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California Says OK to Counsel Clients on State Marijuana Laws

May 28, 2020, 3:43 PM

California, the nation’s largest bar and the world’s largest cannabis market, is now giving guidance to attorneys who advise marijuana businesses on how to represent their clients and protect their licenses. The combined influence of having the most lawyers and the greatest market could easily make the state’s decision influential elsewhere.

The tax, trade, intellectual property, local licensing, employment, environment, and other issues for which a cannabis business would consult an attorney are similar to that which would compel any federally legal business to seek counsel.

The wrinkle, of course, is marijuana is illegal under U.S. law. While other state bars have issued advisory opinions addressing cannabis, the opinion issued in recent days was the first from the Golden State, said Jessica McElfresh.

The state bar, with 260,000 licensed attorneys, said that it’s O.K. for California lawyers to counsel clients on how to comply with state cannabis laws that may violate federal law as long as they explain the state-federal law conflict, and don’t help the client break U.S. law.

It basically says that California lawyers can’t be subject to discipline for practicing cannabis law if they follow some basic steps, said McElfresh, a cannabis lawyer in San Diego.

More than 30 states and the District of Columbia, Guam, Puerto Rico, and the U.S. Virgin Islands permit cannabis use for medicinal purposes and about a third of them also allow it for recreational use. But regulations vary, and state legalization conflicts with federal law that bans it outright.

California pot sales last year hit $2.9 billion and the market is expected to reach $3.7 billion in sales this year and $7.1 billion in 2024, according to a forecast by BDSA, a cannabis market analytics company.

Late to the Game

California was a bit late to the game on the advice because it permitted the San Francisco and Los Angeles bar associations to give guidance while other states took the lead on a state-wide basis, said Amy McDougal, an International Cannabis Bar Association board member.

The state, however, has now “issued the most comprehensive state formal opinion,” said McDougal, echoing language found in the text of the opinion by the bar’s Standing Committee on Professional Responsibility and Conduct.

McDougal is founder and president of CLEAResources LLC, which advises clients about mitigating business risks associated with ethics and compliance failures.

California Rule of Professional Conduct 1.2.1 says lawyers can’t counsel a client to “engage, or assist a client in conduct that the lawyer knows is criminal, fraudulent, or a violation of any law, rule, or ruling of a tribunal.”

This means that they can help clients get regulatory approval necessary to conduct a cannabis business, help draft documents and negotiate transactions, and help with other steps “reasonably required to make that business functional and profitable in compliance with California law,” the opinion said.

The rule’s Comment 6 says these actions are permissible even if there’s a conflict with federal law, it said.

Other states have used a combination of approaches. One is to add language to the cannabis statutes that attorneys can’t be disciplined for advising on the laws, the direction Michigan took. Another is to publish policy statements that attorneys will not be disciplined, which is how Florida went, McDougal said.

Most states amended Rule 1.2 to permit advice and assistance contingent upon advising the client on federal laws, too, said McDougal.

“There are a number of problems with this,” she said in an email. “How do you document you advised your client about federal law without creating an exhibit showing you willingly entered a criminal conspiracy for the production and distribution of a controlled substance (and thus inviting the crime-fraud exception to privilege at the federal level?) For in-house counsel, it is even more difficult to separate your advice from the actions of your client-employer,” McDougal said.

And here’s something to consider in terms of California’s pot market: the state last year employed 39,804 workers in cannabis, the just-released Leafly Jobs Report 2020 said. The forecast is for the state to add 350 new cannabis stores this year, with 85 groups now holding cannabis event licenses enabling them to throw parties with on-site sales and lounges.

That’s a lot of potential business and a lot of potential conflicts.

No ‘Rainy Day’ Funds

The California bar’s opinion was based on a scenario in which a lawyer’s client is considering opening a business that grows and sells cannabis. The client wants to comply with California law and wants advice on business activities like financing and taxation, the bar said.

The two also have discussed the possibility of the lawyer holding excess funds in a client trust account as a “rainy day” fund in case federal agents seize assets, assisting in the establishment offshore bank accounts for business proceeds, and acquiring an interest in the client’s business in lieu of fees.

As long lawyers believe their clients are making a “good faith effort” to follow state law, they can help them comply with it even if client actions might violate the conflicting federal law, the bar said.

But ethical obligations of attorneys to clients and to respect federal law require they explain that contemplated conduct violates federal criminal law and tell them of any penalties as well as any related risks of civil forfeiture, it said. Advice doesn’t extend to how to conceal a violation of state or federal law, the bar warned. But a lawyer can discuss the legal consequences of any proposed action with a client, it said.

A Los Angeles County Bar Association opinion found that the rule supports the conclusion that “a lawyer is not advising a client to violate federal law when the lawyer advises the client on how not to violate state law,” the opinion noted.

However, creating a “rainy day fund” and keeping it in the lawyer’s trust account to protect against the risk of a federal seizure of client assets is conduct that helps them evade prosecution and isn’t permitted, it said. Finally, the rule can’t be read to allow lawyers to acquire an interest in the client’s cannabis business in the place of fees, the state opinion said.

As long as conduct complies with rule 1.2.1, it shouldn’t be viewed as reflecting adversely on the lawyer’s honesty, trustworthiness, or fitness, it said.

The opinion is State Bar of Calif. Standing Comm. on Prof’l Responsibility & Conduct, Formal Op. 2020-202.

To contact the reporters on this story: Melissa Heelan Stanzione in Washington at mstanzione@bloomberglaw.com; Joyce E. Cutler in San Francisco at jcutler@bloomberglaw.com

To contact the editors responsible for this story: Rebekah Mintzer at rmintzer@bloomberglaw.com; Tom P. Taylor at ttaylor@bloomberglaw.com; John Crawley at jcrawley@bloomberglaw.com

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