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Cannabis, Conflicts, and More Ethical Issues

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Cannabis, Conflicts, and More Ethical Issues

Cannabis attorneys are bound by the same rules of ethics as their non-cannabis law practicing lawyers, such as avoiding conflicts of interest, protecting privilege, and carefully weighing the pros and cons of possibly going into business with clients. However, for cannabis lawyers, these obligations can require greater care and attention for two reasons: one, cannabis law is relatively new practice, growing in states across the United States amid the backdrop of cannabis remaining a Schedule I Controlled Substance; and two, the business of cannabis is growing rapidly, resulting in knock-down drag-out fights for permits that repeat every time a new jurisdiction licenses cannabis businesses.

Transcript

Hi, my name is Jessica McElfresh. I'm the founder and principal of McElfresh Law, which is a law firm focusing on cannabis, regulatory, licensing and business issues in San Diego, California. I've been practicing cannabis law for oh gosh, we're pushing 14 years, which is really crazy to to think about sometimes. I'm also on the board of directors for the International Cannabis Bar Association, where I have the pleasure of chairing its continuing Legal Education Committee. And for the rest of this year the Professional Responsibility and Ethics Committee. And a lot of that is some of what we're going to talk about today, because the topic of this is cannabis conflicts, the crime fraud exception and more ethical issues as sort of a just initial statement about this. It's not with the notable exception of sort of what we we call the discussion around the right of cannabis lawyers to exist, or at least that's my joking way of referring it, which is can you even practice in this area under various ethical rules of different states? The truth is, cannabis lawyers, for the most part, we just have all the same ethical challenges and issues that all other lawyers do, such as conflicts of interest. Can you go into business with a client? You know what is and is at times not permissible. It's just that we tend to experience those standard issues at a really rapid speed and at a more constant occurrence. And that's because of the cannabis industry itself and the way that it is growing and emerging in real time before our eyes. And a lot of people are getting in at once seeking licenses at the same time and that that has just sort of turbocharged how one goes about dealing with the conflicts and other issues. But let's start with sort of the whether or not you can even practice in this area. We start out with sort of ABA model rule 1.2 D. We cover it because let's face it, a lot of states have enacted a somewhat similar rule, particularly for this one. I know not all states, for example, California being one have wholesale incorporated the ABA model rules, but really pretty much all states have a version of model rule 1.2 D, and that model rule is the one that states a lawyer shall not counsel a client to engage or assist a client in conduct that the lawyer knows is criminal or fraud. Stop there for a second. So let's just get something out of the way. Cannabis remains a schedule one controlled substance in the United States. That means it is federally illegal for all purposes. And while I know there are a lot of discussions, we're recording this in July 2023 about possibly cannabis being rescheduled or de-scheduled. I think it's worth mentioning that that would not necessarily solve all of our federal illegality problems and by extension some of our conflicts around this practice area. The topic of this is not to get into the merits of rescheduling versus rescheduling and those effects, but it is worth mentioning that even if those things occur, it's not going to immediately make cannabis completely federally illegal for all purposes. The scheduling would come closer, but but even then we would still have to have some other accompanying legal changes. But for now, it remains schedule one. And so that's always given cannabis attorneys sort of this interesting question that people love to confront you with at cocktail parties, either in an aggressive manner or because they're genuinely frightened for you, which is how do you really represent somebody in a business that may be state and locally legal or seeking to be state and locally legal in its eventual implementation when it's federally illegal? And the truth is, some of this is every cannabis attorney, just like every cannabis participant, industry participant, really has to sit down and have a conversation with themselves about whether they can handle that or deal with that. The next part of it really has to do with the fact that attorneys are at core a state regulated profession. In the United States, we are barred or licensed by different states. It is true, of course, that there is admission to the federal courts. If you're an intellectual property attorney, these issues can be even more complicated in terms of your admission status. But at core, it starts with having a license from some state or the District of Columbia for your practice. And that's really, I think, been a tremendous boon to the development of cannabis law and by extension the advancement of the cannabis industry and broader cannabis policy and societal changes, because in a sense it created an ability for attorneys to practice in this space if they chose to, without having to, or maybe having a little more safe harbor in worrying about losing their license under state law solely for the federal issue. To circle back to to this model rule, the next part of it is a lawyer can discuss the legal consequences of any proposed course of conduct with a client. And you can counsel or assist a client to make a good faith determination whether about the about what the law actually says and what it actually applies to. And I think that this sort of second part is also very key because, of course, that's really the core of what attorneys do. Yes, we it is our job, as we'll discuss in a sec, to counsel clients about federal illegality and the consequences of it. But it's also our job to help businesses figure out what is legal under state law and how to follow it. And I really can't think of any area of law in the last couple decades where this has really been more true than cannabis law, because we've been engaging in a real time change. The other model rule I do want to touch on briefly is 8.4. This is the professional misconduct rule. Most states do have a version of 8.4, even if they've chosen different pieces of it. The main one we sort of want of talking around cannabis practices, that is professional misconduct for a lawyer to commit a criminal act that reflects adversely on the lawyer's honesty, trustworthiness or fitness as a lawyer. Again, there is the federal illegality issue, which we'll talk more about that. The answer would be that helping