“The pot lawyer.” Not every legal professional would embrace this moniker, but Aaron Pelley knew he had found a niche back in the early aughts when his representation of a cannabis user who had crossed state lines made the national news.
Pelley has since formed his cannabis-focused firm, Cultiva Law, and built up a team of corporate lawyers with expertise in tax, compliance and trademarks to compliment his litigation background and offer a full-spectrum legal shop for all things pot. The firm, which currently serves California, Oregon and Washington, is quickly emerging as the gold standard for legal representation in the cannabis industry. Pelley plans to expand operations into new markets as more states legalize recreational marijuana and the budding industry finds its legs (stems?).
Never afraid to get his hands dirty, Pelley is the type of leader who is always in the trenches, with both his clients and his colleagues. He’s sole owner of his firm, but he doesn’t outsource the little stuff: In the middle of our call, he paused to grab the lunch he’d ordered for the team that day. “What’s the occasion?” I asked.
“It’s a long day,” he said simply. "They need fuel.”
This type of hands-on approach and thoughtfulness is indicative of Pelley’s approach both to firm management and his legal practice. Clients of the firm, many of whom operated in the black market before legalization, are navigating a nascent industry with a patchwork of state laws and little to no federal guidance. Pelley and his pioneering group of colleagues offer strategic counsel for building their businesses while staying right with the law.
Lawdragon: When did you first develop an interest in cannabis law?
Aaron Pelley: Right out of law school, I started out volunteering my time with the Cannabis Defense Coalition, a nonprofit group in Seattle. One of their programs was a reclamation project, where they were getting back cannabis or materials that had been confiscated by police from legitimate medical marijuana patients. For one homeless medical marijuana patient, I spent two months and several hours on getting back two grams of cannabis and a small pipe. The total monetary value was maybe $50, but for him it meant a lot. Not the marijuana so much, but that somebody would stand up for him. We had a lot of cases like that. It felt good, fighting for justice and against the faceless machine of law enforcement.
Then, I ended up taking a few cases as private counsel. One of them was a fairly large case where a California man had driven up from Washington with several pounds of cannabis. We got the case resolved, and then we requested that his cannabis be returned to him. The judge ruled in our favor and said, “Ok you have to give him his cannabis back, but he can't possess that much at one time." In California, you can possess five pounds, but in Washington you can only possess 1.5 pounds. So they agreed to give him back his marijuana in 1.5 pound increments, thereby making the local police agency one of the first police agencies that was also a dispensary. The Police Chief at the time wrote an Op-Ed piece and the case picked up national attention.
That case got me a lot of press and people started calling me the pot lawyer. I've been called worse things.
LD: What year was that?
AP: That started back in 2007. Long before this stuff was ever sexy and cool. I just decided to lean into it though.
LD: What sort of law were you doing before then?
AP: Essentially, I was doing all defense law, but I was only really doing cannabis-related work. Mostly medical marijuana clients, and some other ones that were just plain outlaws. In short, I was doing all drug law.
LD: Was it a natural move then to start your own firm? Or how did that come about?
AP: Cultiva Law was born out of my small solo practice. I had cut my teeth and had some real success as a trial lawyer, but corporate law requires a different skillset from pure litigation. I needed to build a firm that could help address my clients' diverse needs. There were all these outlaws essentially becoming businessmen, and so they were coming to me because they trusted me with their contracts, with their partnership agreements, with their lease agreements and intellectual property. Even though the laws hadn't quite caught up with them yet in terms of legalization, these people believed that the more legitimate and upstanding citizens that they became, the more likely they would be viewed that way. They started wanting to have contracts and have agreements and engage in paying their taxes.
I recognized that all of these legal practice areas were too diverse. I needed to start to build a team. I've been really lucky in who I’ve been able to bring in over the years.
LD: That’s smart to build up a whole team so you can tackle every aspect of this. It seems like such a fascinating area of law because it’s still so nascent, and because it’s illegal federally.
