Minnesota’s legislature has adopted some of the strictest legislation in the country making medical marijuana available. But federal law and regulations and state professional responsibility rules pose continuing challenges for Minnesota lawyers, bankers, and businessmen who become involved in this new business.
Medical marijuana has arrived in Minnesota, and long-suffering patients may finally find relief. Last month, strong bipartisan majorities in the Minnesota House and Senate legalized the use of medical marijuana. Despite widespread support for the new law, however, its success is no sure thing.
The manufacture, distribution, and use of medical marijuana remain federal crimes even though Minnesota now permits such conduct. Businesses, banks, doctors, patients, and even lawyers risk federal prosecution for the sale and use of medical marijuana, despite Minnesota’s new law. Further, Minnesota’s Rules of Professional Conduct prohibit a lawyer from counseling a client to engage in a crime or assisting a client engaged in a crime. A lawyer who provides basic business advice or legal services to a marijuana-related business, such as drafting corporate formation or transactional documents, may violate not only federal law but also Minnesota’s ethics rules. Finally, federal banking law hamstrings those financial institutions looking to invest in or serve Minnesota’s new medical marijuana businesses.
Minnesota’s medical marijuana businesses cannot function, let alone meet the needs of Minnesota patients, without the professional services of lawyers and banks. Yet the threat of federal prosecution and other sanction is a serious disincentive for professionals to get involved in the medical marijuana industry. The new law’s success will turn in large part on how Minnesota’s U.S. Attorney, the Office of Lawyers Professional Responsibility, the Minnesota Supreme Court, and Congress resolve these
Minnesota’s medical marijuana law is one of the most restrictive in the country. The law permits consumption of marijuana or its chemical compounds in liquid or pill form, and it also allows patients to “vaporize” the liquid form of the drug using an e-cigarette. But Minnesota is the only state with legal medical marijuana to prohibit consuming raw marijuana plant material through smoking, vaporizing, or other methods.
Minnesota patients will need to register with the state to obtain medical marijuana. Patients must be diagnosed with a “Qualifying Condition” to register. Qualifying Conditions include cancer, glaucoma, AIDS, Tourette’s syndrome, amyotrophic lateral sclerosis (Lou Gehrig’s Disease), epilepsy, severe and persistent muscle spasms, and Crohn’s disease. In addition, terminally ill patients with a life expectancy under one year who are experiencing extreme pain or nausea qualify to obtain medical marijuana. The commissioner of health has the authority to add Qualifying Conditions, but the legislature may veto any addition.
The law does not authorize doctors to prescribe or distribute medical marijuana. Instead, doctors will “certify” patients for registration in the program based on diagnosis with a Qualifying Condition, and registered patients will obtain medical marijuana from a licensed manufacturer. The commissioner will set a range of recommended doses for each Qualifying Condition. The pharmacist who distributes marijuana to a patient will consult with the patient to determine the appropriate dose, relying in part on the commissioner’s recommended dosage.
Only two manufacturers will be licensed to produce medical marijuana in Minnesota. The manufacturer licenses will be competitively bid. The commissioner will consider applicants’ technical expertise, experience in the industry, employee qualifications, and long-term financial stability, among other factors. Licensed manufacturers must perform all cultivation, harvesting, and manufacturing in an enclosed, locked facility, and they must submit their products to an independent laboratory for quality testing. The manufacturers must bear the cost of this testing.
Manufacturers must operate four distribution sites, one of which may double as the manufacturing site. Each manufacturer must have one distribution site operational by July 1, 2015, and all four distribution sites must be operational by July 1, 2016. The distribution sites must be located to take into account geographical need throughout the state to ensure patient access to the medicine. Only licensed pharmacists employed by a manufacturer may distribute medical marijuana, and patients cannot consume medical marijuana at the manufacturing or distribution sites. The sites must not be located within 1,000 yards of a school.
