News & Articles
FIRM SELECTED AS A "GO-TO" LAW FIRM
Corporate Counsel magazine recognized our firm as a "Go-To" law firm based on a survey of the Fortune 500 companies.
Corporate Counsel magazine researched seven legal practice areas, including Litigation, Intellectual Property and Securities. According to the magazine, less than one-half of one percent of the top law firms in the U.S. and abroad were designated as "Go-To" law firms. "We are very pleased to have achieved this designation, which we believe reflects our success in achieving great results for our clients," stated member Al Van Kampen. "This award shows that a small law firm can have very significant roles in representing the largest business clients."
INSURER'S "HISTORICAL PRACTICE" HELD TO BE BAD FAITH
Al Van Kampen and David Crowe 1
Claims against employers have become more commonplace. In response, insurance carriers have expanded their offerings of Employment Practice Liability Insurance ("EPLI"). EPLI is a relatively recent form of liability insurance which provides protection for employers against claims made by employees related to wrongful employment practices. Generally, EPLI coverage limits range from $1 million to $25 million and most policies include coverage for legal defense within the aggregate insurance limits, along with covering costs for adverse judgments and/or settlements. EPLI coverage varies based on the type, size, and risk profile of a business. Although EPLI coverage differs substantially between policies, it commonly covers claims related to discrimination (race, age, sex, disability, etc.), sexual harassment, wrongful termination or discipline, breach of employment contract, emotional distress, invasion of privacy, libel or slander, and employee benefits mismanagement.
Knowing the coverage scope of an EPLI policy is particularly important when an employer faces claims brought by a class of employees. A class action based on violations of law for minimum wages, holiday pay, or deprivation of meal and rest breaks, for instance, can force an employer to expend significant time and expense in litigation. Often numerous claims are included in the same complaint requesting retroactive payment and injunctive relief for the employer to change its practices. However, although these claims can often seem integrally related in a complaint, the coverage under an EPLI policy for each specific claim can be drastically different. Indeed, an insurance carrier that treated a meal and rest break claim as a wage and hour law violation under its EPLI policy was recently ruled as a matter of law to have acted in bad faith for doing so.
In Travelers Cas. & Sur. Co. of Am. v. Spectrum Glass Co., Inc.,2 Judge Coughenour, of the Western District of Washington, examined the obligations of an insurance carrier under an EPLI policy. The insurer's EPLI policy contained a "sub-limit" for $100,000 for defense costs to be paid in relation to "wage and hour" claims.3 The insurer determined that since the complaint sought relief which "looked like the other causes of action for failure to pay overtime and wages, [it] treated it as a wage and hour claim."4 In regard to the meal and rest break claim, rather than examining the claim separately to determine whether it fit within the wage and hour sublimit, Travelers "chose to characterize the break claim as one seeking unpaid wages - a conclusion that inured to its own benefit."5 Travelers came to such a conclusion even though the class action complaint requested that the policyholder be made to provide breaks in the future.6 As explained by the court, Travelers' self-serving characterization of the claims to fit within the sublimit of its EPLI policy harmed its policyholder by forcing them to pay more than $500,000 in defense expenses after Travelers withdrew from defending the dispute (when the wage and hour sublimit was reached).7
Moreover, there is little doubt that Travelers has similarly mistreated claims tendered by other EPLI policyholders. Besides characterizing the claims in this instance as "meal and rest break claim[s as] ultimately a claim for unpaid wages,"8 Travelers went further to explain that it had "traditionally handled meal and rest break claims together with wage and hour claims,"9 and that it had "historically treated meal and rest break claims as subject to the [w]age and [h]our [s]ublimit because such claims are closely related to wage and hour violations,"10 However, as explained by Judge Coughenour, it is bad faith to make such an assumption as to how a particular claim should be treated in a complaint because the insurer inherently fails to give equal consideration to the interests of its policyholder.11
In an additional attempt to avoid accountability, Travelers argued that its policyholder failed to timely object to the characterization of the meal and rest break claim as being a wage and hour law violation.12 However, the court explained that "Travelers offer[ed] no authority for the subtext of that argument, which is that an insured's initial acquiescence in a coverage determination insulates the insurer from its duty to investigate."13 Furthermore, the court affirmed that an insured "cannot be faulted for relying on [its insurer] to perform its obligations under the policy in good faith," irrespective of whether the policyholder seemingly agrees with the insurer's initial coverage determination.14 In short, a policyholder's failure to notify the insurer of its objection to the coverage determination does not obviate the insurer's continued responsibility to properly investigate and determine whether its policy conceivably covers the asserted claims in the complaint.
