Know the legal terrain before starting a medical cannabis business.
As recently as last year, if you were growing or selling pot in Oklahoma, you only had need for one legal service: criminal defense. Today, medical cannabis is a legal, multimillion-dollar industry, and its participants face a wide variety of legal needs.
In many ways, these needs are similar to those encountered in most other industries. Simultaneously navigating the murky intersection of jurisdictional conflicts and rapidly changing regulatory regimes, Oklahoma’s nascent cannabis industry requires legal counsel carefully attentive to singularly industry-specific concerns. Sophisticated businesses now operating in the sunshine, Oklahoma’s “ganjapreneurs” need legal counsel of a decidedly different character.
Are you interested in starting a cannabis business? These are the 10 most immediate legal concerns you will face on your way into the industry.
Even the simplest matters present choices. How will you organize your business? The limited liability corporation is the most flexible option, but some corporate tax arrangements might be preferable to certain investors. Of course, an LLC can also elect tax treatment as a corporation and might be the simplest option for many startups. Still, this decision should be based on your particular needs, including some investors’ interests in protecting other assets in their portfolios.
The process of protecting what you earn — and what you already have — begins at the earliest stage. Usually this involves the formation of a series of business entities that serve as holding companies. These companies function to separate ownership of valuable assets from the “operating” side of the business, as the latter is exposed to the most liability. Ideally, if your operating company faces some sort of judgment — whether by a tax authority, law enforcement or other government agency, or in a lawsuit — it will not extend to those assets you maintain in a properly managed and separately maintained holding company.
Asset protection also concerns property you already own. Naturally, you want to avoid the association of any of your pre-existing assets with liabilities generated by your new venture. For example, you might want to transfer any real estate that will be involved in your cannabis business out of portfolios that hold other property. Land and buildings used by your cannabis company face increased liability, and you should endeavor to avoid the attachment of any judgment against those properties to other properties held by the same owner.
Of course, maintaining the distinction between these entities — and avoiding a consequence in which they are all treated as alter egos of one another — is an ongoing process. It involves observing the formalities that attend the governance of each separate business entity and avoiding commingling each entity’s respective funds.
Cannabis companies suffer greater tax exposure than virtually any comparable businesses. Section 280E of the U.S. tax code prevents drug traffickers from making the ordinary business deductions allowed to all other taxpayers, even those involved in other federally illegal enterprises. Additionally, Oklahoma law generally prohibits any deductions disallowed by the Internal Revenue Service (IRS).
You must work closely with a qualified tax professional to minimize your exposure. Without proper planning, many naïve business owners will receive tax bills that might bankrupt them, even when they turned minimal profits. There do exist strategies to minimize your taxes, but they require careful planning and diligent accounting.
If you have big plans for your company, you probably want to own your real estate. The obvious problem is that because the property you want to collateralize faces enhanced risk — including the risk of federal seizure — no bank is likely to finance your purchase. A well-networked and creative cannabis consultant might be able to connect you with other forms of asset-based lending that could put you in control of your own property and greatly improve the value of your company.
Alternatively, you are going to rent. An experienced attorney should review your lease agreement since much of the boilerplate common to commercial leases is inappropriate in this industry. Examples include provisions requiring tenants to obey federal law or permitting the landlord to seize inventory in the event of a default — these tenants will violate federal law and these landlords cannot seize this inventory.
Most likely, you have read State Question 788. You might not have read local ordinances that have been passed by the municipality or county in which you intend to locate your business. Some localities have ordinances specific to medical cannabis businesses. Others apply existing zoning ordinances to industry activities. In any event, you should ensure your property complies with all local regulations before investing significant resources into its improvement.
Recently, some municipalities have enacted overly restrictive ordinances — or otherwise interpreted reasonable ordinances in overly restrictive manners — in order to discourage or practically prohibit medical cannabis business in their jurisdictions. Some of these local authorities will face lawsuits as a result of their attempts to undermine medical cannabis reform, and they are likely to lose those lawsuits.
Of course, medical marijuana businesses must be licensed by Oklahoma Medical Marijuana Authority (OMMA) and registered with Oklahoma Bureau of Narcotics and Dangerous Drugs (OBNDD). Once quite simple, the application process will become increasingly complicated as a result of House Bill 2612 and related regulations. You would be wise to consult an experienced attorney to ensure you are licensed as quickly and painlessly as possible.
Simply put, your brand is your most valuable asset. More directly, if you are not devoting significant attention and energy to developing and protecting your brand, your priorities are misplaced. Developing your brand means developing your intellectual property portfolio.
Your trade name is the most obvious example of intellectual property — it is a trademark. You must be sure to clear your name against other active trademarks to ensure that you own it and avoid expensive allegations of infringement. Once cleared, you should protect your trademark by registering it and enforcing your rights to the exclusion of any competitors trading under a confusingly similar name. Some business owners are reluctant to initiate a dispute by confronting those infringing on their trademarks. You cannot be; if you fail to enforce your trademark rights, you risk losing them.
You should also protect your trade secrets. Many of the things that make your business different — those things you believe give you the edge — constitute trade secrets that should be protected like the recipes for Dr Pepper or Coca-Cola. You should take precautions to protect these secrets and avoid their dissemination.
Copyright law is also of interest to you to the extent that you are hiring third parties to produce works of “authorship.” This includes any contracts you might have for logos or marketing materials, murals or other art, websites and the like. It is tempting to assume that you own these things when you pay someone else to produce them. Typically, you do not. Accordingly, you should execute appropriate agreements to clarify the ownership of these works.
The laws and rules that govern this industry at the federal, state and local levels are changing rapidly, and sometimes it is difficult to predict what reform might come next. You need someone on your team who is devoted to remaining constantly familiar with these regulations and developing new and innovative strategies to deal with them.
Many medical cannabis employers are unfamiliar with their obligations under state and federal law. While Oklahoma law is fairly friendly to employers, it is nonetheless crucial that anyone paying for labor consult a qualified attorney to assess their obligations and reduce their liabilities. Employment litigation is expensive and best avoided through responsible policies, procedures and training. Do not assume that because you call those who work for you “independent contractors,” you therefore owe no further obligation. You might be exposing yourself to significant liability.
The most effective way to avoid litigation — which, again, is expensive — is to draft careful contracts. Amazingly, so much business is done in the cannabis industry by handshake. These unrecorded agreements will eventually result in costly disputes and ruin relationships. Do yourself and those with whom you conduct business a favor: Record your agreement. Actively negotiate contracts that accurately reflect the parties’ agreement and anticipate the potential problems that might emerge in the relevant transaction. As with so much legal infrastructure, any money you spend on developing these written agreements in advance will be saved later if you avoid even one unnecessary dispute.
J. Blake Johnson
Extract Legal Analyst
J. Blake Johnson is the founder of Climb Collective and a partner in Overman Legal Group, representing some of the biggest cannabis brands in Oklahoma. The preceding is intended to be generally informative but should not be interpreted as specific legal advice. If you are involved in the cannabis industry and have legal questions, you should seek legal counsel from an attorney with whom you have an attorney-client relationship and who is familiar with your particular legal needs.