to rescind its one producer license policy at yesterday’s LCB meeting and noting how Washington State cannabis producers had been pushing to be able to expand and how the LCB’s own rules (WAC 314-55-075) allow ownership of up to three producer licenses. The LCB said it was time for the Board to “get out of the way” of Washington State cannabis producers.
We wholeheartedly agree.

To be clear, this shift in LCB policy towards producer licenses does not mean the LCB will be accepting new producer applications or expanding canopy space for existing producers; the LCB will not issue producer licenses to any new applicants nor will its policies on canopy space change. What this announcement does mean though — and this is a big deal — is that anyone who already holds a Washington State producer’s license will now be free to expand its cannabis production capabilities and canopy by purchasing other licensed producer businesses (up to two more). We know there is a massive pent-up demand for such purchases and sales because hardly a week goes by without one of our Washington State cannabis producer clients telling us of their desire to expand their production operations (mostly to better achieve economies of scale), and we also get frequent calls from companies (and clients) wanting to sell their production operations.

What we predict will happen in the market is a massive consolidation of smaller and/or struggling cultivators who will sell their businesses to larger-scale producers that are well organized and well capitalized. For years we have suspected this market consolidation of cannabis producers would occur in Washington and we see it likely to happen in other states as well.

If you are contemplating buying or selling a Washington cannabis production business/license you should be sure to check out the following:

 

 

Washington State New Cannabis lawsIn 2015, Washington passed Senate Bill 5052, which allowed medical marijuana patients and their designated providers to grow cannabis plants for personal medical use and band together to form medical marijuana cooperatives. That bill did not provide a legal pathway for cooperatives, medical marijuana patients, or designated providers to acquire plants. It also did not allow retail sales of plants directly to consumers. In 2016, the Washington Legislature passed legislation allowing cooperatives to purchase plants from licensed marijuana producers, but failed to address the ability of other patients to acquire plants.

Washington lawmakers recently addressed this issue with Senate Bill 5131, which allows qualifying patients and designated caregivers to purchase cannabis plants directly from licensed marijuana producers. A “qualifying patient” is a person who has been recommended medical marijuana by a healthcare professional and a “designated caregiver” is a person the qualifying patient designates in writing as authorized to procure medical cannabis. Qualifying patients can enter into a medical marijuana authorization database and receive a recognition card from the state. Not all qualifying patients enter the database and so some qualifying patients do not hold recognition cards. Carrying a recognition card brings advantages, such as tax discounts and the right to purchase larger quantities of marijuana in a single transaction.

All Washington marijuana patients can grow marijuana for their personal use, unlike recreational users, but qualifying patient cardholders can grow more. Cardholders may cultivate six cannabis plants at home (up to fifteen plants if their physician recommends it) which can yield a maximum of eight ounces of useable marijuana. Cardholders can also join state-registered medical marijuana cooperatives to cultivate marijuana with four other patients. Patients who are not cardholders may grow up to four cannabis plants and possess up to six ounces of useable marijuana produced from those plants, but cannot join a cooperative.

SB 5131 also allows qualifying patient cardholders to purchase immature plants and clones:

Qualifying patients and designated providers, who hold a recognition card and have been entered into the medical marijuana authorization database, may purchase immature plants or clones from a licensed marijuana producer as defined in RCW 69.50.101.

The Washington State Liquor and Cannabis Board (LCB) recently issued an interim policy statement that describes how members of cooperatives, cardholder, and cardholder’s designated providers can purchase cannabis plants and seeds but makes no mention of how patients without qualifying patient cards can purchase seeds. The LCB is mandating that Washington State cannabis producers receive documentation before selling plants or seeds. Members of a cooperative must show a valid recognition card and a copy of the letter from the LCB confirming the person is part of a registered cooperative. Qualifying patients must show a valid recognition card. It appears that there still is no means for patients who do not enter the database and receive a recognition card to legally obtain seeds to grow their own medical cannabis.

