5 Ways to Trip Up Your Legal Cannabis Business

Some of the best growers and distributors tend to have more of an agricultural background than a business one. But even the most business-minded professionals can stumble into some unforeseen regulations that can jeopardize their entire operation.

Luckily, attorneys and others who specialize in issues surrounding the legal cannabis trade say there are no truly esoteric or draconian regulations waiting in dark corners to trip you up. Not quite. But there are some things that might slip under your radar.

1. The Trouble With Investigators

Aaron Pelley, owner of the Seattle-based cannabis litigation team Pelley Law, warns that investigators are not always your friends. Neither are they always your enemies, of course, but you need to be wary.

“No one’s business plan is to sink $800,000 or so into their growing business, operate for six months, make a few mistakes and lose it all,” Pelley says. “That’s not a business plan, but that can easily happen.”

Many conscientious Liquor Control Board (LCB) investigators (or those from the marijuana governing body in your state) are true advocates, and take the education part of their job seriously and want to see well-run businesses succeed. The problem, Pelley says, is that many prefer to focus on enforcement over education and even are encouraged to find ways to write up multiple violations for the same activity.

“Then you have growers who are doing everything they can to get it right, who go from operating with a desire for compliance to operating in absolute terror and fear of getting one more violation and losing their license,” Pelley says. “I’ve never met anyone who can function well in a company where they are operating from a place of fear.”

The root of the problem, he says, is lack of communication between enforcement and growers/retailers, and that as the industry matures, the lines of communication should open up and become more cooperative.

“There are bad actors out there, and if you’re doing something that could be harming the consumer, then that’s a big deal,” Pelley says. “But there are times where people just make mistakes. They didn’t do something with nefarious intent, and they shouldn’t lose their license over it.

“If a cop follows someone in car for miles, eventually he’ll find something to write a violation for,” he adds. “I don’t think any investigator could walk through and not find something wrong. The question is, ‘Do we want to shut them down, or do we want to educate them?’”

Advice: Get to know your investigators, and cooperate. “Many of the people in the cannabis business have an historical distrust for authority figures,” Pelley says. “But this relationship arguably can make your life immensely difficult or quite easy. Investigators have a tremendous amount of power. Treat them with the respect you would want to be treated with, keep the lines of communications open. A hostile relationship is not going to be beneficial to you.”

2. The Trouble With Gray Areas

For the most part, administrative codes outline what growers and distributors can and cannot do, and what they’re expected to do. But that still doesn’t eliminate gray areas — and that is where businesses can get tripped up.

Pelley shares an incident when a client called the LCB to report a potential violation by an employee, but wound up being written up for the violation.

“How do I advise a client when they know that a potential violation might lead to the loss of their license?” he asks. “Regulations should allow an employer to call the LCB about a violation [by an employee] without feeling like they’re launching an air strike on themselves. It’s like the ‘sins of the father’ theory, only upside down.”

“There is a fallacy in thinking that because you are compliant with the law that you can’t be found negligent.” —Martina Jaccarino, Jaccarino Law Firm

He also gives the example of dispensaries being warned (if not actually written up) for allowing budtenders to leave out tip jars. “No one has come out and said you can’t do that, but the investigator decided on the spot that it was a potential violation,” Pelley says.

Advice: Keep the lines of communication open. And hire well. Employees are extensions not only of the business, but the business owner. “Anything they do ultimately could fall at the head of the company,” Pelley says. “Only hire people who you truly believe have the best interest of your company at heart and who recognize the importance of following the rules that are required of them.”

3. And Then There’s OSHA

Josh Kappel, partner at Colorado-based marijuana law firm Vicente Sederberg and associate director at Sensible Colorado, says many cannabis cultivators and distributors aren’t aware that they’re required to comply with the same Occupational Safety and Health Administration (OSHA) standards as those in any other business — despite the fact that cannabis isn’t yet federally sanctioned.

“Cannabis growers and distributors are trying to determine which federal laws apply to them,” Kappel says. “In fact, they do have to comply with OSHA, because no matter what the product, it’s an issue of worker safety.”

“They can get tripped up locally,” he adds. “On one hand, this is a highly regulated business. But because it’s new, people may be trying to modify or change things, and they’re finding it’s not always OK to do that.”

Ten cannabis-related businesses in Colorado underwent OSHA inspections in the past year — and all of them resulted in fines, Kappel says. Some of the infractions were focused on things as simple as the use of extension cords.

