What does Prop. 64 mean for lawyers?

Hashing out the details

2018 February

On January 1, 2018, California joined seven states and Washington, D.C. to legalize marijuana for both recreational (and existing medicinal) use. No matter which side of the pot plant you sit, legal marijuana use is upon us and will most certainly be around us. With this progressive change comes new legal issues that will affect us personally and professionally.

In 2016, Proposition 64, The Adult Use of Marijuana Act, was passed by voters. The act allows adults 21 years and older to possess up to one ounce of marijuana and cultivate up to six plants for personal use; allows adults 18 years or older to possess medical marijuana; regulates and taxes the production, manufacture, and sale of marijuana for adult use; rewrites criminal penalties so as to reduce the most common marijuana felonies to misdemeanors and allow prior offenders to petition for reduced charges. It is illegal to drive while under the influence of marijuana and you can only smoke in your own home or backyard. It is still illegal to smoke marijuana in public, in a restaurant, or in a bar.

California’s marijuana and related-product sales are projected to hit $3.8 billion (that’s with a “B”) in 2018 and $5.1 billion by 2019. To compare, revenue from beer sales in California was approximately $5 billion in 2017. The state and local cities will benefit significantly from tax revenue, with a projection of $1.4 billion in revenue for the state from sales of cannabis and related products such as edibles, topical creams, foods infused with marijuana like honey, and packaging items like labels and containers. Some dispensaries are also offering delivery services, similar to Uber Eats or Grub Hub.

California faces many challenges that will significantly affect cannabis sales and revenue. Retailers must have a state license and local permit to conduct business in this new marketplace. Under Business and Profession’s Code section 19320(a), “no person shall engage in commercial cannabis activity without possessing both a state license and a local permit, license, or other authorization.” California Bureau of Cannabis Control continues to review thousands of applications but cities are slow to issue business licenses to retail stores; even dispensaries are having a difficult time transitioning to the recreational use market because of the licensing red-tape, but are being given first priority. Anaheim, Pasadena, Riverside, and others will not allow recreational pot sales, at least to start off in 2018. The city of Los Angeles has yet to start issuing local licenses to pot shops. West Hollywood, Santa Ana, San Diego and Palm Springs have approved the sale of recreational marijuana.

Difficulties for the businesses

Because marijuana is illegal in the eyes of the federal government, banks and armored car companies are refusing to do business with local dispensaries and growers, most of whom conduct all of their business in cash. An estimated 70 percent of cannabis businesses have no bank accounts; those who do have to deposit their cash in small amounts and often use straw-persons to make deposits or payments into these accounts. Purchases cannot be made through a credit card transaction. As a result, dispensaries and shops are flushed with green (in more ways than one) and are becoming repeat victims of assaults, thefts, robberies, and burglaries. In 2012, an Orange County medical cannabis dispensary owner was kidnapped and sexually tortured by four thieves trying to find and steal his cash. Some dispensary owners have been arrested and charged with money laundering because they are in possession of a lot of cash when stopped by law enforcement. California legislators need to provide the framework to allow the creation of government-owned financial institutions that would take deposits, make loans, and work with marijuana companies. Public banks would be owned by the public, run by elected or government-appointed offices, and operated to support public priorities and return the profit to the public. This scenario would be a win-win for California and local cities.

California needs to also be cognizant of insurance needs for all those involved in the marijuana industry, from growers to bud-tenders to accountants to drivers. A retail dispensary is like any other type of business, with employees needing workers’ compensation insurance, health insurance benefits, and retirement opportunities, and businesses needing general liability coverage. California’s insurance commissioner Dave Jones continues to fight for insurance coverage for the cannabis business. Currently, the Department of Insurance has approved a commercial carrier to write policies and offer commercial coverage for cannabis business owners. However, no health or workers’ compensation insurance policies exist, and no retirement plan options are available to cannabis business employees.

Criminal law challenges

Difficulties exist in the criminal arena as well. California Vehicle Code section 23152 (f) makes it unlawful for a person who is under the influence of any drug to drive a vehicle. Police officers are currently using Marijuana Field Sobriety, Blood, Breath, or Urine Tests to determine impairment. However, these tests are proving to be flawed. THC is different than alcohol because it is stored in fatty tissue. As a result, these tests cannot provide accurate results on the level of impairment or a timeframe of when the drugs were ingested.

Neighboring States like Colorado, Oregon, and Washington are releasing statistics that DUI accidents and arrests involving THC are on the rise. According to the Insurance Institute for Highway Safety, collision claims since marijuana was legalized are up 16 percent in Colorado, 6.2 percent in Washington and 4.5 percent in Oregon. However, the study did not differentiate between an accident involving someone legally impaired and someone who simply showed traces of THC.

Can employers require employees to pass a drug test as a condition of employment now that marijuana use is legal? Under current California law, an employer may require pre-employment drug tests and take illegal drug use into consideration in making employment decisions. California’s Supreme Court has held that an employer may refuse to hire an applicant who tests positive for marijuana, even if the drug is legally prescribed for a disability. Is it now considered workplace discrimination to terminate an employee based on their use of marijuana, regardless of why they use it?

As the billion-dollar cannabis industry grows in California, we as lawyers must brainstorm on how to interject our talents in this boom. How do we protect our current business dealings with revenue derived from a client who is associated with the newly legalized industry? Would creating a shell account separate from your current law office safeguard accounts currently held at a national bank? Would you lose your license to practice if the State Bar learns that funds deposited into your trust account were derived from a business dealing with cannabis?

Justice Day

CAOC’s Justice Day will take place on April 24, 2018. Share your suggestions for new legislation with CAOC. Your input and participation at Justice Day will greatly improve the evolution of legalizing cannabis in California.