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Another Unlicensed Enforcement: Is it Worth the Risk?

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Months ago, we reported on recent enforcements on two unlicensed cannabis businesses in Sacramento and Costa Mesa. Now, we have learned of another enforcement action against an unlicensed cannabis retailer operator in Los Angeles.

On October 25, 2018, the Bureau of Cannabis Control (Bureau) and the Department of Consumer Affairs’ Division of Investigation-Cannabis Enforcement Unit (DOI-CEU), in coordination with the Los Angeles Police Department (LAPD) served a search warrant on an unlicensed cannabis retail location. The City of Los Angeles confirmed that the location had not applied for a local license. As a result of the search warrant, over $2,000,000 of cannabis and cannabis products were seized, including nearly 500 pounds of cannabis flower, over 430 gross pounds of concentrates, and over 200 gross pounds of edibles.

Not only do unlicensed businesses need to worry about the seizure of product, but they also need to be concerned with criminal charges. The owner of the retail location, as well as six employees, were all arrested on misdemeanor charges for operating a commercial cannabis business without a license. This particular investigation was conducted at the request of the Bureau based upon a complaint received.

As we are coming to the end of the first year of legalization and licensing, unlicensed cannabis businesses are going to have fewer excuses to provide the Bureau, and the District Attorney’s Office, if they find themselves under investigation.

BOTTOM LINE: If you don’t have your license yet, start the process now. If you don’t know what you need to do, seek legal advice and assistance. It’s just not worth the risk.

No Lines, No Problem: Cashier-less Stores vs. Traditional Retail

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Post 85

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Amazon opened another Go store in San Francisco, its third city after opening locations in Chicago and Seattle. Scan your Amazon account on the Amazon Go app to enter, pick what you want off the shelves and walk out. Cameras and sensors track customers throughout the store and other technology monitors when you take items off shelves (or put them back). Your digital receipt will charge you for items that you have taken off the shelves. No cashiers, no lines, no problem.

With three stores in Seattle, two in Chicago with another two opening soon, one in San Francisco and another opening months from now, Amazon looks primed (pun intended) to start expanding its brick-and-mortar operation. Another store is planned for New York City as well.

The goal is convenience and speed and it looks like this cashier-less store may have a leg up on traditional retail locations. Customers no longer have to wait in lines and waste their lunch hour trying to purchase quick on-the-go food. This model may be convenient for consumers, it is also clearly benefits the retailer. While the up-front costs would likely be costly, this technology could help cut costs long-term by eliminating traditional overhead costs including cashiers, credit card processing and the like. This technology also helps retailers understand their consumers better to identify inventory. While it is unlikely that these automated stores will take over the retail industry across the country, it certainly could be the new normal in certain urban areas where “life by app” is the norm.

Transition Time is Over…Enforcement is Now

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Last week, the Bureau of Cannabis Control and the Department of Consumer Affairs’ Division of Investigation – Cannabis Enforcement Unit coordinated with police departments in Sacramento and Costa Mesa to serve search warrants on unlicensed cannabis businesses. On August 22, 2018, a search warrant was served on an unlicensed cannabis home delivery business in Sacramento. Two days later, a search warrant was served on an unlicensed cannabis retail location in Costa Mesa.

Both investigations were initiated based on a complaint the Bureau received regarding each business. Both search warrants resulted in the seizure of cannabis, cannabis flower, concentrates, and edibles. The Costa Mesa search warrant also resulted in the arrest of an individual who was charged with four misdemeanor counts of unlawful transportation, sale and furnishing cannabis.

All commercial cannabis activity in California requires a license from one of California’s three cannabis licensing agencies. Selling cannabis goods without a state license is a violation of state law.

Bottom Line: The transition period is over and the Bureau is taking action with enforcement. If your company has not applied for the appropriate licenses, now is the time or risk seizure or worse.

2018: Out With Cole (Memo), In With What?

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Just as the state has allowed legalized adult use of cannabis, the feds have thrown a wrench in California’s new “Green Rush” era.

