Congratulations to Canna Law Blog’s Hilary Bricken, recently named one of the cannabis industry’s top lawyers by Business Insider!

The cannabis industry is volatile and deals are growing more complex as markets evolve. Having worked with clients in the cannabis industry for over eight years, though, and in multiple jurisdictions, there is no deal too complex for Hilary. In 2018 alone, she closed an estimated $100 million in industry transactions.

Because Hilary has been in the industry for so long, she is also uniquely equipped to make observations regarding its changes. As she states in the article, the field is now more diverse, including among service professionals. Among the other attorneys listed were lawyers from large international firms such as Dorsey and Whitney and Fox Rothschild.

With an industry “set to skyrocket to $194 billion,” the diversity and complexity of cannabis transactions will only increase over time. All in all, we are super proud of Hilary and our growing L.A. office, and looking forward to big things in 2019.

cannabis trademark scamWe hear from clients on a regular basis who receive fraudulent notices pertaining to their U.S. federal trademark applications, and because we’ve seen an uptick in these scams over the last month, we thought it would be prudent to publish a PSA on the topic, together with what to look out for if you are a trademark applicant or owner.

These trademark scams often come in the form of an official-looking letter or invoice requesting payment related to the trademark application. These letters can come via mail or via email, are formatted to look like an official government document, and list specific details about your trademark application, including an image of your trademark. All of this is public information and readily available, for better or worse, to potential scammers.

A client of ours recently received a letter from a company called Trademark Selection, Inc. that requested a “Registration Fee” of USD 1,360. The letter also provided wire instructions to an account in Florida, and in very fine print at the bottom stated, “By paying the indicated amount you accept this offer that will approve listing this information in the ‘TM SELECTION 2018 / The International Trade Marks and Service Marks’ catalogs.” This letter is a scam.

For clients that utilize our firm for their trademark filings, all correspondence related to those filings come directly from us. We pay filing fees and invoice our clients accordingly. No official U.S. federal trademark-related correspondence will ever come from an agency other than the United States Patent and Trademark Office (USPTO).

Some of these third-party letters include official-sounding words, like “Trademark,” “Patent,” “Registration,” “Agency” or “Office.” Most of them, if you read the fine print, provide for worthless services like those stated above in the Trademark Selection letter, or may offer to provide you updates on renewal deadlines (something you’ve probably already paid your trademark attorney to do). Some of them list no services at all.

Unfortunately, because these notices can look quite official, some companies end up paying them, believing they are legitimate. If you do receive third-party correspondence, it’s always best to check in with your trademark attorney, but chances are, you can and should disregard it.

Here are a few of the companies we’ve seen fraudulent notices from lately:

  • Trademark Selection, Inc.
  • Patent and Trademark Institute
  • Register of Protected Patents and Trademarks
  • ITP Service
  • S. Trademark Compliance Office
  • ITR Register
  • Trademark Edition Ltd.
  • TPP Trademark & Patent Publications

And this list only scratches the surface of what is out there in terms of trademark scams. Again, official correspondence will come from the United States Patent and Trademark Office (USPTO) with an address in Alexandria, Virginia, or will come directly from your trademark attorney. If you receive any official emails, they will come from the domain “@uspto.gov.” If you ever receive one of these suspicious notices, you should contact your intellectual property attorney immediately. The USPTO is also available to answer questions regarding the status of your application.

Pay those employees, non-exempt and otherwise.

I recently wrote about a case in the Tenth Circuit, Kenney v. Helix TCS, Inc., where the Court of Appeals is asked to decide if the Federal Labor Standards act (FLSA) provides wage and hour protection to employees of cannabis businesses. That case hasn’t seen much movement since I wrote about it, but its decision could have a significant impact on a case recently filed in Federal District Court in Oregon.

Michael Garity has filed a state and FLSA wage and hour claim against his former employer, WRD Investments LLC (“WRD Investments”). According to the complaint, Mr. Garity was hired by WRD Investments to provide expertise and labor in support of WRD Investments’ marijuana grow near Junction City, Oregon.

