Cannabis Business Blog

During our April 10 event, “Moving Forward Under Measure 91,” in Portland, Ore., we addressed a number of complex issues regarding the developing marijuana industry. This blog series will answer questions that we may not have been able to get to during the Q&A portion of our event. Make sure to keep checking back here, or subscribe to our blog for updates!

“Is the Process of Bankruptcy Different for Marijuana Businesses?”

Some marijuana businesses and their owners have actually been denied the protection of bankruptcy in several U.S. courts. A bankruptcy trustee is an officer of the federal courts, and must uphold federal law. Because marijuana is a Schedule I drug under the federal Controlled Substances Act, some courts have deemed bankruptcy trustees unable to take possession of marijuana businesses and their assets. The trustees are therefore unable to perform their duties, and those bankruptcy cases have been dismissed. See, e.g., In re Arenas, 514 B.R. 887 (Bankr. D. Colo. 2014).

While federal bankruptcy protection may be unavailable to marijuana businesses until a change is made to federal law, it is possible that some state-level remedies will be available to insolvent marijuana businesses or their creditors. For more detailed information about marijuana businesses and bankruptcy, and recommendations for how to begin considering state-level approaches, see our article in Marijuana Venture magazine: “Marijuana business denied protection by bankruptcy court.”

On Friday, Governor Jay Inslee signed Senate Bill 5052, reshaping Washington’s medical marijuana law and largely merging commercial medical marijuana production and sale into the regulated I-502 recreational system.  This law will have a significant impact on medical marijuana providers and patients. In this brief update, however, I will highlight some of the changes that will impact current participants in the recreational marijuana market or those who wish to join the merged recreational/medical system.

Retailers and Medical Endorsements

Under the new law, medical marijuana will be sold by licensed retailers who obtain a medical marijuana endorsement from the renamed Washington State Liquor and Cannabis Board (mercifully preserving the Board’s useful acronym).  Any retailer who acquires an endorsement must carry products that are identified by the Department of Health as beneficial to medical marijuana patients and comply with what will likely be a host of additional regulations adopted by the Department and the WSLCB.

By July 1, 2016, the law will bring to an end unregulated collective gardens.  Although individual and collective growing by no more than four medical marijuana patients (or designated providers) for their own use will remain lawful (subject to WSLCB regulation), the retail sale of recreational and medical marijuana will be limited to licensed stores with medical endorsements.  Current recreational retailers will need to assess the pros and cons of serving the medical marijuana market and begin to take steps to prepare for applying for a medical marijuana endorsement.

New Retail Licenses

Under regulations to be adopted, the WSLCB will reopen the licensing process for retail stores and issue new recreational licenses to meet the needs of the medical marijuana market.  The law directs the WSLCB to increase the maximum number of retail outlets authorized to operate in each county to accommodate the needs of medical patients.  Unlike the prior I-502 lottery, however, this round of licensing will be merit-based and intended to identify retailers who have a demonstrated history of legal compliance, qualifications and experience in the marijuana industry, and familiarity with the needs of medical marijuana patients.  The specific merit factors, timing, and licensing process will be determined by WSLCB regulation and interested applicants must take measures to stay abreast of this process and react quickly.

The WSLCB will give first priority to applicants who applied for a recreational retail license in the I-502 lottery (prior to July 1, 2014), who have operated or been employed by a medical marijuana collective before January 1, 2013, who have maintained appropriate business licenses, and who have a demonstrated history of paying applicable state taxes and fees.  Second priority will be given to applicants who have operated or been employed by a medical marijuana collective before January 1, 2013, maintained business licenses, and paid state taxes and fees, but who did not previously apply for an I-502 license.  This priority structure presents an opportunity for applicants who were unsuccessful in the I-502 licensing lottery, but have a tax and business licensing compliant history in the medical marijuana industry and are willing to incorporate medical marijuana into their retail business model.

Accordingly, participants in the medical marijuana market who did not maintain a business license or pay state taxes and fees may face a challenge in entering the new medical marijuana market structure and should take steps now to ensure compliance.

Producers and Processors

The law directs the WSLCB to reconsider the size of the total production canopy to address the need for production of medical marijuana within the regulated system.  In addition, existing licensed producers may designate production space for the production of plants determined by the Department of Health to be appropriate for medical use.  The LCB is directed to increase the production space allotted to those producers.  If current producers do not claim the total increased production canopy, the WSLCB is empowered to reopen licensing for new producers who commit to grow plants destined for medical-endorsed retailers.

