The Washington State Liquor and Cannabis Board (WSLCB) regulations for issuing retail cannabis licenses prohibit, among other things, a retail cannabis business within 1000 feet of the “perimeter of the grounds” of a school. In Top Cat Enterprises, LLC v. City of Arlington, a retail cannabis license recipient sought to move from Marysville, which had just passed a ban on marijuana retailers, to Arlington, where only one retail license was available. Top Cat challenged the license that had been issued to another retailer for a location on one of the Arlington Municipal Airport’s more than 100 parcels. The Arlington School District leases another lot at the 1200 acre airport and, depending on how the distance is measured, the school is either 1600 feet or 100 feet from the cannabis retailer. The ruling issued January 6, 2020 by Division One of the Washington Court of Appeals held that the correct measurement is from leased lot line to leased lot line, not from the property line of the retailer to the property line of the larger airport property.

After Top Cat could not get a license for an Arlington location, it brought an administrative challenge to WSLCB’s denial and to the issuance of a retail license to 172nd Street Cannabis. An administrative hearing officer ruled that the regulatory definition of “property line” includes leased lot lines and subleases and, therefore, the license to 172nd Street Cannabis was not in error because the retailer’s lot line is more than 1000 feet from the sublease lot line for the school. Top Cat appealed to Snohomish County Superior Court, which affirmed the hearing officer and Division One affirmed in a published opinion.

The regulations at issue provide that the 1000 foot distance “shall be measured as the shortest straight line distance from the property line of the proposed building/business location to the property line of * * * (a) [an] elementary or secondary school.” WAC 314-55-050(10). Top Cat contended “property line” means the legal description in the deed that describes the boundaries of a real property. WSLCB, relying on a 1987 Washington Supreme Court case, Mall, Inc. v. City of Seattle, argued that the usual and ordinary meaning of “property line” is “those lines which separate one’s lot from adjoining lots or the street.” The Court of Appeals agreed with WSLCB.

The court said the regulation is unambiguous, and therefore it is unnecessary to consider the legislative history of the regulation and its amendments. In addition to the interpretation in Mall, WSLCB also relied on two dictionaries that defined the property line as “the boundary line between two pieces of property.” The court of appeals ruled that includes a leased lot line. Furthermore, the court noted that the cannabis statute, RCW 69.50.331(8)(a), does not mention “property line” and only states that a marijuana business must be 1,000 feet from the perimeter of the grounds of a restricted entity. The court said that the regulation mirrors the statute, explains that the measurement is the shortest distance between two property lines, and defines “perimeter” as “a property line that encloses an area.” Consequently, the court held that WSLCB’s measurement of the 1600 foot distance between the school and the 172nd Street Cannabis lot was consistent with the statute and the regulation.

In a footnote, the court of appeals posed a hypothetical to demonstrate that Top Cat’s interpretation could lead to absurd results–The federal government owns Olympic National Park and leases a parcel on the west side of the park to a Native American tribe for a whale study school. On the east side of the park, within 1000 feet of the park boundary, a retail cannabis business seeks a license from WSLCB. Although the driving distance between the whale school and the retail location would be more than 100 miles, the court said under Top Cat’s interpretation the measured distance would be between the proposed cannabis business and the eastern edge of the park, not the lease line for the school. According to the court, “This would result in a denial of a license for the proposed cannabis business even though the driving distance between the two entities would be over 100 miles. This cannot be what the legislature or WSLCB meant when it used the terms perimeter or property line.”

It’s uncertain whether the Court of Appeals’ decision will be reviewed by the Washington Supreme Court. Meanwhile, because it is a first of its kind, the ruling could provide guidance not only to cases in Washington, but also in any other state, such as Oregon, that uses a similar 1000-foot prohibition.

Ben Pirie and Josh Ashby will be representing Lane Powell’s Cannabis Team at the Marijuana Business Conference (“MJBizCon”) next week, December 11-13, in Las Vegas. If you are interested in talking cannabis and hemp law (or learning more about Lane Powell’s Cannabis Team), connect with us to meet up while we’re there!

MJBizCon is the largest marijuana conference in the world, dedicated to the future growth of the expanding Cannabis industry and those who work in it. Bringing together cannabis professionals, growers, distributors, innovators and thought leaders from around the world, MJBizCon helps companies grow their businesses, display new cutting-edge innovations, and share how cannabis businesses are growing in a rapidly advancing market.

