WA's 'Destruction of Inventory' Penalty Is 'Abhorrent,' Says Cannabis Grower

The LCB recently released proposed revisions to sections of the WAC draft rules to regulate the legal marijuana market. While containing what some see as positive changes, such as expressly allowing labels to contain data on test results for terpenes and other cannabinoids (i.e., other than THC and CBD), as well as eliminating the residency requirement for financiers, the WAC draft rules have several contentious points, most notably the expanded inclusion of “destruction of inventory” as a penalty for certain types of violations.

 

While the destruction of inventory found to contain illegal or unapproved pesticides may make sense, others are questioning inventory destruction as a reasonable penalty for other violations. 

 

The destruction of "harvestable plants" was permitted in the existing LCB rules, but only under “Group 4” rules (for Marijuana Producer Violations). “The new draft changes the target of destruction to ‘inventory’ and greatly expands the number and types of violations to which it applies,” explains Gene Flynn, managing member, Canna Herb Farms LLC in Ford, Wash., and a retired member of the California Bar. Curiously, though, he notes, the rules still apply only to producers.  

 

The destruction of inventory is listed in the draft rules as a potential penalty for:

Furnishing or selling marijuana to a minor (under age 21): 

The "or" and "and" in the penalty language is significant. The "or" means that producers/processors (or retailer/transporters) have a choice between the two penalties, explains Mikhail Carpenter, spokesperson for the LCB. The "and" means that all listed penalties apply.

 

While sales to minors are of the utmost concern to communities, and therefore regulators may apply the strictest penalties on violators, destruction of inventory doesn’t seem to be a penalty that applies to any other industry (unless that inventory is harmful to consumer – such as in the case of pesticide or other contamination). Liquor retailers who furnish alcohol to minors face penalties from fines to probation, liquor license revocation and even jail time, as it is considered a criminal offense. But CBT can’t find “destruction of inventory” penalties in any state laws.

 

Beyond being a penalty for sales to minors, destruction of inventory also is listed as a penalty for Conduct Violations, such as criminal conduct, disorderly conduct or a licensee and/or employee intoxicated on the licensed premises. The first violation allows for the option of destruction of up to 25 percent of inventory, and the second violation allows for the destruction of up to 50 percent of inventory. 

 

For “general advertising violations,” the second violation in a three-year window includes a penalty option for the destruction of 25 percent of inventory, and the third violation ups that to 50 percent of inventory. 

 

Significant destruction-of-inventory (25 percent to 50 percent) penalty options (in addition to fines and possible license suspension) are listed for producers/processors (not retailer/transporters) for:

- “Refusal to allow an inspection and/or obstructing a law enforcement officer from performing their official duties,” 

- “Licensee/employee failing to display required security badge,” 

- “Failure to maintain required security alarm and surveillance systems,” 

- “Improper recordkeeping” 

- “Failure to submit monthly tax reports and/or payments,”

- “Failure to post required signs,”

… among others. You can read the full draft rules here. 

 

The draft rules specify that “For the purposes of applying penalties outlined in WAC 314-55-520 through 314-55-535, ‘inventory’ means all marijuana plants, clones, usable marijuana, marijuana-infused products, intermediate products, and marijuana concentrates located on the licensed premises at the time of a violation. The most mature plants on the licensed premises will be selected for destruction. The destruction of other types of inventory will consist of an equitable cross section of those products.”

 

“The destruction of inventory as an administrative sanction is repugnant to deep-seated notions of fairness, proportionate sanctions, preservation of assets, and doubtless many more fundamental underpinnings of our legal system,” writes Flynn in his prepared comments for submission to the LCB in response to the WAC draft rules (shared with Cannabis Business Times). “As far as I can determine, it is an unprecedented form of administrative sanction in the State of Washington, or any other state of the union, and it disregards bedrock principles of private property rights. It is astonishing to think that such a provision found its way into the WAC in the first place, and the discussion should be about removing inventory destruction from the WAC, rather than an aggressive expansion of its application.

 

“The idea that any amount of a licensee's inventory could be destroyed as a penalty for some administrative violation flies in the face of private property rights in the State of Washington,” Flynn continues. “We can find no precedent anywhere in this state or any other state of the union that bears any resemblance at all to this proposal. The mere thought that a company's property could be confiscated and destroyed (not even auctioned off!) is abhorrent, and should be soundly and clearly renounced as ‘inappropriate.’ Such a penalty should be deleted altogether from the WAC, and certainly not expanded in the proposed manner.”