AP: Yes, the tension between federal and state has always been there, since the beginning. Some of these dispensaries are operating with all cash and just trying to be above board as much as they can, at least at the state level. Obviously when you're dealing with all-cash businesses, that makes it dangerous for folks. We're pretty lucky, especially on the West Coast here, because in the three states where we’re practicing, Washington, Oregon and California, there are small credit unions that will work with the dispensaries now. But if for some reason you get rejected by the Credit Union or don't make it in, then you are operating in all cash, which is stressful and dangerous. A lot of people don't want to deal with that, understandably. Vendors and other people don't want you showing up with a stack of twenty dollar bills to pay them. It can make doing ordinary business, dangerous.
LD: How do they handle taxes?
AP: Everybody in cannabis is dealing with 280E, which essentially doesn't allow you to get to the typical tax write-offs as a normal business. Our current federal tax laws treat you as criminal enterprise. I've had clients tell me that they were being taxed at 80%, which is untenable for businesses to actually stay open and operate. This is the entry price of wanting to be on the tip of the spear, as they say. This is how you know that people in the cannabis industry love what they do.
LD: I take it you have a tax lawyer on your team, too?
AP: We do, two actually. Both of them are great. Sometimes I think that this job gives them gray hairs, though.
LD: Has it been difficult to get attorneys on board with what you’re doing?
AP: No. Surprisingly, it's almost the opposite. I've been so lucky to attract amazing talent at this firm and get folks that really want to be a part of this. A lot of them came from other emerging industries, and they recognize that this is just another emerging industry, with massive potential. We have attorneys that work in land-use, intellectual property, complex business litigation, licensing and compliance. I have such a deep bench with amazingly talented lawyers. We are also a lifestyle firm. So our attorneys do not have ridiculous billable hour expectations. We want our lawyers to have lives outside the firm and to be able to produce quality, not quantity.
LD: It sounds like you’ve built a full-service shop for the cannabis industry. Can you walk us through the different legal services Cultiva provides?
AP: A lot of what we do fits into three different silos. There's the ongoing, strategic legal counsel where we're helping these companies the way any other corporate law firm would help a company, advising them in how to get ahead of hurdles and prevent problems. We just have the distinct advantage and collective experience of getting so many other cannabis companies, in a highly regulated, overtaxed industry on an upward trajectory. That is the first silo.
Not everyone is in that place, though. A lot of my clients operated previously in the industry without contracts, where any agreement they had was based on a handshake. So we do a lot of work in the litigation section of my firm, which is the second silo, around partnership disputes. Especially on the grower side. When you look at what it takes to build out a grow operation, especially a large one, it can be a multimillion dollar effort and these growers had to go out and find that money. The way that investors look at the world is very different than the way a farmer looks at the world. I suppose that that's a good thing, but it also does create a lot of tension between the parties.
So we’re dealing with something that happens a lot in emerging markets: The people who bring the money to the table believe that nothing could have happened without that money. Then the people who bring the expertise to the table say, well, your money doesn't mean anything without my expertise. Of course they're both right, but they also both overvalue their own position. It creates a lot of the litigation work that we do, which are these partnership disputes or fights over how things are going to end.
The third silo is regulatory, either compliance or lack thereof. Some of these folks end up getting in trouble for the way they're running the company, the things that they're doing. Sometimes they haven't done anything wrong and they need somebody to come step in and defend them for what they didn't do. It is not just the company owners that are new and getting their “sea legs,” it is also the regulatory bodies themselves. They are trying to interpret the law, educate their own team and get, a lot of times former law enforcement, out of the mindset of enforcement and into the mindset of education.
There are a lot of moves towards revoking licenses, especially for growers. These people have put everything into these grows, and so it's our job to defend them from getting their licenses revoked. I feel really proud of the fact that we've successfully saved numerous licenses from that outcome, for storefronts and growers, but it's challenging because you know that everything's at stake, that if they lose the license, then everything else that they have there doesn't matter. Those lights weren't purchased at that price to grow basil.
LD: What grounds are they using to revoke the licenses?
AP: Well, for example, a lot of folks especially at the beginning of this process were getting licenses revoked for financial violations, which would happen when money comes into the company from outside sources that hadn't been vetted by the regulatory agency. It can be for camera violations, or failure to adhere to the administrative rules. For better or worse, some states are still regulating cannabis like it is plutonium. There are a few that are running cannabis out the back door. Not many though. These people came to be in a legal market. If they are breaking the law, it is usually out of desperation or nativity.
