The highly publicized police and DEA raid of California’s Care By Design and seizure of its cash, equipment and paperwork outraged the entire cannabis community.
Care By Design (also known as CBD Guild) has a stellar reputation for transparency and regulatory compliance. It is among California’s most respected medical marijuana operations, and, just prior to the raid, had been educating regulatory agencies and legislative offices as they draft California’s proposed recreational regulations.
The cannabis community rallied behind CBD Guild owner Dennis Hunter, who, in connection with the raid, was arrested on felony charges for allegedly manufacturing a controlled substance by butane extraction. Bail was initially set at $5 million — almost three times more than the bail set for the heavily armed man who was intercepted en route to the Los Angeles Pride Parade. Hunter was ultimately exonerated after an investigation revealed that the allegations had been fabricated by a disgruntled former employee.
Vireo Health also found itself subject to a criminal investigation on allegations that it had used one of its armored vehicles to illegally transport approximately $500,000 worth of cannabis oil from Minnesota to New York, in order to meet New York’s production deadline and save the company from financial ruin.
Vireo Health is one of New York’s five licensed medical marijuana organizations and also owns MinnMed, one of two licensed medical marijuana organizations in Minnesota.
Vireo Health’s management denied the allegations, issuing a statement that inventory discrepancies were due to inadequate tracking software designed for dried flower, not plant extracts, which led to confusion regarding destination labeling. (More than 400 industry professionals have signed a petition calling for improvements to this tracking software.)
Vireo Health stated that any excess Minnesota product had been destroyed, not transferred, and that the armored car was moved to New York for security reasons. The company also stated that Vireo Health is “financially sound,” and that there was no inventory shortage in New York.
As with Care By Design, the allegations against Vireo Health were spurred by a disgruntled former employee, who had also tampered with laboratory equipment and threatened further harm prior to his departure.
Disgruntled employees can damage any organization’s reputation. But for cannabis businesses, principals accused of misconduct also face crippling fines and potential jail time. Fortunately, there are a variety of practical, low-cost preventive measures available to reduce the risk of harm that can be caused by disgruntled former employees.
One such measure is having a business culture that incentivizes participation and feedback from every employee. Learn to recognize disgruntled conduct, such as lack of motivation or passion, recent personal crises or complaints by fellow employees. Document and address these complaints, and invite departing employees — those who quit or were terminated — to conduct exit interviews. Ask questions about the employee’s experience with the company, including their reason for leaving, what their new position offers that the old one did not, where they see room for improvement within the company, their comfort level addressing problems, why they would or would not recommend their prior position, and of course, whether there are any unresolved issues.
A properly designed exit interview may allow you to anticipate false whistleblowing allegations and preserve an amicable relationship between employer and former employee.
Another strategy is to enforce confidentiality agreements and require all employees to sign non-disparagement provisions. Such provisions are frequently included in employment, severance and settlement agreements, and in employee handbooks.
A non-disparagement provision must be individualized, not boilerplate. There are several provisions worthy of inclusion to ensure the maximum likelihood of enforceability. First, define “disparage” — a term that is open to interpretation — to include, among other things, “any negative statement, whether written or oral.” Providing such clarity may reduce the likelihood of any defense that a particular statement is not disparaging.
Second, include a mechanism by which damages for breach of the non-disparagement provision may be calculated. Be sure to indicate that any amount set forth is a “reasonable estimate” of damages that may be suffered in the event of a breach, that the parties agree that the amount is “fair and reasonable,” and that the amount indicated “is not a penalty.”
Third, include “carve-outs” to any non-disparagement provision which: (a) allow employees to speak candidly with agents of the SEC, FINRA and state securities and cannabis regulatory authorities; and (b) indicate that the provision is not intended to impose a “chilling effect” on employees’ rights to engage in concerted activity protected under the National Labor Relations Act — regardless as to whether the workplace is unionized. Such provisions are necessary to comply with federal law.
Lastly, indicate that the non-disparagement provision constitutes a “material term” of the agreement, the absence of which would result in your refusal to enter into the agreement.
With these precautions, you may minimize your risk of becoming the next target of a bogus raid.
Lauren Rudick represents investors and startup organizations in all aspects of business and intellectual property law, specializing in cannabis, media and technology. Her law firm, Hiller, PC, is a white-shoe boutique firm with a track record for success.