On October 17, Canada became only the second country in the world, after Uruguay, to legalize cannabis for recreational use. Canada’s brand new recreational market allows consumers to purchase, possess and/or share up to thirty grams of cannabis and grow up to four plants. Notably, edibles can only be made at home, and other manufactured products, such as concentrates are prohibited. However, the Canadian government expects to make edibles, concentrates and other manufactured products available for legal sale by this time in 2019.

Since 2001, Canada had limited legal cannabis use to medical purposes only. The 330,000 Canadians estimated to use medical cannabis will still be able to access their medicine through the parallel medical cannabis market under the control of Health Canada, the Canadian governmental department responsible for national public health.

Individual provinces and territories will have regulatory control over enforcement including minimum age requirements, personal possession limits, additional restrictions related to residential growing, where and how to purchase cannabis products and legal consumption locations. Currently, Ontario and Nunavut provinces are only permitting online sales via their government-operated online stores, while other provinces allow for private licensed stores, government operated stores, or both. Quebec and Alberta have opted to make the legal age of consumption eighteen to be in-line with their alcohol rules, while nineteen is the prevailing legal age in the rest of the country.

A big question Californians are asking is how will Canada’s legalized recreational cannabis industry impact the U.S. cannabis market? Most would agree that Canada’s nationwide legalization is a huge step forward for global acceptance of cannabis and will hopefully provide a workable model for legalization in more countries. But the competition it may represent is discouraging to some U.S. operators continuing to struggle with inconsistent federal policies, including banking limitations on the one hand, and large tax burdens on the other.

Many California cannabis companies, grappling with the high additional cost of state and local compliance are feeling vulnerable to competition and buyouts by well-capitalized Canadian enterprises. These fears are not entirely unfounded. The twelve largest Canadian cannabis companies, which are collectively valued at about $42 billion, are able to take on more traditional investors. An example is Constellation Brands’ massive investment in Canopy earlier in 2018. In contrast, many investors are still wary of pumping money into California companies facing the federal ban, high taxes and a slow, convoluted path to state and local licensing.

Canada, like California, foresees an on-going battle with a powerful and entrenched black market. Despite that, Canada is shaping up to be the global leader in cannabis capital and investments with an estimated 4.9 million Canadian cannabis users and a market expected to be about $5.6 billion.

If you’re in the cannabis business you know about the risk of federal prosecution and the risk of state action, especially if you fail to dot your i’s and cross your t’s under your state’s recreational/medicinal regulations. But have you considered the third rail—liability in civil litigation? Here are a few of the liability risks facing your cannabis business.

Government Civil Actions

In an interesting twist, some city and county authorities are foregoing criminal actions and bringing civil actions, seeking substantial penalties (up to $2,500 per day per violation) under the unfair competition law, California Business and Professions Code Section 17200. These actions are based on violations of other statutes or ordinances, so if your cannabis business violates any provision of the recently adopted Proposition 64, any building code, or other local ordinance, you could find yourself defending a civil case brought by the district attorney, code enforcement or some other local agency. Colorado has a similar statute, authorizing the Attorney General or district attorneys to seek civil penalties ($2,000 per violation) under Colorado Consumer Protection Act Section 6-1-112.

Beware of Sharks-Plaintiff’s Attorneys Using “Rinse and Repeat” Tactics

Some plaintiff’s attorneys wait for aggrieved clients to come for them; others go out looking for trouble. New businesses attempting to follow new laws are prime targets by this latter, more “entrepreneurial” type of attorney. For example, for many years certain plaintiff’s attorneys have filed cookie cutter complaints alleging violations of California’s Proposition 65 warning requirements. Prop 65 requires businesses to notify customers if their products contain chemicals that cause cancer, birth defects or other reproductive harm. Some law firms focus their practice on bringing Prop 65 actions against businesses, large and small that failed to provide the required warnings. Suppliers, distributors and retailers face potential liability. Now that California has decriminalized recreational cannabis and hundreds of new companies are open for business, these attorneys are targeting these cannabis businesses, alleging that they have failed to provide a Prop 65 warning regarding the health risks associated with smoking, or in some cases with ingesting, cannabis products. We’ve seen certain law firms filing dozens of identical Prop 65 cases against various cannabis businesses. These businesses also face the same exposure to Americans With Disabilities Act claims, wage and hour (pay) claims and other “cookie cutter” type cases faced by non-cannabis businesses.

