If cannabis licensees needed any reminder, Division Three of the Washington Court of Appeals has confirmed that the Washington Liquor & Cannabis Board (LCB) is not required to defer to local zoning laws when deciding whether to issue cannabis licenses. The issue arose from a petition to LCB by Kittitas County that argued the LCB’s licensing decisions are subject to local zoning regulations because LCB issues site-specific cannabis licenses. The LCB denied the petition, but the Kittitas County Superior Court had reversed and ordered the agency to only approve licenses that comply with local zoning. Division Three’s decision reversing the superior court’s ruling should clear up any uncertainty about LCB not making licensing decisions based on local zoning.

The appeal focused on the meaning and scope of the directive in the Growth Management Act (GMA) that state agencies are required to comply with local comprehensive plans and development regulations. Kittitas County argued the LCB is a state agency and, therefore, the GMA requires the LCB to adhere to local zoning restrictions. Several cities and counties joined in the petition because their experience indicated some cannabis license applicants do not understand that an LCB license does not override local zoning. At least one city said it spent more than $35,000 in legal fees to enforce a local zoning code against a cannabis business that received licenses in conflict with local zoning.

The LCB argued that the GMA restriction applies only to actions by a state agency in its proprietary capacity as a developer or operator of a public facility. The LCB argued its licensing decisions, including site-specific cannabis licenses, do not involve a state agency acting in its proprietary capacity. The LCB also argued that complying with the superior court order would result in an unprecedented involvement of the LCB in local land use regulations.

Division Three agreed with the LCB. The court said issuing cannabis licenses is not a siting activity because the licenses do not confer final authority to open a cannabis site. LCB regulations specify a license holder must comply with local laws, including zoning requirements before opening their doors. The court said, “Zoning restrictions remain in full force regardless of whether a license is issued. The [LCB]’s decision to issue a license in a zoning-restricted area may mean the license will have little utility. But nothing in the limited nature of the [LCB]’s license changes local development plans or undermines the GMA’s policy of coordinated development.”

Kittitas County also argued that LCB had to consider local zoning because the cannabis statute requires LCB to notify local governments of cannabis license applications and renewals, to allow an opportunity for input, and to give substantial weight to objections from local government authorities based on concerns regarding chronic illegal activity. The court said the statute requires only communication with local governments, but not compliance with local zoning laws. The court noted that while there is no statutory requirement to issue a cannabis license in conformance with local zoning restrictions, there also is no prohibition on the LCB doing so. Nevertheless, the court said that discretion is up to the LCB or the legislature, and is not for the courts.

This is not likely to be the last word on this issue. Although the LCB does not appear inclined to revise its regulations, the counties and cities probably are motivated to press the legislature for changes in either the GMA or the cannabis statute. In the meantime, cannabis licensees need to be aware that an LCB license does not override any local zoning restrictions.

On April 10, the Oregon Senate failed to pass Senate Bill 218, and instead referred it to the Rules Committee. As proposed, the bill would amend current law and delegate rulemaking authority to the Oregon Liquor Control Commission (OLCC). If the bill passes as written, the OLCC would obtain the authority to refuse to issue production licenses for an amount of time the OLCC deems “necessary.” The OLCC’s authority under the bill would not extend to a current licensee’s request for a change of location or to a “new” license application triggered by an ownership change.

Senate Minority Leader Herman Baertschiger Jr. decried the bill as “socialism” and “a stab at capitalism in pure form” to the Associated Press, and said that the state “should let the free market dictate prices.” Cannabis sits in a liminal space between its countercultural roots and its new incarnation as an agricultural commodity. The 17 “Nay” votes included 12 Republicans, Mr. Baertschiger among them, underscoring the strange bedfellows that this transition can sometimes create.

You might recall that during the spring of 2018, the OLCC announced it would “pause” review of new license applications starting June 15, 2018. This announcement created a rush for many would-be industry participants to submit applications prior to the OLCC’s deadline. Further, the pause applied to all license types — not just production license applications. The proposed bill, however, would only apply to production licenses and not extend other license types.