The LCB’s policy statement provides additional guidance on the sale of plants and seeds. Immature plants or clones are defined as plants that have no flower, are less than 12 inches in height and less than 12 inches in diameter. Producers must abide by security and traceability requirements including a 24-hour waiting period imposed on all cannabis transfers. Patients and providers must notify a producer 24 hours before picking up plants or seeds. All transfers must occur on the producer’s licensed property and deliveries are prohibited. Cooperatives, patients, and caregivers are not permitted to purchase more plants than they were authorized to grow by a physician or under Washington law. The patient or caregiver must buy the plant in person and producers cannot sell to anyone other than those who called in on a product. Sales tax applies to the sale of plants or seeds, but the state’s marijuana excise tax does not.

You can find more on SB 5131 at the following links:

California cannabisThough we very much want states (and our clients) to follow the federal government’s “robust regulation” directives in the 2013 Cole Memo, we can’t help but bemoan when “robust” state cannabis regulations take the fun and creativity out of cannabis business operations.

Over the years, clients and potential clients have come to the cannabis lawyers at my firm with a bevy of business proposals that in federally lawful world would make sense and probably even be profitable. Unfortunately, we have to nix most of the “creative” business models and product proposals we see in California, Washington, and Oregon (the cannabis states in which we have our offices and in which our lawyers do most of their work) because these states rarely tolerate or permit unique business models or ideas.

In the spirit of the innovation that we have had to quash, the below are the five best/most interesting business proposals killed (or suffering a slow death) from comprehensive cannabis business regulation:

  1. Delivery. It’s a small miracle when a state allows cannabis delivery to customers by dispensaries. And even those few states that permit this typically put it under such serious restrictions you’d think the driver is moving millions in gold or a high level federal prisoner. Washington State doesn’t allow delivery, which helps the illegal market there. Oregon didn’t permit home delivery by retailers until February of this year. Even California’s proposed MCRSA retailer regulations (which will be withdrawn in full, but probably re-issued in similar form in the near future) restrict deliveries to retail licensees that have complied with a massive amount of security procedures.
  2. Fresh food manufacturing and manufacturing certain other products. States do not generally like cannabis manufacturers processing fresh foods or potentially hazardous foods or foods that might appeal to kids. The list of prohibited products varies by state, but the following fresh food items nearly always make the list: heated food, refrigerated food, anything with alcohol for drinking, pies, fruits, vegetable butters, dairy products, meats and seafoods. California planned to ban caffeinated products in its draft MCRSA manufacturer rules. And good luck trying to find any legally sold cannabis-infused gummy candies (or really any traditional candies other than chocolate and fruit chews) in California, Oregon or Washington.
  3. Cannabis events. We’ve previously written about how state cannabis regulations tend to be the death knell for the kinds of cannabis events that were immensely popular just a few years ago. Many states prohibit any gifting of cannabis and that has led to far fewer cannabis cups and cannabis parties.
  4. Marijuana online exchanges and marketplaces. Cannabis-legal states just aren’t ready for cannabis businesses to sell online or through exchanges of any kind. Whether it’s because of a lack of transparency or trust, or just the potential logistical nightmares, states pretty much force in-person transactions within the cannabis chain of distribution, all the way down to the consumer. California may be the one hope here since MAUCRSA retailers can use “technology platforms” they own and control for customer deliveries.
  5. On-site consumption and branded merchandise. No state allows public consumption of cannabis and most also prohibit their cannabis licensees from selling branded merchandise. Though some cities (Denver and Portland) have made a push for social, on-site consumption, most states loathe this as well, which is a real shame since consuming with others in a social setting normalizes cannabis and would likely boost tourism. California is another bright spot here as MAUCRSA will allow for consuming cannabis on the premises of retailers and micro-businesses, but only if the cities and counties in which those businesses sit also allow for this. As far as sales of branded merchandise, the majority of states prohibit cannabis businesses from selling any branded merch. from their licensed premises. For example, Washington State bans that practice (but Oregon does not). California is trying to take it a step further by stopping the sale of all branded merchandise by any cannabis businesses whatsoever.
Cannabis financing
Cannabis financing. Cash is good.

