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Cannabis Conundrum: Weeding Among the Hazy Legal Ethics Lines

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Cannabis Conundrum: Weeding Among the Hazy Legal Ethics Lines

The entrepreneurial cannabis industry requires legal assistance like any other growing, innovative business sector. However, the cannabis industry does not necessarily resemble other evolving start-up business areas. Unlike most other industries, cannabis continues to be a federally designated illegal controlled substance, while various states have legalized cannabis and planted a patchwork garden of cannabis statutes, regulations, and ethics advisory opinions. What’s a lawyer to do? Legal ethics questions abound! What type of legal assistance may a lawyer provide to a client involved in the cannabis industry? May a lawyer accept product or an interest in a cannabis business in lieu of fees? Will a lawyer who participates in a medical marijuana program or indulges in recreational cannabis face ethical repercussions? This course will explore the historical context of the cannabis debate, the legal ethics implications for lawyers seeking to represent cannabis clients, and the current state of the legal profession’s response to legal ethics questions posed by lawyers traipsing through the patchwork garden of state regulations.

Presenters

Jan L. Jacobowitz
Founder & Owner
Legal Ethics Advisor

Transcript

Jan Jacobowitz: Hello, and welcome to Cannabis Conundrum: Weeding among the Hazy Legal Ethics Lines. This course explores the entrepreneurial cannabis industry that requires legal assistance, just like any other growing innovative business sector, however, does not resemble other evolving business areas. Why not? Because unlike many other evolving and innovative businesses, cannabis remains a designated controlled substance, I should say an illegal controlled substance under the federal government. The states have enacted a patchwork garden of cannabis statutes, regulations, and ethics opinions to legalize cannabis for medical purposes, and in some places, for both medical and recreational purposes, while the federal government has not moved cannabis off the controlled substance list.

   So what's a lawyer to do? There's all types of legal ethics questions that we're going to explore for lawyers who are interested in being involved in the cannabis business, or just understanding how the legal ethics rules play out in a situation where you have federalism, meaning federal statutes, trumping state statutes, but yet them both coexisting at the moment.

   One of the best ways to explore this is to start with understanding some historical context of the place of marijuana or cannabis in the history of the United States and its regulation in the United States. So if we go back to the mid 19th century, in other words, the 1800s, we'll find that marijuana is listed in the US Pharmacopeia which was a list of recognized beneficial medicinal properties for various medicines that physicians used, and it stayed there until 1936. And in 1936, it became involved or associated rather with violent crime. This led to Congress passing the 1937 Marijuana Tax Act. So this act didn't make marijuana illegal, and it was way before the Controlled Substances Act, but imposed registration and reporting requirements, along with taxes on sellers, growers, buyers, and it removed marijuana from Pharmacopeia, that registrar of accepted medicines.

   Again, it didn't out rate ban marijuana, but it made it extremely difficult to participate in the industry. And eventually, it took 30 years in 1968, this particular statute was declared unconstitutional, and the declaration of it being unconstitutional had to do with the right to avoid self-incrimination and the reporting requirement. So it really didn't address the properties of the drug itself. But that was to happen shortly thereafter when President Nixon's administration declared the war on drugs in 1970, and Congress passed the Control Substance Act.

   So the Control Substance Act has different schedules of drugs in it, and the highest or most dangerous drugs are listed as Schedule One drugs. And that is the place where marijuana was listed and continues to be listed. So what does that mean? A Schedule One drug is defined as having a high potential for abuse and no currently acceptable medicinal use. So it's illegal for all purposes, other than government research. This continues to this day. And in fact, despite state regulations, which we'll get to in a minute, in 2005, the Controlled Substances Act on the topic of marijuana found itself in the US Supreme Court in a case called Gonzalez versus Raich, where the federal right of preemption over the states was upheld. And this was a situation where it was a California resident who needed medical marijuana. It was legal in California and the Supreme Court said, "We're sorry, but the federal law prevails over state law," which is a basic bill of federalism that you don't often get to see play out in real time.