someone to follow state and local law could is a crucial part of being an attorney and is not reflect adversely on your honesty. Where sort of this question has also come up is on the question of attorney consumption of medical or adult use cannabis and also with investment and also with going into business with one's clients. And for the most part, most state bars that have addressed these issues directly or indirectly have ultimately concluded that even though cannabis remains federally illegal, if someone is. Consuming, investing, etcetera around cannabis in compliance with their states laws and or model rules. It is not likely to be an act that reflects adversely on their honesty, trustworthiness or fitness as a lawyer in and of itself. However, a lot of these states have also predicated this, which is also true about their opinions on the practice of cannabis law in general. They've really predicated this on the idea that at this time federal law and I'm sorry, not federal law, but federal policy is kind of starting around a period of the Obama administration and going back and forth to varying degrees since has really been that the federal government should not prioritize enforcement against state legal cannabis businesses. We've had this in a series of memos, FinCEN guidance. We've also had it in various budget writers. It was originally the Rohrbacher budget writer, and it's come in different forms since. So I'm not that I'm expecting this, but it would be if hypothetically some of those things changed. A lot of these model opinions have said, Yeah, well, we might have to change our view at that point too. So but that's, that's kind of the current, the current state. So what exactly are the different states doing? Well, at this point, we have roughly 20 plus jurisdictions that have amended rule 1.2 or their equivalent of 1.2 or the comments to it. Um, six and counting jurisdictions have issued advisory opinions around cannabis legal practice, and most of them say equivalent to what we've been discussing here. Some have not changed their rules, but they've said publicly that they're not going to go after lawyers solely for providing advice to cannabis clients. A few jurisdictions have passed legislation. And then there is Missouri, which is engaged in almost a sort of game of slaps around the practice of cannabis law. And what I mean by that is when Missouri first passed laws in their state to allow medical cannabis, they did have some mention of the idea that an attorney should be allowed to represent cannabis clients there who are following state law without fear of losing their license, etcetera. The Missouri Supreme Court disagreed and became what I believe was at the time, and I think still the only state Supreme court to explicitly state in a state where we've decided to legalize medical cannabis, that attorneys could still be disbarred or disciplined based on federal illegality alone. Um, that, needless to say, had a bit of a chilling effect among Missouri attorneys and created a lot of confusion. However, a certain number of attorneys in Missouri just kept going. And also then when the when the state moved forward with allowing for adult use and changed its laws, there was considerably more ink spilled. Covering the idea that attorneys should be able to advise and assist clients who are following the laws of Missouri regarding cannabis, regardless of federal illegality. And that's why I refer to it as sort of a game of slaps. You know, right now that's the hand on top and I think we're hoping it will stay. There's also been some turnover on the Missouri Supreme Court, so we will see. But that's kind of been the one time where this came to boil and rather rapid fashion following a change in the laws. Let's go through some of the other rules around this. So one model we have seen is they also advise you can certainly see it here very clearly in Colorado's version of model rule 1.2 D, we're basically that you can advise a client in this area so long as you also advise a client about federal illegality and all the potential possible consequences of it. Probably would be hard to cover every single conceivable one without handing somebody the entire federal criminal code. But, you know, it certainly is an important part of counseling somebody. And regardless of what your state rule says, it, of course, is an important part of counseling your client on this. Uh, by the way, Colorado embodies another thing that we have seen in some of these model rule changes, which is to explicitly refer to your state's cannabis laws, which is what they have here, even though they don't use the word cannabis or marijuana. Some states have kept this a little more, I'm going to say amorphous, which is becoming useful as laws change in various states and move towards law, legalizing psychedelics and things such as that. Illinois is also another also advise where they discuss going through federal law and its consequences. Uh, New York is also, uh, and also advise. Um, they also have a, an opinion regarding cannabis practice, which actually from 2019, which actually reaffirmed an earlier one, which is you, the lawyers, can offer legal assistance that goes beyond a mere discussion of the legality of the conduct. And when a state adopts a regulatory scheme for cannabis, implicitly the state law authorizes lawyers to provide traditional legal services to those clients. California has a version of also advise. But actually I know in California first came out with its model rule around this and as part of an overall update on their model rules. Initially I wasn't keen on it, but it's really grown on me. And the reason why I wasn't keen on it initially is it didn't really call out our state's cannabis laws either in the rule itself or comment. Instead, we have a fairly standard version of model rule 1.2 D and then we have a we have comment six to the state, which basically says that an attorney in California can advise a client about California laws that might conflict with federal or tribal law. You can go so far as to draft, administer or comply with these laws, which conceivably includes writing contracts and things such as that. You do have to, of course, also advise about how there is a conflict and the effects that could have for somebody. They don't use the word cannabis. They don't specifically call out any of our state's cannabis laws, but it's pretty clear what they're referring to and talking about. And I also have to say that this has grown on me over time because as we change laws in different states and get into psychedelics and other areas, we've sort of wound up with this awkward position of, well, I guess now we're going to have to go approach that state and try and update its model rule again, because you know, it's specific to cannabis, whereas if you have something more like what California did in its comment, even though I prefer it were on the rule itself, because that would be more protective to attorneys. Um, you know, it does provide