Washington State marijuana businesses face heavy regulations regarding business financing. One of the unique aspects of Washington’s cannabis business regulations is its level of control over every dollar contributed to a licensed cannabis company. Prior to receiving a license, a marijuana company must declare all capital it will receive, whether in the form of equity or in the form of debt. There is no de minimis exception, so if someone is putting a thousand dollars into a million dollar company, that thousand dollars and whomever contributed it must go through the state’s pre-clearance process. Once a company is licensed as a Washington cannabis business, any additional contributions or loans to that business must be approved by the Washington State Liquor and Cannabis Board (LCB) before they can be paid to the company, including additional loans or contributions from individuals who were previously approved. The one exception to this rule is that loans from chartered financial institutions do not need LCB approval.

This creates a major problem when cannabis licensees get into financial danger, which can happen for any business. Sometimes, money problems arise with very little notice. Whether due to a failed crop, unexpected bills, an employee emergency, or something else, cash crunches happen. Even for cannabis businesses with access to banking, it is rare for them to have access to an unsecured line of credit similar to what other non-cannabis businesses can get. When a cannabis business runs into a cash crunch, it has to figure out how to keep things afloat while figuring out how to infuse capital without violating Washington regulations. If a business is lucky, its current owners have sufficient personal capital to make additional contributions, because the LCB clearance process is shorter for individuals already in the system. If a business is unlucky and it has to bring in outside capital, it is looking at what can be a months long approval process before any of that capital can be paid in. Those months can mean the death of a business.

All of this leads to a common outcome — cash contributions to businesses without LCB clearance in violation of LCB regulations. When the worst thing the LCB can do is cancel a business’s license, you can understand why someone would be willing to violate those regulations when the alternative is worse. Many marijuana business owners have more tied up in their business than just the business assets — they signed personal guarantees with landlords and other vendors that will survive business failure. If you are in that scenario, it is hardly illogical to bring on an outside financier outside the rules and hope you don’t get caught.

But regulations that put business owners into this type of quandary are the type that should be revisited and revised. There are plenty of simple fixes to avoid or at least mitigate the current challenges struggling cannabis businesses face. For example, the LCB could change the structure of approval for interest rate lending to make it more of a notice requirement — save the hard approval process for equity owners and profit-sharers.

Unless and until the LCB takes another look at this issue, the best advice we can give is to shore up your capital reserves. If you are just starting out in the cannabis industry, contribute more capital than you need to your cannabis business and let your unused capital sit in the bank as a rainy day fund. If you are making sales, put a portion of that money to the side and don’t use it for either reinvestment or profit distributions. The more cash you have on hand to deal with unexpected challenges, the greater your chances of surviving those challenges long enough to go through the LCB’s regulatory process of getting new lending or capital contributions approved.

Washington state cannabis compliance
Prohibition lives on in Washington State’s cannabis laws

Washington State continues to regulate intra-industry cannabis transactions more than just about any other state. When Washington voters passed I-502, they did so based on a campaign that said we should regulate cannabis like we do alcohol. It turns out that certain legacy alcohol-style regulations can be extremely onerous and simple business transactions that most people wouldn’t imagine could violate any rules can get marijuana licensees into hot water.

The term “tied-house” refers to a statutory scheme implemented for alcohol in the wake of prohibition to regulate both the marketing and cross-ownership of licensed operations. The goal of a tied house regime is to prohibit vertical integration or dominance by a single producer within the marketplace. These rules were also intended to discourage bribery and certain predatory marketing practices and overconsumption of alcohol. The whole idea was that if things were sufficiently difficult for the businesses involved, it would somehow lead to less alcohol use by the populace. It’s like a reverse version of trickle-down economics.