   But meanwhile, as the drug continued to be listed and the subject of the 2005 US Supreme Court case, California actually was the first state to enact medical marijuana. The Compassionate Use Act was passed as a result of California State Proposition 215 in 1996, so quite a while ago now. And from 1996 to today, 2021, marijuana is legal in approximately 15 states for recreational and medical purposes. It's legal in approximately 34 states for medical purposes. And in the November 2020 elections, four more states approved marijuana, some of which is being debated in those states. So don't hold me to those numbers, but you get the idea that despite the Controlled Substances Act, with California in the lead, other states have moved ahead in legalizing marijuana.

   So what is the federal government's position on this, other than the Controlled Substances Act? Well, it's interesting. The Department of Justice, charged with enforcing federal law, has commented several times through the years. And in 2009, Attorney Deputy General David Ogden issued what's referred to as the Ogden Memo. And that memo said, "As a general matter, pursuit of federal priorities should not focus federal resources in your states on individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the use of medical marijuana." So shorthand, let's not use our resources to prosecute people, even though it's illegal under federal law, if they're at least following the state law. What happened subsequent to the Ogden Memo is an explosion in the cannabis industry. And you saw this particularly in California and Colorado, and there started to be some concern about this.

   So in the Justice Department, between 2011 and 2014, there were several more memos issued. They're referred to, and this was under Eric Holder's Justice Department, as the Cole Memos, and the Cole Memos reinforced the government's adherence and commitment to enforcing the Controlled Substances Act in a way that would prevent cartel and criminal enterprise, and also sale to minors. When I say cartel and criminal enterprise, of course, meaning involvement in the cannabis industry. And then they also released memos warning financial institutions about money laundering statutes that already were in existence, as they might pertain to handling the proceeds of a marijuana business.

   And the Treasury Department also issued guidelines, so that financial institutions would be able to comply with these so-called Cole memos and still try to provide services to the marijuana industry. So, the Justice Department seemed to be taking a hands-off approach, unless it was a big criminal enterprise. And then in 2018, Jeff Sessions became the attorney general, and he issued what of course is called the Sessions Memo. And that memo essentially withdrew the Ogden Memo, the Cole Memo, all the DOJ memos, and we were back to square one that marijuana is a controlled substance, it's illegal, and it will be prosecuted in the same manner as any other criminal infractions.

   So you may ask, what is this battle between the states and the federal government have to do with legal ethics? That's a good question, and some people are surprised at the answer. It has a lot to do with legal ethics because lawyers, obviously, are sought after to represent businesses, whether it's to apply for initial licensing to become a medical marijuana dispensary, it's negotiating other deals, it's defending if there's a contract dispute and a lawsuit in a particular area of business. And the lawyers have two particular rules that are not the only ones that come into play here, but have been the main focus of the tension between the legal ethics rules and the battle between the states and the federal government.

   So the two main rules, and we'll get into some others. One is referred to, and I'm going to use the model rule here, but most states, I think all the states have this rule, and it's very often under some variation of 1.2 Objective and Scope of Representation, is the name of the rule. So the rule reads, and I'm going to use the model rules since every state has the ability to adopt it verbatim or change it, and sometimes there's some variations in the rules, especially now in the states dealing with cannabis, but the rule reads, a lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent, but a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good faith effort to determine the validity scope and meaning of the application of the law.

   So shorthand, you can't knowingly counsel or assist a client to commit a crime or fraud. You can tell a client, if they propose a certain course of action, what the repercussions will be but you can't help them commit a crime. So you can see where I'm going with this. The other rule is under the misconduct rules, which is in many states under 8.4, as it is in the model rules. And two parts of that say that it 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 in other respects. And another section of that rules says, it is misconduct to engage in conduct involving dishonesty, fraud, deceit or misrepresentation. So these are two of the main rules of legal ethics that come into play when lawyers are considering whether they can represent someone or otherwise participate in the cannabis industry. And you can see why, because regardless of what a state says, they're advising a client to engage in a crime on a federal level.