Executive Director of the OLCC, Steven Marks, claimed that a pause was necessary “to ensure that the OLCC is fulfilling its regulatory duties and providing timely responses to businesses in the industry.” Another argument for the pause was that “it takes significant staff time and resources to complete marijuana license renewals.” Unstated, but commonly understood, is that the OLCC recognized the misalignment of supply and demand in the Oregon cannabis market, and “paused” licensing to slow down the growth of new production canopy without exceeding their statutory authority. The intent of SB 218 is to give the OLCC this authority.

If SB 218 fails to become law, then we anticipate the OLCC will either reverse its prior decision to pause the processing of new applications or face legal challenges. The current statutory regime prohibits the OLCC from unreasonably delaying license review. ORS 475B.060(1). As noted above, the OLCC has no explicit statutory authority to cap the number of licensees. Current authority is limited to regulating aggregate canopy size under ORS 475B.085. If the bill fails, the OLCC could potentially grant new licenses, grandfather all existing licensees’ canopy size, and restrict all new licensees to a nominal (or zero) size.

The OLCC could also increase licensing fees or establish new fees to regulate supply. Nationally, the annual fee for a cannabis business license ranges from several thousand dollars to several hundred thousand dollars.  Oregon’s licensing fees are among the lowest in the country. While new or increased fees would likely face similar pushback as SB 218 from both industry stakeholders and Republican legislators, the OLCC is within its authority to do so. As noted above, both Executive Director Marks and the Oregon Secretary of State auditors are on record about the problems created by the OLCC having insufficient resources to effectively administer and oversee Oregon’s cannabis market.

In our March 15 post, we discussed the Secure and Fair Enforcement (SAFE) Banking Act of 2019 (H.R. 1595), which would, among other things,  limit federal banking regulators from taking action against banks providing services to cannabis businesses operating legally under state or tribal law. On March 28, the bill passed the House Financial Services Committee by a vote of 45-15 with three amendments added, the most important of which would apply the protections to insurers as well as to depository institutions. The bill now goes to the full House for a vote. While it is anticipated that the House will adopt the bill, there remains a relatively low chance to pass the Senate, although the environment there is subject to change.

In addition, the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act was reintroduced in both the House and the Senate of the 116th Congress on April 4. The bill, which appeared in the last Congress, would amend the Controlled Substances Act to protect people complying with state legal cannabis laws from federal intervention.

While there is bi-partisan support for both bills, whether they will proceed, and how quickly, especially in the Senate, remains unclear. It does appear that President Trump would be willing to sign one or both of the bills into law, if they passed, but this is likely something that will be subject to the final texts adopted.

 

Today, the Washington Hemp Law passed out of the Executive Committee on Commerce and Gaming with an industry-supported amendment regarding legal human consumption of hemp and hemp-derived products such as CBD. The amended language of the bill represents a significant step forward for the State of Washington in the emerging hemp industry.

Lane Powell Cannabis Team members authored and advocated for language specifically adopted into the bill.

Next steps for the bill include resolving language with the Senate version before it’s sent to the Governor’s desk for final signature. Many people in the industry will celebrate this as a significant step forward.

Carriers have long relied on the ability to cross state lines without concern that state laws may impede or end their journey. The Supreme Court’s Dormant Commerce Clause jurisprudence (including the landmark trucking case Bibb v. Navajo Freight Lines, Inc., 359 U.S. 520 (1959)), in combination with the preemptive effect of federal statutes and regulation, has allowed goods to flow with limited friction across state borders.

While it comes as no surprise that cannabis intended for consumption is an exception to the free flow of goods around the country, given the patchwork of state law and nominal federal prohibition, a lesser-known issue for carriers is the status of hemp in interstate commerce. Hemp is a variety of the cannabis sativa plant species grown specifically for industrial uses of its derivatives, such as paper, textiles, biodegradable plastics, biofuel and animal feed. While hemp looks and smells much like cannabis intended for consumption, it differs in that it contains less than .3% THC, the psychoactive component of cannabis. Hemp cultivation is legal (in varying degrees) in 41 states, but poses a challenge for both carriers and law enforcement given differing state law and limited ability to make a roadside determination of what a load contains.