Attorney General Jeff Sessions has rescinded the 2013 Cole Memo which set forth federal involvement and enforcement in states that have legalized cannabis. The Cole Memo detailed enforcement directives that allowed states to move forward with legalization so long as they had sufficient regulations in place. While the Cole Memo did not decriminalize cannabis, it essentially adopted a policy of non-interference and a “hands-off” approach for federal prosecutors in states were cannabis had been legalized. Attorney General Sessions has now reminded federal prosecutors that federal law prohibits the possession and sale of marijuana and they are to use their own discretion in weighing whether charges were appropriate.

In a statement, Sessions said that he has directed federal prosecutors to “use previously established prosecutorial principles that provide them all the necessary tools to disrupt criminal organizations, tackle the growing drug crisis, and thwart violent crime across our country.”

With the rescission of the Cole Memo, will this stifle investment and growth of this newly state legalized industry? Will the federal government raid, prosecute and enforce federal criminalization of cannabis? The interest of federal prosecutors in pursuing cannabis businesses will depend heavily on specific regions and locales and their respective views on cannabis.

Banking, investment and insurance issues are already significant obstacles for cannabis industry businesses. This new uncertainty created by the rescission of the Cole Memo will undoubtedly have a chilling effect on these already troublesome areas for the industry.

Undoubtedly, court actions by states with legalized cannabis will surely be on the horizon.

Navigating Real Estate Waters in a Cannabis World

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With the legalization of cannabis in California, cannabis businesses will need to address their real estate needs. As not many businesses can afford to buy a building outright, leases will need to be negotiated and executed. However, cannabis related real estate leases will need to be handled more carefully than a normal commercial lease. Once you have identified the proper location for your cannabis business, which complies with all state and local regulations, keep these practical considerations in mind before executing your cannabis real estate lease:

1. Consider whether the landlord is someone who understands the nature of your business. Be upfront to avoid any surprises in the midst of your tenancy, like an eviction notice for conducting illegal activity on the property. Typical lease terms will contain specific permitted use language governing the allowable activities on the leased property. The allowable activities should be specific to your cannabis business. Be cautious of vague language which could leave tenants at risk of breaching the agreement. As well, typical leases will forbid illegal activity from taking place on the property and will constitute a breach and default of the agreement. Instead, the cannabis real estate lease will need to exclude lawful activities under state law from that provision.

2. Be prepared to pay a premium. There are landlords who know the risk that they are taking by knowingly leasing space to a business deemed to be illegal under federal law and they want to pass on the cost of that risk. There are landlords who charge a premium on commercial space to cannabis tenants because they can. Regardless of the type of landlord that you may encounter, the bottom line is be prepared for the likelihood of paying exponentially more than another industry for the same amount of space.

3. Depending on the type of cannabis business, a tenant may want to negotiate terms that its landlord will assist them if new regulations or ordinances require unforeseen requirements on the business during its tenancy. For example, if there are additional requirements placed on a cultivator as it relates to electricity, a tenant will want to know that the landlord will assist or allow them to make the necessary changes for compliance with any unforeseen regulatory changes.

4. Given the nature of the business and the uncertainty of federal legal implications, you may want to consider negotiating a shorter lease term than a normal commercial lease, which is generally a minimum of five years.

5. Consider including an arbitration clause in the cannabis lease agreement. Litigating in court over a cannabis lease agreement (or any cannabis related contract for that matter) may not be the best venue for your dispute. When you do not know the views of the jury or the judge, you do not want to leave the fate of your dispute in the hands of those who may have negative views of cannabis or the cannabis industry. If you can arbitrate the dispute, you can identify an arbitrator or mediator who has familiarity with the industry.

Landlords and Medical Marijuana in California

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In 1996, California voters decriminalized the medical use of marijuana by approving the California Compassionate Use Act. In 2015, the voters approved the Medical Cannabis Regulation and Safety Act (“MCRSA”), to regulate the medical marijuana industry. In 2016, California voters approved the Adult Use of Marijuana Act (“AUMA”), allowing (1) individual adults to possess, use, purchase, transport, or give away up to 28.5 grams of marijuana or 8 grams of concentrated marijuana; (2) them to grow up to 6 plants and possess the marijuana produced by the plants; and, (3) legally possess marijuana accessories.