On November 19, the World Law Group held a webinar on vaping and the legal issues related to the current controversy in the U.S., and anticipated developments in Europe.

Listen to Josh Ashby and Pilar French’s insight on the legal issues regarding:

    • Legal distinctions between tobacco and cannabis with respect to vaping;
    • How different U.S. states are handling the vaping controversy;
    • How is products liability insurance being affected;
    • Risk mitigation for cannabis and tobacco companies; and
    • Other related issues

Join the World Law Group for an upcoming webinar on vaping and the legal issues related to the current controversy in the U.S. and anticipated developments in Europe—all WLG members, lawyers and clients are welcome to join us on November 19, 2019, from 8 – 9 a.m. PST,.

The webinar will focus on legal issues, including:

  • Vaporizing and what it is;
  • What we know about vaporizing health implications for tobacco and cannabis;
  • Differences between tobacco and cannabis with respect to vaping;
  • How different U.S. states are banning vaping;
  • What we have seen in insurance policies;
  • Risk mitigation for cannabis and tobacco companies; and
  • Other issues such as the impact on valuation of cannabis companies

Lane Powell will be represented by attorneys Josh Ashby and Pilar French as key speakers in the online event.

Register today!

Last week, federal Judge Marsha Pechman sent an ominous signal regarding the enforceability of cannabis contracts by issuing an Order to Show Cause, in which the parties have to show why the court should not dismiss the case. If the parties cannot show cause under the Order, the case will be dismissed based on the contract at issue’s unenforceability – a decision that should send a shiver down every cannabis business. This dismissal would not be precedential, but it would send a strong signal about how federal courts will treat contracts concerning cannabis.

The case, Left Coast Ventures, Inc. v. Bill’s Nursery, Inc. (case no. 2:19-cv-01297), revolves around defendant Bill’s Nursery, Inc. (“Bill’s Nursery”) alleged breach of an option agreement whereby plaintiff Left Coast Ventures (“Left Coast”) allegedly had an option to purchase Bill’s Nursery. Left Coast claims that Bill’s Nursery reneged on the agreement and filed suit.

The lawsuit was originally filed in Washington state court but was removed to federal court based on diversity jurisdiction.

The Order to Show Cause states that the contract at issue may be unenforceable under the federal Controlled Substances Act (“CSA”) because it concerns cannabis businesses, and cannabis remains an illegal substance under the CSA. Generally, the longstanding Erie doctrine provides that federal courts follow state substantive law, so contract issues are dictated by state law. Judge Pechman distinguished from that and stated,

Although Washington law governs the breach of contract claim, “where it is alleged that an agreement violates a federal statute, courts look to federal law.” Polk v. Gontmakher, No. 2:18-CV-01434-RAJ, 2019 WL 4058970, at *2 (W.D. Wash. Aug. 28, 2019) (citing Kelly v. Kosuga, 358 U.S. 516, 519 (1959) (“the effect of illegality under a federal statute is a matter of federal law”).

Judge Pechman cited directly to Polk v. Gontmakher, another cannabis contract case that was dismissed earlier this year on similar grounds. It would be a strong signal for a second case to be dismissed on unenforceability in a few months, and both here in Western Washington, which has had state-legal cannabis for seven years now.

It is not necessarily surprising that a federal judge would have this opinion, but what is notable is that we are getting these opinions in 2019, many years after cannabis was legalized. This certainly was not the first time contract enforceability between cannabis companies has come up.

If federal courts are willing to find whole contracts unenforceable due to the illegality of cannabis, then it is difficult to imagine how much weight specific provisions within those contracts would have. That said, it is still a good idea to include provisions in contracts acknowledging the federal illegality of cannabis, including a covenant that the parties agree not to raise the argument of enforceability in litigation. Most of these contracts are still litigated in state courts where they will still be held enforceable, and the risk of federal court does not negate the good sense of having a well-drafted agreement.

As we discussed last week, the United States Department of Agriculture (“USDA”) released their interim final rules for hemp manufacturing, and those rules were published in the Federal Register on Thursday, October 31. Hemp growers should note the rules on testing within the 0.3% limit that dictate whether the produced crop is classified as marijuana or hemp. These rules provide for potentially onerous situations for growers, though they are not unexpected.

