The Washington State Legislature’s 2020 regular session is proceeding, and we will be covering bills as they develop. You can see Part 1 here and Part 2 here. Wednesday, February 19 was the house of origin cutoff, meaning generally that bills need to have passed out of their house of origin (House or Senate) in order to advance further this session. Most bills that become law meet the deadline, but some exceptions permit otherwise dead bills to advance.

Some Important Updates

HB 1974, (discussed in Part 2) which would establish a cannabis commission, was reintroduced into the House Appropriations Committee, passed (as a 2nd substitute bill) out of the committee and was referred to the Rules Committee. Stakeholders have indicated to us that the bill is unlikely to advance any further.

HB 2826, (also discussed in Part 2) which would clarify the Washington State Liquor and Cannabis Board’s (“WSLCB”) authority to regulate marijuana vapor products, was passed out of committee and passed on a full House vote nearly unanimously. It is now being considered in the Senate, where a hearing has been scheduled in the Senate Committee on Labor & Commerce.

Additionally, stakeholders have indicated that each the bills discussed in Part 1 are unlikely to advance. Those were HB 2361, which concerned industry workplace standards (often called the union bill), and HB 2263 / SB 6085, which would have removed the residency requirement and would have established a marijuana equity loan program.

HB 2870 – Allow additional marijuana retail licenses for social equity purposes

HB 2870 seeks to address inequity in the current cannabis industry “for individuals and communities most adversely impacted by the enforcement cannabis-related laws.” (We had reported on another social equity bill in Part 1, HB 2263, and that bill appears to have died.) HB 2870 was actually requested by the WSLCB and quickly made its way through three committees before passing out of the House. It is now being considered in the Senate, where a hearing has been scheduled in the Senate Committee on Labor & Commerce.

HB 2870 allows the WSLCB to issue (or reissue) new marijuana retail licenses that have been previously canceled for various reasons. WSLCB currently has 13 licenses that are available to be issued. These licenses would be issued only to “social equity applicants” who submit a “social equity plan.” A social equity applicant means:

(i) An applicant who has at least fifty-one percent ownership and control by one or more individuals who have resided for at least five of the preceding ten years in a disproportionately impacted area; or

(ii) An applicant who has at least fifty-one percent ownership and control by at least one individual who has been convicted of a marijuana offense or is a family member of such an individual.

The definition of “social equity plan” is longer but means a plan that addresses some of the intent of the bill, which is to ameliorate some of the harms done to neighborhoods that were disproportionately affected by the criminal justice system, particularly as a result of marijuana criminal offenses.

The fiscal note for HB 2870 shows that it would generate nearly $10 million in tax revenue for the state.

If passed, this bill would be the first legislative or administrative effort made in Washington to address the harms done by the War on Drugs, which preceded marijuana legalization.

SB 6057 – Concerning price differentials in the sale of marijuana

SB 6057 allows for price differentials in the sales of marijuana, either in longer-term contracts between licensees or in single transactions. Currently, WAC 314-55-018 prohibits such activities, as it states, “No industry member or licensee shall enter into any agreement which causes undue influence over another licensee or industry member.” The WSLCB essentially interprets that to mean no preferential treatment, and any differences in the pricing of products may indicate to the WSLCB “undue influence.” Under the bill, reasons for price differentials could include (but is not limited to) competitive conditions, costs of servicing a retailer, and the quantity purchased. Current WSLCB interpretation is in line with so-called tied house laws which are common in the alcohol industry.  SB 6057 would move away from tied house pricing restrictions and provide marketplace participants additional pricing options.

SB 6057 has passed out of the Senate and has been referred to the House.

SB 6206 – Creating a certificate of compliance for marijuana business premises that meet the statutory qualifications at the time of application

SB 6206 amends existing law and creates a certificate of compliance that the WSLCB must issue to marijuana businesses if the license application meets statutory requirements on the date of the application. Though not obvious by the bill’s text, the intended effect of this bill is to ameliorate activities by competitors that could result in a business being shut down for being non-compliant.

Senator Ann Rivers, the Republican whip who is known for her involvement in cannabis legislation, spoke on the need for this legislation:

[I]t has become common practice for competitors to prevent other businesses from entering into a place by throwing up a storefront, if you will, for a child care center or some other type of premise that prevents someone from actually opening a store that they have been going through the permitting for….  [A] cannabis store owner may spend millions of dollars to open a business only to have it shut down at the very last second.

These three bills have all passed out of their houses of origin and will be considered by the other half of the legislature. They have therefore advanced far more than most bills ever do, though that does not mean they are destined to become law. Stay tuned for more updates.

The Washington State Legislature’s 2020 regular session is proceeding, and we will be covering new bills as they develop. You can see Part 1 here.

Some Important Updates

SB 6393, the companion bill to HB 2361 that we discussed last week, passed out of the Senate Committee on Labor & Commerce by a 5-4 vote—split along party lines with Democrats in the majority—and has been referred to the Senate Ways & Means Committee. These bills would require all licensed cannabis businesses to implement certain labor requirements for their employees, which could include providing a living wage, offering benefits, or establishing an agreement with a union (there are other business practices that would count as well). Since Democrats control both the House and the Senate, there is a good chance that this bill will pass, but it still has a long way to go.

