SB 5318 was signed into law in Washington on May 13, and requires the Washington State Liquor and Cannabis Board (WSLCB) to overhaul its practices when enforcing cannabis regulations. But even before the bill was signed, a look through the WSLCB’s Adjudicative Proceedings Log indicates that the WSLCB had already begun making some changes in how it handled certain license-cancelling administrative violation notices (AVN). In particular, the WSLCB in 2019 has been more willing to agree to levy large financial penalties against cannabis businesses rather than cancel their licenses outright.

Cannabis businesses in Washington are quite familiar with the dreaded “True Party of Interest” AVN, which can be issued for a variety of circumstances including hidden ownership, hidden control, out-of-state ownership, undisclosed financiers, and other issues relating to the overall control or ownership of the business.

A News Article and a Spike in License Cancellations

Two years ago, Bob Young of The Seattle Times published an article criticizing the WSLCB for not cancelling licenses for hiding owners (or financiers) as is stated in WAC 314-55-530 as the appropriate penalty. Young stated that of the 36 hidden-ownership violations that had been issued since sales began in 2014, only three had led to canceled licenses. Young highlighted the case of Vela, a retail store in the SoDo district of Seattle, as a classic example of hidden ownership in which the WSLCB issued a $50,000 fine rather than canceling the license.

Since that article was published, there have been 28 final decisions from the WSLCB concerning True Party of Interest violations. Of those 28, 15 licenses were cancelled. Two others were given the opportunity to sell the license or face cancellation. Not a single fine was issued in lieu of license cancellation. Note that this only counts cases that were appealed, and not licenses that were cancelled without an appeal.

One can speculate as to what caused this spike in license cancellations — 15 (or 17 if you prefer) cancellations over two years compared to three cancellations over the three preceding years, and no large fines. It may have been related to the Times article, or it may have been related to the election of Donald Trump and his naming of anti-cannabis Jeff Sessions as his Attorney General. Or WSLCB may not have changed anything and the difference was simply by chance. Whatever the cause, the spike was clear.

A Letter From Legislators and SB 5318

Many in the industry cried foul, claiming that licenses were being cancelled as a result of inadequate or unfair investigations, and that businesses were being shut down for minor violations or mistakes. The issue came to a boil when in January 2019 a bipartisan group of 10 state legislators wrote a letter calling on Governor Jay Inslee to rescind the nomination of WSLCB board member Russ Hauge, complaining of a “toxic culture” at the WSLCB and taking issue with the severe penalties being levied against cannabis businesses.

At the same time, SB 5318 was introduced, which requires the WSLCB (a) consider de minimis violations (too small to merit consideration), (b) waive violations that are quickly rectified, (c) establish a compliance program for businesses, and (d) cease license cancelling on a first offense for many types of violations unless those violations concerned threats to public safety.

Recent Penalties: Large Fines Return

Even before SB 5318 was voted on, let alone signed, the WSLCB appeared to have finally gotten the message and changed its tune. Thus far, in 2019 the WSLCB has issued eight final decisions regarding True Party of Interest Violations. Of those eight, four have canceled licenses while the other four instead have levied fines of $50,000 or $75,000. This is remarkable when compared to 2018 and the second half of 2017 (following the Times article), in which not a single large fine was levied for a True Party of Interest Violation and 11 licenses were cancelled (and an additional two required to be sold or face cancellation).

The WSLCB has yet to issue its new administrative rules following the directive of SB 5318, but the above indicates just how wide a discretion the WSLCB is afforded in how it issues penalties that decide the life or death of a business. It also seems eminently clear that, regardless of law, the WSLCB is influenced by politics.

SB 5318 requires the WSLCB to reform, and it will issue new rules later this year. Washington cannabis businesses may enjoy a softer regulatory agency that should allow them space to get into compliance without penalty, and afford them alternatives to cancelling their license. Still, agency culture does not change easily, and businesses should be cautious and be aware that WSLCB continues to have wide discretion in what penalties it issues and how it investigates businesses. But businesses facing a True Party of Interest AVN may again entertain taking a large fine rather than losing their business, and they should review the new rules when they are released.