a little more leeway for attorneys to begin advising clients in those areas as the laws of their state change. Because it's New York so aptly put it, when a state makes these legal changes, they are opening the door for attorneys to assist clients in following and interpreting those new rules or laws. New York also has an opinion on consumption, including consumption for recreational purposes, which is basically that attorneys can so long as they're following the laws of their state. It does not by itself adversely reflect on their honesty, trustworthiness or fitness as an attorney. They also have an opinion regarding investing or taking equity in a cannabis business, even in exchange for legal services, though, of course you do have to be extremely careful to follow the state's rules on conflicts of interest, including business transactions with clients. Um, by the way, New York as well as California have extremely detailed model rules and procedures within them around conflicts of interest and business transactions with clients and all of the steps that you have to follow to do that safely and appropriately. These are not rules that are specific to cannabis, but they are extremely detailed and careful. Uh, Nebraska had sort of an interesting model rule or sorry advisory opinion, which Nebraska is not yet legalized, but it had to do with the idea of what if somebody wanted to invest in a state next door where medical cannabis operations were legal? Also, if you're dealing with legal questions around employment, which, you know, in a way I thought was sort of a funny question because. If you're a Nebraska employer and you're a Nebraska lawyer, you can still give advice about Nebraska law. And I guess that's true even if it comes up in the context of there are people living in the state next door who are using cannabis. Um, but Nebraska and again, this is sort of a similar approach to New York and other states. They do really focus on the idea that this, that the fact that this is permissible in their eyes is really predicated on the current federal approach to enforcement of federal, which is they're a very low priority. Oh, so let's talk about some of these conflicts in the way that they come up. Um, honestly, for for many years it was sort of entertaining in a way. I would speak at different cannabis conferences or uh, state bar or bar association meetings. And I used to joke that this was everybody's favorite question because back then it really felt like it at times. Frankly, every time one or more different lawyers would come up afterwards. And the question that they all wanted to pepper me with was whether was really, you know, this cannabis law stuff was interesting. And what they really wanted to do at this point was go in-house or advise a cannabis company so that they could then become investors or, you know, basically trade their services for a portion of equity because they they thought they were going to all get rich really quickly. That has not come to pass. But, you know, that's that's not what we're here to talk about. Um. I only I, I personally think around conflicts of interest. The question of whether you can or should possibly go into business with a client or take equity in a client is, in my opinion, a much more complicated and fraught topic in terms of how it will affect your day to day practice and your disclosures with all your clients. Then I think at times some people give it credit for. But again, with the ABA, with California, with New York. No, because this really gets into the counter, then everyone gives me, which is, well, everyone likes to come up to me and basically scream in my face. Silicon Valley, like, because there are lots of lawyers who have taken fees or represented or gone in house or had equity with various technology companies. Not that that invented the concept either, that that means it's just hunky dory and fine to do in cannabis. And let's be clear, um, while New York has written a very clear opinion on investment and some other states have danced up to it, I think overall, if you're going to go with the logic that if it is state legal and you can advise in this area, you should be able to do the other things that other lawyers get to do with their clients, which does include under the rules of professional conduct and going into business with a client taking equity as payment. Um, it is logical to argue that that should be true of cannabis attorneys as well, assuming that they follow these rules very carefully. Where I think, and this is not really been a fully answered question, um, there is, I think some lingering questions around model rule 8.4 in addition to the conflict of interest problems, which is. It perhaps want some states and some of danced around this in their analysis. Is there an argument that it is one thing to advise a client on how to follow state law while advising them around federal law? If you reached a point where you have taken equity in a client, are you essentially directly benefiting from the violation of federal law that these businesses may be doing? And does that affect adversely on your character? I think most states, when they've dealt with this, they've really addressed that by going with, well, this is the current federal policy around enforcement. And that's all right. But I think there's an interesting question there now. Personally, I think that one can get a little pointy headed to focus on that. I mean, if it's permissible to advise a client. And clearly I've dedicated my entire professional career to that idea. Um. At that point. Well, you know, you're getting legal fees that are from representing a business that is engaged in selling or producing or other activities around a Schedule one controlled substance. It doesn't in some ways seem it seems a little to be slicing the onion a little thin in my book to say, well, it's totally permissible to just advise at that point. I have nothing to do with federal illegality versus, well, I guess I really do. If I have taken ownership or equity in a company. And I think that that particular analysis to me, slices the onion a little thin. However, there are people who feel very strongly there is a difference. It is worth remembering to kind of go back into California medical cannabis history. There was. There was a ruling that had to do with the idea of doctors offering recommendations for the use of medical cannabis and whether or not that was legal, given that cannabis was a is a schedule one controlled substance. And essentially what the court said was, yes, it was permissible because essentially the doctor was engaging not just in medical practice but also in free speech. He wasn't handing medical cannabis to the patient. He wasn't telling them where to buy it. He was saying, yes, this could assist you with your medical problems and giving them medical advice and what they did and went out into the world with afterwards with that recommendation was their business and not the doctors. And I think that that