The law protects registered patients in several ways. First, the law creates a presumption that a registered patient is engaged in the authorized use of any medical marijuana possessed. That presumption can be rebutted by evidence that the patient used the marijuana for a purpose other than alleviating a Qualifying Condition. Second, the law prohibits housing or employment discrimination against registered patients, unless inconsistent with federal law. The law provides, however, that nursing homes may adopt “reasonable restrictions” on the use of medical marijuana in their facilities, including refusing to store a patient’s supply of medical marijuana at the facility. Finally, a person’s status as a registered patient will have no effect on their custody or visitation rights.
Patients who divert their medical marijuana face significant penalties. Diversion of any amount is a felony punishable by up to two years in prison. The law also criminalizes false statements related to medical marijuana, including statements about an individual’s eligibility for medical marijuana or participation in the medical marijuana program.
Finally, the law establishes a task force to evaluate medical evidence about the efficacy of medical marijuana gathered from Minnesota’s medical marijuana users and their physicians, as well as the social impact of the new law. The task force members will include law enforcement, legislators, patients, health care providers, substance abuse treatment providers, and commissioners of several state agencies. The task force will report to the legislature in February 2015 and every two years thereafter. Task force reports will include suggested revisions to the law.
Marijuana remains classified as a Schedule I drug under the Controlled Substances Act (“CSA”).1 It is illegal to “manufacture, distribute, or dispense, or possess with intent to manufacture, distribute, or dispense” Schedule I drugs, and they cannot be prescribed.2 In Gonzales v. Raich, the Supreme Court held that the CSA is not preempted by state law legalizing marijuana.3 Thus, a Minnesotan who manufactures, uses, or distributes medical marijuana in compliance with state law nonetheless risks federal prosecution.4 Minnesota banks, lawyers, and other professionals who finance or assist marijuana-related businesses assume the same risk.
Because many states have legalized marijuana, and lawful marijuana businesses have emerged in those states, the federal government has had to take a position on when to prosecute those operating in compliance with state marijuana law. The United States Department of Justice (“DOJ”) has vacillated between a relaxed and aggressive posture toward such prosecutions.
In 2009, the DOJ issued the “Ogden Memo,” which explained that prosecutors “should not focus federal resources in [their] States on individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana.”5 The Ogden Memo stated that prosecuting “individuals with cancer or other serious illnesses who use marijuana as part of a recommended treatment regimen,” or “caregivers in clear and unambiguous compliance with applicable state law,” was unlikely to be an efficient use of limited federal resources.
The Ogden Memo listed several commercial enterprise “characteristics” that may trigger prosecution. Those characteristics included sales to minors, ties to criminal enterprises, evidence of money laundering or other activities inconsistent with state law, violence, and the unlawful use of firearms.
By 2011, the medical marijuana industry was rapidly expanding, and several states had passed legislation allowing large-scale commercial cultivation of medical marijuana. In 2011, the DOJ issued a new memorandum regarding medical marijuana (the “Cole Memo”), which announced an aggressive stance toward large-scale cultivators.6 It stated:
The Department’s view of the efficient use of limited federal resources as articulated in the Ogden Memorandum has not changed. There has, however, been an increase in the scope of commercial cultivation, sale, distribution and use of marijuana for purported medical purposes.
. . . .
Persons who are in the business of cultivating, selling, or distributing marijuana, and those who knowingly facilitate such activities, are in violation of the Controlled Substances Act, regardless of state law.
The Cole Memo also fired a shot across the bow of any bank contemplating involvement in the nascent medical marijuana industry. It threatened that “[t]hose who engage in transactions involving the proceeds of [large-scale cultivation and distribution] may also be in violation of federal money laundering statutes and other federal financial laws.”
Despite the Cole Memo’s aggressive tone, states continued to legalize medical marijuana, new marijuana-related businesses were formed, and scores of patients obtained treatment.
Between 2011 and 2013, Connecticut, Delaware, Illinois, Massachusetts, and New Hampshire all legalized some form of medical marijuana.