Given Judge Coughenour's ruling, it is highly advisable for EPLI policyholders that have previously tendered wage and hour and other EPLI claims to Travelers, or to other insurance carriers, to reexamine the way in which the carrier treated those claims. In particular, if a policyholder finds an instance where its insurer characterized different claims as being the same, it is vital to have a knowledgeable attorney analyze the particular policy language and relevant claims. Even where the policyholder believed the insurer's characterization of the policy to be initially correct, such acquiescence does not limit the policyholder from bringing claims at a later date, so long as suit is brought within the applicable limitations period (under law or the policy itself). Policyholders should make certain that they received the full benefit they contracted for under their EPLI policy.
1 The authors are attorneys at VAN KAMPEN & CROWE PLLC and represented Spectrum Glass in the discussed lawsuit. They can be reached at (206) 386-7353, , and DCrowe@VKClaw.com.
2 Case No. C11-1324-JCC, Dkt. 59 (W.D. Wash. Aug. 31, 2012); 2012 WL 3780356.
3 See slip op. at 2-3; 2012 WL 3780356 at *1-2.
4 Slip op. at 7; 2012 WL 3780356 at *4.
5 Slip op. at 12; 2012 WL 3780356 at *7.
6 See id.; see also Washington State Nurses Ass'n v. Sacred Heart Med. Center, 287 P.3d 516, 520-21 (Wash. 2012) (explaining mandatory breaks are considered to be more than just wages as they are vital to employees' health and efficiency).
7 See Travelers Cas. & Sur. Co. of Am., slip op. at 15; 2012 WL 3780356 at *9.
8 Id., Dkt. 52 at 12:22-23.
9 Id. at 12:15-16.
10 Id., Dkt. 53 at 2:9-10.
11 See slip op. at 12; 2012 WL 3780356 at *7.
12 Slip op. at 7-8; 2012 WL 3780356 at *5.
13 Slip op. at 7; 2012 WL 3780356 at *5.
CLUSTERING OF RETAIL CANNABIS STORES
Matthew J. Cleary
The cannabis industry in Washington has a number of problems, many of which stem from the regulatory structure created by an under-informed legislature. This is likely to be the case for the states that passed legalization measures in 2016 (California, Maine, Massachusetts, and Nevada). One such problem that is popping up and forcing action from local governments is the “clustering” of retail stores.
“Clustering” is basically what you would think based on the common use of the term. There are certain main roads throughout Washington that have seen a number of retail cannabis stores siting close together for a number of reasons. Local residents and adjacent business owners have taken to filing formal complaints with their local city councils and the Washington State Liquor and Cannabis Board claiming that clustered retail cannabis businesses attract crime, loitering, illegal public consumption of cannabis, and other such concerns. While some, if not all, of these concerns may be legitimate, the reasons cannabis businesses are forced into “clusters” can be explained by Washington regulations.
Unlike Oregon, Alaska, and Colorado, Washington made the regulatory choice to restrict the number of retail licenses rather than allow the market to act freely. Washington set up a system of allotments, both with the original round of retail licenses after the 2014 voter initiative (I-502) and the 2016 increase, which was meant to limit access points to cannabis while also forcing a relatively even distribution of stores based on population sizes.
The allotment system means each county at large and incorporated city are allowed a specific number of retail cannabis stores within their boundaries. Small cities are granted one or two licenses while cities like Seattle and Tacoma are allowed up to forty-two and sixteen licenses, respectively. While this may seem like a good idea in theory to guaranty a certain dispersion in order to reach rural communities, it has also led to a number of licenses being captured and squandered in jurisdictions that place bans or moratoriums on the cannabis industry. Washington does not allow these license allotments to transfer to alternative jurisdictions, so many potential store opportunities have been lost by requiring a certain number of licenses to be designated to areas that refuse to allow them. A number of the remaining licenses are then forced into groups on the border between a jurisdiction with a ban and one without to reach certain major metropolitan areas and access those consumers.
Further, within these jurisdictions, either through the requirements of the Washington regulations or those imposed by the local government, the stores are restricted in where they can land. For instance, the Washington Administrative Code requires cannabis licenses to be 1,000 feet from any school, park, etc. Localities are then granted the authority to adjust this buffer by increasing or decreasing its requirements as they see fit. Many local governments further restrict cannabis businesses to certain isolated zoning areas, typically industrial or commercial. After all of these restrictions, most cities or counties have very narrow strips that are both commercially viable for business and compliant with the buffers. As such, areas like Highway 99 in Snohomish County, Aurora Avenue in Seattle, and Rainier Ave South in Renton have become hotbeds for cannabis businesses. This trend can be found all over Washington.