The issue has come to a head in a case now before the Ninth Circuit. In January, Idaho State Police detected a strong smell coming from a box van trailer during a roadside inspection of a truck en route from Oregon to Big Sky Scientific LLC, based in Aurora, Colorado. Discovering a load of nearly 7,000 pounds of hemp legally grown under state law in Oregon, police arrested the driver on felony marijuana trafficking charges and confiscated the hemp. As described in a decision issued in early February by the District of Idaho:

the load was not concealed but, rather, in plain sight in the cargo area of the semi-truck trailer; the driver freely indicated that he was hauling hemp; the driver did not run or otherwise try to escape; and the driver did not try to dispose of the load which he was shipping. The bill of lading that accompanied the load indicated that the shipment consisted of “hemp” and that the shipment was being transported from Oregon to Colorado. (Citing plaintiff’s complaint.)

Subsequent testing confirmed the load to be legal industrial hemp as defined by the 2018 Farm Bill — that is, cannabis sativa containing less than .3% THC.

After Idaho prosecutors refused to release the impounded load, Big Sky filed a declaratory action in the District of Idaho seeking an order that they do so. The crux of the dispute was whether or not the 2018 Farm Bill preempts Idaho law, which prohibits cannabis and makes no exception for hemp. Big Sky pointed to Section 10114(b) of the 2018 Farm Bill that states, “[n]o State * * * shall prohibit the transportation or shipment of hemp or hemp products produced in accordance with subtitle G of the Agricultural Marketing Act of 1946 (as added by section 10113) through the State.” Big Sky contended that Section 10114(b) prevents Idaho from prohibiting the transport of hemp.

Idaho law enforcement, however, contended that Section 10114(b)’s prohibition applies only to hemp that is “produced in accordance with subtitle G of the Agricultural Marketing Act of 1946.” Here, the hemp was produced pursuant to Oregon law in compliance with the Agricultural Act of 2014. And while the 2018 Farm Bill authorizes states and the U.S. Department of Agriculture to create plans regulating the production of hemp, but no such plans have been approved yet. Therefore, Idaho argues, the seized hemp was not “produced in accordance with subtitle G,” and is not protected by 10114(b).

Examining the statutes at issue and considering Big Sky’s “likelihood of success on the merits,” Magistrate Judge Ronald Bush declined to grant a preliminary injunction, holding:

The takeaway from an examination of the respective arguments of Big Sky and the Defendants * * * is that a reasonable argument can be made that even though Big Sky may, at some point in time, be able to purchase industrial hemp that has been “produced in accordance with Subtitle G,” the hemp that was seized in Idaho could not possibly meet that standard because no “plans” to regulate the production of industrial hemp under the 2018 Farm Act have either been approved (by the federal government as to Oregon, as pertinent here) or created and promulgated by the United States Department of Agriculture for the federal government (to apply in the absence of an approved state or tribal plan).

* * * Primarily, the Court is attentive here to the circumstances – that is, the record carries a question as to whether Big Sky (in its efforts to get to the front of the burgeoning industry that is forming around industrial hemp) went forward without being certain that it could move any hemp it might buy from one state to another, or did so without paying attention to whether one route from Oregon to Colorado might be better than another. In one setting, it might be said that Big Sky was taking a gamble that it thought was worth taking; in another view, it might be said that Big Sky did not realize that Idaho might take a different position about whether Big Sky was free to move industrial hemp around the country (or at least across its borders). In either instance, the scale that the Court is permitted to draw from the record now before it does not slide so far as to overcome the open question about what constitutes “hemp” under the 2018 Farm Bill and the status of the regulatory framework required by that legislation.

Big Sky has appealed that decision, which is now pending an expedited hearing in the Ninth Circuit. Meanwhile, industry groups such as the American Trucking Associations are warning carriers to “exercise caution” in transporting hemp across state lines.

Whether or not hemp produced under 2014 Farm Bill regulations is within these protections is an open question. As states and tribes implement approved hemp regulatory schemes under the 2018 Farm Bill, Section 10114(b) should provide legal protection for carriers moving loads across state lines. But as the Big Sky case shows, that protection will depend on individual state compliance with the 2018 Farm Bill, requiring up to date information on the status of hemp in each jurisdiction. Further, the USDA has indicated that they do not intend to issue federal regulations or approve state plans until late 2019, leaving carriers in uncertain territory in the interim. And police agencies around the country are already noting that they are ill-equipped to determine whether transported cannabis is hemp or for consumption, raising further questions about how roadside encounters will play out.