   Okay. So hold that thought for a moment, and then let me just mention a few of the other rules that also stem from these two rules or otherwise impact lawyers. One is just the fundamental rule of competence and the concern among the handful of lawyers who've been at this for quite a while, as to lawyers getting into a new burgeoning industry that don't know what they're doing. Because of these federalism aspects, besides just learning about cannabis and the particular statute in your jurisdiction, you have to understand the federal repercussions, not just the criminal exposure, but for example, how to file your taxes because you have to pay taxes regardless of it being a federally illegal business, but there's certain business expenses and deductions you can't take, or bankruptcy, not really available for a business that's completely cannabis-oriented because a trustee can't distribute the proceeds of an illegal enterprise. So the competence is beyond just, can you figure out the licensing statute?

   This also ties to fees and costs for legal services, and we'll see this later. We're going to visit with some hypothetical characters, Arden and Canna, later to see you have to analyze how are you going to be paid because most of the state bars prohibit you from taking an illegal fee. So if you're taking proceeds from an illegal business or a client's offering you product, which I know has happened from attorneys I've spoken to who represent clients in this area, are your fees now illegal? And then, some of the other rules that come into play are just the supervision rule. So if you are working with others or you outsource some of the work so that you can get up to speed more quickly, are you properly supervising and evaluating the people that are working for you who may be non-lawyers?

   All of these rules, and probably more, we could come up with pertain. And that gives you some idea of why there's been so much discussion and debate in the legal profession and among the state bars as to what to do about the cannabis industry and lawyers who want to represent clients in this industry, or otherwise get involved in the industry or get a medical marijuana prescription for pain they're having, and be able to engage in the medicinal benefits that were around in the mid-19th century that have come full circle to be recognized by many.

   Okay. So let's take a look at how some of the states have dealt with scope of representation and misconduct and responding to inquiries from the legal profession as to what they can do, because clearly, we start with the premise that under the scope of representation rule 1.2 and under the misconduct rule 8.4, it would be impermissible on the face of those rules for a lawyer to become any way involved in or represent a client in an illegal business. And there's no question that cannabis remains an illegal business on the federal level. There's also no question that the industry is a burgeoning industry that it's growing. I think in 2017, it was estimated at six billion and it's estimated this year to go to $13 billion. So lawyers are needed, like they are in any industry, to do the contracts, to do the licensing, to deal with litigation stemming from the statutes or disputes between the parties. So what can they do? What have the states done?

   Probably an easy way to look at it, is these three categories of how states have handled this. And the first is, just a few states, I think Florida, Massachusetts and Minnesota have not dealt all that much or at all with rule 1.2 or 8.4, they've simply come out with a blanket protection for lawyers that essentially says if you want to represent clients in this area, you must tell them the potential repercussions from the illegality on the federal level. In other words, you could lose everything. You could be prosecuted. You need to explain to them not only what your state law is, but that it remains illegal on a federal level. And if you do it in that way and consistent with the state regulations, then you will be essentially sheltered from discipline.

   A second group of states, and there's about eight of them, are interesting to take a look at. We won't spend the time looking at each one. But in these states, they came out initially with a very strict opinion or a prohibition against an attorney representing a client in the cannabis industry because of 1.2, the scope of representation rule, and the opinion urge the state supreme court or the legislature to do something to rectify the situation. Here's an example: Prior to marijuana being legalized for medical purposes in Pennsylvania, the Pennsylvania Bar and the Philadelphia Bar, which is a very active bar, issued a joint opinion saying that Rule 1.2 forbade a lawyer from representing cannabis clients, even for drafting or negotiating contracts.