Competitor, Partner and Co-Owner Civil Actions

Despite the popular image that cannabis people are laid back and litigation averse, some in the industry are willing to use litigation to seek competitive advantage. Many of the jurisdictions allowing cannabis cultivation or dispensaries have capped the number of permits. As a result, some competitors are filing lawsuits alleging unfair business practices, trade secret misappropriation, trademark infringement or other similar claims, seeking to disqualify competitors or, at a minimum, saddle them with costly litigation and slowing their growth. Cannabis businesses have vendors/suppliers, customers and employees, and each of these relationships has the potential for misunderstandings, disputes and ultimately litigation. Many cannabis operators historically ran their businesses on handshake deals, in part because until recently one could not enforce a contract with an illegal purpose. But in October, California adopted AB 1159, which provides that “activity relating to medicinal cannabis or adult-use cannabis conducted with California law…. shall be deemed to be … a lawful object of a contract….” In short, now you can enforce a contract relating to your otherwise legal cannabis business.

What You Can Do to Minimize Your Litigation Risk

Know Your Rights And Obligations. Ignorance of the law is no defense, so make sure to scrupulously follow the local ordinances as well as state law. Prominently post your Proposition 65 warnings today. Listen to cannabis trade groups as they track and report on the litigation trends.

Read the Whole Contract Before You Sign and Before You Act. Absent extraordinary circumstances, “I didn’t read it” and “I didn’t understand it” are also poor defenses. Consult with legal counsel if you have any doubts about the applicable cannabis laws and regulations. Make sure you use the right type of contract. Don’t try to repurpose a lease as a sales agreement, or an independent contractor agreement as an employment agreement. The result will be a Frankenstein agreement that exposes you to monster litigation.  Try to anticipate future events and make certain you understand the implications of the contract language. For example, under your packaging agreement, who bears the risk if the packaging plant is flooded ruining your entire crop?

Get It/Put It In Writing. In dealing with vendors/suppliers, customers, landlords, tenants or employees, if you spell out what you expect from one another there is less opportunity for the ambiguities that lead to disputes that result in litigation. Especially if you are forming a new business, make sure you and your partners have a heart-to-heart discussion about your “shared” vision for the company and that you draft a comprehensive agreement that spells out who owns what, how your company will make decisions and how you will resolve any disputes that may arise.

Play out various scenarios under your ownership agreement; what happens if you are super successful and Amazon wants to buy you out? What happens if the crop fails?  What happens when your company ownership changes hands? Who’s on the hook to the landlord for rent and other obligations?

An ounce of prevention can avoid the pounding headaches that come with civil litigation.

Today, United States Attorney General Jeff Sessions has scuttled Obama-era federal law enforcement policy on marijuana. Effective immediately, the seminal Cole Memorandum and related guidance previously issued by the Justice Department have been rescinded. A copy of Sessions’ January 4, 2018, one-page memorandum announcing this policy shift can be found here.

Sessions, a strong critic of marijuana, has strongly hinted since his appointment that he would revisit federal enforcement policy regarding this Schedule I drug. Even so, the Attorney General’s announcement does not portend that federal enforcement in states where medical and recreational marijuana legislation has been passed is imminent. Sessions stated that future prosecutions are left to the discretion of individual U.S. Attorneys’ offices.

In deciding which marijuana activities to prosecute under these laws with the Department’s finite resources, prosecutors should follow the well-established principles that govern all federal prosecutions…. These principles require federal prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.

Sessions’ about-face policy shift, however, has drawn sharp criticism from several members of Congress. Senator Cory Gardner (R-Colorado) tweeted his displeasure, threatening repercussions: “I am prepared to take all steps necessary, including holding [up] DOJ nominees….” Senator Lisa Murkowski (R-Alaska) also took to Twitter to decry the policy shift noting, “Over the past year I repeatedly discouraged Attorney General Sessions from taking this action and asked that he work with the states and Congress if he feels changes are necessary. Today’s announcement is disruptive to state regulatory regimes and regrettable.” Congressional Cannabis Caucus co-chair Representative Earl Blumenauer (D-Oregon) was even more blunt in his criticism, observing that Sessions’ edict is contrary to the opinion of a “majority of Americans – including a majority of Republican voters – who want the federal government to stay out of the way,” and that today’s policy change “is perhaps one of the stupidest decisions the Attorney General has made.”

Congressional outrage aside, if anything can be read from the tea leaves of Sessions’ announcement, consider today’s statement from U.S. Attorney Bob Troyer regarding marijuana prosecutions in Colorado:

Today the Attorney General rescinded the Cole Memo on marijuana prosecutions, and directed that federal marijuana prosecution decisions be governed by the same principles that have long governed all of our prosecution decisions. The United States Attorney’s Office in Colorado has already been guided by these principles in marijuana prosecutions — focusing in particular on identifying and prosecuting those who create the greatest safety threats to our communities around the state. We will, consistent with the Attorney General’s latest guidance, continue to take this approach in all of our work with our law enforcement partners throughout Colorado.