Hans Huggler and Joan Robinson practice in Lane Powell’s Transportation Team, which provides advice and representation to a diverse range of clients across all modes. Sativa Rasmussen and Ben Pirie practice in the firm’s Cannabis Team, advising clients on federal, state and local issues involving commercial cannabis.

The City of Bellevue’s (WA) first-in-time rule to decide between competing applications for retail cannabis establishments within 1,000 feet of each other created a confusing process when first implemented in 2014 and now has led to the City’s exposure for tortious interference with business expectancy damages by a license applicant who lost out. In a March 4, 2019 published decision in Greensun Group, LLC v. City of Bellevue, Division One of the Washington Court of Appeals ruled that a trial is warranted on Greensun’s claim that the City’s denial of a recreational cannabis license improperly interfered with Greensun’s plan to open a store in downtown Bellevue.

Few would argue that uncertainty and confusion accompanied the development and rollouts of recreational cannabis regulations by the State Liquor and Cannabis Board (LCB) and local jurisdictions. The licensing process in Bellevue probably was more fraught than others due to the large number of qualified applicants, the limited number of licenses available, and restrictions on areas for operation. At issue in Greensun was which applicant got their LCB license first because the City would use that to preclude licenses for other retail cannabis shops that might be located within 1,000 feet of that applicant.

Greensun planned to open a recreational cannabis shop in downtown Bellevue at 106th and Main Street, and started the city permit process 18 months earlier when it sought to open a medical marijuana shop there. Undaunted by the City’s initial denial of the medical marijuana license, Greensun extended its lease, made improvements to the property, and applied to the LCB for a recreational cannabis license. Things got complicated for everyone after the LCB listed Greensun and 18 other applicants as qualified for Bellevue, but only allocated four retail licenses to the city. LCB held a lottery to sort out who got the licenses. Greensun initially was fifth in the lottery, but expected one of the four selectees to be disqualified due to application errors.

The City, meanwhile, had adopted an ordinance that extended interim zoning controls for retail cannabis shops and imposed the 1,000-foot separation rule. The City said if two or more applicants would be located within 1,000 feet of each other, it would apply a “first-in-time” rule to the entity that LCB licensed first. Greensun applied for a business license expecting the disqualification of one of the other lottery selectees. The City, however, denied the application because Greensun was not one of the four lottery winners.

Another of the lottery selectees submitted its application for a license to the City for a location in the same block as Greensun’s anticipated store. That applicant received LCB’s conditional approval on July 7, which was part of a batch of LCB license approvals issued that day. Greensun was not part of that initial batch of approvals, but later the same day received a conditional approval letter after the disqualification of an applicant.

Late in the afternoon of July 7, the City advised that Greensun was not “first-in-time” and could not open a retail store at the planned location in downtown Bellevue. After the LCB said it had no way to determine which applicant it had licensed first, the City asked the two competing licensees for information about which one LCB licensed first. Following submissions by both applicants, the City informed Greensun that it was not first in time. Greensun sued the City for violation of due process and the privileges and immunities clause of the Washington State Constitution, seeking declaratory and injunctive relief, claiming it would have been able to open its retail store in less than two weeks after LCB’s issuance of licenses if the City had issued the requested business license.

The trial court granted summary judgment dismissing Greensun’s claims on the grounds the City’s actions were not arbitrary and capricious. In June 2016, Division One reversed the trial court and invalidated the first-in-time rule. Greensun amended its complaint to add a claim for money damages caused by the City’s interference with its business expectancies. On cross motions for summary judgment, the trial court granted the City’s and denied Greensun’s. The March 4, 2019 decision by Division One reversed the City’s summary judgment.

The court’s ruling reviewed the five elements of tortious interference with a business expectancy and found that Greensun had alleged facts establishing all five elements. The court ruled Greensun had a valid business expectancy to open a retail cannabis store; the City knew of that expectancy; it intentionally interfered; by improper means through the regulatory course changes and definitions in the midst of the process; and caused resultant damage to Greensun, for example, the other applicant’s store in Bellevue generated $300,000 gross sales in its first month.

