Editors’ Note: This is the transcript version of the podcast we published yesterday with Patricia Heer. We hope you enjoy it.
Rena Sherbill: Today, I am happy to be joined by Patricia Heer, Editor and co-founder of Cannabis Law Digest, an online platform of legal resources for the cannabis industry. I interviewed Patricia at the CWCBExpo last month in LA. As we’ve mentioned before on this podcast, the cannabis laws are especially difficult to parse and in California the regulatory structure would be comical if it weren’t so frustrating and disheartening to stay in compliance. Patricia, with her extensive litigation and commercial experience helps break down the convoluted legal landscape for us.
Prior to serving as editor for the Digest, Patricia was special counsel at Duane Morris, LLP. and her clients have ranged from national advocacy groups and investors to direct and ancillary operators cannabis industry. Patricia is also a member of the State Regulations Committee of the National Cannabis Industry Association, a member of the Emerging Issues Committee of the National Cannabis Bar Association, a regular supporter of the New York chapter of Women Grow and CannaGather, and a member of the New York City Affairs Committee of the New York City Bar Association.
For reference purposes, this interview was recorded September 27, 2019.
Patricia, welcome to the Cannabis Investing Podcast. It’s great to have you.
Patricia Heer: Thank you. Thank you. Excited to be here.
RS: Okay Good. Tell us about what you do and who you work for.
PH: Sure. For the past 12 years I was at a National Law firm and then the last five years of those I did Cannabis Law and I found myself spending a lot of time searching between state agency websites and statutes and regulations and court decisions and I just found myself wasting a lot of time and I thought: how is that that we don’t have all of this information in one spot, all of these resources and hence the birth of Cannabis Law Digest, which is what I’ve been focusing on for the past year now since I left the firm, and basically we gather all of the state statutes and the regulations on the medical or at all use program in a particular state, any proposed changes because we obviously know that’s an issue in the industry.
We have those proposed changes to regulations also covered and court decisions that really interpret right, what a regulation says or let’s say, there is a dispute right, a legal dispute and litigation between operators or an ancillary business, we will cover those decisions. So, any cannabis decision that we think really affects an operator that an operator should know about or that an investor looking into a company should know about we will cover those cases.
So, federal cases, state cases, or even cases at the administrative tribunal level right we’ll have those because those also will affect how operators handle issues on a particular state with regard to let’s say, they tripped a regulation and so now they are facing a violation from the state regulatory authority, right. So, what’s going to be the penalty and other operators in that jurisdiction need to know that.
RS: So, can you talk about a few instances that have come up lately that you’ve looked at and been like this is a great case study and this is what it would be good for?
PH: I mean there is, you know, it’s interesting when we started this right, we saw cases trickling in, but more recently, I mean there is at least two on average, two three decisions coming out a week from federal and state courts. So, it’s kind of tough for me to pick an issue that’s really hot lately. I mean what we are seeing, you know, I will tell you this. What we are seeing is a lot of litigation heating up right.
So, litigation between former owners, you know that years ago just jumped into the industry because they saw the money and let’s face it, it’s a cash industry, right. We know all of the 280 issues, right, and how the industry has to operate, based on cash a lot [of the time] and so when you have two friends that go into business together and all of a sudden they are making money, right and all of this cash is pouring in, there is not necessarily standard operating procedures that are set-up.
There isn’t an operating agreement that they thought, you know what, we should really have an agreement; talk about the structure of how we’re going to operate and how we are going to make decisions, right. And then the money is pouring in, you know maybe someone takes the money because they need to pay the mortgage or something else and now all of a sudden right, you have a little bit of a fight between friends and who owns the company; who has been doing most of the operations, right. Who’s been spending more time on the business and now you have litigation. And so that’s what we’re seeing a lot.
We’re also seeing a lot of FLSA violation. So, labor and employment issues, right. How do companies need to treat their employees, what are the accommodations that they need to provide to an employee who is also let’s say a patient under the medical program in that state, right. Does the employer need to provide certain accommodations? Can the employer fire an employee, right, for testing positive in the drug test? You know, are there protections in that state that protect the employee. Do those protections allow the employee to then file a lawsuit against the employer for firing the employee on the basis of marijuana use? So, a lot of employee issues.
You know, and then in every state it’s funny because people say, Oh! Colorado and California, they are mature markets, they don’t have issues they are settled markets, but that’s not true. As a program matures, it sees that, you know what are these new issues that the industry is facing, how do we deal with it?
You know what, we don’t really have any regulations written for that. You know California started out with two pages of regulations. There are 200 now, you know because as the industry matures, you know the regulators are understanding, you know we need to provide guidance to the industry right and so we’ll see a lot of either guidance coming out of agencies, which we also report on or we’ll see administrative tribunal decisions that will also talk about those regulations.