The City of Seattle created an ordinance structure which requires a certain buffer zone between licensed cannabis businesses as well as the separation from a school or park. This is the same sort of requirement Snohomish County has chosen to place on new cannabis retail stores. Specifically, in a response to a “clustering” concern on Highway 99, the Snohomish County Council (by a 3 to 2 vote) determined that to limit this problem, new marijuana retail stores could not be located within 2,500 feet of existing stores, including those in adjacent jurisdictions.
State Regulations are painting cannabis businesses into a corner and creating clusters. Local governments are then stepping in and instituting new requirements to reduce the corner to the point where many businesses will be unable to find a viable location without taking over a currently licensed location. Without a change in policy, new businesses will have no locations left to find and existing businesses will not have the ability to scale up to new buildings.
For those who believe in and support the cannabis industry, let’s hope California, Maine, Massachusetts, and Nevada see what is happening here in Washington and choose to go another way. Excessive regulatory tinkering and overreach from governmental agencies are causing countless problems and setting the cannabis industry up to appear as a bad actor in the market. If regulators let the industry act as if it were any other product, these issues would be resolved by the laws of supply and demand.
CANNABIS BUSINESS ISSUES: ADVERTISING
Matthew J. Cleary
When opening a business, one of the biggest concerns is developing a customer base. Typically, this involves marketing and advertising to entice consumers to venture into your establishment. Maybe that is done with print ads, radio/podcast/television promos, or even something as simple as sandwich boards on the sidewalk or a sign spinner on the corner. It is a numbers game for any business. Advertising costs money but it is meant to drive enough business into the store to cover those costs and increase the overall revenue of the company. While most industries can advertise in creative ways and essentially try anything they may think of, the cannabis industry is not given the same latitudes.
In Colorado, cannabis businesses are not allowed to utilize outdoor advertising other than a fixed sign located on the licensed premises that exists solely for the purpose of identifying the location of the business. This means no billboards, vehicle mounted ads, handbills or leaflets, or any other form of advertising that would be visible to members of the public “from any street, sidewalk, park, or other public place.” 1 CCR 212-2, R 1111(b). On top of those physical advertising restrictions, a cannabis business cannot advertise via television, radio, or internet unless the business has “reliable evidence” that no more than thirty percent of the program’s audience is “reasonably expected” to be under the age of twenty-one. 1 CCR 212-2, R 1104-1105.
In Washington, the rules are similarly prohibitive, though slightly more flexible than Colorado. Businesses are only allowed two signs on the licensed premises of no more than 1,600 square inches (which is quite small if you have a standard store-front). Billboards are allowed only if they are on private property that is not the licensed premises and if that property complies with all other advertising regulations, meaning it is generally 1,000 feet away from any school, park, arcade, etc. Retail cannabis businesses were formerly required to cover their windows so the public could not see into the store from the street or sidewalk, but despite that requirement, the businesses were not allowed to cover their windows with anything including their business name or advertising materials. It continues to be unclear whether window advertising is allowed.
Alaska has adapted the rules from Washington and Colorado to create a more reasonable standard. A retail cannabis business is allowed up to three signs visible from the public right-of-way of up to 4,800 square inches. Businesses are also allowed to advertise on their store-front windows. The same restrictions apply for distance from schools, parks, libraries, and other similar locations that frequently have children present. Alaska’s regulations conspicuously fail to mention the ability to advertise by billboard, print, radio, or television so these options would be a risk without seeking guidance directly from the regulators in advance.
Advertising has been the most common topic of inquiry from my clients and prospective clients. Cannabis businesses want to be creative with their approaches to gaining new customers but are unsure of what will get them fined or penalized by the regulators. For instance, I was asked about advertising on a giant balloon tethered to the roof of a building with the name of the retail store and a green plus sign. In another industry, I would have said this was fine unless the local zoning laws restricted adding height to your building (or if there were any other well defined air space restrictions). In cannabis the question is much more nebulous. I had to research zoning laws and ordinances, state regulations, and even place phone calls and emails to the regulators to get an official opinion, leading to a high bill for my client for something that should be simple and straightforward.
I have also been asked about sign spinners. Is it legal to hire someone to stand at an intersection spinning a sign for the retail store? Probably not. The intersection likely consists of a public sidewalk which would be a violation to advertise on in most states. Further, that sign spinner may now be closer to a school or park and that would need to be measured from any place the spinner may move to as they attempt to draw customers to the store. If these factors are accounted for, a sign spinner may be possible but that added effort might be enough to counter the value of the spinner to begin with.
