Cannabis license holders must disclose agreements to the WSLCB
With the passage of Senate Bill 5131, Washington State cannabis license holders were put on notice. Effective as of July 23, licensees need to disclose, to the Washington State Liquor and Cannabis Board (WSLCB), any Licensing Agreement for intellectual property or Consulting Agreement the licensee has entered into.
As outlined in the earlier blog post, these agreements were always allowed (or at least were not expressly disallowed), leaving many in the industry wondering:
- Why does the WSLCB want to review these agreements?
- What is the WSLCB looking for?
- Who will be reviewing the agreements?
We now have answers to these questions.
The WSLCB wants to review these agreements because in traditional business, consulting fees and licensing fees are typically based (in whole or in part) on the profits of the business receiving the consulting or intellectual property services. However, under WAC 314-55-035, sharing profits is not allowed, and is a “true party of interest” violation, unless of course the party receiving profits has been vetting and approved by the WSLCB, prior to the party receiving any money. The WSLCB recognized the ease in which parties could share profits under these types of agreements, and is now requiring all such agreements be disclosed to check for true party of interest violations.
In the Washington State regulatory system, each licensee is assigned an Enforcement Officer tasked with inspecting the licensed premises, signing off on changes to the license or the premise, and dealing with other issues surrounding compliance. Given this is a compliance issue; it should be of no surprise that these agreements are to be reviewed by the licensee’s Enforcement Officer.
These agreements are common in the cannabis industry.
It would be best practices to review the agreement prior to disclosure in order to check for any provision that may trigger a violation. If the agreement contains a true party of interest violation, the license will be canceled pursuant to WAC 314-55-530. True party of interest violations are taken very seriously, and there is no warning violation or slap on the wrist – there is only one available penalty and it is the cancellation of the license.
If you have entered into a consulting agreement or licensing agreement, disclose it as soon as possible. Reach out to the other party to the agreement to give them a heads up, especially if the agreement has a confidentiality provision.
As always, compliance is key.