Despite California’s legalization of medical and recreational marijuana, the use, manufacture, possession, and distribution of marijuana remains illegal under federal law as an illegal substance. In 2013, Congress enacted the Rohrabacher-Farr Amendment barring the Justice Department from using federal funds to prosecute violations of marijuana related federal laws in 34 States and the District of Columbia and prohibit the States from implementing their own laws authorizing the use, distribution, possession, or cultivation of medical marijuana. This amendment only applied to medical marijuana and not recreational marijuana. Recently, in May 2017, the President signed a new spending bill which included a new version of the Amendment now applicable to 44 states, the District of Columbia, and territories of Guam and Puerto Rico. This Amendment also does not protect recreational marijuana. Attorney General Sessions recently asked Congress to undo the federal medical marijuana protections claiming the amendment inhibits his department’s authority to enforce the Controlled Substances Act saying marijuana was “only slightly less awful” than heroin.

Given the legalization of marijuana in California, where does that leave landlord-tenant law? First, we can expect to see factories, warehouses, self storage facilities and commercial store fronts set up for cultivation, processing and sale of marijuana, marijuana plants, and related products. According to Forbes Magazine, there has been a scramble in the real estate industry to purchase commercial warehouses and other properties that would be desirable for marijuana cultivation, processing and distribution. Second, landlords are charging premium rents for new tenants in the marijuana industry. Since marijuana cultivators and distributors are currently unable to have bank accounts because of the federal illegality of marijuana, they do not have credit and their dealings are mainly in cash causing most tenants to agree to pay above-market rents.

Currently, there are no reported California cases ruling on the legality of whether a landlord can declare a lease terminated and evict a tenant based upon the property being used in a manner that is illegal under federal law, but decriminalized in California.

The California Medical Cannabis Regulation and Safety Act (MCRSA) provides that acts of a person are not unlawful under California law when the person, including a landlord, in good faith allows his or her property to be used by a medical marijuana licensee, its employees and agents, as permitted under both State and local licenses or permits, and in compliance with applicable local ordinances. Such activity will not subject a person to arrest, prosecution, a civil fine, other sanctions, or form the basis for seizure or forfeiture of assets.

However, despite California law affording a landlord a reasonable basis to evict a tenant for not complying with State or local laws regulating the cultivation, use or dispensing of medical marijuana, the law does not prevent prosecution, seizure, or forfeiture actions against a landlord under federal law. A landlord who knowingly rents property to a user, possessor, or cultivator of medical marijuana still risks criminal prosecution under federal law for aiding and abetting and civil forfeiture of his or her real property.

The ultimate issue for a landlord is marijuana’s federal legal status and the government’s approach. While the Obama administration left states alone, there is no assurance the current administration will be hands-off. Stricter enforcement of the federal laws by the federal government would jeopardize the legality of marijuana laws in California and, in turn, the risks to landlords choosing to rent to marijuana related businesses.

Lions and Tigers and Bears, Oh My!

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Support Animals in the Workplace

California employers are familiar with service dogs as a reasonable accommodation for employees and applicants with disabilities. But, what about “support” animals?  In 2013, the California Fair Employment and Housing Act (“FEHA”) required California employers to allow “assistive animals” in the workplace as a reasonable accommodation. Assistive animals include service dogs, but also support animals that provide “emotional or other support to a person with a disability, including but not limited to, traumatic brain injuries or mental disabilities, such as major depression.”  (California Code of Regulations, Title 2, Section 11065(a)(D).) These animals no longer need to be specifically trained or certified.

As with any other accommodation, an employer is required to engage in an individualized good faith interactive process to identify and implement an employee’s request for a reasonable accommodation. Engaging in a good faith interactive process requires timely good faith communication to truly explore whether the employee needs the reasonable accommodation and how they can be accommodated. An employer may require a medical certification from a health care provider stating that the employee has a disability and explaining why the employee requires the assistive animal as an accommodation. However, remember that employers are prohibited from inquiring about the underlying medical cause of the disability.

