September 13, 2019

State and Provincial Regulation of Cannabis

In the year 2019, it's hard not to notice the momentum that the cannabis legalization movement has gained in the United States and Canada. As of July 2019, 11 states and the District of Columbia have legalized adult-use cannabis in the United States. An additional 22 states have legalized cannabis for medical use. And in 2018, Canada became the second nation (behind Uruguay) to legalize both recreational and medicinal cannabis nationwide. 

The program State and Provincial Regulation of Cannabis will look at these legislative changes as well as other actions that are impacting cannabis and explore what they mean for the business lawyer. Specifically, these recent events have created a myriad of new opportunities for the business lawyer. Whether you are cannabis user, a skeptic, or somewhere in between, you may have considered the opportunities that cannabis legalization could generate for your practice. But given the conflict that exists between federal law and the laws of many states, you have likely been confronted with more questions than answers. 

This program will help the business lawyer gain a better understanding of the distinction between cannabis and hemp and why this distinction matters. By way of background, cannabis (or marijuana) is a genus of flowering plants in the family known as cannabaceae. The most common species is called cannabis sativa. The plant contains compounds called cannabinoids, such as tetrahydracannabinol (THC), cannabidiol (CBD), and over 100 others. THC is the compound associated with getting "high," but scientists have begun to study the effects of other cannabinoids, such as CBD, which has been known to provide palliative and restful effects without causing the high that people commonly associate with marijuana. 

Hemp is a specific strain of cannabis that contains less than 0.3% THC, an amount which is unlikely to produce a high. But hemp can contain higher levels of other cannabinoids, such as CBD. While the legalization of cannabis has proceeded on a state-by-state basis, the United States Congress, through the 2014 and 2018 Farm Bills, has eliminated hemp from Schedule I of the Controlled Substances Act and permitted states to create industrial hemp programs. But the Food and Drug Administration (FDA), which retains regulatory authority over drugs including CBD, has been frustratingly slow in providing guidance to the industry on which types of CBD products can be legally marketed. 

We will also delve into the inherent conflict in this space. We will directly explore the inherent conflict between the federal law and the state laws and talk about the importance of government interaction in regard to cannabis law. We will look at cases like US v. McIntosh, where the courts were asked to decide whether criminal defendants may avoid prosecution for various federal marijuana offenses on the basis of a congressional appropriations rider that prohibits the United States Department of Justice from spending funds to prevent states' implementation of their own medical marijuana laws. We'll also review the role of local government decision making by reviewing SBGS v. Santa Barbara and talk about other federal opportunities. 

This program will also explore key issues related to the business side of cannabis. We will explore specific challenges to the industry such as banking. This has been an ongoing issue for any business in this space, and to date, there has been no way for the industry to access traditional banking models. We will explore H.R. 1595, which is currently before Congress. This bill is expected to pass sometime in the fall and will allow Cannabis businesses to access banking and lending services without being penalized. 

We will also explore the contract drafting issue. Given the evolving landscape of cannabis and hemp laws, the best approach for a business lawyer is to proceed cautiously. Because the law in this area is constantly changing, and because cannabis businesses themselves remain in an immature stage, the best approach for contract drafting is one of flexibility. Lawyers should try to remind themselves about what they don't know and that they cannot possibly predict the future. Although both lawyers and their clients usually seek certainty when creating written agreements, lawyers should avoid drafting contracts that are overly rigid. It may be impossible to provide contracts that will survive in the long-term. And lawyers should recognize that many business relationships in the cannabis space will not work out. 

The best practice is to draft contracts that will allow both your client, and the other party to the contract, to exit gracefully. Changing conditions in the industry may require the parties to frequently revisit the terms of their agreements. The best lawyers in the industry draft contracts that allow clients to be nimble in the fact of such changes. Second, remember the likely mindset of your client. If your client has been in the cannabis business for a few years, they are probably used to doing deals by handshake. Many are still scarred by the fear of illegality and may be reluctant to put details in writing. And lastly, if you are an experienced contract drafter, remember that certain things you would take for granted, such as compliance with federal law, are not currently possible in cannabis contracts. Oftentimes cannabis business lawyers will have to unlearn habits that have served them well in other areas of business. 

It is also natural for a prudent business attorney to wonder whether they should be doing this work at all. After all, cannabis is still illegal on the federal level, at least in the United States. Arguably, a lawyer advising a cannabis company is advising the violation oflaw and breaking the professional oath they took upon being sworn into the Bar. Most states that have legalized cannabis have provided at least some degree of protection for attorneys who advise clients on how to operate legally within state regulatory frameworks. As an example, we will explore the new California rules of professional conduct that were effective as of November 1, 2018, which were intended to regulate professional conduct oflawyers. Specifically, the update included a change permitting a lawyer to advise a client regarding the validity, scope, and meaning of California laws that might conflict with federal or tribal law. 

At a minimum, lawyers in the United States should advise their clients that while their actions may be legal under state laws, clients are still risking prosecution or civil or criminal forfeiture under federal laws. In-house attorneys who hold equity stakes in cannabis businesses face an additional layer of ethical questions beyond those of lawyers who provide outside counsel to cannabis companies for a fee. 

Overall, there are many nuances to this ever-evolving issue. The landscape in this area is constantly changing, and by the time this program is presented, some of the information contained herein will have already changed. It is imperative that a business lawyer working in this area stay abreast of each development so that they are properly advising their clients. The goal of this program is to provide the business lawyer with background and tips for how to keep current in this evolving world. 

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