By David Kerr
At this stage of the game, we have a full year of experience, fits and starts, and progress in the burgeoning recreational marijuana industry in Washington State. While there are a lot of applications still in the Liquor Control Board pipeline (as of this publication only about 23% of applications are at a point where you could call their licensing process complete), we are starting to get an impression of what the post-licensing landscape will look like. The one area that I find particularly interesting and that I think applicants and licensees should begin to focus on is: How are you going to stay in compliance with the Liquor Control Board rules to avoid violations and enforcement actions?
Compliance Enforcement Actions
The licensing process was and continues to be harrowing. Those who have made it through and those still plugging away have to think: “Once I get the license, everything will be easy.”
Different yes, but easy? Perhaps not so much.
The recreational marijuana business in Washington State is a highly regulated market where the rules are newly minted and not yet fully interpreted nor fully implemented. However, since licenses have started to be granted, the compliance enforcement process is beginning to accelerate.
Between Sept. 4 and Nov. 26, 2014, the Liquor Control Board made 768 reported marijuana enforcement visits. While a majority (55%) of these enforcement visits appear to be a routine part of the license process (final inspections, new licenses inspection or phone contact) there were 347 of them (45%) that involved complaint investigations (87); applicant site verifications (49); premises checks (193); field contacts (15); and law enforcement contact (3).
These enforcement visits resulted in 158 marijuana administration violations being reported by the Liquor Control Board. These early violations resulted in enforcement actions that range from verbal warnings (119); written warnings (26); fines (10); and even the suspension of a license (1).
There were 26 licensees that had multiple violations in the brief period between Sept. 4 and Nov. 26, 2014. One licensee garnered six enforcement violations, including failure to submit monthly tax reports and/or payments; using unauthorized pesticides, soil amendments, fertilizers, other crop production aids (twice); violations of a board-approved operating plan (twice); and failure to utilize and/or maintain traceability.
The scope of the most common violations that were reported include: Failure to submit monthly tax reports and/or payments (80); advertising violations (18); failure to maintain required security alarm and surveillance systems (11); failure to utilize and/or maintain traceability (10); violations of a board-approved operating plan (8); violation of transportation requirements (5). There was one “miscellaneous violation” of WAC 314.34.30 — cigarette and other tobacco products violations. The one license suspension was for failure to utilize and/or maintain traceability (processor or retail licensee).
The Compliance Enforcement Scheme
Penalties for compliance violations by marijuana licensees or employees are broken down into four categories:
Group One: Public safety violations (WAC 314-55-520)
Group Two: Regulatory violations (WAC 314-55-525)
Group Three: License violations (WAC 314-55-530)
Group Four: Producer violations involving the manufacture, supply, and/or distribution of marijuana by nonretail licensees and prohibited practices between nonretail licensees and retail licensees (WAC 314-55-535).
Penalties for violations in any one of the categories are on a graduated scale and they increase significantly depending on the type and the frequency of the violation by the license holder. Penalties range from the relatively benign (verbal or written warning) to increasingly severe penalties that include fines between $500 and $15,000; suspension of the license for 5-30 days; destruction of 25-50% of the harvestable plants; or cancellation of the license.
If it isn’t obvious, let me just say it — they aren’t messing around. Compliance and compliance enforcement is a serious business. No one wants to find their business in a situation where they face fines, possible license suspension, the destruction of a significant portion of their crop or even cancellation of their license because they get hit with multiple or repeated violation by the Liquor Control Board.
The key to protecting your business from the potentially harsh penalties that can flow from multiple or repeated violations is to avoid the first violation altogether.
Be proactive about compliance: Every I-502 producer, processor and retailer should have an active and proactive compliance plan that includes education, action, auditing and defense. Don’t close your eyes and convince yourself that “it will be okay if I am honest and try my best.” That is not the way it works. Even the most honest, most dedicated licensee can run into compliance and violation trouble through inattention, complacency and a lack of focus on compliance as a key element of the business.
Education: Start with the rules themselves. Read them, understand them and follow them. If you are the kind of person whose eyes glaze over when you start reading things like the Washington Administrative Code — I fully get that! That’s okay, because there are classes, workshops and training seminars out there that can be a good place to start being proactive about compliance, and a good place to find professionals and resources to guide you and your staff.
Action: Being proactive about compliance is the key. The Liquor Control Board rules expressly provide for mitigating circumstances that may result in fewer days of suspension and/or lower monetary penalties if you are cited for a violation. Examples of mitigating circumstances include: having an employee training plan that includes annual training; and having a signed acknowledgment on file for each employee addressing responsible marijuana handling and sales policies.
These are just a couple of examples provided in the rules by the Liquor Control Board. The takeaway from this is simple. Having a proactive compliance program that you implement with your employees is likely to reduce the chances that you get hit with a violation in the first place, and is likely to reduce the penalty if you are unfortunate to get hit with an enforcement violation.
Auditing: Don’t just assume you are in compliance because you held a training session with your employees and no one has told you that your systems aren’t working or are insufficient. You should check and test your systems, practices, procedures and policies.
If you are a retailer, have someone try to buy marijuana without proper ID. On the first day you are open, no one is going to get away with this, but on the 365th day you are open, your employee practices slip a little bit and set you up for a violation.
Make sure your traceability system is fully operational, that employees know how to use it, and that using it is drilled into the business. Test your security surveillance systems. Understand the record-keeping requirements and audit your records and record-keeping practices regularly.
Do a spot check on employee ID/security badges. The Liquor Control Board has already issued three violations for something as simple and routine as an employee failing to display required security badge.
Defense: Let’s say that despite your best efforts and good intentions, you do find your business getting hit with a notice of an administrative violation. The Liquor Control Board rules provide that you have 20 days to take one of the following actions. You can: (a) Accept the recommended penalty; or (b) Request a settlement conference in writing; or (c) Request an administrative hearing in writing.
There are potentially serious consequences of merely admitting the violation and accepting the enforcement penalty. However, if the first violation doesn’t carry an onerous penalty, you might be tempted to ask if it is worth the time energy and effort to fight it. It is and it could make a real difference later.
Here’s an example. Let’s say your producer/processor operation gets hit with a violation of the transportation requirements (WAC 314-55-085). The penalty for the first violation is a fine of $2,500. Not a slap on the wrist, but not so steep that it would be unreasonable to consider just paying it and moving on. So you admit the violation and just accept the penalty.
Then, let’s say, you stumble again (despite your best efforts and good intentions) and you get hit for a second violation of the transportation requirements. The penalty for the second violation is a $5,000 monetary fine and destruction of 25% of your harvestable plants!
Now you are in deep trouble, and facing a potentially catastrophic blow to the viability of your business. But what if you had taken a different approach on your first violation? If you had elected a settlement conference and/or had taken the violation to an administrative hearing, you might have been able to avoid or mitigate the first violation and not have been faced with the potentially devastating consequences of a second administrative violation.
Let me repeat myself. The Liquor Control Board isn’t messing around. Compliance and compliance enforcement is a serious business. Every I-502 producer, processor and retailer should have an active and proactive compliance plan that includes education, action, auditing and defense.
Attorney David Kerr serves business clients throughout the state, including an emphasis on the emerging legal, regulatory and compliance issues facing new cannabis businesses.