Washington tends to be pretty strict regarding the flow of money into and out of the cannabis industry. To date, it still allows marijuana businesses to be financed only by state residents (soon to be relaxed), and it only allows state residents to exert any control over licensed businesses and/or to share in the profits of licensed businesses. Even if you are a state resident, a licensee faces major risks if it shares profits with you without having declared you as a true party of interest and having received approval from the Washington State Liquor and Cannabis Board (“LCB”) before sharing any profits with you.
As many licensees know, however, where the rules are vague or ambiguous, it is generally the first impulse of the LCB (like most regulators), to say that the most conservative, restrictive answer is the correct one. And though listening to your regulators and complying with their wishes is usually your best and least expensive option (See How To Deal With Your State Marijuana Regulators: Fess Up), it sometimes pays off to push back, at least a little.
I and some of the other cannabis business lawyers at my firm recently wrapped up a Washington case dealing with the “profit issue.” Our client was a licensed processor based in eastern Washington that client had contracted with an independent sales company to sell its product primarily in Western Washington for a 7.5% commission. A licensed retailer complained about this arrangement and the LCB sent an enforcement officer to interview the processor. The processor confirmed the basic agreement and the LCB then turned around and tried to cancel its cannabis processing license. Despite our client being a first time “offender,” the LCB had no interest in offering a monetary penalty, a suspension, or any alternatives; it wanted only to cancel the processor’s license.
When we took on the case, our first goal was to achieve a reasonable settlement with the LCB. Few people that have been through litigation, including administrative litigation, would ever describe it as a fun or rewarding or inexpensive experience. Even when you have a good case — which we did – it often makes financial sense to pay a settlement than to pay your attorneys to fight. We tried to get the LCB to agree to a lesser penalty, but it was just not willing to budge, so we went through the administrative hearing process. The administrative judge listened to both sides and let us know about 45 days later that we had won. The judge ruled that under WAC 314-55-035 someone who receives a commission on a specific sale is not receiving “a percentage of the gross or net profit from the licensed business during any full or partial calendar year” and therefore does not have to go through the LCB approval process for true parties of interest.
State agencies get to write the rules they enforce so long as they go through the standard rule-making process — proposed rule, comment period, then final rule. Even if they don’t go through that process, they still get quite a bit of leeway when it comes to interpreting ambiguous rules. But once a rule is written, a state agency is not supposed to expand its scope beyond its text without first going through the rule-making process. When they do act without going through the required rule-making process and then refuse to back down, it is important to use the legal system to push back.
Nonetheless, it is always important you “pick your battles” and know when you are doing something that may cause trouble. In this case, the client probably would have liked to go back in time and not have paid the commission, as that would have meant it could have avoided having to fight the state at all. Regulated businesses need to make decisions using a green light, yellow light, red light approach. Green light decisions are clearly allowed and red light decisions are clearly rules violations. Yellow light decisions are the trickiest, as those are the ones that could go either way based on rules interpretations. For these decisions, it’s all about deciding whether the risk of losing a legal fight against the regulator is worth the potential reward of making the decision.
Most of the time, you will want to be cautious, but every now and then the fight is worth it.