Pre-Harvest Testing

Within 15 days prior to the anticipated harvest date, a designated person (from a governmental or law enforcement agency) must collect samples of the crop. While this requirement is simple enough, it could end up having important ramifications if the state agency doing the sampling takes longer than 15 days. We are familiar with multiple experiences of Washington growers having to wait many weeks for the Washington State Department of Agriculture (“WSDA”) to take samples. The USDA itself notes that sampling beyond the planned harvest date could result in tests higher in delta-9 tetrahydrocannabinol (“THC”) than they otherwise would. This occurs because cannabis plants convert cannabinoids to delta-9 THC as they approach maturity and harvest. This could mean the difference between whether an entire crop is destroyed or not, so the stakes are high.

Acceptable Hemp THC Level

The interim rules provide for some interesting tolerances on the 0.3% delta-9 THC limit, and explicitly states that product could test slightly over that limit but still qualify as hemp. The relevant rule states, “The method used for sampling from the flower material of the cannabis plant must be sufficient at a confidence level of 95 percent that no more than one percent (1%) of the plants in the lot would exceed the acceptable hemp THC level.” “Acceptable hemp THC level” means,

Acceptable hemp THC level. When a laboratory tests a sample, it must report the delta-9 tetrahydrocannabinol content concentration level on a dry weight basis and the measurement of uncertainty. The acceptable hemp THC level for the purpose of compliance with the requirements of State, Tribal, or USDA hemp plans is when the application of the measurement of uncertainty to the reported delta-9 tetrahydrocannabinol content concentration level on a dry weight basis produces a distribution or range that includes 0.3% or less.

The rule then provides an example for how this could occur. When cannabis is tested, there is a margin of error of the precision of the result. This margin of error, or “confidence level,” must be reported in addition to the actual result. For example, if a sample is tested as being 0.33% delta-9 THC, but the confidence level was 95% (meaning a 5% margin of error), that means that the sample could actually contain anywhere between 0.28% and 0.38% delta-9 THC. Therefore, because the sample could be under the 0.3% limit, it qualifies as hemp.

That same sample could fail if the test had only a 2% margin of error, because the sample then could contain only between 0.31% and 0.35% delta-9 THC.

Confidence Level

As you can imagine, this creates an interesting moral hazard on the testing laboratories, who could then be incentivized to provide as imprecise results as possible in order to appease their customers. That is why the rule requires a 95% confidence level, or no more than a 5% margin of error. Even with that margin, testing labs will still likely be incentivized to stay at that margin of error rather than trying to minimize the margin, as one might expect a scientist would hope for.

Decarboxylation

The rules state that the testing method must include a validated testing methodology that uses postdecarboxlyation “or other similarly reliable methods.” The rule states that other methods that are currently acceptable include gas or liquid chromatography. Postdecarboxlyation is the value determined that determines the delta-9 THC content in a sample after decarboxylation, which is defined in the rules as “the removal or elimination of carboxyl group from a molecule or organic compound.” In laymen’s terms, the sample is burned or heated to convert the non-intoxicating cannabinoid THCA to the intoxicating delta-9 THC cannabinoid.

Test Failures

The stakes for growers are quite high because if the samples test above 0.3% delta-9 THC, then legally they are marijuana and not hemp. Marijuana is still a Schedule I narcotic under the Controlled Substances Act and thus regulated extremely tightly. This means that the entire lot will have to be destroyed. And it doesn’t stop there: the party destroying the product must be licensed by the Drug Enforcement Agency to handle Schedule I drugs. The sample applies for the testing laboratories, because if a sample fails the test, these laboratories will then be in possession of Schedule I drugs. The rules currently don’t provide for any mechanism to cure defective lots, such as removing delta-9 THC through post-harvest extraction. It is possible that, after receiving comments from stakeholders, the USDA will provide for such mechanisms.

On October 29th the United States Department of Agriculture (“USDA”) released draft rules for hemp manufacturing and the state regulatory programs that oversee the industry with a press release. These rules will become effective when published in the Federal Register on Thursday, upon which a 60-day public comment period shall begin. At 161 pages long, the draft rules cover testing protocols, where hemp can be grown, how product should be disposed of, licensing procedures, and other requirements such as providing GPS coordinates. The USDA released sampling and testing procedures concurrently with the draft rules.