   And the opinion asked the state supreme court to amend Rule 1.2. In most states, the state supreme court is the final arbitrator of amendments to the rules. So in April of 2016, Pennsylvania authorized the use of medical marijuana, and then the following October, the Pennsylvania Supreme Court added to Rule 1.2 another subsection that authorizes lawyers to represent clients in the cannabis industry with the usual disclaimer, so in accordance with Pennsylvania state law and the warning of federal law. And several other states proceeded this way. Colorado adopted a comment to their rule that says a lawyer can represent a cannabis business if the lawyer reasonably believes the business is in compliance with state law and advises them about federal law and federal policy. So in some of these states, there was an amendment to the rule, and some of these states, there was a new comment added to the rule. And in other states, there were supplementary ethics opinions also.

   Maine is another state that I think was the first state in 2010 who come out with a very strict opinion that lawyers could only represent medical marijuana clients and could just give them advice on the validity, scope meaning, or application of the law. The opinion was reevaluated in '16, and there was a call for the change to Rule 1.2, but the rule wasn't changed so Maine issued another advisory opinion that became consistent with all the other ones I'm talking about. In 2017, they said that under 1.2, a lawyer could represent the cannabis industry consistent with state law with the disclaimer of explaining federal policy. And they also acknowledged all the other changes in the other states. So a very evolving process in these handful of states, and there's several others, where you watch the evolution of the legal professions embrace of the cannabis industry in terms of cannabis businesses becoming viable candidates under the ethics rules despite the federal illegality.

   The last group of states, and I think there's about 11 of them here, came straight out and issued opinions or amendments to the rules or the comments to the rules that permitted representation. So in other words, unlike the first group, Florida, Massachusetts and Minnesota who didn't really deal with the rules, these states directly dealt with the rules. And unlike the second group, Pennsylvania and Maine and others, they didn't need to evolve so much as directly provided advice. And notable here is the Arizona who was the second state after Maine in 2011 to issue an opinion. And Arizona, unlike Maine, came right out and said that an attorney could advise on their medical marijuana act, assist in setting up business entities, and represent clients before government agencies. And this was all, again, always with the disclaimer in conformity with state law and with full explanation of federal policy.

   Washington State has been one of the states that's been the most forthcoming, or we could say verbose in a good way, because they not only amended the rule with a comment that, this is 1.2, allowed lawyers to represent clients in Washington State under the same kind of conditions, but they also came out with a professional ethics advisory opinion. It's very comprehensive, and it allows lawyers not only just to represent cannabis clients, but lawyers can ethically engage in a cannabis business themselves. They can possess cannabis. They can consume cannabis as long as they're in conformity with state law. They referred to the Cole Memorandum. In this opinion, it was in 2015. And even prior to that, one of the more local bar associations, the King County Bar Association, in 2013, had already taken the position that lawyers could engage in the business and personally could possess and consume cannabis, and said that the activity under 8.4, the misconduct rule I mentioned earlier, did not reflect poorly upon the lawyer's honesty, trustworthiness or fitness to practice law.

   Now, it's important to know, and the emphasis here is back to competence and understanding what the law is in your jurisdiction and what you're doing, is in contrast to Washington, the state of Nevada, which passed recreational marijuana allows lawyers under similar situations to represent clients in the cannabis business, came out with a comment to the misconduct rule that says, because used possession and distribution of marijuana in any form still violates federal law, attorneys are advised that engaging in such conduct may result in federal prosecution and trigger discipline proceedings. So Nevada is warning an attorney of participating in a business, even though he can, or she can, represent clients.

