WA House COG - Committee Meeting
(March 26, 2021) - Work Session - Cannabis Business Attorneys

WA House COG - Committee Meeting (March 26, 2021) - Work Session - Cannabis Business Attorneys
[ Event Details ]

Two attorneys were invited to speak about Washington state cannabis policies compared to other jurisdictions in a work session about the future of the cannabis industry.

Here are some observations from the Friday March 26th Washington State House Commerce and Gaming Committee (WA House COG) work session.

My top 3 takeaways:

  • Attorney Hilary Bricken talked about the policy landscape for cannabis and the possible impacts of cannabis tourism, lowering barriers to entry, and promoting social equity.
    • Chair Shelley Kloba introduced Bricken, a partner in the Los Angeles office of Harris Bricken McVay Sliwoski, LLP, an “international law firm that works with a broad array of clients” including a cannabis practice area. Kloba said Bricken had worked for the firm for more than a decade, noting she “was also doing cannabis work before then” and was named a Top 40 under 40 businessperson by the Puget Sound Business Journal in 2015. She hoped Bricken could offer “perspective outside of what we typically are hearing from our own local industry” (audio - 1m, video).
      • Bricken offered legal perspectives on cannabis through the Harris Bricken Canna Law Blog and Above the Law, which offered a “behind-the-scenes look at the world of law.”
    • Before moving to Los Angeles, Bricken said she had lived in Seattle and practiced law, describing herself as "boots on the ground when [Initiative]-502” was passed. She said she’d represented medical cannabis patients operating collective gardens and dispensaries “before Washington phased it out” in addition to serving many businesses licensed by WSLCB (audio - 3m, video).
      • Bricken argued that Washington officials had "always prided [themselves] on being heavily regulated" in order to stay in compliance with the former federal Cole Memorandum on state cannabis control. She stated that adult use policies in California were “quite a wakeup call when it comes to the regulatory patchwork quilt that’s been created out of legalization.” Bricken ascertained that the two states “couldn’t be more different” and “there is no gold standard when it comes to how to regulate [cannabis] even during prohibition and of course post-prohibition if we’re lucky enough to see that happen in the next two years before midterm elections.”
      • For Washington’s cannabis sector, unlike California, Bricken believed that "barriers to entry...still reign supreme.” She said low barriers to entry had resulted in "some pretty negative behavior going on in California” but she was “familiar with the regs” and had been asked to speak to how “Washington could position itself for an imminent national market.”
      • “I'm no, you know, ‘yahoo, yahoo’ cannabis person,” she added, but despite being someone “pretty buttoned up on the topic...I do believe regulation, obviously, is the pathway to normalization" of the economy and culture around the plant.
    • Washington State (audio - 3m, video).
      • Bricken said Washington lawmakers needed to be considering federal legalization of adult use of cannabis although she believed “in no way will the federal government usurp the powers of the states to continue to regulate individually.” Even under federal cannabis legalization, “Washington could still proceed in a cottage manner to protect the locals as it’s done basically since 2012/2013.”
      • Bricken urged lawmakers to consider lowering barriers to licensure and the option for vertical integration to see that “locals and incoming entrepreneurs are competitive in a national landscape.” She also suggested state regulators finalize an organic-equivalent certification program like California to inform customers when items were “de facto organic” even if the products couldn’t use the federal term as of yet.
      • Bricken advised creating an “appellations program, just like wine” that designated cannabis from Washington. She believed a system of regional labels for cannabis from the Evergreen State could “drive popularity with consumers” when framed like “the wine industry in California” or Washington.
      • Kloba asked how an appellations program would work for indoor cannabis cultivation since it was traditionally applied to growing grapes outdoors. Bricken replied that wine and cannabis production were “not good bedfellows" as their respective industries sometimes competed for the same pool of adult consumer disposable income. The two products also competed for “the same landscapes, at least for outdoor,” and incidents of “pesticide drift” occurred. Bricken explained that officials didn’t “have to follow a traditional appellation road map,” citing the decision in California to “not be such purists, necessarily, about the actual strains” of cannabis, but instead “only focused on the region” (audio - 3m, video).
