Cannabis Practice Creates Ethical Traps, Conflicts for Lawyers

Ethical and legal snags abound for lawyers representing cannabis industry clients in the growing number of states where weed is legal, requiring extra due diligence to ensure compliance, attorneys familiar with the rapidly evolving business tell Bloomberg Law.

The land mine is federal law, which still outlaws pot. This requires attorneys to monitor ethics requirements and regulatory developments even more closely, and to fine tune their antenna about clients as firms consider expanding into the space. Tax, trade, intellectual property, local licensing, employment, and environment law are some areas to watch.

“This is an industry that has been stigmatized and obviously criminalized for many years and there’s a unique history that I think folks who are going to practice in this for a living need to understand,” said Nicole Phillis, a litigator at Davis Wright Tremaine LLP in Los Angeles where much of her practice focuses on cannabis.

VIDEO: How do states legally get around the federal ban on cannabis, and what unique legal challenges do attorneys and businesses in the marijuana industry face?

Voters or lawmakers in 19 states have legalized recreational cannabis with medical use permitted in 36 others. The South Dakota Supreme Court is considering a challenge to the voter-approved recreational law. Pot shops probably won’t open until next year in Connecticut, New Jersey, and New Mexico while Virginia’s law doesn’t yet allow for sales.

The U.S. legal cannabis market is expected to top $24 billion this year with 3 million more consumers, according to BDSA, a cannabis market analytics company.

Guidance, Some Clarity

The long list of advice to new practitioners starts with a check of the state’s ethics rules “to ensure your own fate,” said Hilary Bricken, with Harris Bricken in Seattle. The firm’s lawyers in California, Oregon, and Washington advise clients in those states and Arizona, Australia, Mexico, and New York.

“Then don’t try to do too much—cannabis involves all aspects of law and has a strict federal conflict interwoven throughout all of those issues, too,” Bricken said.

The bars in California, Colorado, New York, and Washington released guidance for lawyers who practice in the field, giving some clarity that counseling clients on state-legal substances won’t trigger ethical obligations because of federal prohibitions.

For instance,the California Evidence Code covering attorney-client privilege requires lawyers to advise clients of state and federal law conflicts, and should be incorporated in engagement letters to balance ethical obligations.

Federal law classifies cannabis as lacking any accepted use, medical or otherwise, and has a high potential for abuse.

“So when you’re advising your clients in your engagement letters, you need to say that very, very clearly that this is illegal and you cannot give them any advice how to comply with federal cannabis laws be there are none,” said Khurshid Khoja, founder of Greenbridge Corporate Counsel in Sacramento, Calif.

Michelle Mabugat, counsel at Greenberg Glusker LLP in Los Angeles, said she also likes to counsel of the inherent conflict of representing clients with competing economic interests in the small industry.

“The cannabis law practice is just particularly and especially ripe for conflicts in client” engagement, she said. “It’s finite. There’s only so many players in this industry and they’re all trying to do business with each other. You have to be extra vigilant on with your ethical obligations in this space.”

New York permits attorneys to accept payment for their services via equity ownership in a cannabis business. Mabugat said she shuns the offer so she can fairly and completely without bias represent clients without having a financial interest in the outcome.

Don’t Overextend

The questions multiply along with the number of states legalizing weed and local jurisdiction laws.

Rachel Gillette, who leads Holland & Hart in Denver’s cannabis practice, said she sees “over and over lawyers in newly legalized states dipping their toes into what they would call ‘cannabis law.’ Really cannabis is an industry, and just because you practice criminal defense, DUI defense, or personal injury law, that does not mean you should now hang your shingle as a ‘cannabis lawyer.’”

“Any lawyer that says he can file your application, set up your company, give you tax and business advice, file your patents and trademarks, help with any employment issues, and get you out of jail if you get arrested for a DUI or represent you a car accident is probably not the one you should hire,” said Gillette, a cannabis practice pioneer.

Know Your Client

Knowing who the client is crucial. Bricken said attorneys “need to develop a very good red flag radar where a lot of bad actors still make their way to your office in order to try to take advantage of licensing for other nefarious activities.”

Careful client selection is essential “because there are still operators in the industry that are not operating quite legally. If you want to protect your firm and practice, you want to work with good actors,” said Ryan Lowther, founder of Farella Braun + Martel LLP’s cannabis Industry practice group in San Francisco.

Some potential clients are operating illicitly. “Our decision as a firm is not necessarily to get involved with that client,”Lowther said.