cannabis business lawyers

The Rauner Administration yesterday announced the recipients of licenses under Illinois Medical Cannabis Pilot Program. The announcement came late in the day from Governor Rauner’s general counsel but there has still been no announcement on the official website of the Medical Cannabis Pilot Program at the time of this writing.

The announcement came as a surprise to most of us here in Illinois. A week earlier, the Rauner Administration released some documents under a Freedom of Information Act filing and also issued a statement that his administration would “. . . conduct a thorough legal review of the process used by the Quinn administration . . .”  Most believed that the thorough review would take weeks, if not months. No explanation for the efficient legal review was volunteered on Monday.

The announcement on Monday covered 18 cultivation licenses and 52 dispensary licenses. The procedure for scoring the licenses has not been completed and closed, as the law creating the Program authorized 22 cultivation licenses and 60 dispensary licenses. Some licenses are still on hold. Three cultivation center applicants and 5 dispensary applicants are still undergoing further review.

The announcement by Governor Rauner’s general counsel clarified some issues that arose a week earlier about the scoring done by state agencies during the Quinn Administration. Though the applications were scored through a blind review process, without the applicant’s identity being known, the state agencies subsequently carried out a character and fitness review that disqualified some applicants that had otherwise done well in the blind scoring. The Rauner Administration had doubts about the legality of the disqualifications and plans to allow the disqualified applicants to be heard. We see this as a good thing.

All of this means that patients in Illinois prescribed medical marijuana have at least some reason to be optimistic for the first time in months. It will still be a while before they have their medication in hand, however. It will take about six months for the cultivation centers to grow the plants after operations are constructed. A more important issue to watch in the coming weeks will be how many Illinois residents will qualify for a medical marijuana card. So far, only 650 patients have been confirmed. Certainly, more than this number will be necessary to support a vibrant MMJ industry in Illinois.

But at least we have begun.

Documentation released by the Rauner Administration under a Freedom of Information Act request by the Associated Press details the final days and hours of Illinois’ Medical Cannabis Pilot Program under the Quinn Administration. The Illinois agencies entrusted with awarding cultivation and dispensary licenses had completed review of applications, it appears, and believed that the Quinn Administration would announce the recipients of licenses in the hours before Governor-elect Rauner was to be sworn-in to office. 

The Department of Public Health had identified 12 companies to be awarded licenses for the 21 cultivation centers, and 56 companies to be awarded licenses for the 60 dispensaries. It is not clear from the information released whether more than one cultivation license would be issued to a single applicant.

The released documentation illustrates the uncertainty surrounding how the Quinn Administration would handle the Pilot Program in the final hours of office. Several different press releases had been prepared. The first announcement would reveal the recipients of the cultivation-center licenses and the persons to be appointed to the state’s Medical Cannabis Advisory Board. A subsequently prepared announcement would only release the names of the Board appointees. It is not clear why an announcement of the recipients of the dispensary licenses was never contemplated. Ultimately, no announcement was ever issued; at 11:53 a.m. on January 12 a spokesman for the Quinn Administration confirmed the accuracy of an earlier report by the Chicago Sun-Times that no licenses would be issued at all.

Among the documentation released under the Freedom of Information Act request is a scoring sheet for the dispensaries. A review of the scoring sheet raises many issues. Several applicants are marked as “disqualified” on the scoring sheet without any explanation as to what caused their disqualification. A company that retained Quinn’s former chief of staff as a lobbyist was disqualified. Several applicants were marked with the notation “hold” without an explanation as to why. An applicant that otherwise scored high was marked as “hold,” with the name Perry Mandera next to the notation. Perry Mandera owns a strip club in Chicago and was featured in the Chicago press as trying to obtain a license. A large numberof  applicants (none of whom were our clients!) were marked with notations for not following the application instructions. These included applicants that used “pharmacy” in the applicant company’s name, applicants that were not sufficiently capitalized, and applicants with proposed locations that were unacceptable.

So where does the Program go from here?  It is not clear. A spokesman for Governor Rauner said in a statement yesterday: “The governor’s office will conduct a thorough legal review of the process used by the Quinn administration and refer our findings to the Attorney General’s office. No licenses will be granted until this process is thoroughly reviewed.”

Data from recent polling conducted by George Washington University shows that a majority of Americans favor legalizing marijuana. Specifically, 73% of those polled favor medical marijuana legalization and 53% favor decriminalization. The poll did not ask the respondents about legalization of recreational cannabis, which is unfortunate as that would have made for another interesting data point.