Mr. Garity alleges he was a “non-exempt” employee for WRD Investments. His status as a non-exempt employee would have required WRD Investments to pay Mr. Garity at least minimum wage for all hours worked and overtime rates for all hours worked over 40 hours per week. In the complaint, Mr. Garity alleges that between March 2016 through May 2017 he may have worked approximately 2500 hours without any compensation. He further alleges that he frequently worked over 40 hours per week without overtime pay.

Mr. Garity’s complaints do not stop there. Mr. Garity also alleges that WRD Investments failed to provide him with itemized statement of pay and failed to establishe regular pay days in violation of Oregon laws. The Complaint also states Mr. Garity incurred expenses on behalf of WRD Investments such as using his personal vehicle to conduct WRD Investment business without reimbursement from WRD Investments.

Mr. Garity’s complaint requests actual damages for unpaid minimum wage and overtime compensation plus an equal amount as liquidated damages and reimbursement for business related expenses, penalty wages under Oregon wage and hour laws, and attorney fees and costs. Mr. Garity’s complaint does not lay out a number, but based on my calculations WRD Investments could be on the hook for around $40,000 related to the FLSA claims alone. Should this matter proceed far into litigation, WRD Investments could also be on the hook for attorney fees which could eventually surpass the $40,000 number.

The Kenney case mentioned at the beginning of this post may have significant impact on Mr. Garity’s claims. Mr. Garity’s case is filed in a Ninth Circuit district court and nothing binds a Ninth Circuit court to follow a decision from the Tenth Circuit. However, the Ninth Circuit district court could be persuaded by the Tenth Circuit Court of Appeals decision and decide to follow its precedent. Alternatively, it could choose to ignore the precedent and decide to create its own path. Either way, it will be very interesting to see the legal arguments that are made in Mr. Garity’s case regarding whether the FLSA protects marijuana employees.

Regardless, a good lesson can be gleaned from Mr. Garity’s complaint. First, be sure you are properly classifying your employees as exempt or non-exempt. Second, and perhaps even more importantly, ensure that you are properly paying your employees. If you are ever concerned you are in violation of wage and hour laws, its always a good idea to have a cannabis employment law attorney review your payment procedures. It may cost some money up front but will likely save you much, much more in the long run.

washington cannabis employment law

Please note that this event has been postponed until further notice.

Owning a cannabis business can feel like you’re drowning in various regulation compliances and not actually spending time with your business. The excess of rules and regulations levied by the Washington Liquor and Cannabis Board (WSLCB), cannabis-specific regulations, along with an array of state and federal employment laws and regulations can keep any business from blossoming to its fullest. At Harris Bricken we understand your struggles and aim to keep your business thriving.

If you are a WSLCB licensed cannabis business with employees, please join us at noon (PST) on January 29, 2019 for the second of our lunchtime employment law webinar series. Throughout the presentation, Harris Bricken attorney Megan Vaniman will lend her vast knowledge of employment law to ensure that your business is in compliance with Washington regulations. Topics will include:

  • Washington’s Sick Leave Laws
  • Washington’s Ban-the-Box Regulation
  • Washington’s Equal Pay Opportunity Act
  • The difference between independent contractors and employees

Moderated by fellow Harris Bricken attorney Robert McVay, Megan will also address any relevant audience questions throughout the presentation. Please register by clicking here. For any additional questions regarding the webinar, please contact firm@harrisbricken.com. We hope you can join us!

oregon cannabis interstate salesOnce again, Oregon is working on becoming a marijuana maverick. The Beaver State is on the verge of introducing a bill that would allow marijuana exports to other states by 2021.

In an attempt to tackle the oversupply crisis that has plagued Oregon the last few years, the Craft Cannabis Alliance, an Oregon-based membership association of cannabis and allied businesses, has spearheaded a campaign aimed at reintroducing the idea of exporting Oregon cannabis, a plan that was first proposed in 2017 by Senator Floyd Prozanski (D-Eugene).

The idea was memorialized in Senate Bill 1042, which would have permitted interstate transfers of cannabis products with adjacent legal states that complied with Oregon’s testing, packaging and labeling rules as well as any rules imposed by the receiving state. Although the original proposal died in the House last year, a lot has changed since then.

