By Steven Schain
At that point, 80 percent of America’s population will have some form of legalized marijuana access, the 2016 sales of which Fortune Magazine estimates to exceed $6.7 billion (a 25 percent increase of 2015’s $5.4 billion).
Because of the law’s breadth and the state’s demographics, Pennsylvania is poised to be legalized marijuana’s next hot spot. Specifically, the Medical Marijuana Act enumerates 17 “serious medical conditions” eligible for marijuana prescriptions encompassing autism and sickle cell anemia alongside the more traditionally covered ailments such as cancer, epilepsy and post-traumatic stress disorder.
By cutting such a wide swath, the act invites high program participation, particularly in light of Pennsylvania’s huge potential patient base.
Further, unlike New Jersey and other states severely limiting the number of issued licenses, the Medical Marijuana Act authorizes 25 grow/processing licenses and 50 dispensary licenses, each of which empowers the licensee to open three locations for up to 150 dispensaries.
This column explores legal issues confronting the cannabis industry, starting with the big enchilada. Regardless of the law of 24 states and the District of Columbia, marijuana is still 100 percent illegal under federal law.
Pursuant to the Comprehensive Drug Abuse Prevention and Control Act of 1970, 21 U.S.C. Section 801, et. seq (1970), your clients can get raided, have their assets seized and go to jail. Further, by representing cannabis trade participants whom presumptively are violating the Controlled Substances Act, lawyers may be committing ethical violations that place their licenses in jeopardy.
Legal Yet Illegal
This multibillion-dollar, rapidly growing industry’s legality and existence hinges on a former attorneys general’s internal Department of Justice memoranda.
Specifically, the Controlled Substance Act currently lists marijuana as a Schedule I controlled substance having “a high potential for abuse” and for which there’s “no currently accepted medical use in treatment” and “a lack of accepted safety for use” “under medical supervision.” The act prohibits marijuana’s manufacture, distribution, dispensation and possession and, pursuant to the U.S. Constitution’s supremacy clause, state laws conflicting with federal law are generally pre-empted and void. In the U.S. Supreme Court decision Wickard v. Filburn, 317 U.S. 111 (1942), it was said that, “No form of state activity can constitutionally thwart the regulatory power granted by the commerce clause to Congress.” Stated another way, when the federal government kicks in a dispensary’s door, the “but I have a state license” argument won’t be keeping your client out of prison.
While still 100 percent illegal under federal law, the industry’s existence rests on three DOJ “policy clarifying” memoranda restraining U.S. attorneys’ Controlled Substance Act enforcement in legalized marijuana states.
First, in the so-called “Ogden memoranda of 2009,” then-Deputy Attorney General David Ogden wrote that combating major drug traffickers remains a central priority and federal resources should not be devoted to “those whose actions are in clear compliance with existing state laws providing for the medical use of marijuana.” Second, in a June 29, 2011, memorandum, then-Deputy Attorney General James Cole “clarified” that the Ogden memorandum was “never intended to shield such activities from federal enforcement action and prosecution, even when those activities purport to comply with state law.”
Third, in a memorandum dated August 29, 2013, Cole provided that while marijuana remains illegal under the act, the DOJ would focus resources on “most significant threats in the most effective, consistent, and rational way,” listing “eight enforcement priorities” of preventing distribution of marijuana to minors; marijuana sale revenue going to criminal enterprises, gangs and cartels; diversion of marijuana from states where it is legal under state law in some form to other states; state-authorized marijuana activity from being used as a cover or pretext for trafficking other illegal drugs or other illegal activity; violence and use of firearms in marijuana’s cultivation and distribution; drugged driving and exacerbation of other adverse public-health consequences associated with marijuana use; growing of marijuana on public land and attendant public safety and environmental dangers posed by marijuana production on public lands; and marijuana possession or use on federal property.