Interestingly, 68% of the respondents stated that they would be more likely to go to the polls if a marijuana legalization measure were to be on the ballot. The passion that legalized cannabis brings out in the voting populace has the potential to be a driving force in upcoming state elections. NORML’s executive director Allen St. Pierre told Bloomberg that ballot measures on marijuana legalization are set for Alaska’s primary this August and will probably appear in Oregon this November. We have little doubt that marijuana legalization will pass in both states but it will also be interesting to see how those measures’ presence on the ballot impacts voter turnout and voter choice on the other items on the ballots.

A couple of days ago, The New York Times quoted me in an article entitled, Providers of Medical Marijuana Face New Fears. The article was on Washington State’s efforts to greatly restrict (perhaps even kill) the medical marijuana collective garden system in favor of a recreational marijuana only regime and I was quoted on that issue:

A medical marijuana user will certainly be able to enter a shop and buy marijuana once the new stores are open in June, but the old system of medical advice and supply, however flawed or beloved, is over, say both critics and supporters of the new rules.

“Prepare for the end,” said Hilary Bricken, a lawyer in Seattle who works mostly with the marijuana industry, summarizing the advice she is giving her medical marijuana dispensary clients.

Washington State’s struggles — and the inevitable comparison with Colorado’s different, smoother path toward retail marijuana — are being watched around the nation, Ms. Bricken and other legal experts said.

A number of media outlets have misinterpreted my New York Times quote to mean that small artisinal marijuana businesses are being crushed and will never be able to survive in the face of “Big Cannabis.” I never said that and neither I nor any of our other marijuana business lawyers believe that.

My “prepare for the end” advice was directed at medical marijuana collective-garden-based dispensaries in Washington State only. That advice makes sense for Washington State because the politicians (with a lot of prodding from the Federal Government) have consistently made clear that the existing medical marijuana system is untenable and must eventually be submerged into the overarching recreational cannabis system. So in other words, if you do not soon get a recreational cannabis license to allow your cannabis business to operate legally in Washington State, there will eventually come a time when the government will shut you down. That is “the end” to which I was referring. I was voicing no opinion whatsoever regarding the future of the “little guy” in marijuana.

But that is not how other publications are seeing it:

  • The Wire/Yahoo News did an article, entitled, Will Big Marijuana Crowd Out the Little Guy? using my “end” quote to support the claim the following claim: “As more states move to legalize marijuana and seek tax and other economic benefits from the drug, small-scale artisanal marijuana growers are being squeezed out. Welcome to the days of Big Marijuana.”

Nothing could be further from the truth.

To clarify, there is a difference between medical and artisanal and there is a difference between what is happening to MMJ in Washington State and what is happening in the various other cannabis regimes around the country. And though we do believe the future for medical marijuana collective garden dispensaries (only) is grim in Washington State, we strongly believe that the future for artisinal cannabis businesses is incredibly strong in most states in which marijuana is legal and will be legal.

In addition to representing cannabis businesses, we also represent artisinal alcohol producers and we see the marijuana industry as eventually going the way of the beer and wine and spirits industry, where there will be a handful of really huge players on the one hand and a ton of smaller (mostly regional) players on the other hand. The entire Canna Law team and I are incredibly optimistic about our clients’ futures, both our large clients and our small clients, other than those of our clients in the medical cannabis industry in Washington State who are not also in line for a recreational marijuana license.

In other words, we see a very bright future for all sizes of cannabis businesses.

How do you see our industry developing?

In a sign of our confidence that Florida will soon be legalizing cannabis in one form or another, one of our cannabis business lawyers is there right now sitting for the Florida bar exam. We already have a lawyer licensed in Florida, but we think cannabis will be so big there, we want more. Florida voters are expected to approve medical marijuana this November.

Now it looks like recreational marijuana could be on the table there as well.

Representative Randolph Bracy of Orlando is saying that he intends to propose legalizing recreational marijuana use in Florida. Bracy is not naive; he knows that the chance of Florida’s legislatures approving recreational marijuana right away are not high, but he’s starting the conversation about recreational use now in the Florida House of Representatives and he expects state Senator Dwight Bullard to file a companion bill in the Florida Senate.

Bracy is calling for legalizing recreational cannabis because he wants to address the disparate impacts marijuana criminalization has on minority populations and the staggering social impacts of draconian and outdated drug laws. He also wants to see his state start collecting the tax revenues and securing the jobs that come from a legalized recreational pot industry. Bracy told the Orlando Sentinel that he believes Florida is moving toward public support for recreational marijuana use, even if the Legislature is not.

It is always good to hear about politicians doing their best for their constituents.