You have now determined that your employee needs an assistance animal and the accommodation is reasonable, effective and not overly burdensome. Does this mean that they can bring a support snake, rat or monkey to work? (No disparagement intended for snakes, rats or monkeys.) Of course not. Employers are not required to accommodate any animal requested by an employee with a disability. An employer may require the following requirements for an assistive animal in the workplace:

–    Animal must be free from offensive odors and display habits appropriate for the work environment (elimination of urine and feces);
–    Animals must not engage in behavior that endangers the health or safety of the employee with a disability or others in the workplace; and
–    Animals must be trained to provide assistance for the disability.

Practical Tips:
~ California employers should review the FEHA regulations and revise their policies and practices as necessary.
~ Train supervisors to ensure that requests for support animals are treated and analyzed as all other requests for reasonable accommodations.
~ Do not summarily dismiss any request for a support animal, especially if the animal is exotic or unusual.

Currently, airlines are seeing an increase in requests to fly with “support animals” and employers may see more requests as well. These requests also give rise to additional issues involving other employees, such as, how to deal with the allergies of other employees, if there are areas of the workplace where the support animal would be prohibited, or how to deal with a co-worker’s fear of the particular animal. When in doubt, employers should consult with counsel before handling any unknown situation.

Realities of Subrogation Litigation

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By: Bryan J. Ure

Murchison & Cumming Blog: Post 85

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Introduction

Subrogation litigation is a very broad topic that encompasses many different practice areas. It is ultimately however a practice specialty unto itself. It includes innate complexities of subrogation law, but also requires the skills of a Plaintiff’s attorney, and the knowledge of a specialist practicing in niche areas. These areas can range from fire litigation to workers’ compensation law. Complete mastery of subrogation requires the attorney to wear many hats, and requires the client seeking recoupment of their money to understand this dynamic.

Subrogation Basics

At its core, subrogation arises when a party who was obligated to a pay another party seeks recovery against a third party who may have committed an act giving rise to liability. A simple example is that of an insurance company who pays upon a homeowner’s policy to a homeowner after a fire. If the insurer determines that the fire may have been caused by a negligent electrician, the insurer may seek to “stand in the shoes” of the homeowner and pursue litigation directly against the electrician. The insurer often maintains this right by contract with the homeowner through the insurance policy, or it may independently seek an assignment of rights from the homeowner. In certain areas, such as workers’ compensation, the right of the insurer to proceed is authorized by statute.

A right to subrogation also exists in a non-insurer-insured situation. For instance, in lieu of suing a subcontractor for contractual breach over construction delays, a construction company may allow the breach, but then seek rights from the subcontractor to pursue one of its vendors who caused the breach by delaying needed materials.

Subrogation Pitfalls and Promises

Subrogation litigation can be a complex area. The attorney pursuing subrogation must be well versed in Plaintiff’s litigation, subrogation law and practice, as well as the area of law upon which they sue. As noted in the illustrations above, this could mean that the attorney must be knowledgeable of the intricacies of law ranging from fire litigation, workers’ compensation law, and construction law, to name a few. But even with knowledge of a specialty field, a key mistake that is often made by attorneys is a failure to understand the practicalities of subrogation as it relates to both liability and damages. While the legal theories of recovery may be the same, the practicality of subrogation differs very much from a typical Plaintiff’s case. This reality of subrogation law can often trump a “good case”.

In typical Plaintiff’s litigation, there is a maxim that a weaker liability case can be helped by a strong damages component. Unfortunately, this does not always hold true for subrogation. In typical litigation, the Plaintiff is asserting their own personal rights which a juror may relate to. In subrogation, the party bringing the case is generally a corporation or insurer who lacks broad appeal to a jury. In this sense, a weaker liability case which may ordinarily be softened by a sympathetic Plaintiff is removed or too distant. Further, in subrogation, there is often a bar to recovery of general damages or pain and suffering that an ordinary Plaintiff might be afforded. This sliding scale of general damages can vary a great deal and brings uncertainty to a defending party which can result in productive settlement negotiations. But with subrogation, you are generally left trying to recover upon what was paid out of pocket. Practically speaking, a personal injury Plaintiff could recover only a nominal sum for out of pocket damages yet a large sum in general damages. This is not true for a subrogating Plaintiff.