logic is sound and it holds. And I think that you can make a similar argument with attorneys and what they do. We're giving legal advice as professional conduct. We have a right to free speech, even though I think there are some differences, particularly when you get into advising a business and drafting contracts and, you know, literally writing documents related to the sale and production and all these things, I mean, it's just a little different. Um, but again, you know, I think if that area of practice is permissible and important and under state and legal under state law, people should should be free to do the same in other areas. Um, what's really important though, around this, and this is true whether you're a cannabis attorney or working for the latest tech startup, you need to be extremely careful to follow your state's model rules or rules of professional conduct around going into these transactions. California's and New York's are extremely detailed. So candidly, if your state's is not as detailed and you want to have a good template, I suggest looking at these model. The model rules on this. You have to be very careful in this. I mean, the transaction has to be fair and reasonable. The lawyer's role must be disclosed. It has to be communicated in writing that the client can understand. So this is this is not the time for $10 words and, you know, proven you've got a great score on the Lsat. I mean, it's really the time for plain spoken English or in the case of people who's where English is not their first language. For a professionally translated document in their first language, the client must have to have independent counsel or be told in writing to seek it candidly. I would really encourage people to make the client have independent counsel to be to avoid any questions on this. And after all this, the client has to give informed consent in writing. We're, I think, sort of these questions around going into business with clients or taking equity and all that. Where this gets complicated to me is really around conflicts of interest. Now, it's not obviously not the only way that conflicts of interest can come up, but as I mentioned at the beginning, conflicts of interest are basically turbocharged in cannabis legal practice, particularly for those of us who work in intellectual property and those of us who work in licensing and regulatory and business transactions. And the reason is kind of funny. I mean, all attorneys deal with this. That's why there are conflict checks and all those things. When people first call, you obviously don't want to sound like this is, you know, just us. But think of it this way. You have a state that comes on board and is legalizes cannabis and says they're going to set up a state regulatory system or a large city in a big state. Same analysis. They may say, hey, we're limiting these number of licenses. This is true particularly for retail. There's only going to be so many of them. There tend to also be a lot of restrictions around where they can be located in many places. So that further creates conflict and competition. Um, a lot of people are interested all at once. A lot of people, there's a lot of money involved, or at least people believe there's a lot of economic upside and potential. It's very expensive to do these things and we're all going to start going for this all at the same time. That does not happen every day. That is unusual. Um, that's a lot all at once. That is. That's a law school exam for spotting conflicts of interest, in all honesty. Um, and that's the thing. Let's say you've got one client and another person comes to speak to you and it turns out that they want to have the property that's right next door. This happens a lot with very restrictive zoning because then there's only so much property that works. What if, hypothetically, you represent a landlord who has a property that complies and you've got another client who wants to be in the space and you want to put them together? Um, it can come up in all sorts of contexts. I've have intellectual property lawyers explained to me that at times, you know, people start going for marks and branding and it can be surprisingly similar at the same time. I mean, it's, it's not that we have unusual conflicts, it's just that we have them so quickly. So being a cannabis attorney, given the timing, it really requires constant awareness of conflicts of interest. You will often you will also have situations where you may have had two clients they've never intersected before. All of a sudden they're competing with each other very directly, like practically next door, or they're having a disagreement. They may want to go into business with each other, which is a happier phone call, but still involves a lot of conflicts of interest. Attorneys just have to constantly be doing this. And in addition to listening to programs like this one and reading up on your model rules, I really recommend that every attorney in the cannabis space have a malpractice professional responsibility attorney on retainer that they can talk to, that they can have discussions with. Also, you may have thought that you were going to get through your whole legal career without ever having clients potentially sign a conflict waiver or potentially have to drop out of a situation because you just weren't going to have conflicts in your practice. You're going to have a really hard time practicing any cannabis law at all if you are going to maintain that position, if you're not going to be open to the occasional conflict waiver or other adjustment. Um, it it just it's very hard to not wind up with that. And that's another good reason to have an attorney who does malpractice and professional responsibility on retainer because they can help you with these issues and help you draft those things. Know the phone number of your state bar ethics hotline you may need to to call it as part of your diligence and protection. We also have a professional responsibility hotline at the International Cannabis Bar Association. Um, you know, have good relationships with your, with your colleagues so that you have a good opportunity for referral and hope that they return the favor. It's a good reason to be involved in various your local cannabis lawyers groups, your state ones and of course an international one like the International Campus Bar Association. You know, these are these are all good things to do. So but let's talk about this. Usually in California and the ABA model rule are good ones you. Cannot typically take on a new client if it conflicts with your responsibilities to your current client. This can also come up if you've got, you know, two existing clients, etcetera, or a past client that cannot be directly adverse in the same or separate manner. Most of the time there's also a significant risk. This also comes up. There's a significant. My apologies. A significant risk that representation will be materially limited by your responsibilities to or relationships with another client. Like