Any business that provides services, products, or otherwise engages in business with the marijuana industry needs to understand and manage various unique legal and compliance risks associated with such business relationships.
Part one of this series disussed how to understand the federal government's stance on "legalized" marijuana.
3. Know that State and Local Marijuana Laws Vary
Marijuana laws vary greatly by state and local jurisdiction. The laws related to the types of permitted sales — recreational vs. medical — where marijuana can be purchased, consumed, and produced, and the licensing structure can all vary by jurisdiction. It is imperative that businesses providing services or products to MRBs (marijuana-related businesses) understand the applicable state laws and regulations. In addition, businesses should also design and implement thorough due diligence programs to ensure that MRBs are in compliance with relevant state and local law, prior to providing services and products to them. MRBs that are in violation of local or state law or one of DOJ’s (Department of Justice) enforcement priorities are more likely to be a target of federal or state prosecutorial or other action and so, too, are any businesses or individuals providing services or products to them.
Due diligence programs should include, among other things, (i) verifying with state authorities that the MRB is duly licensed; (ii) reviewing the state application and supporting documentation submitted by the MRB to the state authorities in support of the marijuana application; (iii) requesting from state authorities information related to the MRB and individuals involved with it; (iv) developing an understanding of the MRB’s normal and expected activities, including the products it sells and types of customers it serves (i.e. recreational vs. medical); (v) verifying prior violations of marijuana-related laws or regulations committed by the MRB and individuals involved with it; and (vi) ongoing monitoring of adverse public information concerning the MRB and related parties. The due diligence should be updated on a regular basis to ensure continued compliance.
4. Research Whether Your Industry or Business May be Uniquely Affected by “Legalized” Marijuana
Each business will have to evaluate independently the possible unique implications of providing services or products to the marijuana industry to their respective business. That is, some businesses or industries face certain compliance or legal issues as a result of providing services or products to the marijuana industry that others do not. For instance, businesses that participate in federal programs, such as banks participating in federally insured loan programs, may have to certify that they are in compliance with all state and federal laws in order to participate in that particular federal program. If a bank provides a loan that is subject to that federally-insured program to an MRB, the bank may not be able to certify that the loan was extended in compliance with all applicable state and federal laws. Other businesses, such as manufacturers, may need to be concerned about whether their insurance covers the shipment of goods to a MRB. Real estate developers and landlords that provide building space to MRBs, will need to ensure that use of their property that serves as collateral for a loan does not violate any loan covenants in addition to concerns regarding possible seizure of that property. Advertisers may have to comply with certain “time, place, and manner” restrictions related to the advertisement of illegal drugs. And technology companies will have to address unique issues associated with protecting their intellectual property in light of federal restrictions on intellectual property rights related to illegal activities, such as marijuana. These are just a few examples of the layers of issues that businesses must identify and address prior to providing services or products to the marijuana industry. It is important to consult with counsel to address additional unique compliance issues facing your business before engaging MRBs.
5. Understand the Civil Litigation Risks
Conducting business with the marijuana industry creates unique civil litigation risks that must be considered. Because “legalized” marijuana and the marijuana industry are developing, there are many legal uncertainties related to the industry that will likely be unanswered until courts weigh in. For instance, because the manufacture, possession, and distribution of marijuana are still prohibited by federal law, certain courts may refuse to enforce or restrict contracts related to marijuana activities. Specifically, while state courts where marijuana is legal may enforce marijuana-related contracts, federal courts may find those same contracts to be unenforceable or void as against public policy because they purport to advance activities in violation of federal law. As a consequence, businesses should consider including “choice of law” and “venue” provisions in their contracts with MRBs, which provisions require the application of the particular state’s law (where marijuana is permitted) and that any lawsuit related to the contract be filed in state, rather than federal, court in that jurisdiction. Doing so may minimize the likelihood that the contract is not enforced.
In addition, anti-marijuana interest groups and others have begun filing civil lawsuits against MRBs and those who conduct business with them (including contractors who built out the space where the MRB operates, banks that maintained the MRB’s deposit accounts, accountants who maintained the MRB’s books, and suppliers), alleging violations of the federal Racketeer Influenced and Corrupt Organizations Act (RICO) (See, e.g., Safe Streets Alliance, et al., v. Alternative Holistic Healing, LLC, et al., Civ. No. 15-cv-00349-REB-CBS (D. Colo. 2015); Safe Streets Alliance, et al., v. Medical Marijuana of the Rockies, LLC, et al., Civ. No. 1:15-cv-00350-MSK-MJW (D. Colo. 2015).). RICO was originally enacted to provide the government with a tool to fight organized crime, but may be used by private citizens as well. (18 U.S.C. § 1961, et seq.). The RICO plaintiffs in these new marijuana cases allege that the MRBs and those doing business with them are conspiring to violate the CSA and other federal laws. Given RICO’s rather broad reach, businesses and individuals who do business with MRBs are at risk of at least being named in a RICO action. And while civil RICO cases are very difficult to win, they can be complex and expensive to defend, costing defendants — even those who ultimately win — a significant amount of money in the process.
6. Consider Reputational Concerns
The marijuana industry is rapidly evolving and continues to gain wider acceptance. However, to many, marijuana still evokes a negative connotation. As such, those who do business with the marijuana industry must assess how those activities may be perceived by their existing clients, investors, and other business relationships.
7. Remember that “Legalized” Marijuana is Evolving and Unpredictable
Some states have permitted medical marijuana for nearly 20 years. Nevertheless, “legalized” marijuana — especially recreational marijuana — is relatively new and the laws related to it are often changing. Given the dichotomy between federal drug laws and state marijuana laws, there is much uncertainty related to many issues associated with the marijuana industry. That uncertainty, and the risks that go with it, will not go away until marijuana is legalized at the federal level. Further, state marijuana laws and “legal” marijuana activities could be jeopardized almost overnight by a change in the DOJ’s position related to the enforcement of federal drug laws or a change in federal administrations. Those changes could end the marijuana industry, significantly limit it, and/or result in the prosecution of those involved with it — including businesses that simply provide services or products to the marijuana industry.
All of these issues — and others — should be carefully considered by businesses prior to entering into a business relationship with a MRB. Once these issues have been carefully evaluated, the business should develop and implement policies, procedures, and employee training designed to ensure future compliance with DOJ’s enforcement priorities and minimize the business’s risks.