 

For some background and legal insights into the regulations and WAC draft rules, Cannabis Business Times reached out to Lindsey J. Weidenbach, an attorney with the law firm of Jeffers, Danielson, Sonn & Aylward in Wenatchee, Wash., for comment. Weidenbach explains, “The latest rounds of proposed legislation regarding marijuana regulation includes penalties which allow for the destruction of a certain percentage of the licensee’s inventory, depending upon the severity of the violation. … Since the inception of the rules and regulations implementing I-502, destruction of property has been a possible penalty, but only against the producers of marijuana.” 

 

The question arises whether destruction of inventory is a penalty that would be considered legal under state law. Weidenbach says, “The specific penalty of product destruction has not been tested in our judicial system, so it is hard to answer the question of whether or not these provisions are legally enforceable. However, it is likely that these penalties are legal because the licensee is given due process.  If the WSLCB issues an order for destruction, the licensee may appeal through a WSLCB adjudicative process, which must be described in the notice that is given to the licensee ordering destruction of plants or inventory,” she says. “This allows due process to run its course before a licensee’s product can be destroyed. It is only after this adjudicative process has run its course (and assuming that the licensee does not take the issue to the proper Superior Court) that the product may be destroyed.  It is not as if the WSLCB can show up one day and start ordering the licensee to destroy its inventory or harvestable product.”

 

Still, one does have to wonder why destruction of inventory seems a legitimate penalty, especially for violations such as failure to wear an employee badge or failure to post a required sign, whether due process is given or not. 

 

“While slash-and-burn enforcement may apply to contraband, that mentality should not carry over to the legal production, processing, and retailing of cannabis according to Washington law. Licensees must be afforded the same property rights as other business owners, inventory destruction is not generally known as an administrative sanction,” writes Flynn in his draft comments. “There simply is no defensible basis for this discriminatory treatment. Is a percentage of a liquor distributor's or tomato farm's inventory ever destroyed because of a failure to post a sign, stay current in taxes, or having improper records of one sort or another? Or for any of the other myriad of reasons for which a 502 licensee faces such a penalty?

 

“The penalty is wildly disproportionate to these sorts of violations – but it must be repeated that destruction of inventory is never an appropriate administrative sanction,” notes Flynn.

 

"Compliance is our goal," says Carpenter. "We're not trying to put anybody out of  business." The destruction of inventory penalties are designed to serve as the equivalent of a suspension for a retailer, he says. "If a retailer is suspended from transacting business for 30 days, there is a monetary impact. But for a producer/processor to not transact business for 30 days, that doesn't really have the same impact, he explains. 

 

"These penalties have been in the rules since they were first adopted two years ago," Carpenter adds. "With the [proposed changes in the draft rules] we are trying to align the penalties so they are similar for retailers and producers/processors." 

 

The structure of the penalties also is such, he says, that "they escalate. So if you receive one [Administrative Violation Notice (AVN)], you get a relatively light penalty. If you receive a second AVN, the penalty is a bit steeper, and by the third one, it's much more substantial," Carpenter adds. 

 

But in addition to the question of whether or not the destruction-of-inventory penalties are even fair, Flynn raises some serious concerns about the lack of clarity in the regulations (existing and draft rules). “Questions arise how 25 percent of inventory would be determined, on what basis, and by whom? The only guidance in the Draft WAC consists of two sentences in Section (4) that read: 

 

“What does this even mean, never mind is it fair? How is 25 percent measured? Is the intent to destroy 25 percent of the company's inventory value, or 25 percent of tangible goods in every inventory category. Is it by weight, by number, or by value? For example, if a licensee had 100 plants of the same age (consisting of 25 plants each of 3 different strains, and one plant each of 25 strains), 100 packaged 1 gram units (7 different strains), 10 5-lb lots of flower (5 strains), and 10 plants hanging to dry (3 strains), exactly what would be destroyed? How much of each would be destroyed? And who would make that determination?”

 

Flynn continues, “Different products (e.g., 2 different strains of cannabis, or 2 different types of oil) in the same category will frequently have different values in the market. The same is true for identical products that are packaged differently, products that have tested differently, and products that are in high demand in the market. On this point, the Draft WAC fails due to vagueness.”

 

Following the Feb. 10 public hearing, and review of public comments, the LCB is asked to adopt the new rules Feb. 24. If adopted, the rules will become effective March 24, 2016.

 

“We spent many hours listening to and reviewing public comment,” said Board Chair Jane Rushford in a press release issued by the LCB, referring to comments on the original set of regulations put forth by the LCB. “Since the beginning, this has been and open and transparent process. [The] revised rules reflect the Board’s continued commitment to transparency and the willingness to listen and make adjustments that may improve the rules.”

 

 

Do you think the inclusion of inventory destruction is a reasonable penalty for code violations? Please share your comments.