HB 1974Establishing the Washington cannabis commission

HB 1974 would create an agricultural commodity commission known as the Washington Cannabis Commission. Commissions are public entities overseen by the Washington Department of Agriculture, and they exist to promote the general welfare of specific agricultural commodities in the state, particularly with the sale and distribution of the respective commodity. The Wine Commission and Apple Commission are both examples of current commissions. Commissions levy an assessment upon all affected producers and use the funds collected to promote the industry, often with marketing and research. This assessment cannot exceed three percent under state law.

HB 1131 – Allowing residential marijuana agriculture

Prefiled alongside SB 5155 in the Senate, HB 1131 would allow persons 21 and over to grow up to six marijuana plants in their homes. The plants and their products made from those plants would be required to have the owner’s clearly labeled contact information, and they could only be used for noncommercial purposes. Landlords would be allowed to prohibit renters from growing marijuana on their premises.

The aforementioned bill is known as “homegrow” within the industry, and similar bills have been introduced nearly every year since 2015. This year is the first year that such a bill has been before the powerful Appropriations Committee, meaning this may be the year that homegrow advances to a legislative vote. Of the 11 states that have legalized marijuana for adult use, Washington is the only state that does not allow the personal cultivation of marijuana for nonmedical purposes. Current law does allow medical patients to grow marijuana, but they must register with the Department of Health.

HB 2826 – Clarifying the authority of the liquor and cannabis board to regulate marijuana vapor products

This bill comes in the wake of last year’s vaping crisis, some of which we covered here and here. The bill would codify the emergency rule enacted late last year defining “characterizing flavor” and provide the Washington State Liquor and Cannabis Board (“WSLCB”) with broader rulemaking authority concerning marijuana vapor products. The WSLCB would be empowered to regulate devices “used in conjunction with a marijuana vapor product” and additives in marijuana products. However, its authority would have to be in conjunction with the Department of Health.

HB 2826 is an important bill because it will provide the WSLCB with broader authority to regulate marijuana products, both their ingredients and how they are made. The issue of what defined a “characterizing flavor” late last year affected the industry significantly, as many producers and processors add terpenes and other compounds to marijuana products. Furthermore, the House Appropriations Committee passed the bill unanimously and has been referred to the House Rules Committee for a second reading. If it passes that committee, there is a good chance that it will be heard on the house floor.

The Washington state legislature is currently in session, and legislators have introduced numerous bills relating to the cannabis industry. While it is too early to know which bills will advance and which will not, below is a summary of two noteworthy bills generating buzz that was discussed last month in the Washington State House Commerce & Gaming Committee. We will discuss more bills in the near future.

HB 2361 – Concerning cannabis industry workplace standards

HB 2361 would implement a point system when cannabis licensees are up for their annual renewal. It would require the licensee to accrue at least 100 points, as determined by the Washington State Liquor and Cannabis Board (“WSLCB”), to qualify for license renewal. There are nine different categories in which licensees may accrue points, and all relate to worker standards. For example, having a labor peace agreement in effect would be worth 40 points, while a collective bargaining agreement covering the licensee’s employees would be worth 60 points. Failure to reach 100 points allows the WSLCB to put the licensee on a 6-month remedial period, and licensees will face non-renewal if the threshold is not met.

This bill is rather controversial. The bill has many licensees concerned over the economic impact of what could prove to be a de facto requirement to unionize. There may be some negotiation over exempting businesses small enough (based on the number of employees).

HB 2263 – Expanding opportunities for marijuana businesses by removing residency barriers and providing access to capital for minority and women-owned businesses through a fee on certain investments.

Another controversial bill, HB 2263, concerns additional opportunities for minority and women-owned marijuana businesses by providing access to capital and low- or no-interest loans. The bill would direct the Department of Commerce to establish a marijuana equity loan program that would be administered by a marijuana equity advisory board. The program would be funded by administering a transaction fee of 1% “from any investor or financier on any financial contribution made by the investor or financier to a licensed marijuana business[.]” It appears that these sections of the bill are an attempt to provide entrepreneurs with access to small business loans. Such access is lacking in the private sector, where banks and credit unions still largely do not engage with the cannabis industry.

Furthermore, the bill would completely remove the requirement that owners be a Washington resident, and it would not require owners with less than 10% of a license to be listed as a named party on the license. Simply put, this section would transform the Washington cannabis industry, so the bill has generated significant discussion within the industry.

The bill does not seem to adequately account for ways in which licensees would attempt to circumvent the transaction fee, which can be difficult to predict. Additionally, “minority” is not a defined term within the bill, though the Department of Commerce (named within the bill) could elect to follow the definition used by the Washington State Office of Minority & Women’s Business Enterprises.

The Bottom Line:

Aside from generating buzz, there’s a common theme with both of these bills: many within the industry support the goals in spirit but take issue with the implementation of the goals. Based on conversations from within the industry, it is unlikely that HB 2263 will advance, though the fate of HB 2361 is unclear. I have spoken with numerous smaller licensees who state that they broadly support unionizing labor, but forcing it on them would incur significant additional expense and ultimately put them out of business. The devil is in the details.

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.