Cannabis Companies Beware! Washington is Eager to Cancel Licenses

We have represented clients in regulatory violation cases inside and outside the cannabis industry for years. Of all the jurisdictions in which we work, the Washington State Liquor and Cannabis Board in 2018 is unique in its eagerness shut down businesses. In case after case against licensed producers and processors, the WSLCB seems determined to seek violations that could lead to license cancellation and is generally refusing to offer alternative penalties. Because so many of these cases are still pending, it is hard to go into too much detail, but the WSLCB’s actions in these cases indicate a desire to cull the number of licensed producer/processors.

For those producer/processors in Washington that aren’t currently being investigated for regulatory violations, the WSLCB’s current policy generates mixed reactions. When licenses were available for application in November and December 2013, thousands of businesses applied for the right to cultivate and process marijuana. As the market as matured, wholesale prices of marijuana have continued to fall, and the ability of licensees to maximize production has continued to increase. There is so much marijuana available on the market right now that it is hard for producer/processors to compete. Just having a license isn’t enough to run a profitable business, and many of the top performing producer/processors in the state are not generating the profits that most outsiders would assume.

At the same time, the types of violations that can cause the WSLCB to cancel a license and shut down a business are surprisingly easy to commit, even for dedicated compliant businesses. For example, let’s say that a licensed producer/processor has an unexpected bad month and doesn’t have enough money in the bank to make payroll. There isn’t any way for a licensee to get expedited approval of a cash infusion from the business’s owners If those owners contribute more of their own money before getting that approval, though, the WSLCB will still cancel the licenses. Or let’s say that a licensee enters into a licensing deal to manufacture branded products developed by another company. If the contract for that deal includes any terms that the WSLCB determines allow the licensor to exert too much control, they will cancel the license.

License cancellation is not innocuous. Marijuana business regulations bar a company from using a licensed location for business other than marijuana operations. Therefore, any type of license cancellation is really a death penalty for the business itself. These businesses employ anywhere between a few individuals and more than fifty people. Many of the employees are not the most employable in other industries either; legal cannabis jobs are the only thing standing between them and poverty.

And this is where it is clear that the WSLCB’s primary goal in cancelling licenses has to be to reduce the number of active licenses overall. Even in cases where the owner that is the “cause” of the regulatory violation has offered to transfer ownership interest in the business to a third party, the WSLCB still seems determined to cancel the licenses. They don’t seem to consider the effect that license cancellation has on innocent employees, landlords, investors, and contracting parties.

If you’re a licensed producer/processor in Washington (retailers seem to get more leeway), there’s not much you can do about this in the short term other than to stay compliant. There are certainly strategic alternatives that could engender better compliance among licensees, but it isn’t clear that compliance is the WSLCB’s current primary goal. Until the WSLCB starts accepting alternative penalties for certain seemingly innocuous violations for which they are authorized to cancel licenses, though, licensees will not receive the benefit of the doubt from the WSLCB. The correct attitude to take is that the regulators do not want you to have a license to engage in marijuana business activities, and they will do everything in their power to take it away.