Placing U.S. Attorney Troyer’s statement in context, while Sessions’ announcement may be shocking to many, it should not be construed to suggest that enforcement actions have not been taking place despite the Obama-era policy of lesser enforcement. In November 2014, the U.S. Attorney’s Office for the District of Alaska secured a conviction against an Alaskan resident for establishing a significant marijuana cultivation operation in his home. In May 2015, the U.S. Attorney’s Office for the District of Colorado secured a guilty plea against a Colorado resident for sending marijuana through the U.S. Mail. In November 2017, a labor union organizer was successfully prosecuted by the U.S. Attorney’s Office for the Northern District of California for money laundering of allegedly illegal drug proceeds through the banking system.

Moreover, while Sessions is clearly signaling that there is a new sheriff in town, he must rely upon his deputies to instill law and order throughout the land. These attorneys’ past prosecutions suggest that the Cole Memorandum’s enforcement priorities may still hold considerable sway going forward. Therefore, prudent marijuana businesses should keep these priorities in mind:

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

While not established policy anymore, conduct in compliance with these (former) enforcement priorities, as well as all applicable state and local laws and regulations, may be less likely to attract the attention of the “sheriff” in your town.

Last week the California Assembly passed Assembly Bill 64 (AB 64), an omnibus bill regarding medical and recreational marijuana, sending it to the State Senate for review.

Federal cannabis trademark registration appears unlikely under the current administration. The California cannabis industry and intellectual property lawyers are anticipating a trademark filing frenzy on January 1, 2018, when the California Secretary of State is scheduled to begin accepting trademark applications for cannabis goods and services.

Current Status: California Follows Federal Lead — No Cannabis Trademarks

Currently, the California Secretary of State will only register marks that are “substantially consistent with the federal system of trademark registration and protection under the Trademark Act of 1946 (15 U.S.C. §1051 et seq.) as amended. To that end, the construction given the federal act should be examined as non-binding authority for interpreting and construing this chapter.” Cal. Bus. & Prof. Code §14272.

The United States Patent and Trademark Office (USPTO) will only register trademarks relating to commerce “which may lawfully be regulated by Congress.” 15 U.S.C. §1127, and specifically the USPTO, requires that “use of a mark in commerce must be lawful use to be the basis for federal registration of the mark.” Trademark Manual of Examining Procedure §907.

AB 64 Untethers California from the USPTO Limitations

The Legislative Analyst’s Digest for AB 64 identifies the conflict between California and Federal law relating to marijuana’s legality and clarifies AB 64’s intended effect on marijuana trademarks:

(6) Existing law, the Model State Trademark Law, provides for the registration of trademarks and service marks with the Secretary of State and requires the classification of goods and services for those purposes to conform to the classifications adopted by the United States Patent and Trademark Office.

This bill, for purposes of marks for which a certificate of registration is issued on or after January 1, 2018, would, notwithstanding those provisions, authorize the use of specified classifications for marks related to medical cannabis and nonmedical cannabis goods and services that are lawfully in commerce under state law in the State of California. (Emphasis added).

Specifically, Section 2(a) of AB 64 adds Section 14235.5 to the Business and Professions Code, which will establish two new cannabis trademark and service mark classifications:

Classification “500 for goods that are medical cannabis, medical cannabis products, nonmedical cannabis, or nonmedical cannabis products;” and

Classification “501 for services related to medical cannabis, medical cannabis products, nonmedical cannabis, or nonmedical cannabis products.”

Countdown to January 1, 2018

In plain English, on January 1, 2018, cannabis businesses will finally be able to register trademarks and service marks for cannabis goods and services, including trademarks for specific cannabis strains, assuming the proposed marks satisfy the other registration requirements (i.e., distinctiveness, lack of likelihood of confusion with existing registered marks, etc.).

Given that California is the most populous state, that the California cannabis market is projected to reach $6.5 billion by 2020, and that it is currently impossible to obtain a nationwide trademark for cannabis products, the California Secretary of State may be overwhelmed with cannabis related trademark applications on January 2, 2018 (January 1 is an official  State holiday).

Unlike the USPTO, which does not require an applicant’s prior use of a mark to file an application (though proof of use is eventually needed for registration), California requires proof of actual use in commerce to file and register a trademark. Cal. Bus. & Prof. Code 14202(h). While existing cannabis trademarks already used in California may currently have common law trademark protection, registration with the Secretary of State will confer statewide rights and additional remedies.

Smart cannabusinesses should begin finding and using marks that will ultimately qualify for trademark registration well in advance of the January registration date.