In August 2013, perhaps recognizing the changing reality on the ground, the DOJ again revised its guidance in a new memorandum to federal prosecutors. The 2013 memo (“Cole II”) announced a relaxation of the Cole Memo’s hardline position. Most significantly, Cole II erased the distinction between “the seriously ill and their caregivers, on the one hand, and large-scale, for profit commercial enterprises, on the other,” stating “prosecutors should not consider the size or commercial nature of a marijuana operation alone as a proxy for assessing whether marijuana trafficking implicates the Department’s enforcement priorities … .”
Cole II also set forth the following “enforcement priorities” on which prosecutors should focus their resources:
- Preventing the distribution of marijuana to minors;
- Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
- Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
- Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
- Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
- Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
- Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
- Preventing marijuana possession or use on federal property.
Cole II explains that businesses whose activities do not implicate one of these enforcement priorities will most likely be left alone.
Cole II notes that the DOJ’s new relaxed position rests on an expectation that medical marijuana states “will implement strong and effective regulatory and enforcement systems” that will contain “robust controls and procedures.” In such jurisdictions, “conduct in compliance with those laws and regulations is less likely to threaten the federal [enforcement] priorities … .”
Cole II has important implications for businesses seeking to operate under Minnesota’s new medical marijuana law. Because only two manufacturers will be licensed to grow and refine medical marijuana, they will by necessity be the type of large-scale cultivators frowned upon in the Cole Memo. Cole II appears to minimize the risk of federal prosecution for the new Minnesota manufacturers and the businesses that serve them. Further, Cole II provides clear guidance about the government’s enforcement priorities, which will help Minnesota businesses determine how best to operate to avoid federal action against them.
However, while Cole II represents current DOJ policy, that policy could change with a new attorney general or a new administration in Washington, D.C. With any luck, Congress will confront the growing divide between state and federal law on marijuana and render those laws consistent. To bridge the divide, Congress could either reschedule marijuana as a Schedule II drug (like cocaine and methamphetamine), which can be lawfully prescribed and manufactured, or pass legislation prohibiting prosecution of those in compliance with state law. Until Congress takes such action, doing business under Minnesota’s medical marijuana law will not be free of the risk of federal prosecution, regardless of whether or not a business strictly complies with state law.
Minnesota Rule of Professional Conduct 1.2(d) states: “A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent.” A lawyer who helps a client establish a marijuana-related business has arguably “assisted” the client in committing a federal crime. Other states have struggled with this Rule 1.2 conundrum.7 Minnesota’s new law has addressed the problem, however. It provides that “[a]n attorney may not be subject to disciplinary action by the Minnesota Supreme Court or professional responsibility board for providing legal assistance … related to [lawful medical marijuana] activity … .” This provision appears to give Minnesota lawyers cover to advise lawfully operating medical marijuana businesses without violating ethics rules.
Minnesota attorneys must also be mindful that the “crime-fraud” exception to the attorney-client privilege may puncture communications regarding medical marijuana business activity even though state law permits such activity. No court has yet applied the crime-fraud exception to communications between lawful marijuana businesses and their counsel. However, courts have appeared to respect the privilege with regard to such communications. In a recent California case involving the prosecution of an individual and his business for unlawful sale and use of marijuana, the government seized several file boxes containing transactional documents related to the defendant’s medical marijuana business from his lawyer’s office.8 The trial court instructed that the prosecution return those files to the lawyer on grounds of attorney-client privilege, apparently concluding that the crime-fraud exception did not apply.
A Growing Business
The relationship between banks and marijuana-related businesses is also fraught with risk. The Cole Memo raised the specter of money-laundering prosecutions for banks that assist marijuana-related businesses. Moreover, banks could face criminal liability under the Bank Secrecy Act (“BSA”) for failing to report transactions that involve the proceeds of the sale of marijuana.
Because of these risks, many banks have declined to accept deposits or otherwise work with lawful marijuana businesses. The combination of a lucrative and legal medical marijuana industry, and an absence of participating banks, has led medical marijuana businesses to rely primarily on cash transactions. Businesses pay employees with stacks of bills. In some cases, companies have had to disguise the nature of their business by forming holding entities with deceptively generic names simply to open a bank account. Deserving entrepreneurs cannot obtain small business loans that would otherwise be available, simply because of the nature of their business.