   We also find another curiosity. And again, there's a lot of literature that talks about all these state's opinions. I'm trying to just portray the spectrum and the patchwork, as I said earlier, of these states. So we have South Dakota, is another sort of oddity, I would say, because they've passed marijuana, they've legalized marijuana but prior to and subsequent to the ethics opinion there says, it's unethical under 1.2 scope of representation for a lawyer in South Dakota to advise a client. Now, this is true, even though in a constitutional amendment there, licensed professionals have a safe harbor for assisting or representing folks in the cannabis industry. When the ethics commission or the ethics committee was asked to revisit this opinion, they came back with the same opinion and did acknowledge its advisory. So just because they say it's unethical, doesn't mean it is unethical and that it's beyond their purview to comment on the constitutionality of the provision protecting lawyers. So essentially, I think that they're indirectly saying change the rule, but the way the rule stands now, it doesn't distinguish between illegal under state law and illegal under federal law.

   Similarly, North Dakota, I don't know about the Dakotas, but on the issue of an attorney being able to consume marijuana very early in the process, an attorney who had a North Dakota Bar license was also barred somewhere else, was living somewhere else, but filed an inquiry as to whether the North Dakota Bar would attribute his use of medical marijuana with the proper medical prescription in the adjoining state he was living in to be a negative connotation on his fitness to practice law. And the North Dakota responded, and again, it's an advisory opinion, it's an inquiry, and said, "Yes, we think it would be. It's illegal activity." As far as I know, that's still on the books despite being an old opinion.

   So, it's really complicated depending on where you are, unless you're somewhere like the state of Washington or Colorado, where they've made it quite clear in their opinions, which does not take you out of federal jeopardy, but at least provides guidance for you on the state level. It gets quite complicated to determine whether you're within the parameters of the ethics rules, and line those up next to both the state law and then the federal law, which is really quite clear at the moment. What's not clear is whether this particular administration or this particular Congress is going to take any action that will put the industry at further risk, or that will relax or even legalize the rules, or take marijuana off of the controlled substances list, or at least as a Schedule One drug.

   Okay. So how do we make sense of all of this convoluted information just by definition, hopefully not by my presentation that we've gone over so far, the different state opinions, the various roles? One of the, I think, easiest and more fun ways to see how this plays out is to visit with some hypothetical characters. So I will share with you a day in the practice of state of mind's Attorney Arden, we put him in the state of mind because that way we don't have to decide whether he's in Florida or he's in California or he's in South Dakota at the moment. So here's the hypothetical:Arden is a successful personal injury lawyer who practices in the state of mind. He has settled some high value cases in the past five years and has many appreciative clients. One of his clients, Canna, suffered painful bodily injury, and despite a large monetary award, continued to live a diminished life due to ongoing pain.

   One day, while visiting friends in Colorado, Canna is introduced to a strain of cannabis that successfully manages her pain. Canna returns to state of mind on a mission to employ the proceeds of her personal injury settlement to launch a cannabis business. So this is just a great example. I'm stepping off the hypothetical facts for a minute of money doesn't get you everywhere. She is very thankful to her lawyer, but still lived in pain till her friends introduced her to the strain of cannabis, and now she's on a mission. So what does she do? She's back in state of mind. She developed some products and then she contacts Arden, who's her obvious choice for legal representation. Canna plans to name her business Canna-Do and specializes in products designed to alleviate ailments like headaches, migraines, nausea, and anxiety.

   Arden is thrilled that Canna has rebounded. Arden knows that the cannabis industry is fast growing and lucrative. He does not want to miss the opportunity to expand his practice, but he's not sure he has the right resources and expertise to represent Canna. Arden, prone to tension headaches, begins to rub his temples in contemplation. Canna notices that Arden appears to be unsure. Canna offers to further educate Arden about her business model and provide him with sample contracts she's obtained online. Assuming that Arden is rubbing his temples due to pain, Canna also provides Arden with a sample of her product. Arden thanks Canna for her confidence in his abilities and says he will be in touch soon.

   Arden then conducts a Google search of the cannabis industry, and becomes overwhelmed by all of the information. Over lunch, a colleague suggests a cutting-edge artificial intelligence legal service provider, Boss Intel. Boss Intel offers both optimized legal research and contract preparation. Intrigued by the possibility of expanding his practice into the cannabis industry and getting up to speed in a new practice area quickly, Arden schedules a meeting with Boss Intel. Later, Canna stops by Arden's office, and Arden explains that he needs a bit more time to decide whether he can assist or represent Canna. Hoping to further encourage Arden to accept representation, Canna offers to compensate his work with the share of her business.

