Four Business Challenges Unique to the Cannabis Industry

By Dan Mitchell
May 28, 2020

You own a cannabis business. It’s legal. It’s also illegal. This makes your work life challenging. Your state government is all for you and your business, and the tax revenue it generates. The federal government could imprison you, your employees, even potentially your customers, since cannabis is still categorized as a Schedule 1 narcotic under federal law. (The feds also appreciate the tax revenue though.) 

That, of course, is the main problem with the disconnect between state and federal cannabis laws. But the list of complications created by this novel legal situation is long. Here are four challenges cannabis businesses, and no one else, have to deal with: 

1. Banking. Technically, there’s little stopping banks from working with cannabis businesses. In most cases, observers say, the banks would probably be fine. But banks are in the business of managing risk, and most banks — especially the bigger, national ones — are too risk-averse to touch the weed business. 

This makes it hard for  cannabis entrepreneurs to secure loans, to deposit money, and in many cases even to accept anything other than cash as payment. Some operators fill in the gaps by finding alternative sources of financing, and by contracting with companies that facilitate deposits and payments. But the cannabis business won’t be truly legitimate until it has the same access to banking services as any other industry.

There are moves afoot to solve this problem. If passed, the federal SAFE Banking Act would shield banks from liability for dealing with cannabis customers. It has been introduced twice so far, and twice passed the House with a bi-partisan. Senate Republicans have held it up on both occasions. 

Proponents of the bill often cite the risk to public safety posed by the lack of access to banking. Since many businesses deal mostly or entirely in cash, burglaries of pot shops are not uncommon, and the shops, employees and customers are vulnerable to robberies.

2. Interstate commerce. A Colorado-headquartered edibles maker can’t simply ship its product to California the way a maker of toothbrushes or radial tires can. The inability to sell cannabis across state lines has put a chokehold on the industry’s growth.

The same rules apply to farmers. A cannabis grower in California’s Emerald Triangle can’t legally ship weed a couple of hundred miles east or north, to Nevada or Oregon, but can ship it 750 miles south to San Diego. This has led to a strange situation where, rather than there being a “U.S. cannabis market,” there are dozens of separate state markets, with wildly different laws, supply bases and prices. And it tempts farmers and others to operate on the unregulated market.

It’s true that some vape and edibles companies contract with manufacturers in other states to reproduce their products. But this is an option mainly reserved for the biggest and best financed companies. That leaves smaller players unable to compete, and accelerates industry consolidation.

Interstate commerce may not be possible until weed is legalized at the federal level. Most observers seem to think that will happen, but the question is when. In the meantime, some analysts advise investor clients to put their money into companies best positioned to take advantage of federal legalization: that is, those that are already large and operating in more than one legal state.

3. Contracts. If a cannabis company signs a contract with a supplier, a business customer, an executive hire, or anybody else, is that contract binding? Not necessarily. In a strict, technical sense, it probably isn’t. That’s because, under law, contracts that involve illegal products or services are not enforceable.

That of course hasn’t stopped companies from drawing up and signing contracts, but the risk is always there. They might try to get around the problem by, for example, including a clause where both parties acknowledge federal illegality, or one barring either signatory from taking any litigation to federal court. But acknowledging the law doesn’t make the law unenforceable, and state courts can deem a contract to be void just as easily as federal courts can. 

Different jurisdictions could handle the matter in different ways, and there is no case law built up on this issue so far. Still, in most cases, such contracts are still necessary and useful, and in states where cannabis is legal, likely to stand up to court scrutiny. After all, one would hope that a judge wouldn’t sympathize with a party who signed a contract, breached it, and then claimed the whole thing was illegal,” wrote Griffen Thorne, a cannabis attorney, on the Canna Law Blog. That’s true, but hope is a risky thing to bet a company on. 

4. Labor issues.One result marijuana’s quasi-legal status is that while federal law prohibits the industry, it still must comply with most federal laws. An edibles maker might not be able to get banking services, and can’t legally ship its products to another state. But if it tries to break environmental regulations or trample on employees’ rights, it might find itself in serious trouble, just like any other firm.

In September, the three judges of the Tenth Circuit Court of Appeals ruled unanimously that Helix TCS, a Colorado provider of supply-chain services to the cannabis industry, violated the Fair Labor Standards Act when it failed to pay overtime to an employee, Robert Kenney. 

Helix argued that, because cannabis is an illegal enterprise under federal law, the FSLA didn’t apply. The court disagreed in no uncertain terms. “Case law has repeatedly confirmed that employers are not excused from complying with federal laws just because their business practices are federally prohibited,” the judges wrote in their opinion. 

Helix has made a longshot appeal to the U.S. Supreme Court. Most observers doubt the Supreme Court will hear the case, but if it does, the ruling could have a huge impact on how regulators treat cannabis companies. 

In the meantime, the law firm Holland & Hart advises that cannabis companies should behave as if they were perfectly legal enterprises in all respects, however unfair that might seem. “Simply put,” the firm said on the JDSupra blog, “just as Al Capone was required to pay taxes on his mob money, marijuana industry employers must also follow federal wage and hour laws when it comes to their employees.”