    • Tourism (audio - 2m, video) 
      • Bricken suggested an area “to stoke competitiveness nationally, and Washington was never on board for this...more tourism concepts, mainly consumption lounges and/or creating what’s commonly known as a microbusiness license.”
      • She said this could “keep smaller operators competitive,” communicating that the microbusiness licenses in California were “the equivalent of a winery, where you can visit a small grow, typically a cultivation site under 10,000 square feet” that had “front of house operations” to serve visitors. This helped “to keep them competitive with these large scale operations that were vertically integrated,” Bricken commented, “maybe having the bed and breakfast next to the microbusiness would be attractive both to consumers who were seasoned consumers, new consumers, and tourists...no other state really has that.” As Washington already had “a very popular wine industry,” she mentioned developing “something around that experience.”
      • “Consumer psychology” was an implicit assumption at play in designing social use and tourism policy and Bricken acknowledged that it came with risks. While California’s experience in this field was too new to draw conclusions from, she said the idea had potential to help “Washington entrepreneurs stand out without compromising that solid regulatory bedrock that's been created by the LCB.”
        • HB 1945 (“Concerning sales and sampling of marijuana”) was introduced in 2019 to establish cannabis consumption lounges; winery-like vertical integration for producers; special and temporary cannabis sales or event permitting; and associated advertising changes - but the bill did not receive a public hearing in WA House COG.
    • Barriers to Entry (audio - 5m, video) 
      • Bricken said that between 2009 and 2012 the U.S. Department of Justice (DOJ) “was extremely active, including in Washington” and so “tight, tight, tight regulations, robust barriers to entry, was the key to keeping the federal government out of your hair. Things have changed significantly.” She said even under the previous federal administration, then Attorney General Bill Barr had “basically said ‘We have bigger fish to fry. If the state can keep its act together and regulate enough to control the market and support the intent of the Controlled Substances Act we’re basically hands off, We don’t need a memo to commemorate that.’ And that’s pretty much been [the] status quo.” Bricken continued, “things like social equity have come into play, because the feds never talked about social equity...it was never, ever a concept” until states led on establishing equity programs, in addition to asking “what about consumer protection? What about products’ liability?...It’s starting to get very sophisticated, and I do think that’s the right move” for the market, she remarked, “because I do think the Department of Justice is moving on from this topic.”
      • Bricken encouraged committee members to think about the State tied house statute because she believed, “to be competitive, vertical integration can be positive because these people can really consolidate their overhead.” She also advocated for a “stand alone distribution license in Washington to create a distribution network where the smallest actors don’t have to do it all themselves if they don’t want to.” She asserted distribution can be “incredibly lucrative...it still promotes competition, but also efficiency.”
      • Noting officials had “always grappled” with the residency requirement for cannabis licensees, Bricken said Washington remained “one of the last states to have” such a policy. Believing the requirement to be “very hurtful” to competitiveness, she expected large retail chains wanting “product consistency” would avoid places with “arbitrary and protectionist” cannabis markets.
      • Kloba delved deeper into the “tension” around residency requirements, commenting that lawmakers had sought a "happy medium" between commodity monopolies and creating an “everybody’s a small producer kind of market” (audio - 4m, video). 
        • Arguing there was a “utility” to having a residency requirement as “the profits generated from this business stay in Washington,” Kloba suggested the state had a legitimate interest in avoiding “monopolistic, sort of the generic-ization” of cannabis, an attitude she believed had served Washington well in the winery business. She asked how other states had done at “trying to strike that balance.”
        • Bricken confirmed that “licensing limitations,” such as capping the number of licenses owned, could help keep “big business more at bay.” She felt local government control restricting cannabis businesses would also help guard against monopolies. Bricken felt that jurisdictions “that don’t want this in their backyard, they’re perfectly within their rights to take that position” and this layer of control ultimately “promotes local operators.” She then noted that businesses which had been trying to operate in multiple states had faced push-back from municipal governments which “will all try to strike that particular balance.”