I said, what if they're right next door? A former client? The third person or your own interest? Your own interest is kind of where the whole issue around investment and ownership of a client can be so prevalent in the conflicts of interest. Because think about it for a second. Let's say that you do have ownership in one of your clients, or maybe you've taken a position on their board or something like that. Do you think your other clients might have questions around that or they might want to know? It's one thing if you're in-house and that's the only client you ever have and that's how you spend your whole career. But in my experience, clients want to know about these things, and I think that there's a very good argument that the model rules require these disclosures in conflict waivers on an ongoing basis, not just when, say, it comes up that they're brushing up against each other. If you've got equity in a client, you're on their board or your spouse or child or somebody like that does. Um, there is a significant risk that your representation could be materially limited or conflicted. Um, it doesn't mean you can't do it. It just means that the model rules support and promote that disclosure, making people aware, getting waivers solely for that reason. And of course, it's not that every time there's a conflict, the world must come to a complete and utter grinding halt. That's where the exceptions come in. The lawyer reasonably believes that you can competently and diligently represent both. The representation is not prohibited by the law. They're not directly opposed in a current matter, say, for example, in litigation, and each consents in writing. You know, you have to be careful around this. Um, and this is where that independent at times, you know, not only when you have a waiver advising someone to also speak to another lawyer gets important, but this is kind of where this first part the lawyer reasonably believes that can competently and diligently represent both. I think most lawyers try their best to really believe that. But I also think we're all human. And at times, you know, what I've I've thought about because I've worked on competitive and scored and time sensitive licensing applications, you know, these things where you've got to get them in by a certain time and, you know, you try your best. Clearly, nobody wants to be submitting at the absolute last minute. But the scenario that really kind of came home to me, the way that we can all be a little blind, even if we think we can do things competently with both. It came up to me one night when I was working on applications and it was very late and I had two more to get in and I had time, but I started thinking about it like, Well, what if I had a little less time? Or What if the portal crashes? And that happens a lot. By the way, another great reason not to wait till the last minute. Which of these do I pick to put in first? Well, if I hypothetically owned equity in one, which I didn't and I don't. Would I be a human being and inclined to pick that one first if I got that one in and then the portal crashed and the other client found out, Oh, you put in the one you had equity in and you didn't even tell me about that up front first. Would they be epically angry? Yes, they would. So, again, it's a constant analysis. There's no one. Right. Perfect all the time. One size fits all answer here. There just isn't. It's just too complicated. Um, there are more conservative ways to go, but even then it still comes up, say, to clients or both of them a long time, they're going to brush up against each other. The key here is written disclosure, bringing in other attorneys when you need and constantly showing that care. That doesn't mean you'll never make a mistake or screw up. But if you are at least diligent in taking all those steps, it will help you a great deal. Again, you're going to have to also probably at one point or another be open to having clients sign a conflict waiver. Even if you just think it's a potential conflict, you don't really think they're conflicting or everybody's getting along and they've agreed and disclose, get it in writing. Advise them to talk to other lawyers. Get a waiver. And really some conflicts are just not going to be waivable either as a matter of law because of the parties involved, because of your feeling about it. Another thing that you really need to be careful on around this is your duty to past clients. A far too many lawyers, not just in cannabis but in general. They have a lot of people don't seem to understand that under the rules of professional conduct in many states, you also still have duties and allegiance to past and former clients. So, for example, let's say you're doing an intellectual property trademark application and you find out that, Oh, this is actually really like something my past client was was discussing. And even though I haven't talked to them for a year, you still owe that past client a duty. This can also come up in business transactions or licensing applications. The point of it is you may have a moment in your career where you may have to actually not only disclose a conflict to your current client and maybe bow out, you may have to even consider whether your former past client will be willing to sign a conflict waiver so that you can continue representing your current client. And I know many of you are probably laughing and rolling your eyes like that would never happen. It actually can. It can occur. There are clients, particularly if you partied with them under very good circumstances where everybody is still friendly, who actually will consent and sign such waivers allowing you to move forward with a current client when it's appropriate. But here's another thing to consider. Isn't that a good reason in the first place to be very careful about who you take on as a client? If you just don't think it's going to be a fit, if you just don't think you're going to work well with this person up front, probably better not to take them on because you're taking on their conflicts, their baggage, so to speak. Moving forward. You can't just get rid of it. So I know it's hard, particularly when you're just starting and you're just building a practice or you're younger or things are tight. You know, you just really need that client. You just really need that work. But just remember, if you take on that guy who's just a gal who's just a big jerk and you're just not going to get along with and you know it up front. Don't do it because you're going to see them again. I guarantee it. So another topic that is both a general attorney topic but also comes up particularly are can and cannabis practice has to do with the crime fraud exception to attorney client privilege. And I know you're thinking what the holy heck is that or some vague memory. Didn't talk about that in law school. Like like isn't that the isn't that that thing where, you know, if you commit a crime with your client, then, you know, there's no privilege for that. Yes, it