Emily Gant: The Evolution of Cannabis Industry Regulations

Emily Gant is a cannabis and alcohol beverage attorney for Foster Garvey PC based in Washington state.

Continued after the jump.

As cannabis legalization sweeps the U.S., regulators must consider public safety as they draft policy and regulations around the growing industry. When Washington state legalized adult-use cannabis in 2012, regulators chose to model cannabis laws very closely after the state’s alcohol beverage laws. This has shaped an industry that struggles to grow despite being one of the country’s first and oldest legal cannabis markets.

Emily Gant is an attorney with Foster Garvey PC and has been practicing alcohol law in The Evergreen State since before the state’s cannabis laws were drafted — now, she is well versed in the legal landscape of both industries. In this interview, we learn about her work advising cannabis clients, the complications of regulating cannabis from a policymaker’s point of view, her advice for students and new lawyers pursuing a career in cannabis law, and more.

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Ganjapreneur: Why did you decide to become a lawyer? In what ways are you fulfilling those goals now?

Emily Gant: When my children were small, they would always ask what I did for a living. It was hard for toddlers to understand all the technicalities of lawyering, so instead of explaining the “ins and outs” of my practice, my response evolved to say, “I help people accomplish their goals.” This response succinctly expressed the main reason I became a lawyer, namely, to help people.

Wineries, distilleries, breweries and cannabis companies are small businesses just like any other small business, but there is a regulatory piece to the legal work that I find fascinating. I enjoy being the “consigliere” for these businesses – getting to know their company and its dynamics, understanding their challenges, becoming a trusted advisor and using my knowledge of the industry to help them achieve their goals.

When did you begin advising clients in the cannabis industry?

I was an alcohol beverage attorney long before Washington state voters passed Initiative 502 in 2012. My foray into the cannabis industry began shortly thereafter.

The cannabis laws were – and still are – remarkably similar to Washington state alcohol laws, like the disclosure and vetting process, rules prohibiting cross-tier ownership and trade practice considerations. Given my background as an alcohol beverage attorney, clients started contacting me for cannabis-related advice. It was a very natural transition for me to enter into the cannabis space.

How is your work in cannabis business similar to your work in alcohol? How does each space differ?

Those drafting I-502 leaned heavily on Washington state’s alcohol laws as a model. Much of the language is virtually identical – some of the regulation numbers even match.

As an example, Washington’s alcohol laws are based on a Tied House model. This means that a non-retailer (like wineries, breweries, distilleries, wholesalers and importers) can’t induce a retailer (like restaurants, bars, grocery stores and liquor stores) to buy its product through improper means, like gifts, kickbacks, slotting fees, special discounts, etc. Washington also uses a Tied House model for cannabis. Many newly minted members of the cannabis industry were shocked when I told them that they couldn’t pay a retailer for shelf space or a prime spot on an end-cap. Marketing strategies that may work outside the cannabis world are not available here, given the Tied House laws.

Turning to differences, the Washington alcohol beverage industry has had more time to evolve. As one example of a liquor law that has changed over time, there used to be a strict rule against cross-tier ownership, So, someone owning a winery could not have a direct or indirect interest in a restaurant, and vice versa. Laws have changed, such that a Washington non-retail alcohol beverage licensee can hold an interest in a retail alcohol beverage licensee, under certain circumstances.

The same is not currently true for cross-tier ownership with cannabis licensees. This makes it incredibly important for Washington cannabis businesses to engage in due diligence before bringing on a new investor or seeking a successful exit. Time will tell whether the cannabis cross-tier ownership laws will evolve over time, too.

What considerations should cannabis brands take when developing products using both cannabis and alcohol?

In the current legal landscape, it is difficult to mix cannabis and alcohol together in the same product in a compliant manner. The federal Alcohol and Tobacco Tax and Trade Bureau (TTB) will not approve any formulas or labels for alcohol beverage products containing controlled substances under federal law, including cannabis. For many products, no TTB-approved label equals no sales. Further, many states expressly prohibit the production or sale of products containing both cannabis and alcohol, or the presence of cannabis at a liquor-licensed premises. Even if you could somehow get a TTB-approved label, you would still be hard-pressed to produce the cannabis-containing alcohol beverage product in a compliant manner under state law.

However, as they look to the possible federal legalization of cannabis-containing products, state regulators and the industry are starting to discuss the potential of mixing cannabis and alcohol in the same product. They are grappling with numerous questions: Should the same state agency govern both cannabis and alcohol beverages, or should authority fall to separate agencies? Should states base their cannabis laws on their alcohol beverage laws like Washington, or is it better to regulate the two substances differently? Is the Tied House model the right one? Could a licensee create both alcohol beverage and cannabis products at the same licensed premises, using the same equipment? Will states allow for consumption of cannabis products at a liquor-licensed premises? If so, what are best practices in training staff to recognize over-service, when a patron is consuming both alcohol and cannabis?