The DOJ and Department of the Treasury issued new guidance in February 2014 to assuage banks’ fear of prosecution and prevent a shadow cash economy from becoming a fixture in medical marijuana states.9 In the guidance, the DOJ clarified that marijuana-related prosecutions for money laundering and BSA violations should be governed by Cole II’s enforcement priorities. The Treasury Department explained that to stay out of trouble banks serving marijuana-related businesses should:
(i) verify with the appropriate state authorities whether the business is duly licensed and registered;
(ii) review the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business;
(iii) request from state licensing and enforcement authorities available information about the business and related parties;
(iv) develop an understanding of the normal and expected activity for the business, including the types of products to be sold and the types of customers to be served (e.g., medical versus recreational customers);
(v) monitor publicly available sources for adverse information about the business and related parties;
(vi) monitor for suspicious activity; and
(vii) refresh information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.
The Treasury Department noted that a bank’s responsibility to file a “Suspicious Activity Report” does not abate with the legalization of medical marijuana. Instead, the guidance gives banks the option to file a limited report with regard to legal medical marijuana transactions.
The Treasury Department explained that its guidance “should enhance the availability of financial services for, and the financial transparency of, marijuana-related businesses.” Thus, the government not only expects that marijuana-related businesses will originate in states where medical marijuana is legal, it hopes to enhance the ability of those businesses to obtain financial services. This guidance sends a strong signal that the federal government is acquiescing to the expansion of the medical marijuana industry, even though the industry’s conduct remains illegal under federal law.
Will the Smoke Clear?
The legislature and governor have spoken, and medical marijuana is legal in Minnesota. As a practical matter, however, the tension between state and federal marijuana law makes it difficult for businesses, doctors, and patients to breathe life into the law and achieve its ultimate goal to relieve patient suffering. Clear guidance from Minnesota’s U.S. Attorney Andrew Luger will help to relieve that tension. But until federal law on marijuana changes, medical marijuana-related businesses, and the lawyers that serve them, will face significant risks.
Kevin Riach is a senior associate within the White Collar and Regulatory Defense Group at the law firm of Fredrikson & Byron, PA. He advises clients facing government investigations and defends clients in a wide variety of white-collar criminal, civil and regulatory matters.
1 The unique chemicals
present in marijuana, known as “cannabinoids,” are also classified as Schedule I drugs. 21 U.S.C. §812(c)(10) and (d).
2 See, 21 U.S.C. §§829, 841.
3 545 U.S. 1 (2006)
4 The DEA, under authority delegated by the attorney general, may register individuals and corporations to manufacture or distribute marijuana. The National Center for Natural Products Research (“NCNPR”) at the University of Mississippi is the only entity registered by the federal government to manufacture and distribute marijuana. NCNPR has been the only registered entity since the registration statute was enacted in 1968.
5 Memorandum for Selected U.S. Attorneys, David W. Ogden, Deputy Attorney Gen. (10/19/2009).
6 Memorandum for U.S. Attorneys, James M. Cole, Deputy Attorney Gen. (08/29/2013).
7 Just last month the Colorado Supreme Court promulgated Comment 14 to Colo. RPC 1.2(d), which provides that a lawyer may “counsel a client regarding the validity, scope, and meaning of [Colorado laws decriminalizing marijuana]” and “may assist a client” in conduct lawful under the state’s marijuana laws. Following Colorado’s lead, the Washington Supreme Court is weighing adoption of a similar comment, which would provide that “a lawyer who counsels or assists a client regarding conduct permitted under [Washington’s marijuana laws] does not, without more, violate RPC 1.2(d).”
8 Defendant’s Trial Brief, People v. Padilla, Case No. SCD232218 at 4-5 (Cal. Sup. Ct., 05/10/2012).
9 Memorandum for All United States Attorneys, James M. Cole, Deputy Attorney Gen. (02/14/2014); BSA Expectations Regarding Marijuana-Related Businesses, Department of the Treasury Financial Crimes Enforcement Network (02/14/2014).