RS: Given that you are coming from a background as a lawyer and somewhat of an expert in the law space, are you surprised by the kind of what’s the word, inconsistencies, in legislation?
PH: Oh! Inconsistencies. I mean, do you want to talk about, you know inconsistencies between federal and state or between state and state or state and local. Look, you know it’s interesting right, so historically my background was financial restructuring, right, bankruptcy and the way you know, really to get anything done right in bankruptcy, the premise and the goal of bankruptcy is to make a deal, right. Everyone is going to not come out as happy as they want in a bankruptcy, while all of the creditors will be harmed in some way, right from their point of view, but maybe someone will – maybe everyone will get something, right. And so, the point is to find a work around, right. And that’s what this industry is: finding workarounds, right.
As new issues come up, as new regulations change, right, you are thinking of ways to deal with it, but ya, you know it is, I mean, take 280E for instance, right, take the tax issue that the industry deals with, right. Operators that touch the plant, they can’t deduct expenses, right that they incur in running their business that a regular business can do, right. Because of the IRS code section 280E. Now, for a while because of this one case, the Champs case from California years ago, what the industry would do, is separate out their entity.
So, they would have the operator be a separate entity, let’s say from the management company, right. And for a long time, we thought okay you know then the management company can deduct expenses that it incurs as long as we keep them separate. Well, about a year ago there is a decision from the tax court that says no, no, if the management company, if the sole purpose for the management company is to support and provide services to the cannabis operator, guess what, you are one in the same entity and you can’t deduct expenses either oh and by the way, there is a double penalty now for not paying those taxes.
So, that’s tough in the IP world. You know what happened recently was you know a lot of the way the operators would protect their IP, their intellectual property is by registering with the state for a state trademark and also apply for a federal trademark, but because of the inability to get a federal trademark for cannabis you would get a trademark for let’s say your logo that appears on a hat, right. So, it would be in a different category. And with the hope that ultimately you can use this theory of the zone of insolvency to expand it to your other products, right.
Well we had a recent decision, the Woodstock case, where the court said, you know what that’s not a good argument at one point when you applied for a federal trademark, you had to say that your registration is for a product that is not involved with cannabis and so any hope of you using the trademark protection for a cannabis product in the future is now being used against you.
So, many changes in the industry at one point we think you know this is going to be a workaround that will work and the next minute we find out it’s not, but look, we know that getting into the industry, right. It is the gray industry, we know it, right. We know that it is tough and we have to find ways, you know to operate, even if it is illegal at the state level.
RS: It‘s interesting. I mean, I’ve heard people be so surprised at the laws that do pass and then the law that don’t get passed like everybody thought New Jersey was going to pass, it didn’t. I’ve heard very few people thought Illinois was going to pass, it did. The SAFE Banking Act that passed yesterday, what are your thoughts on all of that?
PH: Let’s take a look at what happened at the state level in Jersey because, you know, it really fits into what happened, almost happened with the SAFE Banking Act, right. So, in Jersey, you had a lot of advocacy groups, right, and you had a lot of interest, right. Some of those interests collided, some of those interests coincided, right. Ultimately, they were not able to make them work, right. Coincide and pass the legislation, right. There was an issue over expungement. Okay, of past records.
And at the federal level, right with regard to the SAFE Banking Act, what happened was it passed the full House, right? So, we will see what happens at the Senate level, but coming up to the days before the vote, there was letters sent, right from advocacy groups saying, hey House legislators, please don’t take a vote on this. And the reason they did that was because they were concerned about the effect on the industry as a whole and that if the House considered this bill it would only consider this bill and not legislation that addressed other issues in the industry, right that the industry struggles with.
So, the concern was look, you passed the SAFE Banking Act, if you are only going to look at one piece of marijuana legislation this year and this is the only one, the only thing you are doing is really helping the folks that are already in the industry, but you are not addressing other issues that we are concerned about, for instance how communities have been hurt by the war on drugs and fixing and fixing those issues, right.
So, there is the legislation out there, it’s the more legislation that addresses these issues and so these advocacy groups were pushing for that legislation to be considered instead. Right now, that did not happen, ultimately the House did have a vote, but and did pass it, but I find it interesting that these issues between possibly divergent interests, they’ve up until this point have played out at the state level.
To see that being played out at the federal level, you know on a standalone marijuana bill, you know it is the first standalone marijuana bill. I mean, that in itself is interesting. But to see those issues play out at the federal level on a marijuana issue, I think, it‘s indicative of possibly, look, it’s periodic change, right, maybe we are going to get there. We know that there’s tons of bills introduced, right? But maybe we’re getting to the point, where it’s more than just the introduction of bills. It’s consideration, and then a back and forth on them.
Get FREE Samples
RS: What do you think about that? What‘s your idea for a timeline? I know, everybody hates answering this question. It doesn’t need to be the answer.
