The Critical Role of Legal Expertise in the Evolving Cannabis Industry

Legal cannabis is a rapidly growing industry in the United States, with an expanding list of jurisdictions regulating its medical and recreational use. From assisting in preparing state license applications for prospective cannabis facilities, to providing advice and counsel on local permitting or regulatory compliance issues, to helping in complex mergers and acquisitions during later stages of cannabis facility growth, practicing as a cannabis attorney can involve a diverse range of activities.

Cannabis law touches nearly all aspects of legal practice and study. A cannabis attorney may assist a business operator in navigating complicated tax law and financial planning as well as the ever-changing regulatory landscape. This may involve taking on the roles of advocate, lobbyist, regulator, elected or appointed representative—or within the areas of criminal defense, restorative justice or civil law.

This industry is subject to unique complexities, including conflict between federal and state cannabis laws, occasionally convoluted or even intentionally vague laws and rules enacted by individual states, and the rights and responsibilities of ancillary businesses that interact with legitimate participants in the cannabis industry. As a result, attorneys practicing in this industry face challenges generally not found in other law practice areas.

The challenges are something I’ve observed closely as the owner and operator of an independent cannabis testing facility, which I left a career in law to pursue. By understanding—and perhaps, even helping to refine—the intricacies of your state’s licensing procedures, attorneys can proactively guide their clients toward starting and / or maintaining thriving cannabis businesses, and crucially, foster positive relationships with state, local and regulatory authorities.

Whether you practice in New Jersey (adult-use legalized 2021), Michigan (2018) California (2016) or any other state that has legalized medical or adult use, it’s important to remember that the cannabis industry is young—and still experiencing growing pains. In California, for example, Politico observed that the legal industry is unable to compete with the illicit market, where “[i]nfighting between industry groups and lobbying dysfunction in Sacramento have stalled potential legislative fixes, with no clear end in sight.”

In this young industry, the role and duties of the attorney and counselor are amplified and have greater potential to impact evolving laws. Growing, transporting and selling cannabis (not to mention testing and processing), as it turns out, involve a great deal of technical and logistical expertise. Attorneys working for licensed facilities must keep themselves informed of relevant standards and developments in cannabis science and technology.

OPERATIONAL IMPACTS

In the early stages of regulation, a state’s administrative body may not have the skills, knowledge, resources or appetite for effective enforcement. Many operations use these early days as an opportunity to try and fly under the radar. As a relatively mild example, a cannabis grow facility may attempt to surreptitiously sell products that contain banned pesticides. A more realistic and ongoing issue is product diversion outside the regulated stream of commerce.

An attorney must remind their client of eventual, if not immediate enforcement, during a time when adherence to strict regulation and procedure may often seem inconvenient and inconsequential. An attorney should help their client stay on track and develop systems and procedures that use the state’s licensing rules as a floor rather than a ceiling. Securing the advice and counsel of an effective cannabis attorney may determine the long-term success and survival of a cannabis business.

Staying abreast of rules and regulations—which may change quite often—is crucial. In the early days of implementation, many rules are adjusted, added or altered with high frequency. For example, if a new test is required for cannabis samples, the attorney should advise their client to immediately begin R&D testing as part of the company’s standard operating procedure.

Developing sound procedures with appropriate oversight is critical for the long-term health of cannabis businesses, as the following real-life example highlights. A highly professional cannabis cultivation company had well-defined systems in place for nearly all aspects of its operations and a rigorous testing program with an independent lab to ensure regulatory compliance. One day, several test samples were found to contain pesticides, which surprised the operator because pesticides were not used at that facility. With some investigation, it was found that a temporary shortage of their own soil required using another source of soil. Had the facility instituted an SOP that included routine testing of all new “inputs” (e.g., soil and other growing media), it would have prevented the resulting large-scale contamination of their product and investigation by the state, both of which had significant financial impacts on the business.