First, the popularity of marijuana among American adults has been on the rise. According to a 2017 Gallup survey, 64 percent of Americans favor the legalization of marijuana for recreational purposes.

Second, Oregon’s supply has far exceeded local demands: the state is currently sitting on approximately 1.4 million pounds of marijuana that state and federal laws prohibit from selling outside state lines. This tremendous oversupply in Oregon has caused prices to crater, putting many licensed growers on precariously thin ice. Indeed, in 2018, the wholesale price of Oregon flower dropped from $3.90 per gram at the beginning of the year to $1.86 as of the end of the summer.

Third, interstate exporting has seen a growing support from lawmakers and local media.

So in theory, this idea should materialize; unfortunately, federal law remains in the way as we discussed last year.

Though the use and sale of recreational cannabis is currently legal in 10 states, the plant remains a Schedule I substance under the Controlled Substance Act (“CSA”). Specifically, Section 801 of the CSA provides that the distribution of controlled substances in “interstate commerce and foreign commerce” justifies federal control of said substances. federal guidance also expressly forbid the “diversion of marijuana from states where it is legal under state law in some form to other states.” Accordingly, federal law would put Oregon and other legal states engaged in such interstate transfers at great risk of federal enforcement actions and would most certainly compromise the cannabis exchange.

However, the passage of this idea into state law could arm the Beaver State with a big advantage. Specifically, the state would be able to start exporting its cannabis products the moment federal cannabis prohibition is lifted. Such strategic advantage would position Oregon as a leading marijuana exporter (assuming it can find some buyers) and would serve as an escape valve for the chronic oversupply issue.

For now, we must sit tight and see how the proposed bill, which has yet to be drafted, will be received by the Oregon legislature. We will keep you updated on this issue.

california cannabis seminar san franciscoOn Thursday and Friday of next week, January 17 & 18, our own Daniel Dersham and Julie Hamill will present at a two-day continuing legal education (CLE) event in San Francisco called The Business of Marijuana in Northern California, to discuss cannabis real estate and land use issues in California. The roster of speakers lined up for this CLE includes an array of lawyers, consultants, and business professionals working with the cannabis industry, and everyone, including non-lawyers, would be well served to attend. For a full event description, including topics, speakers and registration links, click here.

Looking back over the past two years since the passage of Prop 64 legalizing adult-use cannabis in California, it is amazing to see how much things have changed in California cannabis. At this point, the state’s adult-use and medicinal cannabis regulatory regime is fully built out, with thousands of license applications now on file with the state. We are proud to call many of these California producers, processors, wholesalers and retailers our clients, alongside the many investors and ancillary service providers we represent.

Now that the California regulatory groundwork has stabilized, local jurisdictions have continued to open up their markets to the cannabis industry, and the legalization and decriminalization movement has continued to forge ahead, cannabis business activity in California is at an all-time high. Many of these new industry entrants bring skills, capital, and experience from other regulated markets, while others are new to the space. California attorneys and business owners alike need to be familiar with the unique regulatory concepts and industry dynamics that will be discussed on January 17 & 18 in order to best serve the California cannabis industry.

Specific topics at this CLE include: state laws and administrative rules, developments in the highly dynamic federal sphere, and practical approaches to working with and in the cannabis industry. Attendees will hear from consultants, lobbyists, business professionals, and, of course, lawyers aplenty, with specialized experience in fields such as insurance, tax, real estate, litigation, intellectual property, investment, and regulatory compliance.

If you are in or around San Francisco next week, we hope you will join us on January 17 & 18 for a two-day exploration of California cannabis law and business that is both broad and deep. And if you are a Harris Bricken client or a friend of the firm, please click here to request a promotional discount code, which can be applied to either the webcast, or to in-person attendance.

See you soon.

california cannabis license merger saleOur California cannabis lawyers are seeing a major spike in mergers and acquisitions (M & A), and it’s time to discuss what’s on the horizon for changes of ownership for some California cannabis businesses. In every cannabis state, M & A is no breeze because the regulators almost always require pre-approval of the transaction or of the new buyer(s). In California, it’s going to be more of the same in the red tape department in the future, as per the proposed permanent rules that will (likely) take effect at the middle of this month.

