The state-legal cannabis industry is often a cutthroat place. State cannabis regulations are difficult to navigate and it usually takes significant capital to get a cannabis business up and running. And even once operating, margins get shrunk by aggressive and unfair federal taxes and limited access to banking. To top it off, cannabis is still federally illegal.
Making matters worse are lawyers and law firms that prey on and drag down industry businesses. Literally anyone can call themselves a “cannabis expert” and plenty do.
Our law firm continues to see bad behavior and sloppy (sometimes dangerous) work from various law firms that claim to have cannabis practices and the below are what we’ve been seeing lately:
1. The “cannabis law firm”. It’s not unusual for a law firm to focus on one specific area of practice. It happens all the time with niche areas like estate planning, environmental law, employment law, patent law, etc. But when you see a “cannabis law firm”, you should ask yourself what that even means. Many of these firms consist of former litigators and criminal lawyers whose businesses are down due to legalization and so they now claim to be able to provide all sorts of cannabis business law assistance, including entity selection and corporate governance, securities work and compliance, transactional work of all kinds, and M&A. When looking for a law firm to represent your cannabis business, you should dive deep into that firm’s actual experience as many lack business law experience. These firms have become expert at hiding this by focusing on and regurgitating cannabis regulations, while wandering aimlessly through the actual business law side of things. We have seen law firms waste client time and money on transactions that never close because they did not know how to draft even basic legal agreements and they would seek to cover for this by endlessly negotiating.
2. The suburban law firm with the “cannabis guy”. In every city and county in America, there’s the law firm just about everyone uses for their everyday legal issues. Many of these law firms claim to have a cannabis department or practice, but they really have only one or two lawyers who have an interest in cannabis and minimal experience representing cannabis businesses. We know about these law firms because they have contacted our lawyers for help in the middle of their floundering deals. Just know that it is unlikely these firms have worked on large cannabis transactions and that is because they lack the legal depth necessary to ensure compliance with the huge range of laws implicated in such deals.
3. The big law firm with the cannabis practice. Our law firm has had a sizable cannabis practice since 2010 and I was actually excited to see some of the mega firms jump on the cannabis bandwagon in the wake of the first Cole Memo back in 2013. But my views on that quickly changed when it became clear that many of these mega firms had no cannabis regulatory knowledge at all. Most of the time we would deal with a very young associate (and a “cannabis partner” who knew nothing about cannabis but was on the project to monitor the young associate and to bill at partner rates) with a passion for cannabis but no skills or bandwidth to handle the actual work. Just by way of one example, I worked on the opposite side of a big cannabis merger with a mega law firm whose partner did not know if their client had local government approval in and did not know who to talk to at the local cannabis department to find out. This lack of even the most basic information stalled the deal and eventually led my client to decide to move on to easier merger targets. I have more respect for the big law firms that retain lawyers from outside their own firm to assist them with the legal areas in which they lack knowledge and experience than those which struggle through and botch the deal by doing so.
4. The cannabis solo practitioner. Cannabis-focused solo practitioners have always concerned me because it is impossible for any one lawyer to become knowledgable about all cannabis business and legal issues. When it comes to dealing with a solo practitioner, less is more when it comes to cannabis. A solo practitioner who handles cannabis licensing matters is a lot more likely to know what they are doing than a solo who claims expertise in all aspects of cannabis business law, ranging from compliance to intellectual property to mergers and acquisitions to receivership, etc.
5. The cannabis law firms that take equity in their clients’ cannabis businesses. A lawyer who takes equity in their client’s cannabis business has an inherent conflict of interest. That conflict can be waived, but it takes very specific, comprehensive waivers to do so properly and we virtually never see those in the cannabis space. In cannabis, where competitive licensing can be critical at the state and local levels, you should ask yourself how trustworthy is a law firm that has an ownership interest in a cannabis business whose revenues will take a hit if your company succeeds in securing a license that would allow you to compete with the lawyer’s own company? If a law firm is clamoring for shares in your cannabis business you should assume it has similar interests in other cannabis businesses and you should think long and hard about how that could financially impact your own business going forward.
As federal legalization nears, law firms in cannabis will do better and most of the sort of firms described above will leave the industry because they will not be able to legitimately compete. If you look at the sorts of law firms that are for sale, you can see that many of the cannabis hacks know their days are numbered.
But in the meantime, please be on the lookout for these usual suspects.
