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special / Legal Ethics

Lawyers with cannabis clients are caught in the ethical weeds

New York Times News Service

California has established and is currently implementing a comprehensive statutory regime to regulate the commercial cannabis industry. Business and Professions Code Section 26000 et seq. Without a doubt, cannabis businesses will require legal counsel to understand and comply with these and other laws. However, lawyers face many unique ethical and professional issues when representing cannabis businesses. Some are discussed below.

First, although public perception and prosecutorial discretion have become more lenient towards cannabis, it remains listed as a schedule one drug under the federal Controlled Substances Act, 21 U.S.C. Section 801 et seq. Rule of Professional Conduct 3-210 states a "member shall not advise the violation of any law." Other states that have legalized cannabis (Washington and Colorado, for example) have had to amend or clarify their professional rules to address lawyers advising on compliance with state cannabis laws. Oddly, the California State Bar has left lawyers in an ethical lurch by failing to opine despite in the 22 years since California's first legalization efforts. Both the Los Angeles County Bar Association and the Bar Association of San Francisco have concluded that a lawyer may ethically counsel cannabis clients consistent with the professional rules under certain circumstances and within specific parameters. (see Opinion Nos. 527 and 2015-1, respectively). And for its part, the Committee on Judicial Ethics Opinions determined it would be a violation of several canons of judicial ethics for a judge to have an interest in a cannabis enterprise. CJEO Formal Opinion 2017-010.

Current Rule 3-210 will be replaced by Rule 1.2.1 of California's new Rules of Professional Conduct, effective Nov. 1, 2018. New Rule 1.2.1 allows a lawyer to "counsel or assist a client to make a good faith effort to determine the validity, scope, meaning, or application of a law," and a proposed official comment, which is still being revised, will likely state something to the effect that a lawyer may advise and assist a client with California state and local laws that might conflict with federal laws, so long as the lawyer informs the client regarding the conflicting laws.

Indeed, there is broad consensus that a lawyer has an ethical duty to inform would-be cannabis clients of the federal illegality and consequences of their contemplated actions. This is easier said than done, however, as dousing the entrepreneurial flames of clients seeking to partake in California's multi-billion dollar green rush is not the usual posture an attorney wants to have with a new client. Also, actually advising on the relevant federal laws is a complex matter involving tax, bankruptcy, asset forfeiture, federal drug and money laundering crimes, mandatory minimum sentences, and aider, abettor and coconspirator liability issues. Few lawyers are expert in all these subjects.

Similarly, cannabis clients require a vast array of legal services (employment and intellectual property, for example) and although there may be a desire by the client and perhaps the attorney to keep the number of lawyers and fees to a minimum, mindful attorneys should take care to accurately identify and advise the client on the full scope of its required legal work, refer specialized matters to other counsel, and specifically discuss and agree on the scope of their particular representation, including expressly excluding issues on which they lack competence. See, e.g., current Rule 3-110, new Rules 1.1, 1.2(b). Lawyers should be clear about who they do and do not represent and of any potential conflicts or required waivers, particularly in entity formation, joint venture, partnership and other corporate matters. The overriding purpose of the representation must always be counsel compliance with all state and federal laws, except the Controlled Substances Act.

A dire concern is the potential lack of the attorney-client privilege for cannabis advice because of the crime/fraud exception. The Legislature amended Evidence Code Section 956 so that the crime/fraud exception under state law would not apply "to legal services rendered in compliance with state and local laws on medical or adult-use cannabis, ... provided the lawyer also advises the client on conflicts with respect to federal law," but the statute's legal contours have not been tested. See Assembly Bill 1159, 2017-18 session. Also, federal courts do not apply state law privileges to federal claims, meaning the attorney's files could be evidence in federal court, especially in any criminal proceeding. Federal Rule of Evidence 501. Attorneys could be called as federal witnesses, placing them in a precarious position if they are to uphold their ethical duty to "maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client." Business Professions Code Section 6068(e)(1); current Rule 3-100; new Rule 1.6.

Another consideration is that Rule 3-410 (new Rule 1.4.2) requires written notice to a client of the lack of professional liability insurance. Since most policies include boilerplate provisions excluding violations of law, attorneys should assume their cannabis advice is not covered. Attorneys should expressly seek or confirm coverage for representing cannabis clients.

Finally, attorneys should use a specially crafted legal services agreement and employ extensive intake and vetting procedures for cannabis clients. More than in other representations, a key part of the lawyer's relationship with a cannabis client is based on the client's compliance with state and local laws, which may preserve the attorney-client privilege in state courts, the enforceability of contracts under state law, and may potentially reduce the likelihood of federal enforcement. Accordingly, lawyers should be very discriminating about the cannabis clients they agree to represent, and will likely need to be more knowledgeable regarding their clients' business activities than for clients in other industries in order to assure themselves that they continue to fulfill their professional and ethical duties.

#332

Ben Armistead


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