As you all know, multiple agencies in California run point on licensing. The Bureau of Cannabis Control (“BCC”) is the lead agency though when it comes to the implementation of the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”). Under the BCC’s proposed permanent rules (which are still under review by the Office of Administrative Law), we now have a revised change of ownership process for distributors, labs, and retailers. (The California Department of Public Health the California Department of Food and Agriculture both have new change of ownership rules that significantly differ from the BCC in certain ways.)

First, and most importantly for all licensees, state licenses are not transferable. What this means then is that buyers have to purchase the companies that hold those licenses. Second, to accomplish a change of ownership under the new rules, would-be sellers of BCC-licensed businesses will need to submit a “Notification and Request Form” (see here) and check the box entitled “Change in Ownership” or “Change in Financial Interest Holder.” Specifically, for changes of “owners,” under the proposed permanent rules at section 5023(c),

If one or more of the owners of a license change, the new owners shall submit the information required for . . . each new owner be submitted to the [BCC] within 14 calendar days of the effective date of the ownership change.”

This timeline is almost the same as what was set forth under the emergency rules–it’s no surprise that the state has a deadline on disclosure for changes in ownership, as it affects licensure. However, this is the new curve ball for the M & A crowd pursuant to section 5023:

The business may continue to operate under the active license while the [BCC] reviews the qualifications of the new owner(s) in accordance with [MAUCRSA] and these regulations to determine whether the change would constitute grounds for denial of the license, if at least one existing owner is not transferring his or her ownership interest and will remain as an owner under the new ownership structure. If all owners will be transferring their ownership interest, the business shall not operate under the new ownership structure until a new license application has been submitted to and approved by the [BCC], and all application and license fees for the new application have been paid . . . In cases where one or more owners leave the business by transferring their ownership interest to the other existing owner(s), the owner or owners that are transferring their interest shall provide a signed statement to the [BCC] confirming that they have transferred their interest.”

In my experience, most business buyers in cannabis are looking for a full buy-out. And your typical cannabis M & A deal will (hopefully) have as a condition to closing that the state and/or local government(s) approve of the transaction/new buyer(s) prior to closing. However, in California, retailers, labs, and distributors will not be able to operate during a complete buy-out while the state is processing not only all of the new owners (including their background checks) but also an entirely new license application, which could take weeks or months to complete. Without a doubt, buyers will want the business to keep operating during the transaction so this is going to be problematic for a complete buy-out, and it’s pretty much unprecedented that the business shuts down during the transition.

What we’re now very likely to see then is that at least one of the original selling owners will always stay on the licensed entity as part of the transaction and only after the state clears the new license application will that person finally be able to transfer all of their equity (once they provide that written statement to the BCC). What this means is that buy-outs of cannabis businesses in California just got that much tougher and risk-laden for buyers as these transactions will now certainly drag out and become even more complicated.

And if you’re not looking at a full buy-out, life is somewhat easier in that “[a] change in ownership does not occur when one or more owners leave the business by transferring their ownership interest to the other existing owner(s),” and changes to financial interest holders (i.e., anyone who holds less than 20% of the business’s equity) don’t constitute a change of ownership that warrants a new application, etc.

You may be thinking that there’s a silver lining here in that these new rules may only apply specifically to annual licenses. However, regulators ensured that the change of ownership standards apply to those who hold a “License,” which is defined statutorily as “a state license issued under this division, and includes both an A-license and an M-license, as well as a testing laboratory license.” In turn, these standards should apply to those companies that hold temporary, provisional, and annual licenses.

California has certainly set itself apart as a very mixed place when it comes to cannabis business friendliness. And these recent BCC-imposed changes of ownership, at least in my opinion, help bring the state closer to more arbitrary barriers to entry than necessary.

california marijuana leaseWe’ve previously written about some of the pitfalls for landlords to avoid when leasing to commercial cannabis tenants in California. We’ve also recently discussed some relevant issues for landlords created by the state’s near-final regulations. And we’ve also looked at some of the biggest uncertainties remaining after the state issued those regulations. Now that we have a clearer picture of what the regulatory regime will look like in 2019, here are some issues we’ve encountered in practice that both landlords and tenants should consider before finalizing a commercial cannabis lease in California.