Thus, despite ongoing efforts to either remove it from the Controlled Substance Act or “de-schedule” (i.e., drop it down to less-penalized Schedules II through V), marijuana remains 100 percent illegal under federal law and an ensuing administration’s policy change could end the cannabis industry in a heartbeat.
Federal Illegality’s Impact on Cannabis Industry and Lawyers
This federal prohibition creates criminal, civil and ethical exposure for both cannabis industry participants and their counsel.
First, depending on the amount of cannabis possessed, cultivated or sold, the Controlled Substance Act imposes penalties ranging from incarceration of 15 days to life and fines of $1,000 to $1,000,000.
Second, because working together to distribute drugs to a third party forms a “conspiracy” in violation of 21 U.S.C. Section 846, both cannabis professionals and anyone “furthering sales” (such as a dispensary’s landlord) faces conspiracy exposure.
Third, any transfer or deposit of monies yielded from cannabis’ sale may be deemed “money laundering” in violation of 18 U.S.C. Section 1956 for the seller and a Bank Secrecy Act, 31 U.S.C. Section 531(g), violation for the financial institution accepting the deposit and “failing to identify or report financial transaction involving proceeds of Controlled Substance Act violation.”
Fourth, one whom knowingly leases property for purpose of “distributing a controlled substance” may be deemed to be “maintaining a drug premise” in violation of 21 U.S.C. Section 856, subject to criminal (up to 20 years’ incarceration and fines up to $500,000 for individuals and $2 million for an entity) and civil (forfeiture of gross receipts earned from leased space) penalties.
Fifth, property involved in marijuana’s sale and distribution may be subject to seizure and forfeiture by the federal government and, which may or may not, abide by the innocent landowner defense.
Sixth, because illegal under federal law, licensed marijuana growing, processing and dispensaries are ineligible for protection under the bankruptcy law. In re Arenas, 535 B.R. 845 (10th Cir., August 21, 2015), affirms Chapter 7 dismissal because majority of debtors’ income was generated from marijuana business. Also, because of the federal prohibition, courts have found that cannabis-related agreements are for an illegal purpose and unenforceable. Haeberle v. Blue Sky, 11CV709 (Arapahoe County, CO, August 8, 2012), decided that contracts related to marijuana are void and unenforceable. In Hammer v. Today’s Health Care II, CV2011-051350 (Apr. 17, 2012), an Arizona court refused to uphold a marijuana business’s loan documents.
Seventh, representing those involved in cannabis production and sale may be unethical. The Rule of Professional Conduct (RPC) 1.2 provides that “a lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal” and RPC 8.4’s professional misconduct definition includes “violat[ing] or attempt[ing] to violate” the RPC or “commit[ting] a criminal act that reflects adversely on the lawyer’s honesty, trustworthiness or fitness.”
Where Do We Go From Here
Despite this “parade of horribles,” since 1996, legalized marijuana has thrived in California by overcoming each seemingly insurmountable obstacle.
While efforts ranging from removing cannabis from the Control Substance Act to amending the RPC to authorize lawyers to assist in state-permitted conduct are under way, practicing law in this space requires:
• Including written warnings in engagement letters, websites and written memorandums of federal prohibition for growers/processors/dispensaries through landlords, distributors, testing labs, suppliers, etc.
• Clearly advising that no amount of retainer or fees eliminates federal prosecution risk.
• Being prepared to immediately withdraw if client proposes skirting state law or violating Cole memorandum enforcement priorities.
• To protect other clients, opening a second IOLTA/trust account for depositing cannabis retainers.
Reprinted with permission from the April 29, 2016 edition of the “Legal Intelligencer”© “2016” ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382 – [email protected] or visit www.almreprints.com.
2019 National Law Journal “Finance, Banking, & Capital Markets Trailblazer” award winner, Steve Schain is Senior Counsel at Smart-Counsel, LLC, a 100% female owned boutique Cannabis law firm. Steve represents entities, governments and individuals in litigation, regulation and compliance, financial services, license applications and entity formation. Reach Steve at [email protected]
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