Pesticides also are an issue. Cannabis growers following the Department of Agriculture’s Worker Protection Standard will be close to — but not completely — compliant with OSHA regulations.

“It’s difficult to know and follow all of the regulations, especially because this is a new industry and things are constantly changing,” Kappel says. “It should get easier over time as the market gets more stable, and there are fewer new systems and rules going into place.”

Advice: Start by becoming intimately familiar with OSHA requirements, as well as any cannabis-specific regulations that your state has in place. Colorado, for example, has a Marijuana Regulatory Health and Safety task force. Then, be prepared to focus as many resources as it takes to get compliant. “Once you lose your license,” Kappel says, “it’s very likely that you won’t get it back.” Many cannabis businesses have hired compliance officers, whose sole responsibility is to focus on changing regulations and ensuring the business is 100-percent compliant. (Editor’s Note: See “OSHA Compliance: Why and How to Prepare Now,” on page 36, for more on this.)

4. Cover Your Ass…ets

A common misconception held by cultivators is that product liability stops with the dispensary. However, a consumer who suffers ill effects from a cannabis product will “go after anyone in the line of production,” says Martina Jaccarino, managing partner at the Jaccarino Law Firm in Nevada.

“Growers think they don’t need to act defensively,” she explains. “Dispensaries and processors will pass liability on to cultivators in any way they can. So cultivators need the same types of waivers and protections from that liability as the dispensaries.”

One of the best lines of defense against liability, however, is to maintain quality and safety standards — and to back that up with testing, Jaccarino says. But not just any standards. She recommends testing your product against the highest standard in the country — Nevada — because if lawsuits happen, those are the standards to which you’ll be held. An attorney advocating for a plaintiff who suffered adverse effects from cannabis or a related product will argue that it is incumbent upon growers to know and meet the very highest standards, even if those standards are from another state and even if you are meeting the standards in your own state, Jaccarino explains.

“In the legal marijuana industry, there is a standard of care that includes knowledge of all jurisdictions,” she says. “There is a fallacy in thinking that because you are compliant with the law that you can’t be found negligent.”

For example, growers in Northern California and Southern Oregon who grow outside are not particularly used to dealing with problems such as the mold that those in other areas who have to or choose to grow indoors often contend with (Nevada, for example). So testing in Nevada might uncover mold that wouldn’t be tested for in other states. In a legal situation, however, California cannabis might be held to Nevada standards, resulting in a negative outcome for the grower under the microscope, she says.

“It’s a national issue because it’s a consumable product,” Jaccarino says. “Growers need to be much more assertive in their thinking and actively protecting themselves.”

Ten cannabis-related businesses in Colorado underwent OSHA inspections in the past year — and all of them resulted in fines.

Advice: Familiarize yourself with the highest standards in the country, and have your product tested against those standards. Also, “when you’re confident that you’re meeting those standards, make a record of the testing and the results,” Jaccarino advises.

5. (Overly) Binding Contracts

In Arizona, dispensary licenses were distributed based on a lottery system. Some of the grantees turned out to be more knowledgeable about the distribution side of the industry than the business side. So they hired people to manage their businesses, explains Larry Fleischman, an Arizona-based mediation specialist.

Fleischman says a result of that is “draconian contracts the likes of which I haven’t seen in 40 years in law, 12 of them as a judge.”

It’s not unusual, he says, to see 10-year contracts that are “strongly worded in favor of the manager” being signed without debate because newly licensed business owners are eager to get up and running, but lack the business acumen to do so, leaving them susceptible. The only out offered in these contracts, he adds, is costly.

Fleischman says that even in time-honored industries, such strict 10-year contracts are uncommon. And they should be unheard of in an area that is so new and uncertain.

“This is a new industry with a lot of obstacles, and that’s an awful long time when you don’t know what tomorrow may bring,” he says. “At the end of the day, you really have to be careful about who you are going into business with and what kind of agreements you enter into.”

Despite many cannabis growers coming strictly from the cultivation side, “this really is a business relationship, and you have to act accordingly,” Fleischman warns.

Advice: “Check with an attorney before signing any contracts,” Fleischman says. “And if you do wind up in a dispute, mediation is by far the cheapest, fastest and most efficient way to resolve it.” Also, “get everything in writing. Don’t do deals on handshakes.”

About the Author: Margaret Battistelli Gardner is an experienced editor and freelance writer, and a frequent contributor to Cannabis Business Times. She can be reached at megmgardner@aol.com.