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.

On May 28, the U.S. Department of Agriculture (USDA) issued a legal opinion that discusses the hemp-related provisions of the 2018 Farm Bill. Two of the issues addressed in the opinion are noteworthy:

Interstate Transportation

The USDA opines that states and Indian tribes may not prohibit the interstate transportation or shipment of hemp lawfully produced under the 2014 Farm Bill. This conclusion is likely to have a meaningful impact on hemp produced during the current growing season under 2014 Farm Bill programs and pending legal matters involving interstate shipments of hemp. It will be interesting to see what, if any, weight the Ninth Circuit Court of Appeals gives to the USDA position in the Big Sky Scientific case we previously covered here. Further, it will be interesting to see how states adjust to the USDA position.

Hemp and the CSA

The USDA memo opines, “hemp has been removed from schedule I of the Controlled Substances Act and is no longer a controlled substance.” The memo notes that removal provisions in the 2018 Farm Bill were self-executing and do not require further action by the USDA. Taken at face value, this position appears benign. We have previously covered the Controlled Substance Act’s (CSA) definition of marihuana here. Please note that we continue to use the spelling “marihuana” given its use as a defined term in the CSA.

Prior to the 2014 and 2018 Farm Bills, certain parts of the cannabis plant were not controlled substances (e.g., mature stalks and sterilized seeds) because of a specific carve out within the definition of marihuana. Following the 2018 Farm Bill, the term marihuana does not include “hemp” as defined in section 297A of the Agricultural Marketing Act of 1946. That section of the Agricultural Marketing Act defines hemp as cannabis having a THC concentration of less than 0.3% on a dry weight basis.

Marihuana and THC are separately included as Schedule I controlled substances within the CSA. THC that is not marihuana is still a Schedule I substance. The 2018 Farm Bill addressed the THC issue by excluding THC “in hemp.” This raises the question and potential conflict that any THC derived from hemp is not a controlled substance whereas THC derived from cannabis not meeting the definition of hemp is a controlled substance. Potential conflicts are likely to arise due to hemp derivatives. If THC in hemp is not a controlled substance, then one might argue that THC derived from hemp is similarly not a controlled substance.

Many of us might be familiar with the saying that hemp does not get you high, or that the quantity of hemp that you would need to consume to get you “high” is too much for any one person. However, if we can legally concentrate or extract THC in hemp without the resulting product becoming a controlled substance, then enforcement problems arise. THC distillate from hemp? This is arguably not a controlled substance. THC from cannabis that is not hemp? Still a controlled substance. This distinction is likely to make cannabis extract and concentrate enforcement efforts futile.

The definition of hemp depends on the plant’s concentration of THC. Our unscientific understanding of THC production within cannabis is that THC production generally does not occur until the flowering or fruiting stage. This might mean that all cannabis seeds and immature plants, regardless of their potential to produce THC in excess of the hemp limit, fit the CSA carve outs for hemp. This could have a significant impact on importing THC-heavy cannabis seeds into the U.S., and federal enforcement efforts relating to cannabis seeds and immature plants.

A recent case in Minnesota highlights the problem. A local hemp farmer faces felony charges over products containing THC levels of greater than 3% — more than 10 times the limit for hemp. According to this news article, the farmer explained that when “he concentrated [the hemp into] the oil, the THC levels can go from 0.3 percent to 2 percent.” It remains unclear whether there is a one-time hemp test for THC that applies sometime after harvest, or if hemp and hemp derivatives must continually fall below 0.3% THC. The news article quotes Thomas Gallager, a criminal defense attorney that is also on the board for the local NORMAL chapter, “federal law exempts THC derived from hemp.” This particular case may turn on the state’s controlled substances act rather than federal law. Federal law will likely remain unsettled until there is clearer guidance from the DEA or other federal authorities.

 

Last week, the U.S. Postal Service (USPS) confirmed in an expanded policy update that hemp and hemp products are mailable under certain circumstances, as set forth below.

