The Ethical Implications of State Cannabis Legalization for Lawyers

Sunday, February 26th, 2017 at 5:00 am, by Elizabeth Brandt

Background

Eight states (Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon, and Washington) and Washington, D.C. have legalized the recreational use of cannabis. There are an additional twenty states that have legalized cannabis for medical usage in one form or another. However, cannabis is still listed under federal law as a Schedule I drug, meaning the federal government considers it to have no accepted medical use and a high potential for abuse. While the Supremacy Clause would typically render invalid any state law conflicting with federal law, executive branch memos discouraging in certain circumstances the prosecution of individuals for cannabis violations under the Controlled Substances Act has helped create the current grey-area around the cannabis industry. Additionally, this unique conflict of law presents several ethical issues for lawyers. This post discusses the ethical implications of lawyers that want to advise clients wishing to enter into one of the emerging state cannabis markets. With an aggregate industry that is estimated to grow to $50 billion in less than a decade, there is no question that entrepreneurs and investors are entering the market, and like any other industry, will need legal counsel in order to do so most effectively. Indeed, even more than other industries, the cannabis industry currently represents a complex interaction of regulations, laws, and contradictions.

Current Bar Association Stances

Several local and state bar associations have issued opinions regarding the ethical implications of advising clients wishing to enter into the cannabis industry. Maine issued the first such opinion in 2010, stating that lawyers could help “clients to make a good faith effort to determine the validity, scope, meaning or application of the law,” but disallowed attorneys from assisting a client in violating federal laws despite its validity under state law. This ruling strictly limits attorneys’ ability to assist clients in tasks for which lawyers are typically engaged, such as creating the business entity or applying for the appropriate state or local licensing. Some commentators have criticized the Maine approach as an erosion of the attorney-client relationship. Others argue that the approach inhibits the growth of the cannabis industry.

The next year, Arizona’s Bar took a very different approach. Arizona determined that lawyers play an integral role in ensuring compliance with and understanding of state law, and allowed its attorneys to represent clients who clearly and unambiguously wish to comply with state law. However, attorneys must apprise their clients of federal law and the potential consequences for violating those laws.

Additional states and locations have since taken positions on the same ethical considerations. Connecticut issued an informal opinion and Illinois a formal opinion with determinations similar to those Maine made. Colorado, New York, Washington (King County Bar and State Bar), and California have issued opinions more in line with Arizona’s opinion. In the case of California, the San Francisco Bar Association made the distinction between advising a client on how to comply with state and local laws and advising a client to violate federal law.

States such as Pennsylvania, Nevada, Florida, Minnesota, and Massachusetts have taken affirmative steps to protect attorneys who assist their clients in conforming to state laws regarding cannabis. These affirmative protections include modifying current state professional conduct codes or, in the Minnesota example, providing immunity for attorneys working within the cannabis legalization regulatory scheme.

Recommendation for Moving Forward

States thinking about putting forward legislation to legalize cannabis in some form should consider Minnesota’s approach of including limited attorney immunity within the statute.  This approach provides immediate clarity to the legal community, shows thoughtful inclusion of an additional constituency affected by the legislation, and provides local bar associations with additional information about the intent of the proposed statute. However, this inclusion does not fully reconcile the ethical dilemma attorneys face when deciding whether to take on a client in the cannabis industry. An attorney can comply with the statutory scheme and still run afoul of the state professional conduct code.

Given the high stakes of potentially violating ethical conduct rules, the fast growing industry of cannabis, and the unique and complicated situation posed by conflicting state and largely unenforced federal law, state bars of all states that have legalized cannabis in any form should unambiguously interpret their state ethical code as quickly as possible in order to bring clarity to attorneys considering expanding their practices to clients in the cannabis and adjacent industries. The otherwise resulting uncertainty adds to an already confusing situation for anyone in the cannabis industry attempting to comply with state laws. The situation is further complicated given that different bar associations have interpreted similar ethical rules in conflicting ways. As additional states legalize cannabis, state bar associations, in particular, should respond in order to bring their membership clarity on their position on the matter.

While it is most important for bar associations to take a stand on this unique situation, those associations should strongly consider the implications of following Maine’s determination. Disallowing attorneys from advising clients in matters such as applying for complicated state licensing, business entity formation, and financing negotiations, and the removal of attorneys from the entire industry is problematic given the complicated and often-conflicting state regulations just taking form in many states. In any scenario, an attorney’s assistance does not translate into an attorney’s agreement with or acceptance of any client’s business methods or practices. Further, as the regulatory framework for the cannabis industry changes rapidly, many businesses are clamoring for competent legal counsel.

This ethical dilemma perhaps most closely mimics the tax implications of engaging in illegal activities. While the vast majority of our judicial system seeks to limit illegal activities, our tax code allows for some odd results, for instance its allowance of deductions for business expenses relating to some illegal activities. Presumably bar associations would not bar tax lawyers from explaining these tax laws to their clients, or from their assistance in filing financial statements containing these deductions with the appropriate entities, a situation that seems reasonably analogous to forming a business entity in the cannabis industry.

Disallowance of the use of attorneys in any industry as a wholesale measure additionally seems problematic from a reputational standpoint. Most of the counsel cannabis companies require mimics the work an attorney would conduct for any other client – entity formation, tax implications and counsel, contract negotiations and creation, licensing advice and application assistance, and other general business matters. The vast majority of states that have passed medical or recreational cannabis legalization schemes have done so with the broad support of the public. For the legal industry to entirely remove themselves from an industry created by such a measure erodes the public’s confidence in individual lawyers, the bar association, and the industry as a whole.

Conclusion

Each state is responsible for implementing and interpreting their own code of professional conduct. The legalization of cannabis in many states has created a unique circumstance of conflicting state and mostly unenforced federal laws. Several bar associations have supported attorneys assisting clients in the cannabis industry, while other states’ bar associations have counseled against attorney involvement in the industry at all. Still other bar associations have yet to take a stance on the issue. States thinking about passing such a legislative scheme should consider including attorney immunity in the legislation. Bar associations, particularly the respective state’s bar, should clarify their position on attorney involvement as soon as possible after the passage of such legislation. Bar associations considering the issue should strongly consider following the Arizona approach, an approach the majority of such bar associations have followed, that allows attorneys to advise clients in the cannabis industry while ensuring that they advise clients of the federal law and the potential consequences of any action that they take in their business.