    • Social and Economic Equity (audio - 3m, video) 
      • Bricken described the equity programs of cities as unsuccessful “because they’ve only been incubated at the local level.” Even with state funding, she cautioned, “the locals in the state have to be working together, otherwise it can be rendered meaningless,” mentioning the California Cannabis Equity Grants Program for Local Jurisdictions which disbursed funds to “cities that really are kind of hosting these programs.”
      • Bricken thought the best local program thus far was the Social Equity Program in Los Angeles, which she called “noble” even if it wasn’t “functional by any means.” She said the program application criteria included applicants’ past cannabis convictions, income, or whether “you reside in a zip code that historically has been directly impacted negatively by the war on drugs.” The program administrators didn’t award licenses based on race or gender but aimed for more “purposeful” metrics that endeavored to “identify folks that had been disenfranchised and raise them up,” Bricken explained. She acknowledged a resulting problem was companies “basically” buying out licensees to “puppeteer” businesses. She found, “for good and bad,” L.A.’s program was worthy of scrutiny but emphasized there was “no gold standard, and there’s room for improvement.”
      • In thanking Bricken for participating, Kloba observed that committee member Representative Melanie Morgan, Co-Chair of the Washington State Legislative Task Force on Social Equity in Cannabis (WA SECTF), had been very interested in Bricken’s remarks and noted the State was already setting up a technical assistance grant program to assist eventual social equity retail applicants (audio - 1m, video).
  • A second attorney, Steve Schain, provided input on interstate and international cannabis markets and business banking challenges.
    • Kloba welcomed Schain, an attorney in New Jersey and Pennsylvania with Hoban Law Group representing “governments, individuals in various stages” of the industry (audio - 1m, video). 
    • Schain introduced himself, commenting that he had worked for 25 years in financial services and focused the last seven years on cannabis law in one of Hoban Law Group’s 17 offices “around the globe.” He promised to touch on some topics already mentioned, “but I’m also pretty expert in financial services as [it] effects cannabis” (audio - 1m, video).  
    • Washington State (audio - 1m, video) 
      • Schain swiftly surmised three paths for state leaders on cannabis policy:
        • “Fortify its existing program.” 
        • “Make the world a better place.”
        • “Prepare for the future, domestically and internationally.”
      • Schain purposefully compared cannabis with a less exciting commodity: root beer. “So whenever I use the word ‘cannabis’ in my presentation, don’t think ‘cannabis,’ think root beer...and root beer is driven by certain market forces,” including costs, legal restrictions, and competition.
    • Interstate and International Competition (audio - 4m, video) 
      • Schain said the foremost indicator he relied on “in terms of competitiveness” was “price per pound” for cannabis. He noted Pennsylvania---where all cultivation was indoors---had cannabis at around $1,400 per pound whereas he estimated California cannabis cultivated outdoors might cost the producer “$500” per pound. Schain admitted he was concerned for his Pennsylvania clients if cannabis became legal for interstate commerce because he was convinced the state couldn’t compete with California producers.
      • Schain said he was in disagreement with Bricken over federal cannabis legalization being helpful to Washington state: “it may be good for your licensees but it’s not good for the State of Washington.” He mentioned the lack of guidance from the U.S. Food and Drug Administration (FDA), believing “when it comes off of schedule one we’re not exactly sure what’s going to happen.” Schain anticipated the employees of the U.S. Drug Enforcement Administration (DEA) “enjoy having jobs and I wouldn’t put it past them to keep their hand in the game.”
      • Schain warned that Thailand cultivators were capable of producing a gram of cannabis “for two cents, now what if the international borders fell? How would Washington-based cultivated cannabis face against that?” He added that the “biggest selling beer in America is Miller High Life, and that’s a fact, and that’s the way cannabis will go.”
      • Saying he’d seen years-old sales figures to suggest that “most cannabis sold in Washington state was sold between 3:30 and 5:30 [pm] on a Friday,” Schain thought that “the key to successfully navigating cannabis is starting at the end and working backwards, like any other industry...In my opinion this thing is going to end with big pharma, big tobacco, or diet supplementary companies buying everything.” He thought, “multi-state operators can just move more nimbly...and I think that’s an inevitable market force.”
