Washington Lawmakers Poised to Redefine the WSLCB’s Role in Washington Marijuana

Senate Bill 5318 is making its way through the Washington legislature and seems destined for Governor Jay Inslee’s desk. As of April 16, the bill had cleared both the Washington House and Senate. If signed into law, which seems increasingly likely, SB 5318 would drastically change the way the Washington State Liquor and Cannabis Board (“LCB”) operates.

SB 5318 is titled, “An Act Relating to reforming the compliance and enforcement provisions for marijuana licensees.” Washington marijuana licensees, in this writer’s opinion, face the strictest, most punitive regulatory regime in any state that allows recreational marijuana. This is due to the rules around “true parties of interest” and “financiers.”

A true party of interest (“TPI”) refers to a legal owner of any shares or membership interest in a licensed business. The LCB also considers anyone who has the right to receive any percentage of the gross or net profits from a licensed business a TPI. The true party of interest designation also refers to the spouses of anyone who qualifies as a TPI.  The LCB currently mandates that a person apply to become a TPI, which means that spouses, even for marriages after initial licensing, be disclosed and vetted by the WSLCB. TPI relationships can occur unintentionally which results in a violation. The recommended penalty for the first TPI violation is license cancellation and the LCB pushes for cancellation on nearly all TPI cases.

Financiers are defined as any individual who loans or gifts money or goods to a marijuana business must also be vetted. In addition, the LCB must vet any funds that go towards the operation of a marijuana business, regardless of the amount. Failure to do so can result in license cancellation. For example, if a TPI uses his or her personal money to cover payroll for a month when revenues are short, the LCB will cancel the license for failure to vet those funds.

The LCB has taken a few half-measures to address this unworkable system. A few months ago it floated the idea of starting an amnesty program for certain TPI/Financier violations. That never happened. The LCB also adopted an interim policy that lets TPI’s infuse their businesses with cash upon submitting an application to add funds. That policy is a step in the right direction, but does not go nearly far enough.

The result of this “enforcement first” policy has been a contentious relationship between the LCB and state lawmakers, as documented by Lester Black for the Stranger. Without diving into the complex relationship between politicians, lobbyists, the LCB, and stakeholders, it seems safe to say that the LCB’s enforcement policy has reached a boiling point and caused lawmakers to overhaul how that agency operates.

Now that we’ve laid the framework, let’s get into the details of SB 5318:

Notice of Correction. If the LCB discovers a license violation during an inspection or visit, the LCB determines that a licensee is out of compliance with laws or LCB regulations, the LCB may issue a “notice of correction” which would include a summary of what’s wrong and how to fix it, a date when the licensee must comply, contact information for technical assistance from the board, and the process for requesting additional time if needed for good cause. These notices are not considered formal enforcement action and not subject to appeal or public disclosure. The LCB would be required to issue a “notice of correction” before bringing a civil penalty and could not issue a civil penalty before the time period in the notice expires. There are some exceptions where the LCB would not be required to issue the above notice:

• The licensee has previously been subject to enforcement action for the same or similar violation;
• Failure to comply with a previous notice;
• Furnishing sales to a minor;
• Diversion of revenues to criminal enterprises, gangs, or cartels;
• Use of firearms in a licensed facility that poses a direct and significant risk to public safety; or
• The commission of non-marijuana crimes.

Restructuring Penalties. The LCB must rework its current penalty structure. The LCB will still have the ability to include escalating penalties, but the cumulative effect of such penalties must be limited to two years, which is a reduction from the current penalty window of three years. Also, to cancel a license, the licensee must have at least four violations in a two year window. In turn, a single violation cannot result in license cancellation unless the LCB can prove by clear, convincing, and cogent evidence that the violation is caused by intentional or grossly negligent action or inaction that involves one of the public-safety scenarios listed in the previous section (i.e., diversion of marijuana, sales to minors, etc.). Additionally, no violations that occurred before April 30, 2017 may be considered as grounds for denial, suspension, cancellation, or non-renewal of a license unless the LCB can prove that one of the public-safety scenarios is implicated.

Compliance emphasis. The LCB must adopt rules to “perfect and expand existing programs for compliance education” for licensees. These rules must include a voluntary compliance program which has recommendations on abating violations. The LCB must also create a system where licensees can request consultation on compliance issues. The LCB is not totally prohibited from using information from these consultation visits, whether in person or done remotely, but they can not treat the consultation as an investigation.

Employee violations. The LCB may not issue a violation if it results from employee misconduct if the licensee documents that before the violation was issued the licensee established a compliance program and performed training to prevent the violation and that licensee had not enabled or ignored similar violations in the past.

Impact on Administrative Hearings. Administrative Law Judges will be authorized to consider mitigating and aggravating factors and can deviate from any penalties prescribed by LCB regulation. In addition, if a licensee enters into a settlement agreement with the LCB or the LCB’s representative, the LCB must give the terms of the settlement substantial weight and can only disapprove or modify the terms if the agreement is clearly erroneous.

SB 5138 seems very likely to pass but it has not done so yet. Differences between the House and Senate versions of the bill must be reconciled and Governor Inslee must still sign the bill. If passed, it will go into effect 90 days after the current legislative session adjourns.