In a statement published to the agency’s Postal Bulletin, USPS said that since the passage of the 2018 Farm Bill it has “received numerous inquiries from commercial entities and individuals wishing to use the mail to transport cannabidiol (CBD) oil and various other products derived from the cannabis plant.” As a response, in March, the institution issued internal guidelines on the matter and is now further clarifying what it considers mailable. The requirements under the updated policy are as follow:

Hemp and hemp-based products, including cannabidiol (CBD) with the tetrahydrocannabinol (THC) concentration of such hemp (or its derivatives) not exceeding a 0.3 percent limit are permitted to be mailed only when:

a. The mailer complies with all applicable federal, state, and local laws (such as the Agricultural Act of 2014 and the Agricultural Improvement Act of 2018) pertaining to hemp production, processing, distribution, and sales; and

b. The mailer retains records establishing compliance with such laws, including laboratory test results, licenses, or compliance reports, for no less than 2 years after the date of mailing.

The previous guidance required mailers to provide USPS with a signed self-certification statement, a document showing that the mailer has authorization to market the products pursuant to a state Department of Agriculture license, and a lab report detailing the THC concentration of the products. Under the new guidelines, “a mailer is not required to present the documentation at the time of mailing, but such documentation may be requested either at that time or on a later date if there is doubt about the item’s mailability or the addressee’s ability to legally receive it,” USPS wrote. “This process is consistent with existing regulations governing questions about mailability of restricted matter.”

The agency also said that it expects to further clarify mailability issues surrounding hemp products after the U.S. Department of Agriculture adopts hemp production regulations under the 2018 Farm Bill.

The Washington State Bar Association Cannabis Law Section is hosting a webinar on the state of hemp-derived cannabidiol (CBD) in Washington and across the U.S. The panelists will discuss legal considerations for advising businesses cultivating hemp, processing raw hemp into finished products and distributing hemp-derived CBD. They will also provide insights on the 2014 and 2018 Farm Bills, FDA regulations and policies, and recent changes to Washington law regarding hemp.

FACULTY

  • Joshua Ashby, Lane Powell
  • Daniel Shortt, Harris Bricken
  • Ammon Ford, Gleam Law
  • Anastasia Gilmartin, OLEO, Inc.
  • Sativa Rasmussen, Lane Powell

SCHEDULE

  • 1 p.m. Webinar Login Opens
  • 1:30 p.m. Webinar Begins
  • 2:30 p.m. Adjourn

Register today!

Barry Abbott and Jimmy Zack authored an article titled “Current Banking Issues in the Cannabis Industry” for The Consumer Finance Law Quarterly Report,  Vol. 72, No. 4, at 390 (2018). The article explores the growth of the U.S. legal marijuana market, which is expected to exceed $23 billion by 2022, as well as the impact that federal prohibitions on marijuana have on banking in the industry, leading to significant public safety concerns and extensive security expenses.

… The so-called ‘Sessions Memo’ (rescinding the Cole Memo on January 4, 2018) caused virtually all national financial institutions to refuse to engage with any marijuana-related businesses, even as those institutions were already reluctant to engage with marijuana-related businesses while the Cole Memo was still in effect.

Read the article.

By a 19-9 vote, the Oregon Senate has passed Senate Bill 582, which authorizes the Governor to enter into agreements with other states for the purposes of “cross-jurisdictional coordinate and enforcement” of marijuana-related businesses and “cross-jurisdictional delivery of marijuana items” between Oregon and other states. The bill moves to the House where it has bipartisan support, and the Governor is expected to sign.

So what does this mean for Oregon cannabis businesses? For now, not much. There are at least two additional obstacles before marijuana import/export can start. First, SB 582 becomes operative only on the occurrence of either: 1) the amendment of federal law to allow for the interstate transfer of marijuana, or 2) the U.S. Department of Justice (DOJ) issues an opinion or memorandum “allowing or tolerating” the interstate transfer of marijuana. Second, SB 582 contemplates an “agreement with another state,” which means that another state would have to pass similar enabling legislation, and the two states would then have to negotiate an agreement.

As to the federal issue, there are a few existing paths forward. Elizabeth Warren (D-Mass.) and Cory Gardner (R-Colo.) recently reintroduced the STATES Act, which would carve out state law-compliant cannabis activity from the Controlled Substances Act. Agreements of the kind contemplated by SB 582 could be legal if the STATES Act passes. Alternately, a Cole-like memorandum from the DOJ “allowing or tolerating” interstate commerce isn’t out of the question — U.S. Attorney General William Barr is on record favoring reform of federal cannabis laws.

As to the state issue, Oregon is the first to advance this kind of legislation this far. While others may follow, interstate commerce raises a host of issues affecting intrastate cannabis industries. As we’ve written about here, Oregon faces a significant oversupply of adult use cannabis, and would benefit from the ability to export it. Growers in other states might feel differently, and there could well be lobbying in the other direction as other states’ cannabis industries come online, mature and organize.