Another difficulty arises in whether the attorney retained to pursue subrogation is being compensated hourly or by contingency. Because subrogation litigation can sometimes be long, difficult, and technical, it can sometimes be difficult to find attorneys or firms willing to proceed with this work on a contingency basis. This holds especially true when one considers the reality of expert witnesses needed for difficult cases.

Defense attorneys fighting against subrogation claims also carry a bias. Unfortunately, subrogation claims are viewed as weaker (for reasons explained above). Even if damages are very high, attorneys and defendants often do not feel that they are required to pay near the full amount because the subrogating party should be willing to greatly discount their recovery. This problem stems not from laws supporting subrogation, but rather from history and the psychology of a weakened unsympathetic corporate Plaintiff.

Even with its pitfalls, subrogation’s weakness can also be its strength. The out-of-pocket expenditures made by a subrogating Plaintiff represent hard costs that can be boarded at trial. Depending upon the case, this can mean that if liability is proven, a near 100% recovery of damages can occur if the payments were reasonable and necessary (dependent upon the jurisdiction).

When is Subrogation Appropriate?

This can be a difficult question to answer because it requires a thorough assessment of subrogation practicalities, cost, liability and damages, as well as assessment of the area of law upon which a subrogating party is basing its claim upon. If all the pieces fit together, subrogation can be a powerful tool. Subrogation litigation benefits everyone, as it often results in companies or insurers paying upon claims quickly if they know they can recoup such payments from an at-fault third party. If you are pursuing subrogation, it is vital that you retain experienced and knowledgeable attorneys.

With offices in California and Nevada, Murchison & Cumming, LLP has several attorneys who have experience with subrogation litigation if you need further guidance.

Beer Law: The Distribution Problem For Craft Brewers In Nevada

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By: Bryan J. Ure

Murchison & Cumming Blog: Post 85

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For Nevada brewers, the largest obstacle to profiting from their product is the frustrating inability to distribute it without the help of a commercial distributor. This frustration is compounded by the fact that it is counter-intuitive to the nature of brewing which often times can be a labor intensive and a grass-roots process. Many brewers would be more than willing to load up their trucks with kegs and sell the product themselves, but simply cannot in light of current Nevada law. Obtaining rights to a commercial distributor is not an easy answer either. It is a costly and often times nearly insurmountable task for a microbrewery, except for those already in the game. The irony is that many of the major craft beer producers today who use commercial distributors attained the ability to do so only because they were successful as self-distributors very early on. Despite the current self-distribution legal stranglehold in Nevada, there are some solutions.

Nevada’s law against self-distribution is only one sentence long, and is codified as Nev. Rev. Stat. Ann. § 369.382:

Except as otherwise provided in NRS 369.386 and 369.415, a supplier shall not engage in the business of importing, wholesaling or retailing alcoholic beverages in this State.

For purposes of this statute, a brewer who makes beer in Nevada is considered a “supplier”. A supplier cannot sell beer unless they have an agreement for distribution with a state-licensed distributor (369.386 and 369.415). As one might imagine, a distributor holds the power, and obtaining the rights to use them can be a cost-prohibitive endeavor. Most mircobreweries likely do not have the production volume or expenses to compete in a market dominated by the large breweries in this country. In short, this means good luck getting your beer on your local grocer’s shelf space.

The above prohibition raises an obvious question, can Nevada brewers sell their product to the public in a cost-effective manner without the use of a commercial distributor? The answer is yes, and effectively so. In fact, the manner in which sale of craft beer is permitted in Nevada is ideally suited to the craft beer consumer and current trends. If you would like further information on how to legally retail beer in Nevada, or need legal counseling on starting or running your brewery, our attorneys can help.

Quenching Nevada’s Thirst for Beer: Checklist for Starting a Nevada Brewery

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By: Tyler N. Ure and Bryan J. Ure

Murchison & Cumming Blog: Post 85

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For many, turning their passion into a business comes with equal parts excitement and trepidation. When it comes time to turn that passion into profit, that initial enthusiasm can be quickly tempered by legal and regulatory hurdles. Those who have turned their home-breweries into commercial breweries know this pain particularly well. Nevada presents unique challenges to this process in part due to laws that have not kept up with the emerging craft brew industry.

