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California Bar Committee Opines that Attorneys Can Ethically Represent Cannabis Clients

The California State Bar’s Regulation and Discipline Committee has just released an ethics opinion that attorneys working for cannabis industry clients have long awaited. The opinion, Formal Opinion 2020-202, provides much needed clarification to attorneys and clients around the propriety and limitations of cannabis-related legal representation.

Formal Opinion 2020-202 provides valuable cover for attorneys engaged in such representation. California has legalized cannabis for commercial use and has even decreed through statute that any contract entered into for the purpose of facilitating state-legal cannabis business—presumably including attorney-client engagement agreements—are lawful contracts under state law. Nonetheless, cannabis, whether recreational or medicinal, is still expressly prohibited under the Federal Controlled Substances Act.

Under Rule 1.2.1 of California’s Rules of Professional Conduct, a lawyer is generally not allowed to assist a client in engaging in criminal conduct. Under Comment [6] of the rule, however, an attorney may advise clients on the “validity, scope, and meaning of California state and local laws,” even if those laws conflict with federal laws (e.g. California cannabis regulation). Cannabis-focused attorneys in California have thus interpreted the State’s ethical rules to permit them to provide a wide range of legal services to their industry clients. Through Formal Opinion 2020-202, the California State Bar formally co-signs this interpretation, stating that Rule 1.2.1 allows an attorney to advise cannabis clients on “applicable laws relating to contracts, real property, employment, taxation, and other subjects,” An attorney, says the Bar, may “engage in negotiating and concluding sales agreements, real estate purchases, acquisition of inventory and general corporate counseling,” so long as the lawyer believes the client is making a good faith effort to comply with state law.

The Bar opinion is careful to note, however, that attorneys may not advise a client on how to avoid detection of federal crimes or hide assets. For example, an attorney can not hold onto client assets to avoid civil forfeiture. An attorney may, however, be able to advise a client about offshore banking if the client has a lawful purpose for doing so. The opinion declines to opine on whether an attorney may accept an equity interest in a cannabis business as compensation for their legal services, but does make clear that neither Rule 1.2.1 nor Comment [6] provide express or implied permission to do so.

Heightened Disclosure Requirements

Formal Opinion 1.2.1 makes clear that the permission that it believes the Rules do imply for attorneys serving cannabis industry clients is far from a blank check. Such attorneys operate in a unique legal and practical framework and thus must make unique disclosures to their clients in order to represent those clients ethically.

One of the most significant issues that the Bar raises in this regard is the application of the “crime-fraud exception to attorney-client privilege under federal law. Generally, the attorney-client privilege prevents attorneys from being compelled to testify about attorney-client communications. However, the crime-fraud exception eliminates this privilege “if the services of the lawyer were sought or obtained to enable anyone to commit or plan to commit a crime or a fraud.” Cal. Evid. Code section 956(a). While the representation of cannabis clients would not trigger this exception under state law, the Bar notes that there remains a risk that the privilege would be applied in a variety of federal proceedings. Thus, Formal Opinion 2020.202 opines that the attorney must disclose the potential unavailability of attorney-client privilege under federal law and its practical implications. These implications themselves, says the Bar, also require cannabis industry attorneys to obtain the client’s informed written consent related to the prospect that such attorneys may end up on the stand, testifying about their client communications, creating a potential conflict of interest at the outset of representation.

Other potential ethical pitfalls attendant in representing cannabis industry clients addressed in Formal Opinion 2020-202 include:

  1. the need to disclose any lack of access to banking or malpractice insurance that may impact an attorney’s (cannabis or non-cannabis) clients;

  2. the heightened duty to make clear disclosures around whether an attorney represents an organization or its constituent individuals, given the fact that operating through the organizational form is novel to so many business owners in the industry; and

  3. noting the fact that a business operates in violation of federal law is a “material fact” and that Rule 4.1(b), requires that a lawyer must “disclose a material fact to a third person when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client.”

It is likely that a number of cannabis industry attorneys are celebrating as they update their engagement agreements tonight!