The Washington State’s Liquor and Cannabis Board’s most recent update newsletter specifically brings up Washington’s implementation of tied-house rules in the marijuana marketplace under both RCW 69.50.328 and WAC 314-55-018. We’ll focus on the WAC — the rules issued directly by the WSLCB. In terms of my Washington State cannabis regulatory practice, this rule is the one that comes up the most often by far. WAC 314-55-018 broadly prohibits various practices, including:

  • Any agreements that would cause one industry member to have “undue influence” over another industry member;
  • Any advances, discounts, gifts, loans, etc. from a producer/processor to a retailer;
  • Any contract for the sale of marijuana tied to or contingent upon the sale of something else, including other marijuana.

These prohibitions can be extremely broad in scope. They prohibit any type of agreement for the sale of more than one shipment of product, so a cannabis retailer and a cannabis producer/processor cannot enter an agreement where the retailer agrees to be bound to purchase regular monthly shipments of product. Every transaction must stand alone pursuant to its own purchase order. Recently, and as repeated in its newsletter, the WSLCB has focused on producer/processors that want to provide display equipment to retailers. The WSLCB’s position is that, under WAC 314-55-018, even a lease of a branded display case would constitute a “loan” in violation of this section. This type of arrangement — the leasing of branded display coolers from manufacturers to retailers — is common in other industries.

Confusingly, section (1) of WAC 314-55-018 contains a caveat that states, “This rule shall not be construed as prohibiting the placing and accepting of orders for the purchase and delivery of marijuana that are made in accordance with usual and common business practices and that are otherwise in compliance with the rules.” However, that caveat only applies to agreements that would otherwise create “undue influence” in Section 1 — it doesn’t mean that contracts that violate the LCB’s interpretation of the other sections are okay so long as they are part of usual and common business practices.

Regulations like WAC 314-55-018 have a few different effects. They are vague enough that it is difficult to tell whether an activity is or is not prohibited, which drastically increases compliance costs for cannabis businesses that either pay their attorneys to review transactions or try to get an answer from an LCB enforcement officer — a process that can take an extremely long time and often leads to inconsistent answers given by different LCB officers. To give you an idea of the scope of these issues, we have roughly an equal number of cannabis clients in the three states in which we mostly practice (California, Oregon and Washington) and we probably see double the compliance problems in Washington as in the other two states combined). The risks to these companies range from fines to a termination of their cannabis license.

These complicated compliance issues also create a situation lawyers dread — what to do when your clients want to follow the lead of market participants that openly violate the rules. Many cannabis industry members are willing to ignore the rules and enter into sales agreements or other agreements that technically violate WAC 314-55-018. This, in turn, disadvantages those that seek to remain compliant. When the LCB then doesn’t consistently enforce those rules, it maintains the disadvantage for the compliant industry members.

Tied-house rules are always going to be annoying to industry participants — that is the point. They are purposeful wrenches thrown into the works of the open market because government believes an open cannabis market would lead to intemperance. These same rules don’t exist for apples because the government doesn’t care if you eat too many apples, but it doesn’t want you to smoke too much marijuana or drink too much. There isn’t a clear logical line between tied-house rules and a reduction in either intemperance or corruption, but the rules do seem to be here to stay and this means industry members should stay on top of current interpretations to make sure that their deals are not running afoul of Washington rules.

Washington State cannabis lawsAs Washington’s cannabis industry continues to develop, marijuana businesses continue to face new challenges. And with an ever growing number of consumers buying and using marijuana the risk of lawsuits against those who produce or sell cannabis keeps growing as well. Under what is called product liability law, manufacturers, distributors, suppliers, retailers, and others who make products available to the public can relatively easily be held liable for any injuries those products cause. Cannabis business owners must be mindful of product liability lawsuits arising from the cannabis products they make or sell.

In Washington State, product liability law is codified in the Washington Product Liability Act (WPLA), which broadly applies to virtually any injury claim resulting from a product covered under this act. The WPLA distinguishes between product manufacturers and non-manufacturer sellers. Washington’s marijuana market is divided between businesses who grow and process cannabis and businesses that sell the product to consumers. Manufacturers, for WPLA purposes, are the licensed producers that grow cannabis and turn that cannabis into edibles, extracts, concentrates, and other marijuana products. Non-manufacturer sellers are retailers that sell marijuana to consumers. A business can hold a license to produce and process marijuana but it cannot also have any ownership interest in a retail business. In turn, a retailer may have not an ownership interest in a cannabis producer or processor.

