We have been working in Oregon’s marijuana industry for a long time and have witnessed the rollout and subsequent evolution of Oregon’s marijuana regulations. As the saying goes, smart people learn from their own mistakes, but really smart people learn from the mistakes of others. While we think New York is already far ahead of the game given its promising new law, the Marijuana Regulation & Taxation Act (MRTA), we have put together some general suggestionss for states considering how to regulate its new recreational marijuana system.
1. Treat marijuana businesses as legitimate businesses, not criminals.
New York’s regulatory focus should be first on helping licensees – and particularly small businesses – be successful, not searching for a “gotcha” violation or having the attitude that licensees are criminals until proven otherwise. When Oregon legalized, regulators quickly pivoted from licensing to rigorous enforcement, leaving licensees with little time to get up-to-speed on the myriad regulations that applied to them. Many of these regulations were unclear or inconsistent, but this did not stop Oregon regulators from seeking revocations for minor or completely unintentional violations. Fortunately, due to a concerted effort by industry groups, the legislature recently curtailed the cannabis regulatory agency’s ability to revoke licenses for technical violations that bear no relationship to any risk to the public.
Regulatory leadership in other states should model an industry-partner attitude from the top down. New York’s Office of Cannabis Management and Cannabis Control Board should have clearly-stated enforcement priorities in place to clarify that the regulatory mission is to help honest businesses succeed, rather than simply to catch licensees who find themselves in regulatory traps. Unless businesses are engaging in activity that actively could harm the public, such as distributing tainted products, the worst they are doing is failing to appropriately appreciate the agency’s authority to regulate that particular matter. A victimless regulatory violation is better addressed through education and training.
Finally, marijuana use among regulatory staff must not be prohibited, and should be normalized to the extent possible under current law. Prohibiting regulatory staff from using the substance they are regulating creates an “us vs. them” mentality that can drive a wedge between regulators and industry stakeholders.
2. Do not cripple marijuana businesses by forcing them to pay business costs for a long period of time while waiting for licensure.
Oregon marijuana businesses have historically been required to undergo a final inspection prior to operating. However, in order to apply for a license, the applicant had to show that they had control of the proposed licensed premises. Because of the high volume of applications in the beginning of the program, this meant that some businesses had to pay rent and utilities on their business spaces for sometimes 12-24 months, with no revenue coming in, as they waited for final inspection and dealt with an extremely backed-up agency. For many, this delay can make starting a marijuana business impossible.
Delay also meant that by the time inspection rolled around, different rules were in place than at the time the business had set up. In some cases, cannabis businesses wasted thousands of dollars on infrastructure that turned out not to be required, in addition to the substantial carrying costs of a non-operating business, which was usually paying premium cannabis rent for their land or qualifying business address. A truly unimaginable amount of financial pain and suffering was caused by this situation, and the Oregon industry will never fully recover from it. A better solution is to require applicants to certify compliance upon submission of their application materials, and to notify the regulatory agencies that they have begun operating and are ready for final inspection. This has been working fine in Oregon since it was implemented recently.
3. Do not assume the existence of a regulated market automatically signals the demise of the traditional market.
Traditional market participants (or what the Feds call illegal marijuana traffickers) are those individuals who kept marijuana alive and accessible through the dark ages of prohibition. The best state-legal marijuana regulatory systems address the existence of the traditional market by attempting to bring traditional market participants into the legal system. The worst simply assume that setting up a regulated market will automatically mean the elimination of the traditional market. New York’s MRTA presents a very promising statutory basis for a regulatory system that reduces barriers to entry to the legal market, and which in turn should help convert a large portion of the traditional market to a regulated market.
But as we have seen in Oregon, lower barriers to entry alone do not automatically translate into keeping those traditional market participants in the regulated market. If compliance burdens are too great (i.e., regulations are too complex for laypeople to intuitively understand, or penalties for noncompliance are draconian, not to mention the federal and state tax burdens), former traditional market participants will fall out of the regulated market and re-enter the traditional market.
4. Punish dishonesty; reward transparency.
Licensed marijuana businesses should be held to a high standard of honesty and integrity. Knowingly making false statements, particularly in the context of misleading consumers or regulators, should be punished appropriately. At the same time, regulators should incentivize good business practices. Honest actors should have absolutely nothing to fear from their regulatory agency, and thus should be encouraged to self-report any violations by the offer of reduced or eliminated penalties and a collaborative cure process.
In Oregon, there was once a rule that required every single licensee to have a minimum of 90 days of recorded video backup. The penalty for violating this rule, even by a single day, was license revocation, and many licensees were cited for violation of this rule when their lack of back-up arose out of something as mundane as a power outage, or the wrong settings on their security system, or adding a camera and thus reducing the total amount of memory available for storage, causing the system to automatically save fewer than 90 days. Licensees who realized they had violated this rule had no incentive to self-report, because our agency did not consistently give credit for self-reporting, and usually, in our experience, just sent out a proposed notice of violation. Through this hard experience, our agency has now been working with licensees who self-report and giving out warnings instead of violations, but New York should learn from our experience and do this from the beginning.