Your Marijuana Business And Your City: Friendship Is Best

Better you make friends than enemies. If possible.
If possible, make friends not enemies.

Last week we mentioned the recent Ninth Circuit opinion in the ongoing Harborside litigation, and expressed our hopes that the end of chief federal prosecutor Melissa Haag’s tenure might usher in more marijuana-friendly DOJ leadership. (Haag instigated the Harborside forfeiture proceedings.) But the Ninth Circuit’s ruling is worth a second look for what it means for the relationship between state-legal cannabis businesses and the cities in which they are located.

As many readers probably know, Harborside Health Center in Oakland, California, is the largest medical marijuana outlet in the country, serving more than 100,000 patients each year. Three years ago, Haag began civil forfeiture proceedings against Harborside and the landlords of its two MMJ shops in Oakland and San Jose. But the city of Oakland took issue with the forfeiture proceeding and sued the federal government right back, voicing its concern that shuttering Harborside would cost it more than $1 million in tax revenues annually, harm patients who depend on Harborside for their medicine, and increase black market marijuana activity.

Oakland’s case was dismissed at the trial court level because, in the judge’s view, Oakland did not have a stake in the potential forfeiture (i.e., it didn’t have an ownership or leasehold stake) enabling it to bring a direct claim in the forfeiture action, so it must therefore also be precluded from launching a collateral attack on the forfeiture action by filing its own lawsuit. The U.S. Court of Appeals for the Ninth Circuit affirmed the trial court, but, importantly, agreed with Oakland that the city’s stake in tax revenue did give it a valid enough interest to confer standing under Article III of the U.S. Constitution. Ultimately, however, the court ruled that Article III standing was not enough, because Oakland was simply not bringing a claim that could be recognized under federal statutes governing the case. The court also expressed concern that allowing Oakland’s claim to go forward would disrupt the framework of forfeiture proceedings generally, opening the door to challenges from all kinds of third parties.

So why do we think the Ninth Circuit’s opinion has a silver lining? Well, for starters, a federal court of appeals said the city had a valid interest in tax revenue generated from the sale of marijuana, which of course is still illegal under federal law. We would not have been shocked by a ruling that said the city had no valid claim to tax funds coming from the sale of illicit goods — although of course by that logic, the IRS should not be able to expect taxes from illicit businesses, which it clearly does. Moreover, the court gave some consideration to Oakland’s arguments that closing down Harborside would negatively impact patients and could lead to increased crime. Oakland’s loss was on technical grounds; on the facts, the court was at least somewhat swayed.

We posed the question “will your city go to bat for you?” because Oakland’s case provides a lesson for cannabis businesses in the value of maintaining a good relationship with local officials in your city. Oakland was only willing to expend time and money in court because Harborside had worked so hard to establish itself as an upstanding corporate citizen that follows state and local cannabis laws, creates jobs in the community, and, obviously, pays taxes. Cynics might say that Oakland was only worried about the potential hit to its coffers resulting from the forfeiture action, but Oakland’s court filings reveal that it really does want Harborside in its community. You don’t often hear about cities trying to put a stop to forfeiture actions involving local businesses. This case could also become legally significant. Even though Oakland couldn’t proceed with its claim in this instance, the court recognized the city’s valid interest, which could mean that in the right case, a city could join forces with a local cannabis business to bring or defend a claim. Whenever the burden of litigation can be shared, that is a good thing.

We’re constantly telling our clients not to bother setting up shop in an area where a marijuana business will be unwanted. It’s simply not worth the headache and potential cost of fighting with city hall, your neighbors, etcetera. Instead, you should try to narrow your site search to a municipality that tolerates, if not outwardly embraces, cannabis entrepreneurs. Harborside obviously found that in Oakland.

Oakland is considering seeking further review of the Ninth Circuit panel’s opinion, so for the time being, the main Harborside forfeiture action will remain stayed. Still, we expect the Oakland piece will be finally resolved in the coming months, which means the forfeiture action will heat up. Until now, Harborside has been able to remain open and serving patients. We will certainly be watching to see how that unfolds with the new federal prosecutor in the Northern District of California and given the significant shift in federal policy in the three plus years that have passed since the forfeiture was commenced. Stay tuned.