Course Correction

[dropcap class=”kp-dropcap”]O[/dropcap]n May 13, Gov. Jay Inslee signed Senate Bill 5318 into law, which dramatically alters the role and functioning of the Washington State Liquor and Cannabis Board (LCB). The bill is referred to as “An act relating to reforming the compliance and enforcement provisions for marijuana licensees,” and begins by acknowledging that “mistakes have been made both by licensees and regulators, and . . . both have learned from these mistakes leading to a stronger, safer industry.”

For those who have been through the LCB’s cannabis licensing process, this statement should come as no surprise. Washington State has some of the most rigorous licensing requirements of any state that has legalized and regulated cannabis, particularly with respect to ownership and financier disclosure requirements.

For a little background, a True Party of Interest (TPOI) is the holder of any ownership interest in a licensed business, as well as any party entitled to any share of the gross or net profits of the licensed business or any party that exercises control over the licensee. Spouses of those who qualify as a TPOI are also considered TPOIs and must be vetted as such. These disclosure requirements have caused confusion for licensees, because there is an ongoing duty to report changes to a licensee’s TPOIs even after licensing. A failure to accurately disclose a TPOI (even for a first violation), can result in license cancellation. This has been the penalty that the LCB has consistently sought for concerning such violations.

Individuals who loan or gift money or goods to a licensee must be disclosed and vetted as financiers. Licensees must disclose and allow the LCB to vet all funds that are used for the buildout or operation of the licensed business, and a failure to disclose financiers can also result in license cancellation. These rules have also caused confusion. For example, even where a party has already been disclosed to the LCB as a financier and vetted as such, if that party contributes additional funds to the operation of the business, no matter how small the amount, and fails to disclose that to the LCB, a violation will result.

Although the LCB has attempted to address these issues over the course of the last couple of years, it has not succeeded. Cue SB-5318, which reminds us that “[t]he risk taking entrepreneurs who are trying to comply with board regulations should not face punitive consequences for mistakes made during this initial phase of the industry that did not pose a direct threat to public health and safety.”

According to the bill, if the LCB discovers a license violation during an inspection or visit, the LCB may issue a “notice of correction.” 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 only a few exceptions to this, which includes failure to comply with a previous notice or furnishing sales to a minor.

“Washington State has some of the most rigorous licensing requirements of any state that has legalized and regulated cannabis, particularly with respect to ownership and financier disclosure requirements.”

In addition, the LCB must restructure its existing penalty structure. To cancel a license, the licensee must have had at least four violations in a two-year window. Most importantly, perhaps, 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 I listed above, the LCB cannot cancel a license for a single violation. And no violations that occurred before April 30, 2017 can be considered as grounds for denial, suspension, or non-renewal of a license unless the LCB can prove that one of the same public-safety scenarios was implicated.

The LCB must also adopt rules to “perfect and expand existing programs for compliance education” for licensees, which should serve to reduce the number of unwitting rules violations. The bill will also implicate administrative hearings in that Administrative Law Judges are now authorized to consider mitigating and aggravating factors in a case and can issue penalties that deviate from those prescribed by the regulations.

These adjustments to the way in which the LCB penalizes licensees should serve to give licensees who inadvertently commit certain rules violations the ability to course-correct without losing their business. In such a nascent industry, this is a good thing.