Additionally, marketing efforts in this industry are further frustrated by regulations. The cannabis space is full of artists and creative types but vague and unclear statutes hamper the ability to be creative and prevent businesses from expressing who they are and what kind of vibe they want to present to consumers. Studies have shown time and time again that marketing makes a difference to your business but it is impossible to differentiate a corporate identity when each company is required to comply with the same narrow set of options.
If a business needs to hire me to determine how they can advertise, the rules are not what they should be. Colorado and Washington have been the reference points for each new state entering the cannabis market and I am hopeful future legislative plans will produce more reasonable results for cannabis businesses.
CANNABIS BUSINESS ISSUES: BANKRUPTCY
Matthew J. Cleary
Starting a cannabis business legally under state law requires owners to consider a wide range of possible challenges. Some of the major considerations include possible enforcement issues if the DEA changes its stance regarding the Cole Memo; concerns with banking because many FDIC-insured banks do not want to handle cannabis business accounts; potentially limited growth options as businesses are not able to move product across state lines; and personal financial and safety concerns related to being in a cash industry. These are just a few considerations to have before entering the cannabis industry, but there are countless more.
One significant issue that many entrepreneurs may fail to consider could have huge implications on both the business and its owner: bankruptcy. Entrepreneurs and business owners rarely think about the possibility of failure when starting a new venture, but this is something that needs to be discussed in the cannabis industry. Compare the following two stories.
First, we have a business person looking to open a restaurant. The owner finds a location and uses a small business loan to renovate the building, buy new kitchen equipment, hire qualified personnel, and after a few months, open the doors for business. As is the case in most industries, the owner is paying for rent, utilities, payroll and products, which leads to a fairly sizable operating budget on top of paying down the small business loan.
Second, we have an entrepreneur looking to start a cannabis business — in this case, let’s say a retail store. The owner needs to find a location, pay for build-out, security systems, licensing fees, operating costs, etc.
Both businesses are aiming to make enough income to cover the owners’ personal needs outside of work, but after a few months, it becomes clear that neither business is generating enough revenue to cover costs and make a profit.
The restaurant owner files for bankruptcy. In this setting, the owner has the chance to be relieved of the outstanding debts and liabilities and live to fight another day. What options does the cannabis business owner have to close the doors and leave the business? Unlike the restaurant owner, bankruptcy is off the table.
Federal bankruptcy courts in both Arizona and Colorado have recently made the decision to deny bankruptcy protection for cannabis businesses and their owners, and these rulings have been affirmed by the 9th and 10th Circuit courts. As long as cannabis remains illegal at the federal level, cannabis entrepreneurs will be unable to file for bankruptcy. Debtors going into bankruptcy cannot receive relief if they are considered to have “unclean hands,” meaning they are involved in illegal activity. However, there are a number of steps owners and cannabis businesses can still take to mitigate against this fate.
First, make sure the business is a properly registered corporate entity (limited liability company, S corporation, C corporation). The structure may be different given the preferences of the owners.
Second, maintain all the corporate formalities necessary for the entity structure chosen. This means holding annual corporate meetings as required by law in the relevant state governing the business, accurately keeping books and records for the business, voting on major decisions and taking minutes for the meetings where votes take place and otherwise following the rules and requirements of the LLC agreement, operating agreement, shareholder’s agreement, etc., as is applicable to the business. If the business is properly maintained, it will assist in protecting the personal assets of the owner from future creditors.
Third, while some construction is necessary for nearly every cannabis business, it is important to keep initial startup costs low. Many cannabis businesses start out expecting that having a license to operate is enough to guarantee a profitable business. This assumption has proven repeatedly to be incorrect. Keeping expenses low will go a long way to preventing a business from ever needing bankruptcy.
Fourth, for owners of a cannabis business, do not overextend yourself personally in an effort to fund the business. A cannabis business will not be entitled to bankruptcy relief and neither will an individual owner with debts and liabilities associated with that company. This means liens against personal property, additional mortgages, credit card debt and any other form of liability incurred to fund the business may remain enforceable.
These steps will not allow you to enter bankruptcy, but they will help avoid the need to file for it. There is a misconception that cannabis businesses are “printing money” with people across the country believing an investment in cannabis equals big returns. In reality, excessive taxes, tough competition and growing uncertainty with the federal government make this a risky bet and such risks should not be taken lightly.