Practical Guidance on Hashing Out the Patchwork of State and Federal Laws

Cannabis law exists in a gray area where federal law is in conflict with a patchwork of fast-changing state laws. In this final installment of the Womble Bond Dickinson Seed to Sale webinar series, the multidisciplinary Womble Bond Dickinson team of attorneys Aulica Monroe, Morgan Persinger and Al Windham examine the legal environment governing the cannabis industry and how companies in this sector can best navigate this often uncertain path. 

Doctors recognized medical benefits of marijuana in the early 20th century—and federal regulation shortly followed. In the 1930s, the Marijuana Tax Act imposed growing regulations and steep taxes on growers, buyers and sellers. During the “War on Drugs,” the Controlled Substances Act (CSA) classified marijuana as “Schedule 1”—the same as heroin and LSD. These drugs are federally illegal and are categorized as having no medical benefit.

But starting in the late 1990s, states started pushing back with their own laws allowing for the legal use of cannabis products under certain circumstances. “What we really see is the momentum of activity in the last 10-15 years,” Persinger said. The result is a booming cannabis industry in many states—and a patchwork of state laws that allow for those enterprises.

Marijuana remains illegal under federal law due to the CSA. So both companies that work in this sector and the attorneys advising those companies must constantly walk a tightrope between state and federal law.

Also, the road to legalization remains fraught with uncertainty, Persinger said. The changes that come with National legalization could adversely impact existing cannabis businesses that have grown up under specific state regulations. Those states are working to protect their home-grown companies from possible out-of-state or mail-order competition. But there is only so much states can do to restrict competition under federal law.

Status of State Legalization

“The one constant in recent years has been rapid change,” Persinger said.

In June 2021, U.S. Supreme Court Justice Clarence Thomas wrote that the federal ban on cannabis may no longer be appropriate.

“Once comprehensive, the Federal Government's current approach is a half-in, half-out regime that simultaneously tolerates and forbids local use of marijuana. This contradictory and unstable state of affairs strains basic principles of federalism and conceals traps for the unwary,” Justice Thomas wrote. “A prohibition on intrastate use or cultivation of marijuana may no longer be necessary or proper to support the Federal Government's piecemeal approach.”

But even in states allowing adult recreational use, laws can vary greatly from state-to-state and cannabis businesses need to be aware of state-specific requirements.

Ethical Rules & Cannabis Law

Persinger said, “The biggest ethical hurdle for attorneys is ABA Rule 1.2 (d), which says, ‘A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent, but a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning or application of the law.’”

While a strict reading may cause concern, a more careful reading of ABA rules gives a more nuanced answer, he said. The conflict between federal and state law makes cannabis a legal gray area.

To give lawyers guidance on whether they can represent cannabis clients, Windham said many states have done one of three things:

1. Some states take a strict interpretation of ABA Rule 1.2 (d) and say attorneys can only counsel cannabis clients about the legality of the business;
2. Some states have issued ethics advisory opinions; and
3. Other states have adopted amendments or comments to Rule 1.2 (d).

Attorneys also need to be aware of Rule 8.4 (b) which says it is professional misconduct for a lawyer to “commit a criminal act that reflects adversely on the lawyer's honesty, trustworthiness or fitness as a lawyer in other respects.” 

Unfortunately, only a few states have issued guidance on Rule 8.4(b) as it pertains to representing cannabis clients. The state bars in California and Colorado have ruled that attorneys are not in violation of this rule as long as they comply with state cannabis law. 

Arizona, Colorado, Washington, Illinois, California, and New York have adopted adult use and medical marijuana programs. In general, these states allow attorneys to advise cannabis industry clients as long as they stay within state law and the attorney advises the client about federal law. But the specifics vary from state-to-state. For example, Colorado and Washington allow lawyers to assist clients if they “reasonably believe” their conduct is permitted under state law. “This reasonable belief standard provides some margin for error for attorneys in Colorado and Washington, but there are other states that require strict adherence to state law without that safety net,” Windham said.

The Illinois Bar requested that state’s Supreme Court to amend its Rules of Professional Conduct in a way that would allow attorneys to represent cannabis clients. The Court made that modification, stating, “A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent, but a lawyer may (1) discuss the legal consequences of any proposed course of conduct with a client, (2) counsel or assist a client to make a good-faith effort to determine the validity, scope, meaning or application of the law, and (3) counsel or assist a client in conduct expressly permitted by Illinois law that may violate or conflict with federal or other law, as long as the lawyer advises the client about that conflict and potential consequences.”

California adopted its version of Rule 1.2 in 2018 with an amendment allowing attorneys to represent cannabis clients. A 2020 advisory opinion provided additional clarification, stating, “A lawyer may ethically advise a client regarding compliance with California’s cannabis laws and may assist the client in conduct permitted by these laws, despite the fact the client’s conduct may violate federal law.” However, the attorney must advise the client about federal law and possible penalties for violating it.

