The Lawletter Vol. 49 No. 1
Cassidy Crockett—Senior Attorney
Many lawyers believe that advising a cannabis business, or cannabusiness, is the same as advising any other business. However, there are several considerations to take into account before taking on these clients.
Legal Ethics
Attorneys know that ABA Model Rule 1.2(d) forbids attorneys from counselling or assisting clients in criminal conduct. While many states have either modified this rule or issued opinions exempting cannabis businesses, some still consider it an ethics violation to work with these businesses. In 2021, the Georgia Supreme Court denied a motion by the state bar to amend this rule to allow attorneys to engage with the newly legalized low-THC medical cannabis program. In re Motion to Amend 2021-3 (Ga. June 21, 2021). As long as cannabis remains a federally illicit substance, the first step that any attorney looking to engage with a cannabusiness client should take is to check their state ethics rules before proceeding.
Regulatory Compliance
Cannabis laws are changing very quickly across the country, but cannabis regulations change even faster. While in most states, new laws take effect on a specified date, regulations can take effect and change throughout the year. It may also be warranted in some cases to attend agency hearings as well if the attorney is engaged in the permitting process. It is imperative that attorneys working with the cannabis industry familiarize themselves with their state’s administrative process, relevant agencies, and the administrative code.
If an attorney is looking to engage a medical cannabis business, additional care should be taken as most of these businesses are subject to HIPAA requirements. It will be necessary to stay up to date regarding the classification of medical dispensaries, as many are classified as “covered entities” under HIPAA, requiring a heightened level of care for any medical records. The client may not even be aware of their obligations to protect personal health information, so it is vital that any attorney advising such a business be knowledgeable about these requirements.
Federal Prohibition
Because cannabis remains illegal federally, banking and taxation are two of the largest issues facing cannabis businesses today, and their lawyers must be prepared to advise on these topics. This is where advising a cannabusiness differs the most from any other type of business. As cannabis remains federally illegal, most banks either cannot do business with dispensaries or they simply do not want to take on the risk. Some independent and state chartered banks and credit unions will do business, but they often lack services like online banking or federal insurance. This struggle leads to many dispensaries maintaining a very large amount of cash. Having large amounts of cash on hand combined with the public knowledge of banking struggles often leads to a disproportionate number of burglaries. The SAFE Banking Act aims to alleviate many of these issues, but it has not yet passed both chambers of Congress and while it provides some hope that things will change in the future, that change is yet to arrive.
Cannabusinesses are also forbidden from taking the regular business deductions available to almost every other company. I.R.C. § 280E prohibits those engaged in illicit enterprises from taking the standard business deductions. This means that cannabis businesses cannot deduct payroll, rent, or other expenses from their tax liability. Some states have decoupled their tax code from the federal code to allow for such deductions, but it is important to remember, this will only apply to state tax liability. Attorneys engaged with these businesses should be aware of the challenges faced by their clients to ensure that the advice given reflects the reality of the situation.
Finance is not the only area federal prohibition affects. Most federal protections do not apply to these businesses, as they are considered illegally operating. The state may require a dispensary to comply with ADA regulations when constructing their storefront, but the ADA will not protect employees or consumers. However, the Tenth Circuit has decided that federal employment law applies to cannabis businesses. Kenney v. Helix TCS, Inc., 939 F.3d 1106 (10th Cir. 2019). Because cannabis laws vary by area, it is always necessary to check how federal law applies to a cannabis business before giving advice.
Flexibility
Finally, it is absolutely imperative that an attorney looking to take on their first cannabusiness client evaluate their flexibility. Many of these businesses are ventures by people who may not have any experience owning and running a business, much less a cannabis-centric business. Much like when working with a start-up business, the client may have no idea what they need from their attorney. Cannabis businesses can implicate many areas of law such as employment, healthcare, criminal, and administrative law. Many of these clients are seeking a one-stop shop where all of their legal matters can be handled.
Advising cannabis businesses will probably require more research than most attorneys are used to doing. The laws and regulations change very quickly and staying up to date is vital for providing clients with good advice. For most, working from memory will not be enough and every matter should be double-checked, especially for those working in multiple states. This area is also outside of the usual and the advice usually given to other businesses, such as DoorDash, will not work for a cannabis courier business.
The intersection of federal prohibition and state legality will prove challenging to decipher, and often attorneys will be looking to provide the most legally sound advice with very little information. Attorneys should not forget the minimum competence requirements for representation as they consider taking on these clients. If an attorney primarily advises small businesses with relatively few legal issues, agreeing to take on a cannabis client’s burglary case may land them in hot water. However, if the lawyer can be flexible and expand their practice, they can tap into an underserved market of potential clients. Flexibility and diligence will be the key to a successful relationship.