Today, the Washington State Liquor Control Board (LCB) issued a message on its Listserv notifying cannabis production applicants that they will be restricted to just one license to produce and that they will be permitted to operate at 70% of total expected production.

The message from the Board states as follows:

The Washington State Liquor Control Board (Board) today approved staff’s recommendations to limit the number of individual marijuana producer licenses to one and initially limit production at 70 percent, clearing a path for the agency to begin issuing producer and processor licenses. 

Today’s Board action clears an obstacle and allows the agency to begin issuing marijuana producer and processor license in the coming weeks,” said Board Chair Sharon Foster. “We believe this is the most fair and equitable way to get the market up and running.” 

In its marijuana enforcement guidelines issued August 29, 2013, the Department of Justice required that states ensure a tightly regulated and controlled market to prevent diversion of product to other states, sales to minors, and other concerns.

The LCB used available consumption data supplied by its consultant, BOTEC Analysis Corporation, to craft production limits in its rules to meet initial consumer demand without over-supplying. The rules were based on BOTEC’s input that the state can capture 13-25 percent of the overall market in the first year of recreational sales. According to BOTEC, additional production is likely necessary for the state to capture an increasing percentage as the market refines and matures.

Agency rules (WAC 3214-55-075 (8)) currently state that “if the total amount of square feet marijuana production exceeds two million square feet, the Board reserves the right to reduce all licensees’ production by the same percentage or reduce licensee production by one or more tiers by the same percentage.”

The LCB closed a 30-day application window for marijuana licenses on December 20, 2013. During that period, the LCB received 2,858 marijuana producer applications. The plant canopy of these applications far exceeded the plant canopy set by the Board in its rules. Of these applications, over 900 involve a party that filed more than one marijuana producer application. The rules currently allow for up to three licenses per licensee.

In an effort to reduce the plant canopy for marijuana production, the LCB intends to file an interim policy that limits any qualified entity or principals within any entity to one marijuana producer license. If any entity or principal has more than one marijuana application pending, LCB staff will contact the applicant to offer them the option of withdrawing their additional applications for a refund or having their additional applications put on hold for up to one year or until the Board determines whether additional marijuana producer licenses will be granted.

Bottom Line: If you were planning on having a 30,000 square foot marijuana grow in Washington State, you will now only be limited to a 21,000 square feet grow area (70% of 30,000) unless and until the LCB decides otherwise. The general lesson here for those in the cannabis industry in Washington (and elsewhere) is that cannabis regulations are going to be a constantly moving target for quite some time and that one of the tricks of this trade will be to maintain business flexibility to allow for these types of changes.

One of our jobs as cannabis business lawyers is to work with our clients in figuring out what must be done now and what can wait until later. Be sure to make your leases and service contracts flexible and calculate for extensions. This latest regulatory shift by the LCB is just one of many, and it only reinforces the benefit of delaying certain things whenever possible. 

Update: One of our cannabis business lawyers, Hilary Bricken, was interviewed for this Reuters article on this last minute change, and she had this to say about it:

“It’s coming too late in the game,” said Hilary Bricken, a Seattle-based marijuana business lawyer. “Many growers made decisions on properties six to nine months ago and are now going to pay the price.”

Obviously, these sort of last minute changes make doing cannabis business only more difficult.

As cannabis business lawyers, it is our job to be very precise. As such, there are two issues about which we frequently find ourselves having to correct our clients. In many different states.

The first is when our clients in states or counties or cities where marijuana has been decriminalized tell us that marijuana is legal there. It isn’t.

You can be fined for parking in a no parking zone but you cannot be jailed for that. The same is true for decriminalized marijuana.

The other big difference between decriminalized marijuana and legalized marijuana is that when marijuana is legalized, it can and is regulated and taxed–there’s a legal chain of distribution. Decriminalization typically means that it is not regulated and many normal taxation rules do not apply.

The second is when our clients just assume that because marijuana is legal in their state that it is also legal wherever they may be in the state. Unfortunately, that is not always true.

Let’s look at four states by way of example:

Washington. Recreational marijuana is legal in Washington State for both licensed entrepreneurs and adults 21 and over, but there are a number of cities and counties that have prohibited selling marijuana within their city limits. This prohibition is of questionable legality, but unless and until someone prevails on a lawsuit against one of these cities, the prohibition is there. It bears noting that a bill is currently pending in the state legislature to prohibit cities and counties from banning marijuana.

California. California obviously doesn’t have recreational marijuana as they’re still operating under a medical marijuana system. Sales of marijuana are prohibited and the usual business model is a non-profit based on donations. Nonetheless, each city literally has a different ordinance or ban in play (Los Angeles seems to constantly ban and repeal its local marijuana laws). Moreover, California’s State supreme court last year ruled that cities could freely ban marijuana commercial activity because the law never said they couldn’t.