A product manufacturer is subject to liability under the WPLA if it was negligent or failed to provide proper warnings or instructions or if the product was not designed as reasonably safe. A plaintiff can show negligence by proving the manufacturer owed a duty to the plaintiff, the defendant breached that duty, and the breach caused the plaintiff damages. A plaintiff can prove a manufacturer failed to provide an adequate warning by showing that a product’s warning or instructions were not likely to notify the consumer of the potential harm and the manufacturer could have provided instructions or warnings that would have been adequate. A plaintiff can show that a product was defectively constructed by establishing that “when the product left the control of the manufacturer, the product deviated in some material way from the design specifications or performance standards of the manufacturer, or deviated in some material way from otherwise identical units of the same product line.” Finally, a plaintiff can prove that a product lacked adequate warning and was designed defectively if the product “was unsafe to an extent beyond that which would be contemplated by the ordinary consumer.”

Washington’s robust marijuana regulations may provide producers and processors with some safeguards against claims brought under the WPLA.  Producers and processors may present evidence of compliance with Washington’s extensive cannabis laws and regulations as a defense to a product liability lawsuit. However, compliance with these state law cannabis standards does not automatically bar products liability claims as it is still possible the state required warnings or acceptable standards for growing and processing are inadequate.

Under the WPLA, non-manufacturer sellers can be liable in some scenarios, but simply selling a product that eventually leads to injury does not by itself establish liability. This means that retailers have a lower risk of being subject to product liability than a manufacturer because they do not manufacture the products they sell. However, a retailer may be liable to an injured consumer if the consumer’s harm was caused by the seller’s own negligence by the breach of a warranty made by the seller, or by a seller’s intentional misrepresentation of facts about the product it is selling. A seller may also be liable if there is no financially solvent manufacturer. Because many producers and processors do not have the funds or the insurance to pay off on large (or even not so large) product liability lawsuits, even cannabis retailers in Washington State need to be wary of product liability lawsuits.

Marijuana businesses operators can reduce their product liability risks by doing the following:

  1. Set up your cannabis business so as to protect yourself from personal liability. See Cannabis Businesses And Corporate Separateness and Cannabis Business and Corporate Separateness, Part II
  2. Vet the businesses with which you conduct business and, in particular, seek to ensure they are complying with applicable regulations and industry standards. See Buying a Cannabis Business: The Top Five Due Diligence Items or Buyer Beware.
  3. Draft your contracts so that vendors must indemnify you for any damages arising from their defective product.
  4. Use appropriate packaging and warning labels on the products you sell. See Cannabis Products and Dosing: Educate, Educate, Educate and Label, Label, Label and Pot Puppies? Let’s Talk Labeling and Packaging. NOW.
  5. Get good insurance for your business. The LCB requires cannabis licensees carry and maintain commercial general liability insurance, but you should also consider adding additional insurance to cover potential product liability lawsuits.

1600px-Flag_of_Washington.svgI previously wrote how “change would be coming” to Washington State’s cannabis law were Governor Inslee to sign SB 5131 into law. Governor Inslee has signed SB 5131 and is now set to go into effect on July 23, 2017.

If you hold a license to produce, process, or sell marijuana in Washington, you need to prepare for the legal changes stemming from SB 5131. This post summarizes some key of the key changes you should expect from SB 5131.

Requires disclosure of IP licensing deals. We previously wrote how the passage of SB 5131 would impact cannabis branding and intellectual property transactions and rights because it requires licensed cannabis businesses to disclose their IP licensing deals to the Washington State Liquor and Cannabis Board (the LCB).