Regulations

One of the chief purposes of SB 5052 is to bring medical marijuana under the regulations already adopted by the WSLCB for the I-502 recreational system, including regulations requiring seed to sale tracking, testing and product safety, product packaging, retail store locations, and more.  In general, retailers selling medical marijuana under a medical endorsement will need to comply with these WSLCB rules, and be prepared to address the rapid regulatory changes that have occurred in the past year and will likely continue to occur.  In addition, the new law will establish additional areas of regulation that have not previously existed in the recreational system or that are specific to medical marijuana.  For example, the law authorizes regulations to implement a new medical authorization database and define retailers’ responsibilities for inputting information and issuing recognition cards to patients.  In addition, the Department of Health will adopt regulations addressing beneficial medical marijuana products, safe handling requirements, a new “medical marijuana consultant certificate,” and requirements for employees of medical-endorsed retailers.  Finally, the law authorizes the WSLCB to conduct controlled purchase programs to enforce the restrictions on sales to minors and authorizes licensed retailers to conduct their own in-house controlled purchase programs to monitor compliance by employees.

We’d like to thank everyone who attended our seminar, “Moving Forward Under Measure 91,” last Friday, in Portland! It was a great event, and we were even featured as part of a KGW-TV news segment.

As promised, we’ve included links to presentations by GSB attorneys, the Oregon Liquor Control Commission, League of Oregon Cities and Association of Oregon Counties. Beginning next week we will begin our blog series addressing questions that we may not have been able to get to during the Q & A. Make sure to keep checking back here, or subscribe to our blog for updates!

OVERVIEW OF MARIJUANA BUSINESS PLANNING

• Andy Aley, Garvey Schubert Barer

• Claire Hawkins, Garvey Schubert Barer

• Jared Van Kirk, Garvey Schubert Barer

• Hal Snow, Garvey Schubert Barer

CITY AND COUNTY PERSPECTIVE

• Sean O’Day, General Counsel, League of Oregon Cities

• Rob Bovett, Legal Counsel, Association of Oregon Counties

• William Kabeiseman, Garvey Schubert Barer

OREGON LIQUOR CONTROL COMMISSION

• Tom Towslee, Acting Communication Director, Marijuana Programs, Oregon Liquor Control Commission

Garvey Schubert Barer invites you to “Moving Forward Under Measure 91” a free public event, Friday, April 10, 2015 at the World Trade Center Portland.  The half-day event (8:15 a.m.–1:00 p.m.) will address the business, legal and practical implications of Measure 91 for anyone looking to do business in the marijuana industry.

Representatives from the Oregon Liquor Control Commission, Association of Oregon Counties and League of Oregon Cities, will speak about the important role city and county government plays in shaping and regulating the Oregon marijuana industry. In addition, Garvey Schubert Barer attorneys experienced in representing licensed marijuana growers, processors and retailers in Washington state will discuss general business planning needs unique to the emerging recreational marijuana industry.

Licensed marijuana and marijuana-related businesses in the U.S. face extraordinary legal challenges. Not only are these businesses burdened with challenges inherent in any new industry, but also must deal with complex and evolving state and local regulations, as well as uncertainty resulting from federal law.

Featured speakers and topics include:

• • Tom Burns, Director of Marijuana Programs, Oregon Liquor Control Commission, discussing OLCC’s anticipated and developing rules and regulations;

• • Sean O’Day, General Counsel, League of Oregon Cities, discussing cities’ perspectives and zoning issues;

• • Rob Bovett, Legal Counsel, Association of Oregon Counties, discussing counties’ perspectives and zoning issues;

• • William Kabeiseman, Garvey Schubert Barer, Discussing local perspectives and zoning issues;

• • Andy Aley, Garvey Schubert Barer, Discussing financing and operating a regulated marijuana business;

• • Claire Hawkins, Garvey Schubert Barer, Discussing intellectual property, trademarks and trade secrets;

• • Jared Van Kirk, Garvey Schubert Barer, Discussing labor and employment practices;

• • Hal Snow, Garvey Schubert Barer, Discussing asset protection planning.

Garvey Schubert Barer’s Cannabis Industry Group is part of its Regulated Industries Practice which serves businesses across a broad range of industries, including alcohol, radio and television broadcasting, government contracting, healthcare, and maritime.  The Cannabis Industry Group is comprised of attorneys experienced in finance, tax, real estate, intellectual property, employment, commercial litigation and criminal defense. This breadth of legal experience provides state-licensed marijuana businesses, and businesses serving the licensed marijuana industry, full-service representation.

The event is open to the public but space is limited. 

Despite some early grumbling from Congress threatening to block DC’s ballot initiative from becoming law (because of DC’s special status, DC ballot initiatives do not become law until they pass through a 30-day Congressional review period), with only a few hours to go, it appears that the review period has come and gone.

DC Mayor Muriel Bowser held a conference yesterday outlining the new DC law and how it would be enforced.  Under DC’s new law, anyone 21 years of age or older will be able to lawfully:

• • Possess two ounces or less of marijuana;

• • Use marijuana on private property;

• • Transfer one ounce or less of marijuana to another person, as long as (a) no money, goods or services are exchanged and (b) the recipient is 21 years of age or older; and

• • Cultivate within his or her primary residence up to six marijuana plants, no more than three of which are mature.

