The conflict between federal, state, and local laws and compliance requirements can be challenging for any start-up entrepreneur, but the cannabis industry faces more legal pitfalls than most. According to expert attorneys, these are the top concerns you should avoid at all costs.
Not Fully Understanding Cannabis Laws
There are considerable legal requirements cannabis operators must follow, and understanding them isn't always easy. Business owners must take the time to understand the laws and meaning because "I didn't know" isn't a justification that will hold up in any court.
In addition to knowing cannabis-specific laws, MSO owners must follow various non-cannabis-specific local laws, codes, and regulations, which define everything from zoning and labor practices to building codes. Some states have additional requirements on everything from recycling to energy usage. Given that MSO owners work in multiple states understanding the complexities of each state, county, and city law they're working in can be daunting. In addition to knowing cannabis-specific laws, cannabis business owners must follow various non-cannabis-specific local laws, codes, and regulations, which define everything from zoning and labor practices to building codes. Some states have additional requirements on everything from recycling to energy usage.
"There are many (legal) pitfalls. While cannabis companies operating in the state legal markets often are focused on compliance with state cannabis regulations, they can neglect other applicable compliance issues like OSHA, employment laws, and federal environmental laws. In addition, companies are often locked into getting through the day or week, dealing with the current dynamic regulatory and financial markets, but without planning strategically for the future and changes in laws and market factors," said Derek Auito, partner at Dentons US LLP.
Dentons, the world's largest law firm with 20,000 professionals in over 200 locations in more than 80 countries, was ranked Law360's 2021 Cannabis Group of the Year. Dentons' cannabis group, under the leadership of Eric Berlin, has approximately 50 lawyers throughout the US who work on cannabis-related issues.
Compliance
Businesses put themselves at risk if they commit any violation of compliance. Partial compliance is not enough; you could receive hefty fines and possibly even have your business shut down. It's imperative to follow all compliance requirements every time. It will keep your legal fees down and benefit your overall operation. Strict compliance with state and local laws is your business's best defense against federal or local litigation.
Implementing recommended best practices and having a thorough standard operating procedure for staff will encourage discipline in complying with regulations. Train your staff well and follow up regularly to ensure procedures are being adhered to.
Taxation
Tax laws are incredibly complex and vary from state to state, city to city, and have multiple filing deadlines. Getting professional support is critical to ensure you are always in compliance. Tax codes could be the undoing of your business if you don't understand them. Plan to be audited; it's not if you will be audited by a local, state, or federal tax authority, but when.
Any significant deficiency assessment for a previous tax year could cause financial grief for your business. Having a robust understanding of how and when to collect and remit state and local sales tax, use tax, excise tax, income tax, and business property tax is necessary.
SMB Accounting & HR Professional Christine Barkley from Bennu Accounting Solutions in Denver, Colorado, added, "If the entrepreneur doesn't have extensive industry regulatory information themselves, they should find advisors who do. This includes the accounting and financial area, as well as human resources and legal perspectives."
Christine has worked with clients within the legal cannabis space since its legalization in 2014. "These advisors are well worth the money in retainers—especially given the fines from regulatory bodies I've seen with clients. Unfortunately, I'm frequently sought after when it is too late, and the business has folded due to the financial burden of taxes, fines, penalties, and interest expenses."
On a federal level, study up on § 280E. Ensure you are learning from a reliable source, as there is misinformation and bad advice online. Business owners should understand the IRS's position and potential application of § 280E.
Lack of HR/Training
It's important to pass on your knowledge of cannabis and business laws to your employees. The buck stops with you. A business owner is ultimately responsible for what occurs in their licensed business and the licensed premises. Unfortunately for MSO owners, when an owner fails to supervise staff within their licensed facility sufficiently, they will be held accountable. If your employee commits a compliance violation, you could lose your license and ability to operate. So, in addition to training, ensure you know what happens inside your facility.
Class Action Litigation
New regulations are changing the marketplace as the legal cannabis industry achieves legitimacy in the US and abroad. The legal sale of cannabis creates countless business opportunities. Those same regulations lay the groundwork for further scrutiny and, undoubtedly, class action litigation against suppliers and manufacturers.
Legal scrutiny in the cannabis industry hinges on the definition of the drug. Simply reflecting on current regulations, limitations, and litigation of the supplement and pharmaceutical industries, cannabis product suppliers can anticipate future concerns. Regulation brings litigation. Regardless of the definition of cannabis medicines, a robust, in-house testing strategy will serve as a tool against considerable settlements and damage awards. Testing improves consumer safety and satisfaction while advancing the legitimacy of legal cannabis.
While most class action suits filed were for false or misleading statements, an easily avoided mistake, there are other ways to avoid being on the wrong side of a class action suit. Best practices, qualified staff, SOPs, and regular communication can keep your business out of trouble.
Lack of Contracts
Many cannabis businesses can be too lax with business contracts. Many business owners make handshake deals, and while that may have made sense in the past, it won't work today. MSOs must have formal, on-paper contracts with vendors and staff to ensure accountability, prove regulatory compliance, and protect them from future litigation.
Especially when working with friends or family, get your agreement in writing. Just because it's someone you're close with doesn't mean you shouldn't document your agreement. While contracts cost money, it's an investment in your future and may allow you to avoid uncomfortable conversations and potential litigation.
Possible Future Concerns
Product liability cases are on the rise. The industry should be prepared for increased disputes alleging bodily injury due to flaws in how a cannabis product was manufactured or marketed – particularly as this pertains to minors. Claiming cannabis products were inaccurately labeled or had trace amounts of pesticides present are other ways lawsuits may be filed.
Unfortunately, the cannabis industry should also be prepared for an increase in FDA enforcement actions, especially in the hemp-derived CBD space. The FDA has issued many warning letters to companies relating to the sale, labeling, and marketing of their CBD products.
Any product liability claim can be arduous. Fortunately, cannabis businesses finally have the ability to protect themselves against the disastrous losses associated with this type of litigation. But just like with everything in business, not all product liability insurance policies are equal.
Per Michael Hennessey, National Cannabis Practice Leader at IMA Financial Group, "More insurers are dipping their toe in the cannabis space, which is great. The downside is coverage forms now vary drastically. We have seen policy exclusions ranging from Health Hazzard (long-term illness), anxiety, depression, THC, and CBD to altering the plant from its natural state, resulting in some cannabis owners buying expensive paper with little to no coverage. I encourage people to ask questions, more about what is not covered than assuming, "it's covered. I have insurance." Use a trusted source for your insurance needs that understands these limiting factors in the market, and you'll protect yourself from the devastating outcomes of this type of lawsuit.
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