USDA Secretary Sonny Perdue said in a tweet, “At USDA, we are always excited when there are new economic opportunities for our farmers, and we hope the ability to grow hemp will pave the way for new products and markets.” The industry has waited for these rules ever since the passage of the 2018 Farm Bill that legalized hemp nearly a year ago, and the rules finally provide specifics on how the USDA and states will regulate hemp.

More information on USDA hemp rulemaking can be found here.

While we haven’t yet reviewed the entire document, some interesting points in the draft rules include:

  • Samples shall be collected within 15 days of the anticipated harvest. The rules point out that delaying could affect the concentration of delta-9 tetrahydrocannabinol (“THC”). It will be interesting to see whether states will actually comply with this, and whether there will be repercussions for states or licensees if not. We know that the Washington State Department of Agriculture (“WSDA”) requests 30 days’ notice before they test a crop, but has struggled to make timing commitments, leaving licensees with delayed testing and delayed harvests.
  • The rules provide that sampling must “be sufficient at a confidence level of 95 percent that no more than one percent (1%) of the plants in the lot would exceed the acceptable hemp THC level.”
  • “Acceptable hemp THC level” means that the rules allow for a certain amount of uncertainty in the testing, such that a crop may fall under the 0.3% limit and still qualify as hemp even if it tests above 0.3%. The rules state, “For example, if the reported [THC] content concentration level on a dry weight basis is 0.35% and the measurement of uncertainty is +/- 0.06%, the measured [THC] content concentration level on a dry weight basis for this sample ranges from 0.29% to 0.41%.”
  • The USDA is considering establishing hemp laboratory approval processes.
  • If tested plants exceed the 0.3% acceptable limit, then legally it is marijuana and not hemp. As a result, it is a Schedule I drug and it must be collected for destruction by a person authorized under the Controlled Substances Act to handle marijuana.
  • The rules direct states to provide procedures for determining negligence in hemp production, and specifically state that plants grown that tested 0.5% THC or below will not constitute an act of negligence.

The above are simply a few highlights and are by no means comprehensive. Expect some deeper dives into the rules in the coming days and weeks. As always, if you are a hemp company with questions regarding these rules or hemp laws in general, please contact us.

On September 25, the U.S. House of Representatives passed H.R. 1595, also known as the SAFE Banking Act of 2019, which aims “to increase public safety by ensuring access to financial services to cannabis-related legitimate businesses and service providers and reducing the amount of cash at such businesses,” as stated in its purpose. The bill was subsequently referred to the Senate, where it was referred to the Senate Banking Committee to await its fate.

The bill would provide safe harbor to financial institutions that provide services to a “cannabis-related legitimate business,” which is defined essentially as a company that produces, sells, and distributes (etc.) cannabis “pursuant to a law established by a State or a political subdivision of a State.” The Financial Institutions Examination Council is required to develop uniform guidance and examination procedures for financial institutions within 180 days of the bill’s enactment.

Interestingly, the bill also includes language on hemp and cannabidiol (“CBD”), which was legalized in late-2018, but still faces significant issues with banks for its close association with cannabis. The bill states, “The Congress finds that… despite the legalization of hemp, some hemp businesses (including producers, manufacturers, and retailers) continue to have difficulty gaining access to banking products and services[,] and businesses involved in the sale of hemp-derived cannabidiol (“CBD”) products are particularly affected, due to confusion about their legal status.” The bill directs federal banking regulators to issue guidance to financial institutions within 90 days of the bill’s enactment to “confirm the legality of hemp” and to provide best practices for financial institutions to follow when serving hemp and CBD companies. It is likely that this was done to appease Senate Majority Leader Mitch McConnell, a known advocate for hemp (but not cannabis).

It is difficult to speculate on the fate of the bill’s sister bill in the Senate, S. 1200, but it currently has 33 co-sponsors, including five Republicans.

