Considerations for Attorneys With Clients in Cannabis-Related BusinessesPhil Fraim
We were probably the first lawyers professional liability insurer to openly declare the willingness to write coverage for law firms providing legal services to cannabis business clients. Many insurers declined to underwrite firms with these types of clients, while others crafted specific exclusions for claims arising from clients in a cannabis business. On the other hand, we felt this niche area of practice was largely business transactional, along with corporate and business organizational, and that there was not too much that was unique other than the clients’ products.
Businesses in the medical marijuana-related business do have the potential for substantial revenues. Many feel that law firms representing this business will also see increased fee income. However, one of my concerns is with the number of competing businesses. How many of these will survive, especially the dispensaries? Will those that do not survive look to their lawyers and accountants in an attempt to recover monies, especially any investors’ funds?
To put this into perspective, look at the number of specific cannabis-related businesses in just the City of Edmond, a town with a population of approximately 94 thousand and 36 thousand households. At last count there were 46 dispensaries with 9 more pending review, 27 growers with 10 pending review, and 17 processors with another two under review. The “buzz” around town is that these numbers will not shrink any time soon.
BE MINDFUL OF POTENTIAL PITFALLS
We have seen a handful of claims arise from this niche practice area. So far though, nothing has surprised us greatly. Yet there are a few nuances we did not factor into the equation. Lawyers need to be aware of these as they consider engaging prospective clients.
Stay current. Like most legislation dealing with newly permitted businesses, we will see evolution in regulations. Lawyers will need to stay up to date on changes in order to advise clients appropriately. In many states, the point-of-sale model that came about during the pandemic was more industry friendly, with delivery and distribution changes due to social distancing. Does this change risk management efforts for your clients? Does their business change with the “new normal”?
Industry knowledge doesn’t mean business savvy. With respect to claims, there has been a recognized common thread. Let’s just say that not all the owners of the businesses in the medical marijuana industry are experienced businesspeople, nor are they always aware of business best practices. Some of the LLCs or partnerships are formed with friends constituting the ownership group. It is different being social friends than it is staying friends when business goals, strategies and ROI do not line up with expectations. When the friendship ends, we have seen them split and form competing businesses. The owner of Company B begins selling Company A branded products in direct competition. Has Company A thought about trademarking products or even copywriting names, logos, etc.? It is possible for the lawyer, now representing both companies, to step into the trap of at least a perceived conflict.
Avoid perceived conflicts. The potential dollars involved in a successful cannabis business makes it alluring to take an ownership interest in lieu of fees, or in lieu of a portion of the fees. Just remember, this is almost always a perceived conflict, and is probably an actual conflict of interest, in the eyes of other owners if the business is not as successful as they envision.
Check for conflicts before taking new clients. Make sure you look closely at potential conflicts before agreeing to represent additional clients in the same sector of the medical marijuana business. Thankfully, we do not see limited number of licenses given in Oklahoma or fights over specific territories or vendors could be more problematic. Keep this in mind if there are changes in our state.
STAY DILIGENT AND PROTECT YOURSELF
If you are considering working with clients in the medical marijuana business, do not assume they understand anything involving business formation, intellectual property or other business practices. If it is an LLC, make sure to include operating agreements. Probably most importantly, address all potential areas of conflicts of interest and document whom you are representing and who is not the client.
Something else to consider is your policy limits. You just want to be sure the value of the matters you handle are covered in the event a claim arises. For most policyholders, the cost is less than they expected to increase their limits. As always, please contact us if we can answer any questions – we’re here to help!