While the manufacture and sale of beer is highly regulated at many levels, craft breweries continue to expand at an ever increasing pace. Nevada is lagging well behind other states, but it is expected that the brewery drought of the hot desert will soon be quenched. In 2015, craft breweries expanded to make up 21% of the total U.S. Beer market. With such growth, Nevada should follow suit.

The market for Nevada is prime, and this is good news for brewers. Nevada, which imposes more stringent regulations than most other states is missing out on some of this phenomenal growth. In 2014, Nevada had 25 breweries, ranking 39th in breweries per capita. This presents both challenge and opportunity for those willing to embark on their goals.

Craft Brewers are no strangers to complex tasks. Just like careful attention is paid to mash schedules and boil times to get the best product in the glass, there’s a pattern to follow if you want to get that product to a paying consumer. To get started, the checklist seems easy enough, but it can be complicated by the practicalities of regulation. Because most brewers enjoy brewing first, and business second, the goals of opening a brewery can be at odds for your typical brewer. If you have the right amount of dedication (and capital), there are a few basic requirements to get started.

You’ve most likely already done step one, figure out what to call your brewery. You’re going to want to make sure that the name, or a similar name, is not already taken. A quick Google search is a good place to start, but you should also check the Nevada Secretary of State, and the United States Patent and Trademark Database.

With the perfect name selected, it’s time to form a legal entity and obtain trademark protection. Forming a legal entity, such as an LLC or a corporation, is an important early step as it would help protect your personal assets from the liabilities of the brewery. It’s also a good time to hammer out the responsibilities between several owners of the brewery. At this point, it’s a good time to contact a lawyer specializing in the brew industry. A mistake on your corporate setup could cost you both time and a lot of money. Especially if you have partners and employees, the process becomes more complicated legally. Contacting qualified legal counsel will also be beneficial for the remaining few steps on your way to opening a Nevada brewery or brewpub.

A trademark protects your brand name and logos associated with the brewery’s goods. The trademark process can take 12 to 18 months and begins by filing an application with the United States Patent and Trademark Office (“USPTO”). If the USPTO determines that there is a reason your mark should not be registered, you will be notified and given an opportunity to respond. If there is no objection to application, the mark is published giving others a chance to object. If there are no objections, the mark becomes registered by the USPTO. Each name and individual label for your beer should be trademarked.

You are also going to need to file a “Brewer’s Notice” with the Alcohol and Tobacco Tax and Trade Bureau (“TTB”). It can be a daunting and lengthy process, so it is best to start as soon as practical. Before you begin making beer for sale, the TTB has to approve your operation, recipes, and beer labels.

Nevada also requires a brewer to obtain a license from the State of Nevada, as well as other local license. There are two routes at this point: the operation of a brewery or the operation of a brew-pub. Brew pubs are an exception to the three-tier scheme which allows a brew-pub operator to sell directly to consumers. There is, however, currently a 15,000 barrel annual cap on production. There is no cap on a brewery’s production, but a brewery is prohibited from selling beer directly to the public. In addition to obtaining a state license, a brew pub must obtain an appropriate local retail liquor license.

If you’ve decided to open a brew-pub, it’s time to start brewing. If you’ve opened a brewery, one more note of caution– you’re going to want to carefully consider your agreements with distributors. A contract with a distributor is a long-term arrangement and can be difficult to terminate. This is perhaps the single most significant hurdle to starting a brewery and making it profitable. Nevada law on distribution is unique and challenging, but there are solutions.

Despite the legal hurdles, momentum is still strong in the craft-brewery industry. Having the right information and guidance is critical in ensuring your business opens smoothly. If you would like more information on how to start a Nevada brewery, we can help. As Nevada and California lawyers, we maintain the experience necessary to helping you open and run your brewery without having to worry about the regulations that reduce most brewer’s plans into nothing more than wort.

Tyler N. Ure is an attorney and home brewer who has a fondness for brewing german altbier. Bryan J. Ure is also an attorney, who has a fondness for drinking german altbiers.