Banking remains one of the largest issues for cannabis companies across the country. The cannabis industry still transacts almost entirely in cash and there are very few state-charted banks and credit unions who will serve it, resulting in exorbitant fees just to have these accounts. Because non-hemp cannabis is still federally illegal and because of the inherent difficulty in determining the legal status of hemp, national banks will not knowingly provide services to these companies. In addition to the high fees the companies must pay to the few institutions that will take them, companies also face a massive shortage in lending and capital, and when they can find it, they often face onerous interest rates and terms. If this bill were to pass Congress and be signed by the President, who has not indicated any opposition, this could be a massive boon to the cannabis industry.

The Washington State Liquor and Cannabis Board (“WSLCB”) often moves slow with rulemaking (we’re still waiting on rules for SB 5318, which was signed into law in May and went into effect in July), but occasionally they move fast. As I reported last week, on October 9 the Washington State Department of Health (“DOH”) voted to adopt rules that banned flavored vapor products, which included a rather porous definition of what was being banned.

As I alluded to in my previous post, the definition of “characterizing flavor,” which is central to the definition of “flavored vapor product,” could be reasonably interpreted differently. It could be interpreted as allowing marijuana/hemp-derived compounds (namely, terpenes) while prohibiting compounds derived from other sources, such as fruit or other plants. We at Lane Powell interpreted the rule to emphasize the importance of the taste or aroma of the compound, and whether or not it was a taste or aroma distinguishable from tobacco or marijuana (remember, this rule applies to both tobacco and marijuana). So we believed that the rule did not expressly prohibit non-marijuana/hemp derived terpenes if they provided a taste or aroma of marijuana, though we acknowledged the rule wasn’t explicitly clear on that.

The WSLCB’s Broader Take

Unfortunately, the WSLCB has a markedly different interpretation of ours, and provided further guidance to stakeholders via multiple emails in the evening of October 11. In one of their emails, they directed stakeholders to this webpage on the WSLCB’s website where they provided guidelines that, while their enforceability is questionable, at least provided more clarification than the DOH rule itself. The WSLCB states the following:

Not-Allowed and Allowed Under Emergency Rule
Per the State Board of Health’s emergency rule amending 246-60 WAC and the definition of “characterizing flavor” contained therein:

Not Allowed Allowed
Synthetic terpenes and terpenoids or other synthetic flavoring compounds Terpenes and terpenoid derived directly and solely from marijuana, as defined in RCW 69.50.101(y), or hemp plants that have been grown and tested as required by state law
Botanically-derived terpenes, terpenoids or other botanically-derived flavoring compounds, except if directly derived and solely from marijuana plants tagged within the I-502 system or hemp plants
Any other compounds that impart a “characterizing flavor” that is not specifically excluded

Any licensees wondering about the vagueness of the DOH rules should take the WSLCB’s interpretation into account, and be aware that selling marijuana products with botanically-derived terpenes risk enforcement action from the WSLCB. Licensees should also be aware of the importance of the rulemaking process, a process that the WSLCB has subverted in this case, and that this could weigh heavily if a licensee chose to appeal an enforcement action against them.

Improper Rulemaking Procedures

Like all government agencies, the WSLCB cannot reinterpret or change rules on a whim without proper procedure. The Administrative Procedure Act (“APA”) requires agencies to follow certain procedures, such as providing the public with notice and comment periods, and submitting rules to the Code Reviser’s Office. None of these procedures were followed by the WSLCB’s posting of the above information, so the information is technically not a rule.

It is also important to note here that the WSLCB has authority to enforce its own rules, but it generally should not be enforcing rules of other agencies. For example, if a licensee is delinquent in paying its taxes, the WSLCB can (and does) cooperate with the Department of Revenue to see that those taxes are collected, but the WSLCB does not use its limited resources to have its enforcement officers act as tax collectors. And while the WSLCB may deny issuance or renewal of a license due to unpaid taxes, that’s because they have an administrative rule that explicitly provides for that (see WAC 314-55-050(12)).

This is not the first time that the WSLCB has issued what amounts to rules without following proper rulemaking procedures, nor is it likely the last. For example, the WSLCB periodically issues newsletters highlighting current issues and rules concerning marijuana licensees, often including reinterpretations of rules, not just mere restatements. These newsletters are issued without following notice and comment requirements of the APA, but licensees generally must follow them as if they were rules because, again, to not do so puts them at risk of enforcement action.