   So this fact pattern of an appreciative client coming back to a lawyer who served her well and wanting the lawyer to handle another matter for her is age old. It happens all the time. You got me a great personal injury result, can you handle my divorce? And sometimes a lawyer is versatile enough to take on the other area, sometimes a lawyer is in a firm with other lawyers where someone else specializes in that area, sometimes a lawyer refers the client out. And in this situation, sometimes a lawyer sees it as an opportunity to get involved in a new area of the law. But of course, as we discussed early on as to the ethics rules that apply, we start here before we even get to the scope of representation or the fact that it's a criminal enterprise, because Arden is interested, we have to ask the question about his competence because he's already talking to himself perhaps and saying, he's not sure. He has the expertise or the resources. So point one, good for Arden, because some lawyers may not know what they don't know, but he clearly does.

   And the competence rule doesn't require you to necessarily know everything, or we couldn't come out of law school and practice in almost any area of the law, but it does require you to be able to get up to speed to acquire the knowledge, whether it's by learning it on your own, in a CLE, associating with someone who's otherwise knowledgeable in the area, has experience in the area, which might be a good idea for him here. And again, as we talked before, the discussion of competence here isn't just kind of personal injury lawyer draft a contract or file a licensing application in the cannabis industry. It gets to be not only fundamental, but also interdisciplinary. Does he know enough to understand and advise her on the tax implications, on the bankruptcy implications, on the intellectual property implications? Getting a federal trademark is not possible depending on what your mark looks like, if it's clearly a cannabis or marijuana plant.

   So, he has a lot of issues to explore just under the competence rule, and we don't know his background. We don't know his work ethic for that matter, or his motivation here. And we'll get to Boss Intel if maybe that's a vehicle for him. But then, after or alongside with, he does have to consider the Rule 1.2 scope of representation and 8.4 misconduct, as we've discussed, and we need to know what state of mind's policy is. So in other words, is it more liberal, like Washington State where he can look up the ethics rule, the comment to the rule and the ethics opinion that have been issued, and feel pretty comfortable on the state level under the ethics rules that he can represent Canna? Or is it a state that said a lot less? Or is it a state like Massachusetts or Florida that said if you follow the state law, then you won't be subject to discipline if you explain the federal law and the repercussions, but doesn't really get into the specifics of some of the other states?

   So he has to decide or investigate both of those, the competence and whether it's permissible in state of mind, his jurisdiction, and then he has to also analyze what his own risk tolerance is in terms of being involved with the client in what's an illegal business and taking fees and otherwise participating. We'll get to her other offers in a minute. Because there is no doubt, as the South Dakota ethics opinion said, in South Dakota, there's no distinction between advising a client on what's illegal on a state level and what's illegal on a federal level. Illegal is illegal. So he asked to decide whether he wants to dip his toe into the cannabis water, so to speak.

   So let's explore another question. Question two: How should Arden respond to Canna's offer of a Canna-Do sample? Now, Canna is obviously a compassionate and empathetic person. She's on an entire mission to build a business based on being relieved from her own pain from the use of cannabis, and so when she sees him rubbing his temples, she gives him a sample. Now, can he accept the sample? Should he accept it? Could he try it? Would it relieve his headache? These are all questions that come into play. And again, we're in the state of mind, not a particular state, but we're aware of opinions that range from Colorado's opinion in 2012, or the Washington State opinion, saying that lawyers can consume cannabis to the North Dakota opinion, which was from 2014.