The court also said there were issues of fact regarding the City’s defenses of good faith interpretation of the zoning ordinance because the use of the timing of LCB licensing to determine “first-in-time” was questionable and changing. In fact, the other applicant complained to the City about its “illogical first-in-time rule.” Nor were the City’s actions necessarily protected by its discretionary immunity because a city is not protected from liability for arbitrary and capricious acts. Accordingly, the court of appeals remanded the case for trial.

Division One’s decision may not be the last word on this case. Because of the potential to open cities to greater liability for zoning and licensing decisions, the City certainly can ask the State Supreme Court to take the case, and the City likely would have strong support from other cities and local governments. If the Supreme Court declines to take the case, it would go to trial and, whatever the outcome, probably be subject to a third appeal. In the meantime, Greensun is a cautionary tale about what can happen with the implementation of a new and complicated regulatory scheme and raises the stakes for cities in all types of zoning and licensing decisions, not just those related to cannabis.

The passage of the 2018 Farm Bill signaled a bright future for the U.S. hemp industry, authorizing individual states and the U.S. Secretary of Agriculture to formulate regulatory plans permitting commercial hemp production. Secretary of Agriculture, Sonny Perdue, recently testified that the U.S. Department of Agriculture (“USDA”) is working to finalize regulations in time for the 2020 growing season, with plans to consider proposed state regulations shortly thereafter. The USDA’s timeline creates a big, unanswered question — what protections, if any, does the 2018 Farm Bill provide for hemp produced under existing state programs created under the 2014 Farm Bill?

This is not an insignificant question. As the dispute over a truckload of hemp seized by Idaho authorities hurtles towards the Ninth Circuit Court of Appeals this week, one of the key issues is whether the interstate commerce protections in the 2018 Farm Bill apply to 2014 Farm Bill hemp. In this post, we outline a favorable industry position: that hemp produced in compliance with a state pilot program under the 2014 Farm Bill has interstate commerce protections provided in the 2018 Farm Bill.

The dispute in Idaho centers on the scope of Section 10114 of the 2018 Farm Bill. Section 10114 states, in part, “No State…shall prohibit the transportation or shipment of hemp or hemp products produced in accordance with subtitle G of the Agricultural Marketing Act of 1946 (as added by section 10113) through the State.” Subtitle G added Sections 297A through 297E to the Agricultural Marketing Act of 1946. 297C directs the USDA to establish a federal regulatory plan for hemp, under which hemp can be produced in states without their own regulatory framework. 297B describes the method by which states “desiring to have primary regulatory authority over the production of hemp” may do so, by having a regulatory plan approved by the USDA. 297B also allows the production of hemp in states without an approved plan “if the production of hemp is in accordance with Section 297C of this title or other Federal laws” (emphasis added).

Therefore, hemp may be produced “in accordance with subtitle G” in one of three pathways: 1) under a federal regulatory plan promulgated by the USDA, 2) under a plan created by a state and approved by the USDA, and 3) “in accordance with…other Federal law.” In denying a request for a preliminary injunction to release the Idaho hemp, the U.S. District Court of Idaho reasoned that no plan under 297B or 297C has been issued or approved under the 2018 Farm Bill. This holding recognizes only the first two regulatory pathways, and disregarded the third. The two recognized pathways are not the exclusive legal paths for hemp production in accordance with subtitle G.

Subtitle G, added to the Agricultural Marketing Act of 1946 by Section 10113 of the 2018 Farm Bill, expressly allows the production of hemp in states without an approved plan “if the production of hemp is in accordance with…other Federal laws.” One such federal law is 7 U.S.C. § 5940, enacted in 2014 as part of the 2014 Farm Bill. 7 U.S.C. § 5940 authorizes the production of hemp in states that have a “pilot program to study the growth, cultivation, or marketing of industrial hemp.” Oregon has such a program, authorized by ORS 571.300 et seq. The Oregon Department of Agriculture has made rules governing the production of hemp in Oregon (see OAR 603-048-0010 et seq.). Therefore, hemp produced by an ODA-licensed hemp grower, who is issued a license pursuant to the authority granted to the ODA by 7 U.S.C. § 5940 and ORS 571, is produced “in accordance…with Federal law,” and thus “in accordance with subtitle G,” and is protected in interstate commerce under Section 10114.