is that thing. However, it's honestly a far more nuanced analysis. And it's not just limited to actual crimes. Of course, the crime fraud exception to attorney client privilege can also feel particularly fraught in the cannabis practice space because of that federal illegality issue, that whole schedule one controlled substance thing. Um, and as we've discussed, cannabis or sorry, legal, well actually cannabis laws I suppose really do tend to start at the state level with legalization. We have not yet changed our federal laws regardless of various policies regarding their enforcement. Um, we may I'm sure we will someday, but we're not there yet. And also we've discussed the fact that law is a state regulated profession, even though with federal practice that can become a more complex analysis. But let me just get something out of the way. We are not yet sure, nor has it been fully adjudicated at all. Uh, whether privilege applies in federal court between a cannabis client and their attorney. Um, or could it be pierced simply over the fact that cannabis is federally illegal? We haven't really dealt with that question head on and whether it could be pierced just based solely on that fact. Like let's assume everything is totally above board. It's just say a business dispute in federal court, um, between cannabis companies. And that is not always the best way to go, but it can happen and at times it goes very well for people. But could the privilege be pierced if you solely just based the question around, you know, cannabis being federally legal? We haven't answered this question yet. Um, I actually do not think the analysis is simple or that it is automatic that privilege would automatically be pierced or vitiated. I think it's a lot more complicated actually, in part because of the federal laws or sorry, the federal case law around attorney client privilege and crime fraud. Um, but actually we are on somewhat for more terraferma in various states because again, of that cannabis being legal under the state's laws, it's kind of like a New York set around the cannabis practice. Um, if we're going to allow attorneys to advise clients in this state legal space on how to follow state law, they should be entitled to not just be able to do that, but also to enjoy confidentiality and attorney client privilege and work product protection and all of those sorts of things. But still, it's important to consider the crime fraud exception. And it's also important because, I'll be honest with you, a lot of people don't really understand the crime fraud exception to attorney client privilege, and that is actually quite narrow and overall very protective of privilege. And to go through that, we're going to talk about the federal case law around it. And we're also going to talk about the rules of the state of the state of California. Why California? Well, one, in the interest of full disclosure, I am a California licensed practitioner. And also because California might be the most zealously protective state in the nation of attorney client privilege. And so we have some particularly zealous rules that are even more protective than the federal rules. Okay. Also, another thing that I would like to highlight that is specific to cannabis practice. See, every once in a while something specific to cannabis and special for us. California, to the best of my knowledge, remains the only state in the country that has amended its evidence code to specifically address cannabis practice and the crime fraud exception. That is evidence code section 956, subdivision B, which clearly states the crime fraud exception quote, shall not apply to legal services rendered in compliance with state and local laws on medicinal or adult use. Cannabis and confidential communications provided for the purpose of rendering Those services are confidential communications between client and lawyer provided. The lawyer also advises the client on conflicts with respect to federal law. See, you're never going to get around that. Also advice provision. It's very important. Um, most states have not gone to taken the protective step of amending their evidence code or wherever their similar rules laws around it are housed. But I really hope more states will take this step of going this far as opposed to solely putting the onus on various state bars and opinions. I appreciate there probably are people who agree with the writers of that New York opinion that, well, you know, we made this stuff legal under state law. We clearly meant lawyers could help people follow the law and have all these things. Um, but I'm really of the mindset that attorney client privilege and the ability of cannabis lawyers to assist cannabis clients in figuring out these state laws and, and follow them and obey them. I don't know that we would have achieved the progress we've made in changing cannabis laws in this country, both for individuals and creating a new legal industry. It's certainly not a new industry, to put it mildly. I don't know that we would have gotten there without a lot of things, but one of those things one just one. But I think an important one is the fact that attorneys were able to advise clients that they were able to do that under various state state rules of professional conduct and laws. And also that that that was predicated on the idea that that advice would be privileged, that there would be confidential communications. It's not a small thing. It's allowed this movement and these changes. And as a result, I think that a states that wants to allow legal cannabis simply cannot be too protective of attorney client privilege for those businesses for when it when those companies are following state and local law. So I think California got got this one right and I hope more states will eventually adopt adopt similar language. We have seen some state a model rule comments and opinions that have sort of alluded around the privilege question. But yeah, it's more usually housed in the laws. And and that's why I hope more states will do this. Uh, but let's talk about this, because here's the truth around the crime fraud exception and canvas practice in general. Um, there can be concerns among clients, among attorneys about whether they're going to face various adverse consequences simply because they are in cannabis that they do things around or related to cannabis. It's not a totally crazy concern. Um, for example, a business practitioner could face a claim that basically your, your discussions with your client are not privileged because of federal illegality or for some other issue. You just. Also, too, it's important to remember there can be legitimate debate over what is legal under state law. Most states are getting their laws more fleshed out and more detailed faster. But there certainly have been times in the past. California particularly, and some other states where what was legal for medical cannabis, for individuals, for groups of people, that was not always so clear. There could be a lot of debate around