Avoiding [Un] Civil Litigation in Your Cannabis Business

Feb 07, 2018

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.


After Proposition 64 Does Medical Marijuana Matter?

Feb 17, 2017

medical marijuana

California’s recent recreational pot legalization brings into question the relevance of medical cannabis in a state that led the legal marijuana movement with a 1996 voter initiative giving patients the right to possess and grow cannabis reasonably related to their medical needs.

Will medical marijuana continue to matter? The answer is absolutely yes, and in many instances, it will be a preferable choice for both consumers and cannabis business operators after Prop 64’s recreational marijuana laws are implemented and applications for state business licenses are issued in early 2018.

A fundamental reason medical cannabis will continue to thrive is a growing consumer demand for cannabis products that do not provide a psychological “high.” Tetrahydrocannabinol (THC) is the psychoactive cannabis element in pot. But there is a long list of popular medical cannabis products that have only trace amounts of THC and can be used to treat pain associated with ailments such as arthritis and nerve damage. The predominant active ingredient in those products is Cannabidiol, or CBD, which is known to reduce pain, but is not psychoactive.

Business owners may have added incentive to produce medical cannabis as recreational suppliers and users enter the market. Some states have seen recreational pot prices drop significantly due to oversupply, whereas medical pot inventory and prices have generally remained steady because suppliers have not aggressively entered the more specialized medical market.

The experiences of states such as Colorado and Washington suggest that medical cannabis demand may even increase as the recreational pot market kicks into gear. That’s likely because, as cannabis generally becomes more accepted and legal, customers with medical needs who have been hesitant to purchase pot are less reluctant to seek it out.

In addition to commercial medical cannabis, home-based medical marijuana cultivators are expected to continue to grow their own plants. Prop 64 does not change the fact that individual cultivators and cooperatives are still legal under California’s 1996 Compassionate Use Act (Prop 215) and related legislation and can grow an amount of marijuana reasonably related to their medicinal needs.

In addition to a continued demand for medical cannabis products and their stable prices, local regulations and lesser-known provisions in Prop 64 that are supportive of medical cannabis will mean that medical cannabis remains relevant in California. See a few highlights below.

  • Local Jurisdictions May Restrict or Ban Recreational Permits: Prop 64 and related state cannabis laws give local governments the authority to place zoning restrictions and other limitations on their cannabis industries, including banning sales altogether. Some cities may ban recreational sales, but allow for medical cannabis commerce.
  • Sales Tax Exemption for Medical Cannabis Buyers With State ID: Prop 64 eliminates a 7.5 percent sales tax for medical cannabis buyers with a state-issued medical marijuana identification card. Once business licenses are issued under Prop 64, all cannabis operations – recreational and medical – will pay a 15 percent excise tax. Recreational purchasers will still have to pay the additional 7.5 sales tax. But, ID card-holding medical purchasers will continue to be exempt.
  • Prop 64 Makes it Easier and Safer to Obtain a State-Issued Medical Marijuana Identification Card and Related Tax Break: Prop 64 caps ID card fees at $100. Many counties now charge $150 to $175. Prop 64 also protects patients’ card data privacy through the state’s Confidentiality of Medical Information Act.
  • Prop 64 Parental Protections: Prop 64 states that it is illegal to “restrict or abridge custodial or parental rights to minor children in any action or proceeding under the jurisdiction of family or juvenile court,” as long as a patient is complying with the Compassionate Use Act. This means, for instance, the presence of pot in a household reasonably related to a parent’s medical needs would not be grounds for child protective services to remove the parent’s children.

To be clear, in order to realize the sales tax exemption described above, a medical cannabis patient must obtain a state-issued patient ID card. The state card application requires a patient’s primary doctor’s recommendation, proof of residency and related paperwork. The state process generally requires more effort than for cards issued by private cannabis card outlets, which have doctors on site to review and approve all patients’ applications. Only about 6,000 Californians currently possess the state ID cards needed for the Prop 64 sales tax exemption, but until now there has been little incentive to obtain the state card.

There’s no doubt that some consumers will conclude that the benefits of obtaining a state patient ID card are not worth the hassle involved. But, recent history shows that medical cannabis is viable even without a tax exemption. In Colorado, where a medical tax break is available only in limited circumstances, medical cannabis accounted for approximately 30 percent of the state’s $1.1 billion 2016 cannabis sales. Until 2015, when the State of Washington merged its medical and recreational cannabis regulations, medical cannabis represented one-third of the state’s market.

Cannabis operators looking to enter or expand in California will be influenced by a number of factors, including state laws incentivizing medical cannabis patients, the relative demand for medical products, and local permitting, which may restrict or ban recreational cannabis sales in areas where companies might generally prefer to locate. The California cannabis industry is growing and changing rapidly in light of new regulations, but medical cannabis is likely to be around for the long haul.