This story was originally published in the October 2017 issue of Marijuana Venture, on sale now at a store near you.
Heavily-regulated industries leave businesses vulnerable to internal sabotage.
The term “sabotage” evokes ideas of grand schemes and evil villains, but in the cannabis industry, sabotage is generally done by petty former employees, current employees who feel they are being mistreated, or greedy competitors. This makes hiring and location-siting two of the most important steps to a successful cannabis business.
As both a former enforcement officer for the Washington State Liquor and Cannabis Board and a current corporate cannabis attorney, I have seen a number of these incidents first-hand.
For example, one indoor grow operation had a head grower who regularly failed to follow the regulations, leaving the business vulnerable to fines and penalties should an enforcement officer pop in for a surprise inspection. The business owners, after repeated warnings, were forced to fire the grower in an effort to avoid future violations that were sure to happen with him there. Before leaving the licensed premises, while out of the owners’ direct line of sight, this grower went through the plants and began removing the tags and labels that identify each plant in the seed-to-sale tracking system. The owners did not realize this had happened and did not think to inspect their entire premises after the grower was ousted. A few days later, an enforcement officer showed up in response to an anonymous complaint stating the business was not tagging its plants properly. Upon inspection, the enforcement officer found numerous violations and the business is now one or two violations away from potentially losing its license.
Alternatively, on the retail side, a frequent issue is employee theft. While theft is a concern in all retail businesses, it is particularly problematic in cannabis, where every single piece of inventory is electronically tracked throughout the plant’s growth and up to the point of sale. Cannabis retailers are at the mercy of their employees when it comes to inventory. Generally, enforcement officers have the right to inspect the inventory count in a retail store without notice and if the physical count does not match the electronic records, the licensee receives a violation for failing to maintain its inventory and tracking system. In one instance, I saw a retail store’s inventory count off by nearly 1,000 items due to frequent employee theft.
While many problems are created by bad employees or poor management, most are discovered due to industry sabotage rather than intentional employee sabotage. In Washington, for instance, it is a well-known, though impossible to prove, stance that many anonymous complaints are sent to enforcement officers by competing cannabis business owners. This is especially true of retail stores. Many stores I have worked with tell similar stories about an unusually large number of visits from enforcement officers in response to anonymous complaints, often after a good month of sales and generally with very specific requests. Officers are required to verify the validity of each anonymous complaint and, due to the number of regulations and requirements placed on cannabis businesses, there is likely to be at least one violation at any given time if an officer is diligent enough.
There is a common thread among cannabis industry members that shows a consistent vision and desire to see cannabis legalized and available to the public, either due to its medicinal properties or purely for pleasure. However, it is still a business and, as such, attracts bad actors and destructive business practices. A large number of licensed cannabis businesses — whether they are run by individuals who were actively involved in medical operations or newcomers with altruistic intentions — love what they do and truly care for their industry, customers and/or patients. On the flip side, a similarly large number of cannabis businesses are owned and operated by those who saw the cannabis industry solely as a money-making opportunity and would rather see their competition crash and burn than worry about the public’s access to cannabis products.
What can be done then to protect your business? First, take your hiring practices seriously. Even the lowest-paid, part-time worker in a cannabis business has the power to impair the license. If they are not diligent in their work or are never taught the regulations they are required to follow, they are sure to miss something that will result in a violation when an enforcement officer drops by. Second, while we live in a capitalist society, remember that this industry is still new and in a precarious position. By calling in fake complaints about competitors or attempting to get other businesses in trouble, the whole industry looks less secure, which could, in turn, be detrimental to other legalization efforts or lead to enhanced regulations in your area.
Matthew Cleary is an attorney at Van Kampen & Crowe PLLC, practicing business and transactional law in the cannabis industry. He has represented dozens of cannabis businesses in all stages of development, as well as advising ancillary businesses attempting to reach the cannabis market. Before practicing law, he was an enforcement officer for the Washington State Liquor and Cannabis Board. (mcleary@vkclaw.com)