LEGAL IMPACTS

As with any business, cannabis operators face straightforward legal liability issues that their attorney can help them navigate. For example, as is true in any industry, it is crucial to guide clients in using best employment practices (being an equal opportunity employer, etc.). Within the cannabis industry, one must prepare for additional, inadvertent legal inquiries, random and scheduled regulatory actions and audits, and a growing trend of class-action lawsuits.

When E-cigarette or Vaping Use-Associated Lung Injury (EVALI) received attention in the media due to a concerning amount of reported cases in 2019, cannabis safety regulators were under enormous pressure to identify and eliminate culprits. Vitamin E Acetate was identified as the culprit, and Michigan’s Marijuana Regulatory Agency (MRA) required all cannabis testing labs to begin testing vape cartridges for that previously untested analyte. In addition, all vape cartridges were removed from shelves of cannabis dispensaries until they were resampled and retested. Vape manufacturers were unable to produce or sell their products until their products were shown, via lab tests, to be free of Vitamin E Acetate.

Consumer class-action lawsuits on cannabis products have increasingly emerged. Personal injury firms have already been preparing EVALI class-action suits. False-advertising lawsuits have begun to emerge as well. For example, a cannabis manufacturer in Michigan recently received a class-action lawsuit for falsely advertising its products as containing a higher potency of THC than what was determined by third-party testing. This type of suit isn’t unique to the United States, as seen in a case where a class of plaintiffs is seeking a $500 million judgment against Canadian cannabis companies, including Tilray, Cronos and Aurora.

RISK AND MITIGATION STRATEGIES

What are some appropriate strategies to mitigate legal, regulatory and operational risks? Firstly, it is important to remember that the cannabis industry is highly regulated, despite some (initial) lags in enforcement. As such, an operation should make thoughtful investments in compliance and hire a seasoned compliance officer. A compliance officer will not only help an operation develop SOPs that pass muster with the state’s regulatory authority, but will also help ensure that the operation follows them. For example, a cannabis grow facility with some gaps in oversight may lead to assuming they have properly tagged and transferred all plants. As state authorities investigate plants that have been found to be untagged and unaccounted for in the state’s tracking system, their products may be unable to be sold for six months. This delay has significant financial implications when an operator’s margins may be thin, and they’re relying on the sale of a product that is currently held up under a state audit.

Equally important is for a facility—particularly a processor (e.g., edible or vape producer)—to be a discerning acquirer in each step of their supply chain. As part of compliance protocol, they must do their due diligence to ensure that there are no contaminants that will make their way downstream to the consumer. They must vet their vendors thoroughly, and make sure all of their inputs are tested (e.g., soil and other grow media, vape cartridges, terpene blends, nuts, chocolates, preroll papers, etc.). For example, a vape producer takes their clean, uncontaminated cannabis concentrate and puts it in relatively cheap vape cartridges acquired from a new vendor. The vape cartridges are tested, and they fail for heavy metals. It is determined that the cheap vape cartridge hardware is leaching heavy metals into the cannabis concentrate—and the entire batch of cartridges must be destroyed.

IN CLOSING

In the cannabis industry, many companies aren’t able to survive. As I’ve covered, cannabis companies face unique challenges. We are a highly regulated industry; however, we suffer from some lack of, or selective, enforcement because we are a young industry. In this new industry, the rules may change quickly and often, which means that cannabis attorneys must do their best to plan for shifting sands. Faced with the new potential of consumer-based civil lawsuits (EVALI and false advertising for potency, e.g.), facilities must thoroughly vet their vendors, and work to be fully transparent with their data.

In a system that isn’t yet fully formed, the advice, counsel and direction of a trusted, knowledgeable attorney will profoundly impact a client’s operation and potential legal liability.

Ben Rosman co-founded PSI Labs in 2015 after a legal career specializing in medical marijuana criminal defense. In his role as CEO, Ben advances PSI Labs’ mission of excellence in scientific testing across medical and recreational markets.