Why are regulators concerned with the combination of alcohol and cannabis – from the standpoint of combining the two products and to social use laws prohibiting venues from serving alcohol and cannabis in the same space?

Regulators’ primary concern is often public safety. Companies that work within the on-premises liquor space – like bars and restaurants – are legally required to train their employees on how to identify when someone is intoxicated from alcohol. Currently, this type of knowledge and training is not readily available for cannabis, especially when combined with alcohol. Without this awareness, many state regulators are concerned about the public safety risk and are not comfortable allowing venues to serve both alcohol and cannabis.

Washington state liquor regulators absorbed cannabis regulation responsibilities when the state passed legalization — could you speak to how this has impacted the development and success of the industry in the state?

The same agency oversees both cannabis and alcohol in the state, meaning the agency understands the regulatory context and can lean on its depth and knowledge from the alcohol space as it enacts cannabis regulations.

Other states – like California, for example – have separate agencies governing liquor and cannabis. As more states legalize adult-use cannabis, they will need to make decisions about the best model for their jurisdiction.

What is the three-tier alcohol sales regime and how is it evolving? What opportunities will that bring for cannabis entrepreneurs?

The three tiers of the alcohol beverage industry are suppliers (wineries, breweries, distilleries and the like), the middle tier (wholesalers and importers) and retailers (like restaurants, bars, hotels, grocery stores and liquor stores).

The three tiers are rooted in history. During Prohibition, the Mob controlled all three tiers: it distilled the whiskey (supplier), it transported the whiskey (wholesaler) and it owned the bars in which the whiskey was sold (retailer). The Mob was vertically integrated, controlling “grain to sale.” This meant that the price of whiskey went down, consumption of whiskey went up, and consumers had but one whiskey to choose from. Further, there were significant public safety issues associated with a criminal organization running an alcohol beverage business. This demonstrated the “perils” of the Tied House, like marketplace domination, undue influence, physical or economic threats to competitors, limits on consumer choice and public health and safety concerns.

Now, the federal government and virtually every state has a version of the Tied House laws to combat these issues.

As noted, some states use a Tied House model for cannabis, like Washington. Others, like Oregon, do not. As additional states legalize adult-use cannabis, those drafting the laws can learn from early adopters (like Colorado, Washington and Oregon) to determine the best path for their state.

You mentioned that the three-tiered system reduces the possibility of bad players entering the market, but some states do allow vertical integration from seed to sale. Are there other ways that these states are reducing the risk of criminal organizations attempting to control the market?

There are various means to limit bad actors’ access to the legal cannabis market, with the most common found in the application process. Using Washington State as an example, any person or entity with ownership in or control over the applicant entity must provide extensive background information, submit fingerprints and undergo a “source of funds” analysis. (For those unfamiliar with the term, an applicant demonstrates the “source of funds” by showing where they got the money. Let’s say an applicant contributed $500,000 to the company and pulled $300,000 from her retirement account and $200,000 from a money market account. Under current Washington law, she would need to provide statements from both the retirement and money market account to demonstrate her source of funds.) State cannabis agencies also focus on seed-to-sale traceability, in an effort to limit diversion of legal cannabis product into the illicit market.

When is the right time for a cannabis entrepreneur to bring in legal representation?

While it is helpful to have a trusted legal advisor for any number of big and small questions, many cannabis companies need to keep a close watch on their legal spend. If nothing else, it’s useful to consult with knowledgeable legal counsel during the company’s “pinch points,” or periods of growth or change.

Often, the first “pinch point” is entity formation. Cannabis companies should structure the entity in a compliant, smart way that meets regulatory requirements, investors’ demands and operational needs. Then, it should enter into governing documents, like an LLC Operating Agreement or a Shareholder Agreement. That way, all owners know the “rules of the game” at the start of the relationship, like decision-making, distributions of profits and losses, dispute resolution and the addition or removal of owners. It’s crucial to engage knowledgeable counsel who can address entity formation and governance from regulatory, tax and liability perspectives, to ensure that the company starts off on strong footing.

Other “pinch points” happen later in the company’s life cycle. If a cannabis company is moving into a new facility, it may be wise for an attorney to review the lease. If a company wants to move into a new market through an IP license, counsel should likely review that agreement. And if the company is looking for an exit, it should consult with skilled M&A counsel attuned to the cannabis regulatory considerations.

Do you have advice for a student who would like to work in cannabis law?

I received some great advice from a mentor early in my career: Don’t just dabble in the industry. To find success, you need to identify a great mentor, expand your substantive skills, develop your industry knowledge, and build regulatory contacts. That will not occur if you merely “dip your toe” into the cannabis space with a project or two. It’s important to build your experience from both risk management and competency perspectives, and work to flex those muscles every day.

Thank you to Emily for teaching us and sharing her expertise — if you’d like to learn more about Foster Garvey PC check out foster.com.


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