Illinois. Illinois is moving forward with legalizing medical cannabis, but there is already talk by a number of cities and counties of banning medical cannabis locally or looking to aggressively zone it into near non-existent areas. We urge cannabis stakeholders in Illinois to contact their state lawmakers and suggest that they follow the lead of the politicians in Washington and seek to enact a state law prohibiting the balkanization of medical cannabis laws within the state. If the locals don’t participate, the industry will never successfully get off the ground.

Nevada. Nevada is also in the throes of revising its medical marijuana program to allow for licensed dispensaries. Though the state has finally clarified that a licensed chain of distribution will take place, we recently blogged about the Las Vegas City Attorney’s absolute refusal to move forward with implementation in Sin City. Even though what happens in Vegas stays in Vegas, the authorities there have cold feet over marijuana.

Oregon. Oregon, like Nevada, has revised its dispensary laws to provide for a licensed State system. Nonetheless, cities are still continuing to ban marijuana commercial activity, characteristically hanging their hats on waiting until the legislature and regulatory agencies make their decisions. This is a mistake for cities if a State law has passed and the regulatory agencies are promulgating rules. It’s incumbent upon all industry players to get a seat at the table with their city councils to ensure that their voice is heard. Education and participation, people. That’s the way to prevent one of these draconian bans.

The bottom line? Marijuana regulation is a moving target on the local level. Even though state legislatures may be enlightened enough to listen to their constituents to pass these laws, that in no way means that all cities and counties within the state are on the same page. What that means for you is that you must stay educated on the laws and politics in your area because it could be the difference between commerce and crime.

Legalized cannabis has so far been confined only to certain states and cannabis remains illegal under federal law. If you have a marijuana business in a state where marijuana is legal, you need to ensure your contracts take into account this state/federal dichotomy. If you don’t, you may find yourself unable to enforce your contract.

Let me explain.

In states where marijuana (be it recreational or medical) is now legal, your marijuana business is now legal. With this legitimacy comes the expectation that you will operate like a legal business. For us cannabis business lawyers, this means that we are constantly drafting all types of contracts for our cannabis business clients. We draft leases. We draft employment contracts. We draft distribution agreements. We draft licensing agreements. We draft purchase and sale agreements for all sorts of items that go with operating a legal cannabis business, including contracts to buy and sell cannabis trademarks and copyrights.

We draft our cannabis contracts to require resolution of disputes in the state in which the medical cannabis business operates, to ensure that the contract will be enforceable. Because of federal prohibition, the federal courts are not likely to enforce most contracts entered into by cannabis businesses, and they certainly will not enforce a contract to buy or sell cannabis. In other words, if you should find your cannabis business in a federal court, (be it a district or bankruptcy court), or in a state court where marijuana is still illegal, there is a good chance the court will deem your contract void and will not enforce it. The same goes for states that have not legalized cannabis.

In real world business terms this means that if your cannabis business is going to use contracts to protect its business interests, (which it should), and you want to be able to enforce those contracts, (which of course you do), you are going to want to avoid the state and federal jurisdictions where marijuana remains illegal. In other words, you need to ensure your dispute will stay in your “home” court. Such forum selection clauses have the added benefit of minimizing the risk that the counter-party on your contract can remove your case to federal court after you sue in state court.

Therefore, you must be certain that any contract you sign on behalf of your cannabis business contains a provision making clear that all claims must be resolved in the state courts of the state in which you operate. Be sure the contract also provides that the contracting parties waive any right they might have had to pursue claims in or remove claims to a federal court.

Bottom LIne: The patchwork of legalization on the state and federal levels creates obstacles for cannabis business at nearly every turn, but finely tuned contracts provide one opportunity to put some predictability into your business relations.

 

Our own cannabis business lawyer extraordinaire, Hilary Bricken, will be appearing live today on MSNBC at 1:30 p.m. PT, 4:30 p.m. ET. Hilary has been asked to appear on Disrupt with Karen Finney to discuss “the politics of pot legalization” right before the start of the Super Bowl. We also expect Hilary to opine on marijuana in the workplace, including in the NFL.

We urge you to watch Hilary give a rousing talk on national TV on the virtues of cannabis.

UPDATE: Hilary spoke mostly on how the states that have legalized marijuana or plan to legalize marijuana, must do so in such a way so as to favor legal cannabis businesses over illegal cannabis businesses. This means giving legal marijuana businesses access to banking and to reasonable taxation and regulatory systems.

Click here to watch the whole thing.