Status of Cannabis Enforcement in California

As of today, the cannabis plant (which includes hemp), including any parts of the cannabis plant and all derivatives therefrom, remains a Schedule I controlled substance that is illegal under the Controlled Substances Act, except to the extent it contains a THC concentration of not more than 0.3% on a dry weight basis (i.e. not psychoactive), in which case it is now legal under federal law thanks to the 2018 Farm Bill. This confusing result follows a year in which the federal government, despite some early drum-beating about a resurgence of the drug war, made clear time and time again that its priorities when it comes to cannabis enforcement are illegal grows on federal land and organized crime. There has been no crackdown on state-licensed cannabis businesses in California (or elsewhere, as far as we know), and on the other side of the equation, the legalization and decriminalization movement has forged ahead to now include several more states, Canada and Mexico, and an incoming Democratic House leadership that has pointedly prioritized the issue in line with surging public support nationwide. Still, however unlikely federal enforcement efforts against state-legal cannabis businesses may seem, until full federal legalization occurs, landlords and tenants alike should consider building contingencies into the lease to anticipate enforcement actions and how they will affect the tenancy.

Structuring the Tenancy Relationship

Even before California came out with its new regulations, it was still a risky proposal for landlords to accept ownership in or profits of a cannabis tenant in lieu of rent. That concern has become even more salient under the state’s new regulations, since landlords can unintentionally become undisclosed “owner” or “financial interest holders” of the tenant cannabis business, thereby subjecting themselves to unanticipated and burdensome disclosure and vetting requirements. The parties to the lease should consider the unintended consequences of anything other than an arms-length tenancy and pay careful attention to the new regulations on point.

Licensing and Permitting Contingencies

The easily obtainable temporary state cannabis license is a thing of the past; now applicants must submit the full annual license application, which is far more robust and demanding (although applicants can now obtain provisional licenses if they previously held a temporary license, they can only do so after submitting a full annual application). Similarly, it can take months for an applicant to obtain a conditional use permit in localities that require one, which is common. Understandably, neither landlord nor tenant will know quite how they feel about the tenancy–and how much they want to invest in tenant improvements–until there is more certainty on licensing. A common solution has been to build into the lease an anticipated licensing timeline with benchmark contingencies that allow the parties to evaluate progress and decide whether to terminate if there is not enough.

Operating Expenses

Cannabis tenancies often involve unexpected costs that neither party fully anticipated, which can create a problem especially for multi-tenant properties. For example, you can expect that the landlord’s building insurance policy will not allow for a cannabis tenant and that the replacement policy will be more expensive. Cannabis businesses in California have to comply with strict security protocols that require security cameras, fencing, and security guards on site, and depending on what the existing uses are at the leased premises and the needs of other tenants, adding a cannabis tenant could create unique requirements that upset the existing proportional allocation of operating expense, and this should be addressed up front in the lease. If a cannabis tenant is a manufacturer or an indoor cultivator, it’s also likely that utility usage will not only increase beyond that of other tenants on a multi-tenant premises, but that additional water or electricity infrastructure will need to be installed to accommodate the increased usage, thereby creating additional capital improvement costs that need to be amortized and proportionally allocated. Another issue that comes up is cannabis waste management: for one, cannabis licensees—especially cultivators—must have strict waste management protocols in place that include securing waste on site or hauling it away under strict requirements. The regular building garbage service will likely not be a good match for a cannabis tenant.

For more on California cannabis leasing, check out the following:

oregon employee medical marijuanaIt’s 2019 and Oregon employees can still be terminated for off-work marijuana use. That includes not just recreational use, but off-work medical use by registered cardholders in the Oregon Health Authority system– even patients with debilitating medical conditions like cancer or epilepsy. This means that Oregon, which has been on the forefront of decriminalization and legalization of marijuana, is no better than the most conservative jurisdictions when it comes to off-work use. What gives?

Back in 2017, the Oregon Senator Floyd Prozanski introduced Senate Bill 301. The bill would have protected employee off-work marijuana use—meaning employers could not terminate an employee for using marijuana outside of working hours, so long as it did not lead to on-the-job impairment. The bill faced opposition from industry groups related to worksite safety and federal law. Accordingly, the bill was amended to protect only off-work use by medical marijuana card holders, but this was still not enough to secure passage.

