The commercial litigation landscape for CBD, hemp and marijuana is constantly evolving as federal and state courts issue decisions that impact investors, commercial contracts, employment issues, intellectual property and insolvency. The CannaBizDisputes™ blog regularly tracks and reports on these developments.
NY State Bar Ethics Opinion Firmly Supports Lawyers Counseling Adult-Use Cannabis Businesses
In our July 12, 2021 CannaBizDisputes post, we noted that New York was a much friendlier place for lawyers to advise cannabis companies than Georgia, where the Georgia Supreme Court ruled that lawyers providing legal counsel to such companies would violate their obligations not to counsel clients on federally illegal activities, even though the activity was permitted under Georgia state law. When penning the previous post, however, we noted that New York’s prior ethics guidance applied only to medical marijuana activities permitted by the Compassionate Care Act. While the rationale appeared to support counseling and representing adult-use cannabis companies to comply with the recently enacted Marijuana Regulation and Taxation Act, no state ethics opinion had squarely dealt with the issue. This was the case . . . until now.
The New York State Bar Association’s Committee on Professional Ethics has now issued Ethics Opinion 1225, providing a strong affirmation of New York’s commitment to the newly authorized commercial cannabis industry.
In short, New York Rules of Professional conduct permit attorneys to assist a client in conduct designed to comply with the Marijuana Regulation and Taxation Act (MRTA). Lawyers may also use marijuana for recreational purposes and grow marijuana at home, consistent with the MRTA. Finally, so long as the terms are fair and there is no conflict of interest, lawyers may accept an equity ownership interest in a cannabis business in exchange for legal services.
As with prior ethics opinions, the New York State Bar Committee on Professional Ethics focused on the ongoing federal non-enforcement policy in its new guidance. Both as a matter of Department of Justice policy and Congressional limits on funding, the federal government does not prosecute cannabis businesses for violations of the federal Controlled Substances Act that are compliant with an established state legislative and regulatory scheme authorizing the growth, processing, distribution, sale and consumption of medical marijuana. Although the federal restrictions are formally focused on medical marijuana businesses rather than adult-use, the Committee noted that “the Department of Justice has not, to our knowledge, taken any public position on federal enforcement that distinguishes between medical and recreational marijuana laws in the states . . . . [I]t seems fair to say that for nearly a decade federal forbearance in the enforcement of federal narcotics laws has been equally applied to state laws legalizing recreational marijuana and to state laws legalizing medical marijuana.”
Next, the Committee noted that MRTA’s comprehensive licensing and regulatory system is the type of comprehensive state enforcement system to which the federal government has given deference. The Committee noted that without the aid of lawyers assisting with license applications and with the “complex regulatory system” for cultivation, distribution, possession, sale and use, “the recreational marijuana regulatory system would, in our view, likely break down or grind to a halt. The participation of attorneys thus secures the benefits of the [MRTA] for the public at large, as well as it promotes the interests of the private and public sector clients more directly involved in the law’s implementation.”
Another significant facet of the Ethics Opinion for purposes of lawyers’ representation of cannabis companies, particularly the number of start-up entities anticipated to be applying for licenses under the MRTA, is that the Committee clearly authorized attorneys taking equity interests in cannabis companies as payment for legal services. Such equity payments must be permissible under New York Rules of Professional Conduct:
- The terms of the transaction must be fair and reasonable to the client, with the client being advised of the desirability of seeking independent legal advice,
- the cannabis client signs a writing that describes the transaction and the lawyer’s role in the deal, and
- the lawyer must also consider whether acquiring or possessing an equity interest in the client’s cannabis business will give rise to a conflict of interest, and whether informed consent, confirmed in writing, as to the potential conflict needs to be obtained.
Finally, the Committee notes that its guidance is limited to interpretation of the New York Rules of Professional Conduct and is not intended to give guidance as to how law enforcement authorities may view any particular conduct.
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