that. And again, without that debate, without that advice, people are going to have a very difficult time following laws, particularly confusing or complicated ones or now, today complicated and confusing regulations. Without that space about that ability for attorneys to advise people and figure this out, you're just going to have a lot of people afraid to do anything. And that's not going to let these laws be meet their full intent or be successfully implemented. And my point is. There can be questions about what is and is not legal, that are more nuanced and go way beyond the federal illegality question. Exactly what is legal around, say, your packaging for a California manufacturing company? What exactly is in the past was legal in terms of what was a medical cannabis collective in California that just not everything is going to be clear. Laws have to be changed and explored and at times. You're going to need to have a good sense that your communications remain privileged around that. And that's why even if you set aside the federal illegality question, which you really, really, really cannot as a cannabis attorney, there's still other questions. It's it's not as simple as saying I'm just going to follow the law and everything's going to be great. It's please, nothing's not simple, particularly not in a rapidly changing, evolving area against the backdrop of federal illegality. Please do do yourself and your clients a favor and admit that this is sticky. So what really does the crime fraud exception say? Well, it's we're going to compare the federal and California. And one of the first initial questions is who is the main decider of what is privileged and what is not privileged? California. The attorney is the main decider. They get a lot of weight. If they say this communication was privileged, they get a lot of weight in that determination. However, um. It is true, though, in California that a court basically the attorney makes the initial decision. The court, of course, can make a final decision on it. But what the court cannot do is review a communication itself to determine if it is privileged or if there's evidence of crime fraud. They have to go with the attorney's decision on whether something is privileged and they have to look basically to extrinsic or outside circumstances to make a determination about whether that decision is valid or whether the crime fraud exception should apply. So basically, don't look at the communication itself. You have to look around at the circumstances. And by the way, I apologize for this typo here in federal court. By contrast, the court is the ultimate arbiter of what is privileged. Initially, they may ask the attorney for their opinion, but they're going to be what decides if it's if communication is privileged. And they can also look at the communication itself to decide if it's privileged or if it contains evidence of the crime fraud exception. And I've listed the leading cases on this, including Zolan and Federal Court, that that is a substantial difference. But I and in the process and how it works and demonstrates California is more zealous so it's good to be aware of that up front moving beyond that federal law so you go with that. But how does it really work? Well, if you're the party that wants to defeat privilege, you have to have and this is federal, some independent non privileged evidence of crime fraud, extrinsic look outside, not the communication itself, not something that's privileged, something else outside it. You got to look at that to an offer to the court, even though the court can look at the communication. But you need more. Basically, it has to support a good forth basis, good faith, good faith basis to believe that something is not privileged or that crime fraud has occurred. A vitiating privilege. It has to be specific and particular. What's the standard of proof, though? Like how much of this do you need? It's unfortunately, it's not clearly defined, but the court can decline to conduct a search even when there is some evidence, or they can ask for more. And the court has to look to the specific facts of the case, the importance of the privileged material, and the likelihood that you're going to find some evidence of crime fraud if you start digging in there with the privileged communications. So again, while they can look at that privileged communication, you've got to have something outside. You've got to have something more, um, you got to have something non-privileged there. And then from there, the court will conduct something of a balancing test. Uh, federal rule of evidence. 104 A It does support that the judge, uh, the sitting judge is the ultimate arbiter. But in federal court, the judges can farm out review to a special master or a taint team. Basically, they make the final call, but they can allow those bodies to do the initial review and go through those communications. So I think this one's privileged. This one's not. Um, and then the judge can sort of overlook those decisions instead of doing that actual searching themselves. So of course a judge can and candidly, I would encourage anybody dealing with these issues in federal court to really push a judge to do that, because they are going to be the one who makes the final decision. And that's also how California does it. And I think overall, that's the more zealous protective model in civil court and federal. You are likely entitled to a hearing before any review occurs criminal. That's not as clear. Now, of course, we have also seen that oftentimes in federal court there are hearings and discussions around this to set rules before review occurs. I certainly encourage anybody in these positions in federal court, whether it's a civil case or a criminal case, to push, to object, to move for procedures, to have a sense of what is going to occur. And I also strongly encourage people to seek the ability to submit a privileged log to the court, to federal court. They're not always they're not always required. But I strongly encourage attorneys to do them and to ask for that for reasons we'll get into. California law, by contrast, a bit more zealous. The party that wants to defeat privilege. Now you just have to be extrinsic, independent and non privileged. It also has to meet the standard of being prima facie evidence that's higher, that's more protective. It's also a clearer standard. And also, again, the court cannot review the communications themselves to determine if they're privileged or if fraud occurred. You really got to look at that exterior stuff first, and it's got to meet the prima facie standard. The standard of proof is a little amorphous, but courts have said in California that it's higher than the standard for issuing a search warrant, which is merely probable cause. They've also made clear that the crime fraud exception is very limited. If it applies, it's narrow, and it's only for those communications or matters that relate to the crime fraud, prima facie evidence. It's not a wholesale