Never one to be stopped by a little failure, Senator Prozanski is back at it and has proposed a new bill, Legislative Concept 2152. The proposed bill is short and sweet. The relevant portion simply states:

It is an unlawful employment practice for any employer to require, as a condition of employment, that an employee or prospective employee refrain from using a substance that is lawful to use under the laws of this state during nonworking hours except when the restriction relates to a bona fide occupational qualification or the performance of work while impaired.”

However, it seems Senator Prozanski may not have learned any lessons from the 2017 session. The proposed bill does little to address industry concerns related to federal government contractors. Businesses that contract with or receive grants from the federal government are required to comply with the federal Drug-Free Workplace Act. As long as “marijuana” remains a federally controlled substance, these businesses must ensure their employees are drug-free to continue to contract with or receive grants from the federal government. If the Oregon employer does not comply with the federal Drug-Free Workplace Act, they cannot receive the contract or grant. However, if they terminate an employee for off-work marijuana use they would violate the proposed legislation.

Proponents of the proposed bill have stated the bill would not allow employees to use marijuana if a collective bargaining agreement prohibited it. However, a quick glance at the bill demonstrates that it does not clearly address that issue, and seems to continue to ignore the Drug-Free Workplace Act requirements altogether.

Many other states have managed to pass laws that protect employees’ off-work use of marijuana. A careful review of other state laws demonstrates that they specifically address the federal concerns. For example, Arizona’s statute protecting off-work medical marijuana use provides:

Unless a failure to do so would cause an employer to lose a monetary or licensing related benefit under federal law or regulations, an employer may not discriminate against a person in hiring, termination, or imposing any term or condition of employment…based upon…the person’s status as a card holder.”

Legislative concepts are a “draft of an idea for legislation.”  Perhaps there is still time for Senator Prozanski to draft a robust bill that addresses the concerns of businesses that rely on federal contracts and grants, and perhaps 2019 truly will become the year employee off-work use of marijuana is protected in Oregon. Stay tuned.

washington marijuana justice
We are glad to Washington opening up with pardons.

Today I’m attending the Washington State Cannabis Summit. This is the 5th Annual summit, but this year is particularly special due to a major announcement by Governor Jay Inslee. During the morning session, Gov. Inslee unveiled the Marijuana Justice Initiative. The Initiative will allow individuals to submit an online petition to Gov. Inslee requesting a pardon for certain marijuana convictions.

To be eligible for clemency under the Initiative, an individual’s conviction must meet the following criteria:

  • It must be an adult conviction for misdemeanor marijuana possession;
  • Prosecuted under Washington state law (RCW), not a local ordinance;
  • The conviction must have occurred between January 1, 1998 and December 5, 2012;
  • It must be the only conviction on a person’s criminal record.

Individuals who do not qualify under the initiative may seek clemency by filing a petition with the Clemency and Pardons Board. 

Gov. Inslee deserves credit here for using his pardon power to address some of the damage done by the war on drugs. The Governor’s office summarized this harm in its press release announcing the Initiative:

For decades, people have faced criminal prosecution for behavior that is no longer considered a crime in Washington. Inslee believes that forgiving these convictions will allow people to move on with their lives without these convictions causing additional burdens on people, their families, their employers and their communities. This is a small step, but one that moves us in the direction of correcting injustices that disproportionately affected communities of color. A successful pardon of a marijuana possession conviction can assist with barriers to housing, employment and education.”

Gov. Inslee’s office estimates that roughly 3,500 individuals will qualify for clemency under the Initiative.

Gov. Inslee made the announcement to a room full of Washington’s marijuana industry stakeholders. This includes marijuana business, owners, lawyers, accountants, regulators, and lawmakers. As the industry develops, it’s important that criminal justice issues remain in the forefront. This Initiative is a good start. Hopefully, in the future this Initiative can expand to encompass more than just 3,500 individuals. Kudos to Gov. Inslee for starting off 2019 with marijuana criminal justice reform.