* A Californian cannabusiness would have zero chance of obtaining Acapulco Gold trademark because it would be geographically misleading and because the strain is already widely used.

In 1996, Californians passed Proposition 215, the first medical marijuana initiative in the United States.  Since then, the California Legislature has enacted various laws relating to the medical marijuana industry, but there hasn’t been a comprehensive regulatory system. Until now.

Last week three California agencies issued a tangled web of proposed regulations regarding medical marijuana. The California Department of Food and Agriculture (CDFA), the California Department of Public Health (CDPH) and the California Bureau of Medical Cannabis Regulation (BMCR) each released proposed regulations. The agencies have scheduled public hearings and are inviting public comment on the proposed regulations.

The CDFA explains: “Because regulations are intended to transition California cannabis cultivation to a legitimate industry, cultivators will be provided the opportunity to operate in compliance with state laws and regulations applicable specifically to cannabis and California business requirements in general.”

The regulations cover everything from an annual license fees ($560 to $38,350), mandatory video surveillance systems, hours of operation (6:00 a.m. to 9:00 pm.) to the maximum quantity of THC per cannabis edible serving (10 milligrams).

The CDFA regulations require that applicants and licensees waive their privacy rights in effect, agreeing to immediately turn over any requested records and allow site inspections. The CDFA further mandates a “track-and-trace” system, which will allow the agency to monitor all plants and non-manufactured cannabis products.

The BMCR regulations require that delivery employees carry no more than $3,000 worth of cannabis goods at a time and also describe the logistics for BMCR’s quality assurance testing. Bringing a new definition to the term “drug testing.”

The CDPH regulations dictate packaging and labeling requirements, as well as manufacturing practices that are “substantially similar to the [Federal] Sherman Food and Drug Act and FDA requirements.”

Altogether, the three sets of regulations total over 200 pages of pretty dense reading, but various cannabis trade groups and stake holders have already drilled down into the regulations and begun weighing in on some of the pros and cons. It will  be interesting to see what kind of feedback the agencies receive and to what extent the agencies are willing to listen and actually make significant changes to the proposed regulations.

In November, Californians passed Proposition 64, allowing for recreational marijuana use. The state will begin issuing cultivation and dispensary licenses in January 2018. In January Governor Brown proposed a Budget Trailer Bill, seeking to “preserve the integrity and separation of the medicinal and adult use industry by maintaining these as two separate categories of license types with the same regulatory requirements for each.”

Many believe the recently proposed medical marijuana regulations will provide a blue print  for recreational marijuana regulations.

Yesterday, right on the cusp of 420, the California Supreme Court Committee on Judicial Ethics issued an opinion regarding “Extrajudicial Involvement in Marijuana Enterprises,” stating that judges should refrain from owning an interest in enterprises that sell or manufacture medical or recreational marijuana.

The Committee explained that California’s Proposition 215 (Compassionate Use Act (1996)) and Proposition 64 (Adult Use of Marijuana Act (2016)) did “not legalize medical or recreational marijuana” but rather that “they decriminalize certain marijuana offenses under California law.” However, “[d]espite the rapid decriminalization and new regulation of marijuana across the states, it remains a schedule I drug pursuant to the Controlled Substances Act. (21 U.S.C. §§ 801-904).”

The Opinion cited various canons proscribing judicial activities, including those requiring a judge to “respect and comply with the law” and “avoid impropriety and the appearance of impropriety…” and noted that Maryland, Washington and Colorado, three states that have decriminalized marijuana, have issued opinions prohibiting their state judges from participating in marijuana businesses.

The Committee suggested that a “reasonable person could conclude that a judge who disregards applicable marijuana laws for his or her own personal benefit is unable to act impartially anytime the judge rules on a marijuana-related matter” and that such lack of impartially could equally apply if the judge’s spouse participated in marijuana-related businesses.

The Committee concluded that a judge with “an interest in a marijuana-related business creates an appearance of impropriety, casts doubt on a judge’s ability to act impartially, and is incompatible with a judge’s obligations under canon 2 [impropriety] and canon 4A(1) [impartiality].”

However, the Opinion failed to address the hazier issue of whether California judges must also refrain from partaking of marijuana for medicinal or recreational use?  To date, there is no published ethics opinion on this issue.

The Committee appears to allude to that issue in its footnote: “The relatively recent enactment of state medical and recreational marijuana laws, and the conflict with federal law, presents a myriad of issues related to marijuana. However for purposes of this opinion, the committee addresses only the question presented [the ethics of judge having interest in marijuana enterprise].” In short, the Committee, and thus the California judiciary, face the same challenges faced by California residents; seeking to walk the tightrope between California law which permits medicinal and recreational cultivation, distribution and use and Federal law which forbids it.