Does the OLCC have unlimited rights to inspect premises?

As Oregon’s adult-use cannabis industry matures and licensed cannabis businesses become more established, the Oregon Liquor Control Commission (OLCC) has shifted to vigorous enforcement of cannabis businesses. However, in this age of enforcement, it is important for state-licensed businesses to consider the limits of the agency’s enforcement powers. Chief among these concerns is the power to conduct warrantless searches of a licensed premises.

The OLCC has taken the position that it has wide authority to conduct warrantless searches of licensed premises. However, the U.S. Constitution and Oregon’s state constitution both place significant limits on the OLCC’s authority.

Consider the following hypothetical: Two OLCC inspectors enter a licensed marijuana retailer. Customer traffic is light, and the dispensary is staffed by only one budtender. The OLCC inspectors peruse the consumer sales area for a few minutes, then go back to the manager’s office while the budtender is helping a customer. While in the manager’s office, the inspectors open the closet, inspect receipt books on the desk (even taking pictures of receipts) and root around in the garbage can. After reviewing the surveillance camera footage of the inspection, the dispensary owner asks her lawyer, “Can they really do that?”

The answer to that question requires us first to consider the statutes and OLCC rules that provide the agency the authority to inspect licensed premises.

“At Any Time”

Subsection 1 of ORS 475B.154, the law that provides statutory authority for OLCC inspectors to inspect the books and records and licensed premises of an OLCC cannabis licensee, says that books and records held by a licensee may be examined by the OLCC after 72 hours’ notice. Thus, in the hypothetical described above, the inspectors’ perusal and photographing of the receipt books on the manager’s desk arguably exceeded the scope of the inspectors’ lawful presence on the premises.

However, Subsection 2 and 3 state the OLCC “may at any time make an examination of a premises for which a license has been issued” and that the commission “may not require the books of a licensee to be maintained on a premises of the licensee.”

In addition, OAR 845-025-8560, which provides rule authority for the OLCC to conduct inspections, states the commission may conduct “an inspection at any time to ensure that a registrant, licensee or permittee is in compliance” and that a licensee “must cooperate with the Commission during an inspection.”

Thus, both the statute and the rule appear to allow the OLCC to conduct compliance inspections “at any time,” and the rule provides that a licensee is required to cooperate with the OLCC during the inspection. That would appear to indicate that inspectors can investigate the premises in the hypothetical situation described above.

Important limitations

However, that is not the end of the analysis. There are two important limitations on a state agency’s authority to enter and search the non-public portions of a business’ premises — the Fourth Amendment to the U.S. Constitution and Article I, Section 9 of the Oregon Constitution.

Searches of commercial premises that are not strictly intended to detect violations of criminal laws are known as “administrative searches.”

In Oregon, administrative searches must be exercised in a manner that is consistent with the privacy interests reflected in both Article I, Section 9 and the Fourth Amendment. For example, the Oregon Court of Appeals has repeatedly held that administrative searches must be carried out under a properly authorized administrative program, designed and administered to control the discretion of the personnel conducting the search.

Legal Precedence

Courts are wary of statutes or regulations that authorize warrantless administrative searches without any opportunity for the target of the search to obtain pre-compliance review by a neutral decisionmaker. In 2015, the U.S. Supreme Court ruled that a city ordinance requiring hotel owners to make records collected about their guests available to law enforcement at any time was unconstitutional, in violation of the Fourth Amendment’s rule against unreasonable searches and seizures. In City of Los Angeles v. Patel, the city contended that the Fourth Amendment’s restrictions shouldn’t apply, because hotels are a “closely regulated industry.” However, Justice Sonia Sotomayor, writing for the court, held as follows:

“Even if we were to find that hotels are pervasively regulated, [the ordinance in question] would need to satisfy three additional criteria to be reasonable under the Fourth Amendment: (1) ‘There must be a “substantial” government interest that informs the regulatory scheme pursuant to which the inspection is made’; (2) ‘the warrantless inspections must be “necessary” to further [the] regulatory scheme’; and (3) ‘the statute’s inspection program, in terms of the certainty and regularity of its application, [must] provid[e] a constitutionally adequate substitute for a warrant.’”

In the context of the OLCC’s statutes and regulations, it’s likely that courts will find that there is a “substantial” government interest in controlling the distribution of cannabis that informs the regulatory scheme that the OLCC is tasked to enforce via premises inspections, and that warrantless inspections may be “necessary” to further the regulatory scheme. However, the statute and implementing rule give no “certainty and regularity” of the application of the inspection regime that is sufficient to provide a constitutionally adequate substitute for a warrant. Like the ordinance at issue in Patel, ORS 475B.154 and OAR 845-025-8560 give no “certainty and regularity” of an inspection regime other than at “any time.” Like the ordinance in Patel, the OLCC’s statute and rule authorizing warrantless searches of licensed premises is extremely vulnerable to a facial challenge under the Fourth Amendment and Article I, Section 9.

Indeed, Oregon courts have held that in order for inspection regimes of closely regulated industries to pass muster under Article I, Section 9, there must be criteria in the authorizing statute or rule that limits the scope of the inspection and the discretion of the agency, and the search must be carried out under an administrative program that is designed and systematically administered to control the discretion of those conducting the search.

It is clear that there are no limits on scope or discretion in ORS 475B.154 or OAR 845-025-8560, which are therefore vulnerable to a court challenge under the Fourth Amendment and the Oregon Constitution.

In the absence of consent, the OLCC inspector in the hypothetical has engaged in a gross violation of both the state and federal constitution when it entered the non-public manager’s office and conducted an exhaustive search.

Kevin J. Jacoby is a partner of the Oregon Cannabis Law Group. He has 12 years of experience practicing civil and administrative law. He is licensed to practice in Oregon state courts, federal courts and the Ninth Circuit Court of Appeals. He is a graduate of Willamette University College of Law, earning honors in legal research and writing. He earned his bachelor’s degree at Portland State University. He can be contacted at kevin@oregoncannabislaw.com.