It will remain illegal in DC for anyone to:

• • Possess more than two ounces of marijuana;

• • Smoke or otherwise consume marijuana on public space or anywhere to which the public is invited; including restaurants, bars, coffee shops, and public housing;

• • Sell any amount of marijuana to another person; or

• • Operate a vehicle or boat under the influence of marijuana.

Some Members of Congress are upset about the new law and Representative Jason Chaffetz, Chairman of the House Committee on Oversight and Government Reform, has written to Mayor Bowser, warning her that implementation of the DC law is illegal because it would violate the federal spending bill passed at the end of last year barring federal funds from being used “to enact any law, rule, or regulation to legalize or reduce penalties associated with the possession, use or distribution” of marijuana.   Chairman Chaffetz has also launched an investigation, demanding that Mayor Bower provide his Committee with information about efforts related to DC’s enactment of the ballot initiative.

This article was original published in Marijuana Venture magazine in June, 2014

Last month, in the first half of this two-part series on strategic planning, we reviewed the important fact that the growth, processing, distribution, retail sale and use of marijuana, while legal under state law, remains illegal as a controlled substance under federal law. The Aug. 29, 2013 Cole memo is guidance from the federal government which provides that the federal government will not enforce the marijuana laws in Washington so long as the state does an adequate job of preventing the marijuana industry from being abused in the state of Washington.

The Cole memo is guidance which could be amended or withdrawn at any time either in whole or part. The impact would lead to criminal prosecution and severe economic hardship.

So what do we recommend for the I-502 business participant?

As mentioned at the end of the last month’s article, we recommend that the I-502 business person utilize a strategic asset ownership plan of limited liability companies (LLCs) and trusts to isolate the risk inherent with the I-502 business from the other assets of the business participant.

Structuring with LLCs: The I-502 business should be owned by an LLC (Washington state law appears to require that the business be owned by an LLC formed under Washington law. See WAC 314.55.020(7)). If the I-502 business person has several I-502 related businesses each business should be operated within its own LLC. The reason for this is to isolate the liabilities associated with each I-502 business within its own separate LLC. We further recommend that the I-502 business person have a second LLC hold the ownership in the I-502 business entity (the operating entity).

The ownership LLC provides a second layer of protection by having both the ownership and operation of the I-502 business in LLCs.

Under Washington law, assuming the investors of the LLC properly operate the LLC and treat it as a separate, independent legal entity, the liabilities associated with the operation of the I-502 business should remain within the LLC and not “bleed” over into the other assets of the I-502 business person. (In the event the federal government reversed the prosecuting of violators of the Controlled Substance Act as it relates to Washington residents, there is no assurance this structure would protect the I-502 business person from criminal liability if found personally liable for violating the federal Controlled Substance Act.)

To read more, visit Marijuana Venture magazine online

This article was original published in Marijuana Venture magazine in May, 2014

This is the first installment of a two-part article which talks with you about issues to consider when structuring the ownership once operation of your I-502 related business has begun.

A very important issue with regard to any business, but now particularly with an I-502 business, is the isolation of the potential liability associated with the operation of an I-502 business or I-502 related business from the other assets of the business owner. This strategic planning issue is of particular concern to participants in the I-502 industry so long as the application of federal law to the business remains uncertain.

Where we are: The passage of I-502 made the sale of recreational marijuana legal under Washington State law and resulted in the creation of major new business opportunities within the state.

The problem with this new business is that the direct or indirect growing, possession, sale and distribution of marijuana remains a violation of the federal Controlled Substance Act. So what is legal under Washington law remains illegal under federal law.

To read more, visit Marijuana Venture magazine online

Back in November, DC voters approved a ballot initiative to legalize possession (of up to two ounces) and cultivation of recreational marijuana.  One of the many special things about DC, though, is that all ballot initiatives must be submitted to Congress for review before they can take effect.  DC thought it best to wait until the new Congress arrived in Washington at the beginning of the year.  So, on January 13^th, DC sent the ballot initiative to the Hill for the required 30 legislative days of review, which now runs until February 26.  In order to ‘disapprove’ the ballot initiative, both the House and the Senate would need to pass a ‘disapproval resolution,’ and then the President would need to sign it.  Unless that happens, the ballot initiative will become law.  There is no word yet on what will happen on the Hill leading up to the February 26^th deadline, but hearings seem likely and litigation is certainly not out of the question.  Stay tuned.

One of Winston Churchill’s most famous quotes comes from an October 1934 radio speech: “I cannot forecast to you the action of Russia. It is a riddle, wrapped in a mystery inside an enigma; but perhaps there is a key. That key is Russian national interest.”