Restricts advertising by licensees. SB 5131 focuses heavily on advertising. Since passage of Initiative 502, cannabis licensees have been banned from advertising marijuana or marijuana products within 1,000 feet of a school or other sensitive area where children regularly populate. This largely prevented advertising cannabis products by radio, TV, or in publications likely to be heard or distributed in or near schools. This is why you mostly see marijuana advertisements only in publications geared towards adults. SB 5131 extends this cannabis advertising prohibition to include not only cannabis products but cannabis businesses. In other words, cannabis licensees now need to be cautious about advertising their cannabis business in any medium where their ad could end up within 1,000 feet of a sensitive area.

SB 5131 also makes the following changes to advertising:

  • No advertising on cars.  The use of “transit advertisements,” which includes any cannabis advertisement on public or private vehicles, is prohibited.
  • No targeting tourists. Advertisements and marketing practices may not target “persons residing outside of the state of Washington.”
  • 21 plus. All advertising must contain text stating that marijuana products can only be purchased by persons 21 and older.
  • No marketing to kids. Cannabis licensees cannot market to kids and cannot “use objects such as toys or inflatables, movie or cartoon characters, or any other depiction or image likely to be appealing to youth.”
  • No mascots. Cannabis licensees cannot use commercial mascots outside of or near a licensed marijuana business. “Commercial mascots” include humans, animals, or mechanical devices used to draw attention to a business, and specifically includes inflatable tube displays, persons in costumes, and sign spinners.
  • Limited outdoor advertisements. Outdoor advertisements are limited to only text that identifies the “retail outlet by the licensee’s business or trade name, states the location of the business, and identifies the type or nature of the business.”
  • Limited indoor advertisements. Indoor advertisements are only permitted in facilities where minors are not permitted, such as bars. Under SB 5131, cannabis advertising is explicitly prohibited in arenas, stadiums, shopping malls, state fairs, farmers markets, and arcades.
  • No billboard advertising, except by retailers. Retailers will be the only cannabis licensees permitted to use billboards, but like all outdoor advertising, they too may only include text identifying the name, location, and the nature of their business on these billboards.

Allows ownership of five retail stores.  SB 5131 will allow individuals to possess an ownership interest in five retail stores. up from three under current law. Existing retailers may (and no doubt will) be able to purchase other licensed retailers and rebrand them with their own name and open new storefronts under their already established name.

Changes for producers & processors. Though medical marijuana patients in Washington are already permitted to grow cannabis in their homes for personal use and may form a collective to grow medical cannabis together there has been no legal means for medical patients to buy cannabis plants because cannabis producers were prohibited from selling cannabis to individuals who did not hold a license to produce, process, or sell marijuana. SB 5131 changes this by allowing “qualified medical marijuana patients and designated providers to purchase immature plants, clones, or seeds from a licensed producer.” This means cannabis producers can now legally sell immature plants, clones, and seeds to medical marijuana patients. However, “to purchase plants or clones, the patients and providers must hold a recognition card and be entered in the medical marijuana authorization database.” Patients that choose not to enter Washington State’s medical marijuana database cannot obtain a recognition card and may only purchase seeds. Though SB 5131 goes into place July 23, the LCB will likely need time to create rules and implement this program.

SB 5131 requires the LCB to adopt regulations for designating cannabis as organic similar to the federal the “organic” classification granted pursuant to federal regulations. Since cannabis is illegal under federal law, it cannot qualify under federal standards for organic certification. Cannabis producers and processors who choose to comply with Washington State organic standards can market their cannabis products as compliant with the LCB’s organic-style regulations.

SB 5131 also tasks the LCB with studying the viability of allowing processors to process industrial hemp. Under current Washington State law, processors may only process cannabis material grown by a producer. SB 5131 will not change this. However, depending on the results of the LCB’s study, processors could eventually be allowed to process hemp products grown by Washington farmers with permits to grow industrial hemp.

Washington marijuana businesses for years have faced a very robust set of rules and laws. SB 5131 only adds to the Evergreen State’s complex regulatory framework. Though businesses may view these regulations as overly burdensome, compliance is not optional and come July 23, SB 5131 will be the law of the land. Washington marijuana businesses should do all they can now to avoid pitfalls after July 23.