PH: Yes. You know what, it‘s interesting. I mean, look, the more I’m in the industry, actually, I think, you know, you start understanding all of the interests that that play out, right? So, I’ll use the SAFE Banking Act. Is it going to pass in the Senate? Well, who knows right? Because there, you do have interests there, right, that are opposed to the bill passing, for instance, right?
We have supporters of the hemp industry that are afraid that, that if we push that marijuana industry too much into legalization, that‘s going to overshadow hemp, right? And so, do I think for full-scale legislation, that’s coming soon? Absolutely not, because of those issues, right, there are legislators – congressional legislators from the Midwest states that just have no interest in legalizing marijuana, right?
I mean, we‘re now at more states that have a program than that don’t have a program. I think, we only have like three states that don’t have some sort of a program. There’s 17 states that have a CBD program, 11 that have a medical program, 30, 33 or something that have a medical program, sorry, 11 with an adult use program. And so, the initiatives are being pushed at the state level, but there’s still states that don’t have an interest, right, in pushing full marijuana legalization, right? Maybe hemp, maybe CBD, but I think it’s going to be years before that happens. And you’re not going to have that happen unless the citizens in that state are really pushing, right, their legislators to take up such legislation and to take any action on such legislation, right?
And so, if they‘re not pushing, the legislators are certainly not going to do anything on their own.
RS: It‘s interesting, most people when they talk about the holdups to legalization, they talk about people aren’t ready or there’s not enough data or all of these things. But it’s interesting to talk about how the hemp bill and CBD, that they’re worried about that overshadowing them and taking some of the shine off of what they could do easily – more easily. So, that’s interesting to think about like how many impediments there are to full-scale federal legalization.
PH: Yes, it really is. I mean, I – you‘ve got the hemp. You have advocacy groups. I think it’s funny, because a lot of our colleagues in Canada say, “How can you even really separate marijuana and CBD from the cannabis plant? It’s all in the one that – it’s all in the same plant, right. And we’re seeing that difficulty with having put in that separate infrastructure now, right, with states not being able to enforce their marijuana laws, right, because hemp smells and looks the same way, right? So yes, we’re definitely running into some issues with that.
RS: And it seems like the CBD Hemp market wants to position itself more as a health and wellness thing, not as a psychoactive substance?
PH: Yes. I mean, good luck with that from the FDA perspective. I mean, we have so far, the FDA right has made a statement that, it‘s neither a dietary supplement or a drug, because for drug you need to go through drug experiments right, and the required steps for approval for a drug to be able to make claims. And then, same thing from a dietary supplement, doesn’t fit into the definition. So, just hold off and just wait until we come out with regulations. We’re looking into it, we’re gathering information. But ya, the CBD and hemp market are pushing for that, but we see clearly the FDA cracking down and writing warning letters to the industry.
RS: Right. And Health Canada, for that matter.
PH: Oh, no, no, I mean, we‘ve seen in Canada, previously, right, where you were able to take your company and list it on the exchange up there, right, on the TSE, as long as you had a business plan, right, and you had a good team. Now, they’re really looking into your company. I mean, obviously, with CannTrust (OTC:CTST) what’s happening, right? The regulators are taking another look.
RS: So, do you see any kind of lessening of those stringent measures, because people think it‘s going to die down once the FDA kind of makes itself felt and people, the companies change their packaging, if that’s the issue or the wording on the packaging, if that’s the issue? But do you think they’re just going to keep pushing kind of the goalpost further and further?
PH: Ya. Look, I think as an industry matures, I don‘t think you’re getting less regulations, you’re getting more regulations right, because the regulations are tried, the regulators are trying to keep up with the industry, what’s happening, what kind of guidance do we need to put out there, right, either from a safety perspective or from an operation perspective?
You know, like I said, in California, right, we started out with two pages, we‘ve got 200 pages. At the federal level, it’s going to be the same thing. Everybody’s gunning for descheduling, take it off the Controlled Substances Act. Well, that really, okay. So, that’s fine. We’ll make it legal, but that doesn’t mean that it’s not regulated by some other entity, right, like the Food and Drug, Cosmetic Act, like the FDA or for hemp, right, like the U.S. Agricultural Department, right? So, it’s not less regulations that you’re going to see.
RS: So, I don‘t know how much you pay attention to the various companies that play in this space, but if you do, who do you see as being the companies that are best able to navigate this? Or do you see kind of a pattern of people that think that they can handle it, and then they can’t handle all the regulatory hurdles?