New York’s State Bar Committee on Professional Ethics issued a 2014 opinion stating that attorneys could advise cannabis clients. In July 2021, the New York State Bar addressed two topics most states have not broached: Whether an attorney may personally use legal recreational marijuana and whether an attorney may accept an equity stake in a cannabis business in lieu of a fee. The bar concluded that both are permitted—under certain circumstances (i.e. avoiding conflicts of interest.)

In 2021, Virginia authorized a regulatory framework for both medical and recreational use of marijuana. In response, the Virginia State Bar has a proposed amendment to Rule 1.2 on the table that would add language that attorneys may “counsel or assist a client regarding conduct expressly permitted by state or other applicable law that conflicts with federal law, provided that the lawyer counsels the client about the potential legal consequence of the client's proposed course of conduct under applicable federal law.” 

Rather than amending Rule 1.2, two states have taken a different approach. The state bars in Florida, which permits the use of medical marijuana, and Massachusetts, which permits adult and medical use of marijuana, have issued non-prosecution policies for attorneys who advise cannabis clients in conduct that the attorneys reasonably believe is permitted by state law.

Like Florida and Massachusetts, Minnesota, which permits the use of medical marijuana, provides attorneys protection from prosecution. “Minnesota’s approach, however, is a bit unique in that the protection is found within the body of the state’s 2014 medical marijuana act,” Windham said.

On the other hand, in Missouri, a medical marijuana state, attorneys are receiving mixed signals. The state approved a 2018 medical marijuana amendment to its Constitution, which said attorneys would not be disciplined for assisting clients in this industry. However, in 2020, the Missouri Supreme Court said lawyers cannot advise clients on acts that would violate federal law, even if those acts were permissible under state or constitutional law (a clear reference to legal cannabis). 

Georgia, North Carolina, South Carolina and Texas remain CBD/low THC states and have not made any modifications to Rule 1.2.  Citing the illegality of cannabis at the federal level, the Georgia Supreme Court recently denied a State Bar request to allow attorneys to represent clients in the manufacture and sale of CBD/low THC oil.

Practical Considerations for Lawyers Representing Cannabis Clients

So what does this all mean? At a minimum, Persinger said it means law firms need to enact enhanced policies for intake and client engagement in their cannabis practices. These include:

• Specific policies for cannabis matters, including a dedicated intake team for cannabis matters and enhanced questionnaires to give the attorney a better understanding of the prospective client’s business.
• Setting clear parameters for representation, and
• Addressing financial accounts, understanding that traditional financial institutions may not work with cannabis industry clients.

The State of Cannabis Litigation

“Despite this patchwork of state and federal laws—or perhaps because of it—one doesn’t have to dig far to find litigation at both the state and federal levels,” Monroe said.

One of the biggest recent developments is a September 2021 antitrust case in California, in which the plaintiff alleges two other dispensaries in Contra Costa County conspired to keep out a prospective competitor. A jury awarded the plaintiff $5 million in damages, which is trebled under state law to $15 million. 

“This case may be the first antitrust verdict involving the cannabis industry nationwide,” Monroe said.

One key question is “Can a state-law cannabis contract case end up in federal court?” The short answer is “yes,” she said. There are two general ways this can happen: via diversity jurisdiction (in which all parties are from different states and the matter in controversy is over $75,000) and federal question jurisdiction (in which federal issues, such as IP or securities law, are at issue).

The Erie Doctrine says that when a federal court sits in diversity jurisdiction, it is to apply state law to the substantive issues and federal law to the procedural issues. Again, with cannabis law existing in a legal gray area between state and federal law, this means federal courts may (or may not) enforce state-law cannabis contracts.

Monroe said the short answer is that courts are likely to enforce contracts when the relief does not require violation of the Controlled Substances Act.

For example, Green Earth Wellness Center, LLC v. Atain Specialty Insurance Company saw a Colorado cannabis company sue its insurance carrier after the insurer denied claims for damages to Green Earth’s marijuana plants. Atain argued that the Controlled Substances Act made it illegal to cover the claim. However, a US. District Court for the District of Colorado judge ruled that state law applied, meaning the CSA argument was not valid. The court also noted that the insurance company issued the policy knowing full well what it covered, and ordered Atain to pay.

Mann v. Gullickson (N.D. Cal., 2016) and Ginsburg v. ICC Holdings, LLC. (N.D. Texas 2017) also yielded decisions holding that cannabis contracts legal under state law may be enforced in federal courts.  

On the other hand, courts have issued numerous decisions that state-law cannabis contracts cannot be enforced in federal courts when relief requires violating the CSA. Such decisions include Polk v. Gontmakher (W. D. Washington), Lilly LLC v. Clearspan Fabric Structures International Inc. (D. Oregon) and Bart Street III v. ACC Enterprises LLC (D. Nevada).

Finally, there also have been cases (such as the Western District of Washington’s ruling in Left Coast Ventures Inc. v. Bill’s Nursery Inc.), in which federal courts have abstained from hearing state-law cannabis cases and remanded them back to state courts.

“There are a lot of interesting intricacies in these cases that make practicing in this area somewhat unpredictable,” Monroe said.