This lack of procedure is worth raising on appeal of an enforcement action. But just to get there would require a months-long process at a minimum, often spending tens of thousands of dollars in legal fees. Thus, leading licensees face the uncomfortable decision of whether to follow this guidance despite not being an actual rule. As a practical path-of-least-resistance, we believe following the WSLCB’s guidance is sensible, despite the principal of the matter and lack of proper rulemaking.

Other Important Guidance

In a separate email, the WSLCB directed cannabis licensees to do the following:

  1. Cease Sales of Flavored Vapor Products. The LCB directs all tobacco retailers and vapor licensees to immediately cease sales and/or gifting of flavored vapor products.
  2. Signage. Print and prominently post this warning sign in retail locations. A Spanish version will be available soon.
  3. Cooperate with the ongoing epidemiological investigation. Local, state and federal health agencies are looking into which products have been involved with Washington cases of lung injury. We ask for your cooperation if you are contacted by someone from a state or federal epidemiology team and/or a representative from your local health jurisdiction.

We will be keeping a close eye on this issue and will update matters as they come.

On October 11, the Oregon Liquor Control Commission (“OLCC”) filed emergency rules banning the sale of flavored vaping products in Oregon for the six-month period beginning on October 15, 2019. The rules follow an October 4 executive order from Governor Kate Brown, which directed the agencies to adopt emergency rules banning the sale of “all flavored vaping products.” The Oregon Health authority has filed similar rules covering nicotine vaping products. Oregon’s ban closely follows a similar ban in Washington this week. New York and Michigan have also moved to ban flavored vaping products, and Massachusetts banned all vaping products last month.

The emergency rules add OAR 845-025-2805 to the Oregon Administrative Rules covering cannabis. Beginning on October 15, 2019, the OLCC will prohibit processors from making, and retailers from selling, cannabinoid vaping products that contains a “flavor” or a “non-marijuana terpene.” “Flavor” is defined as any “artificial or naturally-occurring substance that contains a taste or smell, other than the taste or smell of cannabis, that is distinguishable by an ordinary consumer either prior to or during the inhalation of the product, including, but not limited to, any taste or smell relating to chocolate, cocoa, menthol, mint, wintergreen, vanilla, honey, nut, fruit, any candy, dessert, alcoholic or non-alcoholic beverage, herb, spice or concept flavor.” “Non-marijuana terpene” means “a terpene or terpenoid derived from a source other than marijuana.”

Violations of OAR 845-025-2805 are Category I violations, which can be grounds for immediate suspension or cancellation of a license. The OLCC indicated in a press conference that they may do a soft rollout of sanctions against violators, including warning letters or fine, but this is not reflected in the rule text.

How the agencies will enforce this ban is unclear – terpenes that occur naturally in marijuana are also found in other botanicals. The use of non-marijuana terpenes, which are cheaper and do not require an OLCC license to produce, is common in the industry. Determining the source of a particular terpene in a vaping product presents an acute challenge for state labs that are already struggling to tell the difference between marijuana and hemp.

The OLCC will consider any “public statement or claim, whether express or implied, made or disseminated by the licensee or licensees responsible for the manufacture of a cannabinoid vapor product, or by any person authorized or permitted by the manufacturer to make or disseminate public statements concerning such products, that a product has or produces a taste or smell other than a taste or smell of cannabis” (emphasis added) to be presumptive evidence of the use of a flavor or non-marijuana terpene. Note that the underlined text in the preceding sentence likely include employees and contractors hired to do social media or other advertising. Licensees need to keep a close watch on advertising on a go-forward basis, and should also be diligent about scrubbing past posts or ads that make such claims.

The emergency rules do contemplate a process whereby the OLCC can approve requests by processors to add non-marijuana terpenes to vapor products, “so long as every component of the terpene compound is naturally found in cannabis.” The rules mandate that the OLCC will establish form and manner to submit such requests on or before November 15, 2019. The language indicates that a licensee, rather than an unlicensed manufacturer of non-marijuana terpenes, must drive the approval of a particular additive. It is not clear from the rule whether the approval of a particular additive would be limited to its use by the licensee for which it was approved, or if approval for use would allow any licensee to then use the approved additive.

The OLCC has posted a compliance bulletin that answers some of the practical questions around the implementation of the ban. Lane Powell’s cannabis team is closely monitoring this situation as it develops. Please contact us with questions about how the ban affects Oregon businesses.