Finally, the 2018 Farm Bill specifically incorporates existing Federal law governing the production of hemp under 7 U.S.C. § 5940. Section 7605(b) of the 2018 Farm Bill repeals 7 U.S.C. § 5940 “1 year after the date on which the Secretary establishes a plan under section 297C.” In other words, existing state pilot programs are incorporated into the new Federal hemp regulatory regime, and function as the method by which states can legally produce hemp “in accordance with…Federal law” until one year after the USDA approves plans under 297B and 297C.

Encouragingly, recent case law offers some support for interstate commercial sales of 2014 Farm Bill hemp. Relying on the 2014 Farm Bill and subsequent language in Consolidated Appropriations Act of 2018, an administrative law judge ruled that hemp-derived CBD was mailable and that Congress had “clarified its intention to allow interstate transportation” of hemp grown in accordance with the 2014 Farm Bill.

We are watching closely for developments in the Ninth Circuit as the Big Sky case is appealed and will provide updates here. In the meantime, If you have questions about the production and transportation of 2014 Farm Bill hemp, our cannabis team can assist.

On March 7, Rep. Ed Perlmutter (D-CO) introduced into the 116th Congress H.R. 1595, the Secure and Fair Enforcement (SAFE) Banking Act of 2019. The Act will, in spite of the federal Controlled Substances Act’s scheduling of marijuana, prohibit the federal banking regulators from taking actions against banks that are providing services to cannabis businesses that are operating legally under state or Indian tribal law or to businesses that provide goods or services to such legally-operating cannabis businesses.

The Act goes further than the version introduced in the last (the 115th) Congress and would protect ancillary businesses like real estate owners, accountants and other vendors from money laundering and other federal laws for taking funds from such legally-operating cannabis businesses.

Importantly, the Act would also prohibit any criminal, civil or administrative forfeiture in connection with legal collateral rights that depository institutions have in connection with loans that they make to legally-operating cannabis businesses or related ancillary businesses.

The sponsors of the legislation and virtually all state legal marijuana businesses believe strongly that the current inability of most legally-operating cannabis businesses to obtain banking services, which has led to many cash-only transactions, poses both a dangerous public safety risk as well as a greater risk for unreported income and the loss of federal and state tax revenues.

A version of H.R. 1595 was discussed at a Congressional hearing on February 13, and although the bill was referred to the House’s Committee on Financial Services on March 7, so far no action on it has been taken.

Our current view of H.R. 1595 is that the bill is fairly likely to pass the Committee and the House, but is much less certain to be adopted by the Senate.

This week the Washington state House and Senate passed versions of a new hemp bill drafted in response to federal changes in hemp law. Our Cannabis Team is happy to have participated in drafting language that was incorporated directly into the bill related to requirements for seed sourcing, elimination of a four-mile buffer zone between cannabis and hemp production sites, and CBD. The vote to approve the revised bill was nearly unanimous (95 yeas, zero nays and three excused) and is expected to be signed immediately upon receipt by the Governor. Learn more about the bill here.

We look forward to working with the Washington State Department of Agriculture on adopting the regulations and in developing its new licensing and regulatory program, following the Governor signing the bill into law.

As any farmer knows, planting season waits for no one. Washington state lawmakers are showing they understand this as well.

While other states have moved more aggressively to encourage commercial hemp, Washington’s total hemp crop in 2018 was less than 150 acres, all grown by the Confederated Colville tribes northwest of Spokane. Lawmakers in Olympia are determined that 2019 will be better — Hector Castro, Director of Communications for the Washington State Department of Agriculture recently stated, “It makes sense to assist farmers to get seeds in the ground this season.”

Legislative changes have been proposed to harmonize Washington’s hemp laws with the federal government’s 2018 Farm Bill. A legislative fix is necessary for hemp-derived CBD sales and for out-of-state hemp export.

The Washington State Department of Agriculture is also stepping up to the hemp table and considering two rulemaking changes that would benefit the industry. If successful, these rule changes would allow hemp to be grown within four miles of marijuana cultivation, and  remove the requirement that hemp farmers get permission from the DEA before importing hemp seeds.

One open issue is how to pay for the hemp-licensing program that is compliant with the 2018 Farm Bill. The program is predicted to cost just over $200,000 annually. If that cost is passed on to farmers instead of being funded by the state budget, the current $300/year hemp license fee could increase dramatically, and undercut the momentum that Olympia is trying to build.