Stay tuned here for the latest, and as always, our Cannabis team is standing by.

The Washington State Legislature recently wrapped up its 2019 legislative session on April 28.  Before adjourning, the Legislature passed a number of cannabis bills.  Those bills included:

HB 1792: (Pending Governor’s signature.) Adds new crime. It would be a gross misdemeanor for a cannabis retail employee to knowingly sell cannabis products to a person under the age of 21 in the course of their employment. Existing law requires charging the employee with a felony or dismissing the charges.

HB 1794: (Pending Governor’s signature.) Expands permitted activities of a cannabis licensee to include licensing arrangements for trademarks protected by any state or foreign law. Current law is limited to trademarks protected by federal law or Washington State law.

The bill also expands permitted terms for IP licenses to include:

  1. Flat rates if the fee does not exceed 10 percent of the business’s gross sales of licensed products;
  2. Flat rates calculated based on time or milestones;
  3. Exclusivity or qualified exclusivity of the IP;
  4. Quality control and oversight provisions necessary to protect the IP;
  5. Enforcement obligations of the licensee;
  6. Covenants to use the IP; and
  7. Assignments of IP improvements made by the licensee to the licensor

IP arrangements that exclusively contain permitted provisions are exempt from the requirement that the licensor qualify for a cannabis business license, but such agreements must meet applicable regulatory recordkeeping requirements.

HB 2052: (Pending Governor’s signature.). Establishes cannabis science task force to consider lab standards and report to the Legislature no later than July 1, 2020. Clarifies testing lab accreditation requirements and delegates rulemaking authority to the LCB.  Shifts responsibility for lab accreditation requirements from the LCB to the Department of Ecology (starting in 2024). Gives the Department of Ecology authority to assess and collect fees to cover costs.

SB 5298: (Pending Governor’s signature.) Labeling changes. Requires LCB to establish new labeling rules and criteria effective January 1, 2020. Requires labeling cannabis products with the disclaimer that certain claims or statements regarding the use of such cannabis product have “not been evaluated by the State of Washington. This product is not intended to diagnose, treat, cure, or prevent any disease.”

SB 5318: (Pending Governor’s signature.) Reforms compliance and enforcement of cannabis licensees.  Gives authority to the LCB to issue a “notice of correction” license compliance matters that have no direct or immediate threat to public safety.  Requires LCB to adopt and expand current compliance education programs.  Requires LCB to give substantial consideration, for purposes of mitigating any penalty, where a licensee develops training programs, internal controls that are designed to prevent such violations giving rise to the penalty, and the licensee has not ignored the violation or other similar violations in the past.  Gives administrative law judges authority to consider mitigating and aggravating factors when hearing contested cases, and gives them the authority to deviate from any penalty proscribed by rule.

HB 1094: (Signed into law.) Compassionate care for medical patients.  Permits remote medical examinations for medical cannabis patients meeting certain requirements.

HB 1095: (Signed into law.) Requires school districts to permit students that are medical cannabis patients to consume cannabis-infused products on school grounds, on school buses, or while attending school-sponsored events.  School policy must:

  1. Require the patient’s parent or guardian to administer the medical cannabis;
  2. Establish protocols for verifying student’s medical patient status, and
  3. Identify locations on school grounds where parents or guardians may administer medical cannabis.

Permits state superintendent of public instruction and schools to suspend implementation if implementation may reasonably jeopardize future federal education funding.

 

An amended version of Senate Bill 218 passed the Oregon Senate earlier this week by a vote of 18-10. SB 218 provides that the Oregon Liquor Control Commission (OLCC) may, “based on the supply and demand for marijuana, refuse to issue production licenses…for an amount of time that the commission determines necessary.” As we reported several weeks ago, a previous incarnation of SB 218 failed to pass the Senate, with Republican legislators decrying the bill as “socialism” and an attack on the free market.

SB 218’s advocates have apparently found a cure for socialism, in the form of a sunsetting amendment that automatically repeals SB 218 on January 2, 2022. Opposition remains, but the amendment was enough to win five additional votes, more than enough to pass the Senate. The bill now moves to the House for consideration. If it passes, Governor Kate Brown is expected to sign it.