   So what is Arden to do? So first, obviously, he has to decide what his jurisdiction says. And we can say, in general, a client offering you a small gift shouldn't be an ethical problem. In other words, if Canna had a vineyard and she said, "Here, I brought you a sample bottle of wine," I don't think anyone would be upset about that from the standpoint of the legal ethics rules. But she's offered him what is an illegal gift federally. She's offered him a controlled substance, and we don't know in his state, whether marijuana's been approved for recreational use or medical use. We can kind of presume to answer the question that it's at least been approved for medical use because that's what Canna wants to do. And we can presume she's not trying to set up a medical cannabis business in a state that blatantly doesn't allow it.

   So if it's only medical, we don't know that Arden has a prescription. And if he doesn't have a prescription, again, he's violating state and federal law. If he does have a prescription, then that's another story. If he has a prescription, then we have to say, did the state say anything about lawyers being able to consume it, even with an appropriate prescription? While the states have either spoken or not spoken, a lot of the lawyer assistance programs in the states have struggled with this issue because if it's legal on the state level and if you have a prescription, that many have said while it's illegal federally, if it's legal on a state level, then unless it's inhibiting your ability to practice, it should be okay.

   But if you're not in a state with a clear answer, then again, it's decision-making time, it's risk assessment time. Again, assuming at least that Arden has a prescription, or otherwise, then it's legal in a recreational sense in state of mind, if it's then often analogized to alcohol, where lawyers can have a drink after work. If you become an alcoholic or you are an alcoholic, and it's impairing your ability appropriately and effectively represent clients, then of course it becomes a problem.

   So we're going to leave Arden rubbing his temples at the moment and we'll leave ourselves in the mystery of whether he took the sample, whether he used the sample, whether it relaxed him and took away his headache. We don't know. What we do know is that a friend at lunch is trying to help him with his dilemma of whether or not he should take Canna's representation and explore expanding his business into this, some would say, exciting and remunerative new area of practice. So his friend recommends Boss Intel, an artificial intelligence company that can provide all kinds of research and actually draft contracts, and some of these companies can draft petitions. They're out there drafting applications for patents even. So what about this?

   This is outsourcing and this calls us back to both competence and to the rule about supervising non-lawyers. So you say, "Well, this isn't a law clerk in his office." No, but in the evolving state of technology in its interface with the legal profession outsourcing for probably the last decade has generated a lot of ethics opinions as lawyers started to send work to foreign countries and then to domestic outsourcing companies that provide legal services such as research and drafting, but are not law firms.

   So the rules on this, and especially for Arden is... I should say the rules are investigate the company because you're sending client confidential information so that calls on the confidentiality rule. You want to make sure that your client's information is maintained confidentially. You want to understand where the company's located, where their servers are located, and how they go about processing their business, who has access to client's information, whether there's any conflicts, maybe Canna-Do has an immediate competitor, maybe you don't want the same Boss Intel doing the work for both companies.

   And then, how are you going to charge Canna? And if you decide to do this, are you going to tell her about it? Most of the opinion suggest that it's probably a good idea to get your client's consent, both to reveal their information and, under the communications rule, to let them understand what you're doing. And then when you bill them, most of the outsourcing opinions also say, unless you have another arrangement with your client, you can't mark up this bill. So if Boss Intel charges a hundred dollars an hour and you charge $300 an hour, you can't charge Canna $300 an hour for Boss Intel's work. You have to charge her a hundred dollars. And to the extent you reviewed it, or otherwise were supervising, then you can bill $300 for your specific time.

   But this begs the question back full circle to competence. Are you competent enough even to know what you're looking at? So if they draft a contract, if they do a licensing application, if they do research, they being Boss Intel, do you know enough to even know what you're looking at? And so that's always the tension here. And that's also why in a new area of law, sometimes, even if you're going to use AI, the best thing to do is consult with an attorney who's been at this, maybe someone in another jurisdiction so there's no competition over your client. Take a CLE course. There's a lot of articles out there. There's a lot been written over the years, capturing what's going on in the various states and with the federal government. So there's nothing wrong with using Boss Intel as long as all the legal ethics rules come into play in terms of not only your competence to oversee, but soup to nuts, investigating the company, talking to your client about it, charging the appropriate fees, et cetera. Those rules are true no matter what you're outsourcing, they're not unique to the cannabis industry.