cancellation. It's not, Oh, we found one thing. We've got this evidence, Judge. Open everything to us. No, no. Even if the judge agrees with you. What they will or can release to you is going to be limited. Also in California, as I mentioned, the judge is going to be the one that conducts the final review and makes decisions about privilege. They also do this after receiving and reviewing the privileged log for the attorney who has been accused of the crime fraud. Notice what is left out here. There isn't a taint team. There isn't a special master. Special masters in Cal. Under California law, do not conduct the privilege review. It is a judge, and it is done only after the attorney at issue has had the opportunity to receive what was seized, to go through it, to put together a privilege log and present that to the judge under seal. And the judge will make the final decision on these matters and has to do with themselves. That is a big and important and crucial and highly protective difference. And if somebody tries to tell you differently, please give me a call. This should never happen behind you or your client's back. That's my firm personal view. In California, there is no clear case law about that being disclosed in criminal court. And I understand that two courts are going to be balancing the issues of an ongoing investigation versus protecting privilege. I think overall, the law in California is heavily on the side of protecting privilege. You can conduct an investigation. You could even have a seizure. But before you do that actual review and have one, you have that piece about the attorney at issue getting to do a privilege log, which I think can be glossed over if people aren't careful and it shouldn't be. But there's also the fact that the judge has to go through it and make decisions. There is one case involving a civil hearing in California. It's a it's the Titmus case, Titmus, which is basically there is some case law in that decision that the court has to hold a notice, adversarial hearing, not just motions, but an actual hearing before this, before this review. And these decisions can be made to, again, give an attorney the opportunity to assert privilege, to have a very careful process for determining what is privileged and whether crime fraud has occurred. Um, here's another question. Uh, no. Simply having a search warrant executed or even being indicted as an attorney or charged criminally, that is not the end of whether you can assert privilege, whether you still have a duty to assert privilege. You most certainly do, by the way, or even that crime fraud has occurred again, California, the issuance of a search warrant is not enough. That is merely a probable cause determination, nor is being indicted or charged. The attorney still has the duty to assert privilege. You still go through all those same things with a privilege log and the judge being the final determiner. It's just not enough that you've been charged that a search warrant is issued. There has to be more. Bodman and Rose, The standard for the issuance of a search warrant is an ex parte presentation to a magistrate of an affidavit. It is not necessarily a prima facie showing of criminal activity. By contrast, for the crime fraud exception to privilege, the party opposing the privilege has to have a prima facie case of fraud. They also have to show that there's that relationship between the fraud and the communication, and that is going to be very narrowly tailored. It is not a wholesale don't let anybody tell you differently. Again, privilege logs. I've been harping about them, haven't I? In California? The Court I don't care if it's criminal, I don't care if it's civil. The court must allow the attorney at issue an opportunity to prepare a log and they have to wait while you do. Now, you do have to be prompt about this. You do need to be fast. You are not going to get unlimited time, but you do have to be given that time. It's also important as a result, to make sure or analyze or challenge whether the warrant was narrowly tailored. It should have been. Obviously, we don't have general warrants in this country, but also it's going to reflect what would even be responsive or within the universe of what the court would be looking at, what you would be reviewing for a privilege log, you have to receive access to what was seized so you can go through it. You don't have to just sort of be like, Well, I think I had an email on July 4th, 2020 that, you know, probably involved this. No, no, no, no, no. You get copies of what was seized. You get to go through it, whether it's electronic or paper to do your log. The log then goes to the court for in-camera review and they make those final decisions. Federal Court You do not have an automatic right to a privilege log, but you really should push for it. It is your best opportunity to for dialogue with the court to make clear what happened to stand up for your client's, um, you you can get the court to review the privileged materials. They can farm it out, as I mentioned. But whether they do or they don't a push them not to be. If they do, your log is still going to be your best chance to get some of this forward, particularly to a special master. Um, and what's really fascinating is even the Department of Justice manuals regarding searching attorneys for evidence of crime state that the government should really consider on its own, not even by order of the court, but just mean clear. They have to obey an order of court, but on its own that the DOJ itself should consider giving attorneys under investigation, um, or their counsel an opportunity to prepare a privilege log with the seized materials, because that's how important this is and also because candidly, it will help that process to be more sound and potentially to go faster and of course, to safeguard the rights of innocent clients who may have nothing to do with the matter and, of course, to protect the rights of those who are accused both attorney and client. Uh, clearly, I've. I've talked to you a lot today about cannabis laws and conflicts of interests and attorney client privilege. It's my contact information. I, uh. I do this work in these lectures because I care about these issues, because they've had an effect on my professional career and life. But also I do them because it's a little dorky, but I really care about lawyers. Um, I don't love all lawyers, but I do love the law and the legal profession. And I firmly believe that the role of lawyers in helping people to obey laws, particularly changing ones, uh, is part of how our society works and part of it working well and part of having these changes. And I also believe that those legal changes and rights cannot fully exist or flourish without privileged communications. So that's that's why I talk about this and that's why I love talking about it. And thanks for listening to me today.

Presenter(s)

JMJ
Jessica McElfresh, JD
Attorney-at-Law
McElfresh Law, Inc.

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