How the OLCC would implement this ability is an open question. Per his testimony before the Senate Rules Committee, OLCC Director Steve Marks anticipated promulgating temporary rules whereby the OLCC would continue processing pending production licenses so long as they had already been assigned investigators. Unassigned applications would remain in the queue with the ability to be “processed in the future if circumstances change.” If executed as Director Marks proposed, this would have significant practical consequences for applications submitted in the days leading up to June 15, 2018. As of late April 2019, the OLCC was assigning applications received June 11, 2018. However, there were at least 100 applications submitted after this date. On the OLCC’s current timeline, some of these may not be assigned to an investigator until mid- to late-Summer. SB 218 may very well be implemented before then, putting many June 2018 applicants on uncertain ground.

We are monitoring SB 218’s progress through the Oregon legislature and will continue to provide updates and analysis. In the meantime, if you have questions about a pending application, our Cannabis Team can assist.

We are proud to announce that our Cannabis Team is one of 14 Lane Powell teams recognized in the 2019 edition of Chambers® USA: America’s Leading Lawyers for Business.

The team was described as a “pioneer in the cannabis industry,” and regarded as a “leader in regulatory matters and optimal business structures.” In granting Band 1 status (the highest tier of recognition), Chambers® noted that its sources commented: “the team is highly responsive, has extensive experience and expertise, is extremely proactive and efficient,” touting our team members as “true business partners” that add “long-term value at every level and area of our organization.” We are further recognized as a “high-class team in the Pacific Northwest” representing clients “who have emerged as cannabis industry leaders.” Leading individuals named in this area include our very own Ben Pirie in Oregon and Barry Abbott in Washington. We have continued our commitment to the cannabis industry since we participated in the submission process last year, with recent hires Josh Ashby and Sativa Rasmussen, and fully expect to see additional members named next year. Learn more about our team.

Today’s passage of Senate Bill 5276 marks an important milestone in hemp legislation for the state of Washington. The bill still requires additional signatures before taking effect, however, most view the remaining process as administrative rather than substantive at this point.

Below are a few highlights regarding the points of interest that seem to come up most frequently.

Hemp in Food, Including Extracts (e.g,. CBD)

The bill allows hemp to be used as food. The Washington State Department of Agriculture (WSDA) will have the authority to regulate the processing of hemp as a food ingredient. Although the final version of the bill did not include language that would have prohibited hemp being treated as an adulterant in food, fortunately, language that could have significantly impaired the production of hemp intended for food products also didn’t make it into the bill.

Seeds and Propagule Sourcing

Licensed producers will no longer be limited to Washington or foreign sources for either seeds, clones, or other propagules — an immediate practical effect is the ability of Washington state growers to buy seed from Oregon sellers.

Controlled Substance Exclusion for Hemp

Hemp is specifically excluded from the definition of a controlled substance, and, the definition of hemp includes the derivatives of hemp (e.g., CBD). This means that CBD extracted from hemp will not be a controlled substance under Washington law.

Replaces Industrial Hemp Research Program

The new bill takes effect immediately, however, the pilot program created under the 2014 Farm Bill, and anyone licensed under the pilot program, will have through January 1, 2020, to migrate to the new program. This timeline has not been particularly controversial but is faster than would otherwise be required under the 2018 Farm Bill, which extends state pilot programs up to 12 months following adoption of the new USDA default rules expected early next year.

WSDA Will Be the Regulating Authority

The new rules will be implemented and then administrated by the WSDA, not the Washington State Liquor and Cannabis Board.

New Bill Takes Effect Immediately

Not only will this legislation immediately take effect, but the WSDA is required to implement new regulations under the expedited rulemaking process. The anticipated timeline for new rules is expected to accommodate a 2019 harvest cycle.

Testing Procedures Using Reliable Methods

The WSDA will not be limited to post-decarboxylation — the practical effect will be to greatly expedite the WSDA’s capacity to analyze whether plants are in compliance with the 0.3 percent limit on delta-9 tetrahydrocannabinol (THC). The application of heat during the testing process would not be allowed.

 Cross-Pollination, Buffer Zone Eliminated

There will be no minimum required buffer zone between recreational marijuana producers and hemp growers. Instead, the WSDA will consider any credible scientific evidence that may be presented in the future or examples of specific instances of cross-contamination and respond accordingly. The bill specifically vests a first-in-time right with whichever operation was there first in the event that a conflict arises.

If you have any questions on the new bill, please do not hesitate to contact a member of our Cannabis Team.