Compliance over Enforcement: The New Normal For Washington Marijuana Businesses

12 Aug Compliance over Enforcement: The New Normal For Washington Marijuana Businesses

On July 28, 2019, Senate Bill 5318 (“SB 5318“) went into effect. I wrote about this bill back in April when it was awaiting Governor Jay Inslee’s signature. SB 5318 forces the Washington State Liquor and Cannabis Board (“LCB”) to make some major institutional changes, requiring the LCB to work with licensees on compliance matters and limiting the LCB’s ability to issue violations. Below is a summary of the new regime.

Education and Technical Assistance

SB 5318 adds a new section to RCW 43.05, which governs “Technical Assistance Programs.” Technical Assistance Programs are designed to allow state agencies to collaborate with individuals and businesses subject to that agency’s regulations without issuing civil penalties. SB 5318 requires that the LCB adopt a Technical Assistance Program where “licensees may request compliance assistance and inspections without issuance of a penalty, sanction, or other violation provided that any noncompliant issues are resolved within a specified period of time.” In addition, the LCB must “expand existing programs for compliance education for licensed marijuana businesses and their employees.”

Advice and Consultation Services

Licensees will have the opportunity to apply for advice and consultation services from the LCB. During these visits, the LCB cannot issue notices, citations, or civil penalties. If during an on-site visit, the LCB discovers a violation with a direct or immediate relationship to public safety and the violation is not corrected, the LCB may investigate. A licensee will only be provided immunity if the visit is truly voluntary. Immunity won’t be provided for a visit that is related to a complaint.  That will create an opportunity for licensees to request technical assistance visits from the LCB to verify that a licensee is operating in compliance with relevant laws and regulations.

Notice of Correction

Additionally,  during an inspection or visit “that is not a technical assistance visit, the [LCB] becomes aware of conditions that are not in compliance with applicable laws and rules[,] the [LCB] may issue a notice of correction to the licensee[.]” The LCB cannot issue a penalty for a violation identified in a Notice of Correction unless the licensee fails to comply with the notice. A Notice of Correction must describe the non-compliant condition with references the applicable law or rule, describe what is required for compliance, provide a date for the licensee to address the issue, and provide contact information so the licensee can ask for assistance and for an extension of time if necessary. However, the LCB may issue a civil penalty without first issuing a Notice of Correction if (1) the licensee is a repeat offender or (2) the violation is a risk to public health and safety.  For the first category, the LCB may go straight to a civil penalty if it uncovers a violation and the licensee has previously been penalized for the same or a similar violation, has previously been notified of the same or similar violation, or has failed to correct a violation as required by a Notice of Correction in the applicable time frame.

Public Health and Safety Violations

In addition, the LCB may forego the Notice of Correction and issue a notice of violation or other civil penalty if it can prove by a preponderance of the evidence one or more of the following public health and safety violations:

1. Diversion of marijuana product to the illicit market or sales across state lines;
2. Furnishing of marijuana product to minors;
3. Diversion of revenue to criminal enterprises, gangs, cartels, or parties not qualified to hold a marijuana license based on criminal history requirements;
4.  The commission of nonmarijuana-related crimes; or
5. Knowingly making a misrepresentation of fact to the board, an officer of the board, or an employee of the board related to conduct or an action that is, or is alleged to be, any of the violations identified in [(i) through (iv) of this subsection.]”

The same five public health and safety violations are important for LCB penalties. SB 5318 mandates that a single violation cannot result in license cancellation unless the LCB can prove by a preponderance of the evidence that it was one of the violations listed above.  Additionally, the cumulative effect of any escalating penalties cannot extend beyond two years and cumulative violations may result in license cancellation only when a licensee commits at least four violations within a two-year period.

The first two categories are fairly straightforward: don’t sell marijuana outside of the regulated market place or ship it across state lines, and don’t sell to kids. The third category is interesting because it prohibits the sharing of revenue with criminal actors. The LCB has always been hyper-vigilant in preventing licensees from profit sharing with undisclosed parties. Under SB 5138, the LCB cannot cancel a license due to profit sharing unless the party is a criminal enterprise, gang or cartel or if the party would be disqualified due to criminal history. That nuance is likely to prove important. The fourth category is broad as it covers other crimes. This could include tax-related crimes and other white-collar offenses. The fifth category of violations relates to dishonesty but only dishonesty as it pertains to the other categories. Lying may not warrant license cancellation, but lying about other public health and safety violations does.

Bottom Line

The LCB has yet to release rules under SB 5318. I anticipate that the LCB will draft regulations that expand the five violations related to public safety so that it has broader authority to issue notices of violation without first issuing a Notice of Correction. That being said, I hope that I am wrong on this point and that the LCB drafts rules that capture both the text and spirit of SB 5318. Marijuana laws and regulations in Washington are very complicated and I am hopeful that SB 5138 will help licensees and the LCB work together. Regardless,  stakeholders in the Washington marijuana industry should follow this rulemaking closely.