Broadcasters face a similar dilemma in trying to forecast whether the Federal Communications Communication will prohibit stations from carrying ads for medical and recreational marijuana products. To date, the FCC has issued no rulings or policy statements on ads or underwriting announcements for marijuana. Nor has the Commission ruled on any complaints that raise the issue.

Here is the dilemma: Broadcasters are federal government licensees. While some states have legalized the sale of marijuana products, there still is a concern that advertising for an activity that remains a felony under federal law might present problems if a license renewal application is challenged or a complaint is filed with the FCC.

As a form of “commercial speech,” ads are protected by the First Amendment if the speech is related to a “lawful activity.” However, it is not clear whether the FCC will apply federal or state law and the answer to the question may depend on where the broadcast is heard. The argument that the advertising of marijuana is permissible is strongest if the ad is broadcast only in a state where marijuana is legal. But what if the broadcast is received in a state which has not legalized marijuana?  Or what if the broadcast program is streamed so that it can be received in all 50 states, many of which have not legalized marijuana?

The key to the FCC’s decision in determining whether to renew the license of a broadcast station is whether, in light of the station's past performance, renewal will serve the public interest, convenience and necessity - - - an extremely elusive standard.  To date, there is no FCC rule or policy prohibiting the broadcast of advertising by state-licensed marijuana businesses in an area where state and local laws permit such advertising.  Broadcasters, however, remain concerned that the Commission will not countenance the airing of broadcast ads for the use of a substance prohibited by federal law.  For example, the Colorado Broadcasters Association advises its members not to take any marijuana advertising. In the words of Justin Sasso, CBA’s President: "We boil it down to a very simple point. Broadcasters are federally licensed. Under federal law, marijuana is treated like every other controlled substance.”

On the other hand, DOJ has advised its own federal prosecutors to focus their limited enforcement investigative and prosecutorial resources on certain priorities such as preventing the distribution of marijuana to minors and cracking down on organized crime.  Moreover, in the most-recent federal budget bill, Congress has explicitly prohibited DOJ from using funds to interfere with any state’s implementation of medical marijuana laws.

Also, there is FCC precedent for the proposition that a federal prohibition on an activity should not apply to the licensee of a broadcast station who is acting consistent with state law. A case in point is Section 1304 of the U.S. Criminal Code which prohibits the broadcast of the “advertisement of any lottery or any information concerning a lottery”; violations are punished by imprisonment of up to one year or a $1,000.00 fine, or both.  Despite this federal prohibition, the FCC has allowed the advertising of lotteries by broadcasters licensed to serve communities in states where the lottery is permissible pursuant to state laws, so long as the lottery is conducted by the state itself, or by a non-profit or governmental organization.

Another case that sheds some light in this area is Greater New Orleans Broadcasting, Assn., Inc. v. United States, 527 U.S. 173 (1979), where the Supreme Court held that the FCC could not enforce its ban on advertisements for private casino gambling that are broadcast in states where such gambling is legal, even if the signal of the station reaches into a state where casino gambling is illegal.

Similar to Winston Churchill’s assessment of Russia’s foreign policy, we are unable to forecast the action of the FCC. It remains a mystery.  The key is how the FCC will interpret the public interest standard set forth in the Communications Act of  1934. The dilemma for broadcasters is that the FCC has provided no guidance on whether the airing of ads for marijuana products serves or disserves the public interest.

Alaska’s legalization and regulation effort survived intact on Tuesday night when the Anchorage Assembly voted not to opt the unified City and Borough of Anchorage out of the recently passed laws allowing commercial growing and distribution. Under the new AS 17.38.110(a), local governments and voters have the right to “prohibit the operation of marijuana cultivation facilities, marijuana production manufacturing facilities, marijuana testing facilities, or retail marijuana stores through enactment of an ordinance[.]”  Eagle River Assembly Member Amy Demboski proposed such an ordinance to opt Anchorage out of the cannabis laws shortly after Alaskan voters legalized regulated cannabis distribution in November. The Assembly voted 9-2 to reject the ordinance on Tuesday night.

This vote was very important for the legalization and regulation effort in Alaska because Anchorage is home to 41 percent of Alaska’s population. For that reason, it often leads the way for what will occur around the state.  While the future is always uncertain, the resounding defeat of the measure to opt Anchorage out of the State’s new cannabis laws ensures a state-wide discussion on how to best put forward policies and regulations that serve the best interests of the residents of the State of Alaska.

For more information on the vote, please see:

http://www.adn.com/article/20141216/assembly-kills-proposal-ban-marijuana-sales-anchorage

For more information on the statutes that were passed into law in the November vote, please see:

http://regulatemarijuanainalaska.org/full-initiative-text/