Evolving business of marijuana under Initiative 502

Jerry Adcock

First, it is important to preface this column with the statement that I am not providing legal advice. My goal is to get people thinking about how their business may be affected by Initiative 502, and pose some thought provoking questions. Second, this article will not focus on the questions unique to state licensed dispensaries. Hopefully, any business actively engaged in the state licensed distribution of marijuana has already retained legal counsel, and is well aware of the risks associated with their business. Rather, this article is intended to raise questions for surrounding local businesses, and those who will come to deal with the dispensaries as the market continues to grow.

The starting point for any discussion involving Initiative 502 begins with the current conflict between state and federal law. As many are already aware, state licensed marijuana dispensaries are not really 100 percent legal. They are legal on the state level, but it is still a federal crime to sell, purchase, and/or possess marijuana. For my attorney colleagues, this creates a unique conundrum, as it is an ethical violation to advise a client to commit a crime. Therefore, by advising a client to engage in otherwise legal conduct under Initiative 502 (but illegal at the federal level), you are arguably advising them to commit a federal crime, and committing an ethical violation. The Washington Supreme Court is currently publishing a proposed comment to the Rules of Professional Conduct that would allow for an attorney to advise a client on conduct authorized under Initiative 502, but the comment is not currently in effect and there is a fine line to walk when providing this type of advice.

So knowing that the state licensed dispensaries are still technically illegal, a sane person would likely ask why any business would knowingly engage in distribution under Initiative 502? There are two likely answers to this question. First, there is clearly an enticing market for these businesses, as evidenced by the revenues reported by the first round of licensed dispensaries this last month. The reward of the market is apparently enough to outweigh the potential risks facing these entrepreneurs.

Second, a series of memos released by Deputy Attorney General James M. Cole have apparently provided some level of comfort for those interested in being at the forefront of this industry. The most pivotal statement for our discussion is the August 29, 2013 Memorandum (also referred to as the Cole Memorandum). While I don’t have the space to go through the specifics of the memorandum, it essentially states that while it remains a federal crime to distribute and sell marijuana, the federal prosecution of marijuana sales under state licensed storefronts is not a current priority to the Department of Justice, so long as these sales do not cross into eight distinct areas that are federal priorities. Some examples of federal priorities listed in the memorandum include: preventing distribution of marijuana to minors, preventing revenue from going to criminal enterprises, preventing distribution of marijuana from a state where it is legal to other states where it is not legal, and preventing driving under the influence and other situations affecting public safety.

An update to the August 29, 2013 Cole Memorandum was released on February 14, 2014 (yes, on Valentine’s Day) clarifying the department’s position on prosecution of marijuana related money laundering transactions. Consistent with the 2013 Cole Memorandum, the 2014 update states that while it is still a crime to engage in money laundering with respect to marijuana-related conduct, the prosecution of financial transactions will follow the same eight priorities listed in the 2013 Cole Memorandum. However, of particular concern to financial institutions, the 2014 update indicates that it may be appropriate to pursue prosecution of financial institutions that have turned a blind eye to criminal activity of their customers, or whom have failed to perform due diligence to apprise themselves of the customer’s activities. There is currently a proposed House Bill on the table that would provide a safe harbor for financial institutions meeting certain reporting requirements, but the bill has not passed as of this article; and, until a safe harbor is adopted, I believe that financial institutions will rightfully be gun shy about engaging a client that could result in federal prosecution.

The Cole Memorandum is not exactly the vote of confidence I would be looking for if I were interested in forming a new business enterprise. The memorandum is the U.S. Department of Justice’s current position, but it is also subject to change at any time. Additionally, the memos make clear that the failure to carefully monitor your business could easily shift conduct under Initiative 502 from being of no concern to federal prosecutors, to activity that is suddenly on their radar. Those scenarios are easy to imagine: the first highly publicized case of sale to a minor, or an impaired driver causing a safety risk.

However, the potential risks to businesses are not limited to those actively participating in the sale of marijuana under Initiative 502. In addition to the money laundering statutes outlined in the 2014 memorandum, there are federal aiding and abetting and conspiracy laws, which provide the government with a wide net to prosecute individuals involved in perpetuating criminal activity. While a business may believe that they are safe as long as they are not directly participating in the sale of marijuana, this may not actually be the case. Say that you are a website or marketing firm, retained to promote a newly licensed marijuana retailer. You are promoting a federally criminal enterprise. You may believe that the business you are dealing with is on the up and up under the Initiative, but what if the feds later contact you and inform you that your client is in fact connected with an illegal drug cartel? You may have had no actual knowledge of this relationship, but you are now in a position of having to defend your actions and show that you did not intend to promote the criminal enterprise. You are also in possession of drug money, which may be seized by the feds.

Seizure of property is also a legitimate concern for both commercial and residential landlords dealing with tenants partaking under the Initiative. If you are leasing to a state licensed storefront, any deviation of the tenant’s business activities into the eight areas of federal concern could result in federal intervention. Additionally, like financial institutions, because you should be well aware of the purpose of your tenant’s business, simply turning a blind eye to your tenant’s activity will not likely provide you with protection in the event that prosecution is pursued. Even if you are able to escape criminal prosecution, your property could become open to federal seizure.

While the above risks should be fairly obvious to commercial lessors, the risks may not be as obvious to residential landlords. While a residential landlord is more likely to have an “innocent owner,” defense if it is later discovered that a tenant is engaged in criminal activity, this does not mean that prosecutors won’t question the landlord’s involvement if it is discovered that the tenant is engaged in the criminal sale or distribution of marijuana.

Finally, the emergence of state licensed dispensaries is going to bring about some interesting questions in the employment law realm. Washington Initiative 502 is silent as to whether an employer may fire an employee for “legal” off-duty marijuana use. While there is no case in Washington directly dealing with the dismissal of an employee for off-duty recreational marijuana use, the Washington Supreme Court has determined that an employer is within their rights to dismiss an employee for medical marijuana use. Logic would dictate that the same would apply for recreational marijuana users, but there is a potential distinction, in that medical marijuana is technically illegal under Washington law (use under the law only provides an affirmative defense to the crime). This issue will inevitably be taken up to the Court of Appeals at some point, and it will be interesting to see which way the court falls on the issue.

As one of the pioneers of the state licensed recreational marijuana movement, Washington has the distinction of providing a blueprint to other states that wish to follow suit. However, accepting this distinction also means that we are the guinea pig for the process, without anywhere else to look for guidance, aside from Colorado. As a result, the law and landscape of the market will likely continue to change, and for that reason it is important to keep up on the continuing developments.

With the number of licenses currently limited, it might be easy to say that your business will simply stand on the sidelines and wait for the fad to blow over. However, if the market continues to grow as expected, it may not be long before taking this position means also significantly limiting your client base. The market for recreational marijuana will likely remain somewhat limited, so long as it remains a federal crime, but ensuring that your business is knowledgeable on the issues surrounding the movement also means that you will be able to make informed decisions if and when the market expands.

Matthew T. Blum is an attorney for the Law Offices of Carolyn M. Drew, P.S., focusing on Family Law, Estate Planning & QDRO drafting, and Probate matters. He can be reached at 360.690.0822, or matt@carolynmdrew.com. The above editorial contains general information and not legal advice. If you have questions about specifics of your own case, you should consult with an attorney.

{jathumbnail off}

Comments

comments