PH: Ya. It‘s tough, right? I do see, for instance, a lot of operators who, at one point had operations in a couple jurisdictions, and then just realized you know what, the compliance, the resources it takes for compliance, right, to be compliant, is just too much to focus on every single jurisdiction that we’re in. So, let’s just focus on being really good in one jurisdiction. And once we get that down, then we’ll expand, right. But you got to remember that once you expand, again, it’s a whole new separate ballgame, right, because every state is different. And so, I’ve seen a lot of that. And I think those are the companies that are going to be a lot more successful from a compliance, regulatory standpoint, not facing either warning letters or violations, or frankly, cease and desist letters from other operators, or from – or a – from litigation standpoint.
So, ya, I think, it‘s the entity that really focuses on being really good in the market that they’re in before they really just start buying up entities and other – in other jurisdictions and then focusing on trying to operate all at once. Unless you have the resources to do it, right, unless you have the infrastructure and resources to do it. But a lot of entities in this space are startups, right? So, it really depends on what market you’re in, at what stage your businesses in, and what your – obviously, what your goals are. I think, most of the time companies are looking to be compliant, because obviously, if you’re thinking of the exit strategy, right, that that’s obviously going to increase your value.
RS: So, given that, would you say that like multi-state operators have kind of a leg up in that regard, because they‘re navigating different states?
PH: Look, they have a leg up from the perspective of, we tend to think that they have more resources to spend on compliance. So, I – in-house counsel, they have money for databases, right, checking outside counsel. But does that mean that they are any more successful in navigating the state laws than a small operator who‘s, let’s say, maybe in two states, right, and just really focusing on one product and really focusing on building their brand, I’m not sure about that.
RS: And let me ask you, what‘s your feeling on – there’s a lot of talk about the social justice aspect of cannabis and how unfair and racist the laws have been up until this point? What do you see the future of it? You say, it’s years away, probably federal legalization. How do you see it playing out? Let’s say, I mean, the fact that there’s people sitting in jail right now for selling marijuana. And yet here we are at a conference, the SAFE Banking Act just passed. We know how much money’s pouring into it. What do you think about that? How do you think it’s going to play out?
PH: It’s interesting. So, you‘ve got social equity programs, right, in a number of states that are part of the programs. For instance, in Massachusetts, right, there’s a social equity portion, part of that program. And in California as well, right, the applications were due just recently.
The difficulty there that you‘re seeing is, you could have a state attempt, right, to remedy the situation, right, the disparate impact that occurred. But at the same time, if your regulations for the program as a whole don’t match your social equity program regulations and initiatives, then that’s going to be tough for you to implement.
So, let me give you an example. In Massachusetts, for instance, what we have is these host community agreements, right, that you‘re required to get from your local municipality before you can receive a license from the state, right? These host community agreements, they basically set out the structure of how you’re going to operate in that community and the fee that you’re going to pay to the community, to whether the county government or city, to offset the impact that your business will have on the locality. There’s a cap on that fee.
But what‘s been happening is that fee has been categorized into a different term, let’s say. And so there’s been workarounds on that cap. And so basically, what applicants are saying is, look, this is extortion. We’re paying way more than what’s permitted under the legislation. This was never the intent of these hosts community agreements. But basically, because we want to get a license and because we’re required to get a host community agreement, we have no choice, but to pay this amount. But guess what? We can’t even pay this amount, because it’s now so exorbitant, and we can’t compete with the larger operator who can pay that exorbitant fee. That now me who’s, let’s say, a startup, right, with not that much funding behind me that wants to start a company. Now my chances of getting a host community agreement in that particular locality, right, are decreased, because my competitor who’s got huge funding, let’s say, backing behind them can afford the fee, and they’re the ones that are going to get that host community agreement. And therefore, they’re the ones that are going to get the license, especially in the community, let’s say, that limits the number of applicants that can go into that jurisdiction, right?
So, it‘s almost, when you think about, okay, well, Massachusetts wants to increase the number of their diverse businesses, right that are going to be operators, you know that’s difficult, right? And small business operators, that’s difficult to do when you have this other regulation that requires an agreement that will charge the small business a fee that they can’t afford.
PH: Yes, it‘s a lot.
RS: You have a lot at your fingertips. It‘s – I can’t even imagine how many laws you studied on this. But it seems like for, however, many laws you study, we kind of know – none of us have any idea of what, how it’s really going to play out?
PH: No, and it‘s always changing, like I said. Someone asked me yesterday or this morning, maybe, do you put out something in print? And I said, no, that would be a complete disservice on my part, things are continuously changing, right? I mean, we constantly have proposed regulations, that then there’s a hearing on, right, that then gets implemented or emergency rule. If I put something out in print, I’d have to change it, do a reprint in an hour, yes.
RS: Right. Well, I think you‘ve given us a lot of things to think about, a lot of things to be concerned about maybe. But I think it’s really great to get that kind of realistic perspective, not from an executive, not – even from an industry expert, but from a law expert to just break it down to the black and white of it. So, I really appreciate you coming on and sharing with us your expertise and your knowledge.
PH: Thank you. My pleasure.