California Lawyers Association

Spotlight on Ethics: California Bar Issues Opinion on Advising Cannabis Industry Clients

By Merri A. Baldwin

California reportedly is home to the largest marijuana industry in the world, with nearly $3 billion in sales in 2019, according to market researchers. The state legalized medical cannabis in 1996, and then, in 2016, voters passed Proposition 64 and legalized recreational cannabis. Lawyers have been involved with the industry since the beginning, a practice area that only continues to grow. That involvement brings with it serious ethical questions, given the fact that possession, use, commercial production, distribution and sale of cannabis violate federal law, and violators remain potentially subject to criminal penalties and civil sanctions, and the ethical rules prohibit lawyers from assisting criminal conduct.

The State Bar of California Standing Committee on Professional Conduct in May issued an ethics opinion that considers whether lawyers may provide advice and assistance for conduct that is permitted under California’s cannabis laws, but unlawful under federal law. Cal. Bar. Formal Opinion No. 2020-202 fleshes out Comment [6] to California Rule of Professional Conduct 1.2.1, which explicitly recognized that lawyers are permitted under that rule to “advise a client regarding the validity, scope, and meaning of California laws that might conflict with federal or tribal law” and “assist a client in drafting or administering, or interpreting or complying with, California laws, including statutes, regulations, orders, and other state or local provisions, even if the client’s actions might violate federal or tribal law.” Although the comment on its face gives lawyers a green light to advise and assist clients to comply with California law that conflicts with federal law, the exact scope and extent of permissible advice and assistance are less apparent. Opinion 2020-202 addresses that uncertainty and contains important guidance on how to ensure ethical conduct in this potentially dangerous context.

The starting point in the analysis is the rule, which became effective on November 1, 2018. Rule 1.2.1 essentially follows the language of ABA Model Rule 1.2 and provides that a lawyer may not “assist a client that the lawyer knows is criminal, fraudulent or a violation of any law . . .” Therein lies the dilemma: does a lawyer who provides advice to a client about the client’s cannabis-related activities provide unethical “assistance” of “criminal” conduct?

Opinion 2020-202 addresses this question by presenting a hypothetical set of facts, involving a lawyer who is asked to advise a client engaged in the cannabis industry concerning how to comply with California laws, including obtaining required permits and assisting the client with state and local regulatory authorities. In the hypothetical, the client would also like assistance with business activities including advice regarding formation, financing, contracts, real estate and taxation. However, the plot thickens: the lawyer and client also discuss the possibility of the lawyer becoming more closely involved: holding client funds in trust in case the federal authorities seize the client’s assets; assisting the client in establishing offshore bank accounts; and taking a share of the business in lieu of fees. Not surprisingly, the Opinion concludes that certain of these activities are ethical and permitted under the Rules and certain are not.

Much of the Opinion’s analysis is based on Comment [6] to Rule 1.2.1. As noted above, Comment [6]allows a lawyer to “assist a client in drafting or administering or interpreting or complying with California laws” even if the client’s actions might violate federal law. The Comment also requires that when a lawyer advises or assists a client concerning activities permitted by California laws that conflict with federal laws, “the lawyer must inform the client about related federal or tribal law and policy and under certain circumstances may also be required to provide legal advice to the client regarding the conflict.” While this Comment was understood at the time the new rules were adopted to be addressed to the cannabis industry, the drafters chose not to expressly refer to cannabis laws, and left open the precise scope of what the rule allows or requires.

The opinion reviews the drafting history of Rule 1.2.1 and Comment [6], and analyzes both in the context of other ethical principles and guidance. In so doing, the Opinion fills in certain gaps, while leaving other issues open.

In short, the opinion states that what California lawyers may do is “provide advice concerning the validity, scope and meaning of California state and local laws” concerning the production, distribution and sale of cannabis. California lawyers may also “render all the services that lawyers customarily provide to business clients,” including assistance with formation, real estate, contracts and regulatory counseling. Within the hypothetical facts, the lawyer may provide all manner of corporate and business assistance to the client, including advice to enable the client to form its business, secure regulatory approvals and financing, enter into leases, and generally run its business. This point is an important one: the Opinion clarifies that Rule 1.2.1 is “intended to permit lawyers to render all of the services that lawyers customarily provide to business clients.”

What California lawyers may not do: “provide advice or assistance in conduct that enables the client to evade detection or prosecution under California or federal law.” Accordingly, the lawyer may not stash client funds in the lawyer’s trust account to secure them against federal seizure. Similarly, the client’s request to establish offshore accounts “may very well fall into the forbidden category as well.” While this is a somewhat weak conclusion that might have been strengthened with additional facts, the point is clear: a lawyer may not advise a client on how to hide assets from federal authorities.  

The opinion also contains helpful guidance on the requirement set forth in Comment [6] that a lawyer advise a client concerning the conflict between federal and state laws. The lawyer must “explain clearly that the client’s contemplated conduct violates federal criminal law, the penalties for such a violation, and any related risks of criminal forfeiture.” Moreover, the lawyer’s duties of competence and communication may at times require more detailed advice, a point that illustrates the potential level of complexity that faces a lawyer who seeks to advise clients in the cannabis industry. It is not enough to simply know about real estate, or contracts, or financing: the lawyer must also be competent to advise about the risks under federal law.

Interestingly, the opinion suggests that Rule 1.2.1 and Comment [6] do not allow a lawyer to acquire an interest in the client’s business. “Simply put, those provisions cannot be read to authorize a lawyer to acquire an interest in a cannabis business, or to participate on an ongoing basis in such a business, if such acquisition or participation violates federal law.” On closer examination, the conclusion makes sense: Rule 1.2.1 concerns assistance and counseling of clients, and does not address a lawyer’s own participation in a given industry, cannabis-related or otherwise. The Opinion finally states that the question of whether the lawyer’s accepting an ownership stake would subject the lawyer to discipline as “beyond the scope of the opinion.” This begs the question of why the committee included that part of the hypothetical, leaving open the question of whether a California lawyer may invest or own a cannabis business There may be many California lawyers who would prefer an answer sooner than later.

In issuing Opinion 2020-202, the State Bar of California joins a number of other states’ bar associations that have issued ethics opinions on issues related to cannabis. While the new opinion arrives at the same general conclusion as others—that lawyers may ethically advise clients who are involved in activities authorized by state law—the opinion provides useful but not complete guidance for California lawyers in interpreting new Rule 1.2.1 and its enigmatic comment [6].

Merri Baldwin is a shareholder in the law firm Rogers Joseph O’Donnell, where her practice focuses on attorney liability, ethics and business litigation. She is a member of the California Lawyers Association Ethics Committee, a past chair of the State Bar of California Committee on Professional Responsibility and Conduct, and a lecturer at the University of California, Berkeley School of Law, where she teaches professional responsibility.

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