    • California (audio - 2m, video) 
      • Schain called California a force in cannabis and said he’d seen studies suggesting that half the cannabis consumed nationwide, “legally or not, is consumed in California.” He thought the state's proximity disadvantaged Washington since California was "better funded [and] putting out a better product."
    • Pennsylvania (audio - 1m, video) 
      • Returning to the topic of multi-state operators, he said Pennsylvania had distributed most of their medical cannabis production licenses to such entities, “and the premise was it would generate more tax revenue and be easier to regulate. So there is no wrong answer, the question is what’s the most right answer for” Washington.
    • Alaska (audio - 2m, video) 
      • Schain agreed with Bricken on the strenuousness of Alaska residency requirements for cannabis business owners and “keeping the money in state.” While admitting he was not a constitutional law expert, he voiced doubts the requirements could pass scrutiny.
    • New Jersey (audio - 4m, video) 
      • New Jersey, which legalized cannabis on February 22nd, “set the east coast on fire with its far-reaching adult use program,” Schain observed, describing his home state as the heart of the mid-Atlantic region “where there is no adult use program” set up yet.
      • New Jersey officials would begin establishing rules for “consumption lounges...home delivery statewide...all these things Washington state could add to and enhance their program,” Schain reported. He suggested Washington officials could allow existing businesses to “convert the licenses” to include new privileges.
      • Schain suggested cannabis taxes could also be distributed back to in-state licensees in the form of “tax credits” allowing some of what they would have paid the state to go towards their businesses instead. “There is no wrong lane, but we’ve got to pick a lane,” he added.
      • He said New Jersey’s new law would address “social equity and community impact” but the specifics of the system were “half baked at this point.” However the state market would be 25% microbusinesses, have competitive scoring of applications, “additional residency requirements,” and 15% of all cannabis licenses “are reserved for minority owned businesses” while another 15% would be for “businesses owned by women and veterans,” Schain said. Application scoring would include hiring staff from “impact zones” negatively impacted by cannabis prohibition, Schain relayed to the committee, and a requirement for labor peace agreements “making sure that everybody has the right to union representation in cannabis licensure.”
      • While big businesses “have everything mapped out, they have the money, they have the lobbyists, they have me, but the fact of the matter is that sort of doesn’t create competitiveness. What you want are conditional licenses for the mom-and-pop [businesses] to start off and not have to deal with Microsoft from the get go.”
      • Representative Kelly Chambers, the WA House minority caucus appointee to WA SECTF, noted that under Washington’s Clean Air Act “we’ve moved away from, you know, tobacco use and...cigar lounges,” and asked, “how do those two play with, with other states that are allowing the consumption lounges, do they also allow types of indoor smoking?” Schain said indoor smoking wasn’t permitted in New Jersey but pointed to cannabis edibles or infused beverages, vapor items, and concentrates that “I’m not sure we call that combustion, but it’s also called a dab rig.” He added that it was possible consumption venues would have open air areas similar to a “beer garden” that might allow for smoked cannabis. While New Jersey leaders had “framed out what they’re doing,” consumption rules were far from finished (audio - 2m, video).
      • Morgan asked Schain whether New Jersey laws allowed for hookah bars, he didn’t know, admitting “I’ve actually never been to a hookah bar” (audio - 1m, video).
    • Social and Economic Equity (audio - 2m, video) 
      • Noting his professional background was in banking, Schain commented that assistance obtaining a license to support an equitable and diverse market wasn’t helpful “unless you’re providing them funding, sustainable funding” since those without capital “to launch a business” were unlikely to have the resources “to sustain the business.”
      • Schain called legal cannabis “an invitation to fundraise, technology, economies of scale is really what we do.” He admired Washington’s cannabis industry “as the bellwether” for a broader market along with Colorado, “But what do you want to do? Do you want to prevent consolidation” of cannabis canopy into the control of a few companies, he wondered. Schain felt that a cannabis grow of 5,000 square feet “is, to me, essentially an invitation to bankruptcy court,” which he meant facetiously as it was impossible “with marijuana because bankruptcy is a protection denied because [of] the federal privilege, like patent or trademark.”
