Making the decision to launch a cannabis practice, either as an individual or as a firm, is both exciting and daunting. It’s exciting because, with medical use approved in 29 states and recreational use approved in eight and continuing to grow, getting involved with cannabis in the early stages feels something like jumping on a rocket ship to the moon.
However, opening a practice in which you represent cannabis-based clients or those investing in or servicing this industry comes with a degree of risk, both to your client and your own practice, that is unlike any other industry in today’s marketplace. Let’s look at some of the considerations for opening such a practice, and guidance on principles to think about before taking the leap.
Understand the Risk
The most critical piece in understanding the risks inherent to both your clients and your own practice is the fact that, despite legalization at the state level, marijuana remains illegal at the federal level. Specifically, marijuana is defined as a Schedule I drug under the Controlled Substances Act, which encompasses drugs that are believed to have no currently accepted medical use and a high potential for abuse. Further, despite widespread acceptance by the public, the United States’ current Attorney General, Jeff Sessions, has signaled and publicly discussed his distaste for marijuana, and the potential ramped-up federal enforcement of the law regarding marijuana.
Although Sessions has made these pronouncements, the DOJ’s enforcement priority has not officially been revoked — in particular, the “Cole Memorandum” issued on August 29, 2013 by Deputy Attorney General James M. Cole, which set forth the DOJ’s enforcement priorities when it comes to federal treatment of marijuana production and use that is legal under state law. In the memo, Cole identified eight areas of enforcement priority by the DOJ. They are:
- Preventing the distribution of marijuana to minors.
- Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels.
- Preventing the diversion of marijuana from states where it is legal under state law in some form to other states.
- Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity.
- Preventing violence and the use of firearms in the cultivation and distribution of marijuana.
- Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use.
- Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands.
- Preventing marijuana possession or use on federal property.
In assessing these principles with clients and state regulators, note that the enforcement priorities do not include the prosecution of otherwise lawful businesses under state law, or the prosecution of those individuals and entities that support these businesses. However, an enforcement priority is no shield or safe harbor if the DOJ under Sessions were to take a different approach. Meanwhile, for the time being, the Cole Memo outlines the most significant aspects of potential exposure from the federal government.
While enforcement is a key priority and concern for businesses that touch the plant—i.e., are involved in the growth, processing or sale of marijuana products—entities that do business with them also bear some risk. The risk for these service providers, including attorneys, is focused on aiding and abetting criminal activity, as well as banking-related concerns. For those who provide what would be viewed as “substantial assistance” to businesses that could be found to have violated federal law, there could be aiding and abetting exposure. Structuring relationships properly may reduce that exposure.
The Financial Crimes Enforcement Network has issued guidance for financial institutions that wish to provide banking services to cannabis clients. However, a limited number of financial institutions have chosen to do so, due to money laundering concerns or the fact that cannabis is still illegal at the federal level. Even ancillary businesses may find their banking relationships in jeopardy if they have cannabis clients, as financial institutions may sever their relationships with non-cannabis customers who are engaged in business with cannabis companies. These considerations should be thought through and investigated before getting into those relationships.
Any attorney seeking to start a cannabis practice must also take into account his or her state’s Rules of Professional Conduct, which typically prohibit attorneys from counseling or assisting clients in conduct that is criminal. Many states are responding to the changing landscape, however, in order to allow attorneys to provide guidance to clients in the cannabis field. For example, in October 2016, the Pennsylvania Supreme Court approved an amendment to the Pennsylvania Rules of Professional Conduct, which provides that “[a]lawyer may counsel or assist a client regarding conduct expressly permitted by Pennsylvania law, provided that the lawyer counsels the client about the legal consequences, under other applicable law, of the client’s proposed course of conduct.” PA R.P.C. 1.2(e). This rule change gave Pennsylvania lawyers the freedom to begin counseling clients who were interested in applying for one of the state’s grower or dispensary licenses, or in starting ancillary businesses that would support the forthcoming medical marijuana industry. If your state has not adopted such language, you may potentially face disciplinary action if you engage with clients who are in the cannabis industry.
Understand the Cannabis Business and Your Competencies
Once you have taken into account the ethical, criminal and professional considerations, it is also important to understand the business of cannabis and your clients’ needs. While it is a unique and burgeoning business, it is also comparable in many respects to other highly regulated industries. In the initial phase of a cannabis grower or dispensary business, licensing and regulatory issues will be at the forefront, as your clients seek approval from the state to begin operations. Established businesses need to ensure that they stay abreast of ongoing compliance requirements from the state.
Commonplace business considerations also apply to cannabis clients. You may have to advise on real estate questions or negotiate leases with landlords who may be hesitant to even be tangentially involved in the cannabis industry. Your clients may have intellectual property rights to protect, whether that involves patenting a strain of cannabis or securing a trademark for a non-cannabis product or ancillary businesses. Cannabis clients will have employees and will have to deal with typical employment issues.
As the cannabis industry is growing rapidly, a lot of investors are eager to involve themselves in a business, with hopes of high returns. Conversely, cannabis businesses are often looking for capital to get a business running or to expand an already established company. People on both sides of that equation may come to you for investment counseling. You may often feel like a matchmaker, trying to put the right people together for the right partnership.
Because your clients will have these diverse legal needs, you will need to assess your own skill sets and the competencies of your firm to ensure that you are equipped to address these needs. While it is certainly necessary to continue to learn new skills and areas of the law and adapt to the particular needs of your clients, this is simplified if you and your colleagues already have a broad base of skills on which to build. Small or solo practices may need to add to their teams to accommodate the variety of legal needs of cannabis clients. Or they may need to find a firm with complementary skills to which they can refer their clients.
While this new industry presents many challenges, if you are interested in building such a practice, the challenge of tackling an area of the law that is still a new frontier presents unique opportunities.
About the Author
Alva C. Mather is a partner with Pepper Hamilton LLP in Philadelphia and is a co-chair of the firm’s Cannabis Industry Practice. Contact her at matherac@pepperlaw.com or on Twitter @alcohollawyer.