It is estimated that the legal cannabis industry could reach $30 billion in sales and employ nearly half a million full-time workers by 2023. In one year, cannabis companies raised $13.8 billion in funding. Fueling that investment is the reality that a wide swath of industries is preparing for a future in the cannabis economy. Soft drink and alcohol manufacturers are considering future products using cannabis products.

As Congress is considering legislation to provide banks with a safe harbor for providing services to those in the cannabis industry, other areas, from financial services to soft drink manufacturers, are actively assessing how the explosion of this new market will impact their products and services.

Federalism and the current conflict between federal and state law

As of October 16, 2019, 34 states have legalized the medical the use of marijuana. Thirteen additional states have legalized the medical use of low THC marijuana. Also, eleven states have legalized the recreational use of marijuana. Yet, it remains a federal criminal violation to possess, use, sell, or distribute it. This conflict between state and federal law on the legal status of marijuana creates special problems for attorneys who must comply with the applicable rules of professional responsibility. Model Rule of Professional Responsibility 1.2(d) states:

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.

Given this ethical restriction, how can an attorney provide counsel on business activities that violate federal law? With no meaningful efforts to change the federal criminal implications, in 2013, the Department of Justice developed a policy intended to address this conflict. The so-called Cole Memorandum announced a new federal policy limiting the enforcement priorities of prosecutors to limited areas of state cannabis (i.e., distribution to minors, preventing revenue from going to criminal enterprises, diversion to non-legalized states, cover for trafficking in other illegal activity). With this in place, DOJ provided some assurance that commercial and recreational cannabis activity legal under state law would not be prosecuted under federal law.

On the basis of the Cole Memorandum, many states issued ethical opinions, orders, and/or rule changes to affirm, in substance, that compliance with state cannabis law would not violate Model Rule 1.2(d). These opinions can be found here:

While the Cole Memorandum provided some needed guidance, it was not the same as a repeal of the applicable federal law. That distinction, and the fragility of this situation, came into sharp focus on January 14, 2018, when then Attorney General William Sessions rescinded in large measure the Cole Memorandum guidance. The stated rationale for this action was that pre-existing and well-established general principles of prosecutorial and investigative discretion provide sufficient guidance for marijuana enforcement. As a result, U.S. Attorneys were advised to consider, generally, federal law enforcement priorities, including the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community. This action added confusion and uncertainly on what would be prosecuted and whether Model Rule 1.2(d) applied once again as a barrier for lawyers to provide legal services to cannabis-related activities legal under state law.

Congress is contemplating several pending bills that may once again address how to reconcile the continued conflict on the legality of cannabis between and among the states and the federal government.

Suggested best practices to manage risk until the conflict is resolved

  1. Stay current on the law. The legal landscape is changing quickly. Information is getting stale very quickly. If your business touches the cannabis industry, getting regular updates about material development is necessary. Many law firms, including Nixon Peabody, provide these cannabis legal updates.
  2. Require state ethics opinion on Model Rule 1.2(d). Because attorneys must not only comply with the law, but conform conduct to the applicable ethical rules, obtaining clarity on what legal cannabis-related activity will not provoke a Model Rule 1.2(d) violation is critical. Without such an opinion, any legal services to the cannabis industry is performed at high risk to maintaining professional standing.
  3. Due diligence on client. Whether you are an in-house or outside lawyer, perform and document due diligence on the parties involved with the cannabis-related activity. Bad actors or unworthy clients acting beyond the scope of what is legal creates material risk. Manage that risk by learning who is involved, how they are complying with the applicable limitations, and not otherwise using legal counsel in ways that break the law.
  4. Policy on permissible activity. Being clear with all stakeholders on what is permissible activity and what is not is crucial. In-house and outside counsel need to educate and inform their clients on the limitations on permissible activity in each state.
  5. Compliance program. Implementing a compliance program that actively and reliably assesses conformance with the permissible activity is very valuable. Clients that actively work to ensure compliance and self-correction always fair better in government enforcement activities than those that do not. Plans that exist on paper and are not actively monitored provide virtually no value.
  6. Employee consent. An important risk management consideration is making sure that in-house or outside attorneys are not working on cannabis-related matters without their knowing consent. Providing a waiver that lays out the permissible activities, the reliance on state law, and related ethics opinions as well as identifying the risks of an unexpected but possible exercise of federal prosecutorial discretion is important. Considering what to do with those who do not consent is also important to mitigate any retaliation claim for refusal to work on matters that may violate federal law.
  7. Insurance review. Ensure that any cannabis-related activity in which you engage is covered by your applicable insurance tower. The presence of potential federal criminal activity could be a basis to disclaim coverage.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.