    • Banking (audio - 7m, video) 
      • "Banks cannot profitably bank cannabis," Schain argued, calling pending banking legislation to deal with the problem “mostly hooey and applesauce.” He said the risks to banks from handling cannabis accounts was simply too large to be manageable, as banks were in the business of making money by providing financial services or loans from which they profited. Banks would “take risks but the problem with it is they have to be able to measure the risk,” Schain remarked.
      • Schain said the banking industry faced massive regulations that made handling state-legal cannabis revenue functionally “money laundering" under the Back Secrecy Act of 1970, and “every deposit or withdrawal of cash, theoretically...is a violation” of the act.
      • He credited Washington as a leader in cannabis banking: “you set the high water mark” for legal states. Schain said that between banks and credit unions, the latter had insurers more understanding of cannabis banking but there continued to be strict compliance regulations for even basic banking functions. Because making rules “less onerous for the banks” was important, Schain voiced skepticism over the benefit of the SAFE Banking Act---”which everybody seems to think is the holy grail”---as he believed the legislation merely “formalizes” the Financial Crimes Enforcement Network (FinCEN) guidance from the U.S. Department of the Treasury. He preferred reforms around 26 U.S. Code § 280E which applied to the Internal Revenue Service (IRS), pertaining to “Expenditures in connection with the illegal sale of drugs.” 
      • Schain believed Washington law made it a potential “mecca for banking out of state” because it was “not illegal to move cannabis cash over state lines” even as he suggested that many people assumed doing so counted as money laundering. He said there are “certain ways” cannabis companies outside Washington could bank with the state.
      • Schain summed up the problem of “cash management” as “everybody in marijuana can tell you how much cash you can fit into a backpack in $20 bills.” Large, in-person cash deposits were one of the only methods of getting cannabis business money to the bank, he explained. Counting, storage, and management of such large deposits led to fees of “as much as $10,000 per month, per account” for the cannabis companies forced to use that method, which Schain complained wasn’t “deductible as a business expense.”
      • Kloba relayed her understanding from cannabis industry representatives “that they feel singled out because their fees are so much higher on the services” banking institutions provide. Schain agreed, but felt there was a larger “supply chain issue” due to the fact that credit cards weren’t used directly for cannabis purchases because merchant associations hadn’t established a merchant category code for them. His understanding was that merchants hadn’t found the costs of handling the cards worth the increased “suspicious activity reports” they would be responsible for.
      • Ranking Member Drew MacEwen inquired about any “indication on relaxing banking regulations” from U.S. Treasury Secretary Janet Yellen. Schain replied “theoretically yes" but it would only be a workaround until a cannabis business “safe harbor” was added to the Bank Secrecy Act either by Congress or Treasury rulemaking. He then mentioned the fact that these businesses were ineligible for U.S. Small Business Administration (SBA) loans. Schain also described how NCIA had been lobbying Congress on the SAFE Banking Act and he had heard the bill was “the first thing that they want to pass, the problem is people keep adding other provisions” that complicate doing so (audio - 4m, video).
      • Kloba said she’d realized from the presentations that she “was not thinking broadly enough” when considering the future of cannabis in the state as she had mainly thought about the industry itself “whereas, if we have our banks are well situated to help out businesses in other states that is a broader part of the ecosystem, that I had not been thinking of” (audio - 1m, video). 
      • Chambers asked if there were other ways to improve the state’s banking options for cannabis (audio - 4m, video).
        • Schain said Washington Mutual Bank had been a large client of his, “but I have a particular passion for credit unions.” Credit unions could utilize a “shared branch system” where credit unions network so that their branches can serve members of partner credit unions, he stated, and the entities could “pool resources.” Schain reasoned that cannabis businesses, and retailers in particular, had “cash management issues, so cash has to get from point A to B” with insurance for transporting the funds becoming a key business hurdle. Schain added that he liked “state chartered banks and stuff like that too, but they’re dying, and most of those want to consolidate or, or be acquired.”
        • Schain said financial institutions would do well to “have at least, I’d say, at least $120 million to do it and a lot of these banks don’t have that.”

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