   Okay. Finally, at the end of the hypo, we still don't know if Arden's going to represent Canna, if he's going to use her sample, if he's going to use Boss Intel to help him get up to speed. And Canna realizes she doesn't know either whether Arden is going to help her. So as another enticement to represent her, she offers him a share of her company. The offer to have a share in a new business is nothing unusual. In fact, many of the startups in Silicon Valley years ago, and even today, the new startups in the tech world often offer lawyers shares as part of their fees or as their fees, because that is most affordable. They are short of funds, launching a new business, and the lawyer takes a gamble on the business.

   So, it is so common that it is addressed in the ethics rules under what is typically Rule 1.8 in the model rules. It's another conflict of interest rule, and the rule both blesses and warns a lawyer about taking an interest in a client's business, and of course, tells or directs the lawyer that the interest must be fair and reasonable, it can't be a business that's the subject of ongoing litigation in which the lawyer's representing the client, and encourages the lawyer to have the client seek a third or independent counsel to review the agreement. So on its face, offering shares in a business. Again, there's nothing particularly wrong with it if it's done appropriately.

   We once again have the overlay here of the illegality of cannabis on a federal level. And that is something that Arden will have to explore and both in a state because as we know, Nevada said no, and Washington State said yes in terms of lawyers getting involved in the business world. But also, it is a criminal enterprise federally. So if the legal fees may be illegal, certainly the entire business is illegal on a federal level. And so if Arden concludes that in his state, he could participate in Canna's business, he still has to weigh the risk of the business being prosecuted or shut down depending on what the federal government decides to do, or the local US attorney in the state of mind.

   Further, both in terms of his fees and the business... So even aside from the business, let's say, he needs to be aware that the proceeds of the cannabis business are federally subject to forfeiture. So, even his fees could be subject to forfeiture if she's paying him out of the business. Now, we don't know how large her personal injury award was, and perhaps she's going to pay him from that account, and he's not going to take a share in her business so he's not going to be paid with the proceeds from her business. But you can see, once again, it's very complicated for Arden, especially since he's already suffering from attention headache here. And you can see that it's both fascinating and complex to try to explore the interweavings of state law, federal law, and the legal ethics rules, and watching how federalism, as it pertains to cannabis, the state of federalism is evolving and seeing what's going to come next, because it seems that, as I said to you earlier, the business is huge in the billions of dollars.

   So it's hard to imagine that the cannabis industry is going away. We know the federal government's not going away and the legal profession's not going away. So, all of that I find fascinating. And it's also a very interesting way to apply and learn about the ethics rules because if you weren't keeping score, we did go over very many of the fundamental ethics rules, competence, diligence, scope of representation, client communication, confidentiality, legal fees, all of these supervision of non-lawyers, all of these ran through this CLE. And I hope you could pick them all out along the way because they are omnipresent in the practice of law, regardless of whether we're in the sticky wicked of the cannabis industry, or just in a more traditional practice area.

   There's a lot of recommendations for people who are going to go into the cannabis industry, as lawyers representing clients in terms of putting some of these disclaimers right into their engagement letters, in terms of both state law and the federal policy, and otherwise really continually keeping up with the law because as you saw in this presentation, a bunch of them came out with one strict perspective, and then loosened it over time. You also saw the Justice Department loosen its priorities in terms of who was going to prosecute over time, and then recounted on all of that. So going forward, it remains an interesting growing area that lawyers will no doubt continue to be a part of and participate in. And if you are going to be one of them, or even if you are in a state where medical or recreational marijuana or both have been approved, you still want to be aware of how legitimate on a state level use of that could impact your license to practice law. So thank you very much and have a good day.

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On demand
1h 3m 06s

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