Then you could get revocations for things like pesticide violations. Which sounds bad, right? Nobody wants that. But my clients kept saying, no, we are all organic. Finally, someone decided to fight it and it was only through investigation that we learned that some of the pesticide violations were occurring because of chain of custody issues between the time that they were taking the samples of the cannabis to the lab. The material they were storing the cannabis in, en route to the lab, was being contaminated.
There are other minor violations, like advertising violations, where the regulatory agencies just didn't feel like an ad followed the spirit of the law, even though at the end of the day they were following the letter of the law.
LD: Sounds like maybe they were being targeted a bit.
AP: Sometimes. Not always. I think it's also that they're a new agency, they're brand new, they don't know really what their role is yet. The law has not been interpreted by judges. They need to find the right people to represent the agency. And again, it's worth pointing out that a lot of the growers and retailers were former outlaws who like to push the limits of the rules. There is room for improvement on both sides.
LD: So you founded a law firm and it sounds like such a smart move because you were building this niche. Now, how much of your day or your week is dedicated to firm management versus your legal practice? Are you enjoying the leadership role of being a firm manager or how's that all going?
AP: It's actually really great. At this point, the firm has four offices up and down the West Coast and so my role has definitely changed. I used to be the head of the litigation section and now they have their own leaders. My job is steering a larger ship, but I still have myself involved in a few cases. I still like to go to court. It's a little bit stranger in today's age of Covid where we're doing Zoom trials. But with regards to keeping one foot in the trenches and enjoying myself, being a trial lawyer is what inspires me. But I do have a different role now. My job is mostly managing a larger team.
LD: Those Zoom trials sound like a real nightmare.
AP: It’s the idea of trying to communicate to 12 people you've never met through a Zoom conference. If you're getting together with friends that you already know and hanging out on Zoom, that's great. But when you're trying to really connect with new people, I don't think it's very easy to do through video conferences. I don't think it's impossible, I just don't think it's very easy to do. I don’t think any trial lawyer worth their salt is excited about Zoom jury trials.
LD: Definitely. I’ve talked to some lawyers who say that it's unconstitutional and that it's even a little bit impossible. Like if you're cross-examining a witness, say, it's so much more difficult to see if they're telling the truth. You're losing a lot of non-verbal tells. You have no idea what's going on off screen. And I can't even imagine these jury members, it's hard enough to hold their attention, and now you have to compete with everything else in their homes, and even just on their screens.
AP: That's spot on. I literally made almost those exact same arguments to a judge in a recent case. The judge was not persuaded, though. He said, no, you’ll be fine.
LD: Jeez. Maybe the judges are just so cognizant of the backlog that they're trying to push these trials through despite the pandemic, even though it’s so impractical.
AP: Maybe. I did try and find some case law that supported my position and it's just not there.
LD: Not yet, anyway…
LD: Is your firm still growing? Or are you at a comfortable size now?
AP: We’re growing. I don't have some grand master plans on how to grow, but we’re letting it happen organically. I've followed my clients out from our original office. When we go into a new state, we're just letting the firm grow and create our presence in each city as we get there. We're looking at expanding into Arizona and Nevada over the next year and a half. If we don’t, that is okay too.
LD: Are those states that have legalized either medical or recreational?
AP: They're both recreational states now.
LD: Is the firm only really able to operate in those recreational states?
AP: Medical’s just a little tougher. It's not that we couldn't operate there, but once you have fully regulated, recreational market, there's usually a lot more protections and there's a lot more government input on what's going on. A lot of the states that go into medical, there's a laissez-faire approach to allowing for it and then they really start putting in the regulations once they enter into the adult use market.
LD: What would you say is the biggest challenge that's facing the industry right now, from a legal perspective or otherwise?
AP: That’s an interesting question. The taxes are still a major sticking point, as is banking. The regulations themselves are still very much in their infancy, and we really have these two sides of the same sword there. One side of the sword is this heavy and intense regulation, where they're regulating every dimension and aspect of the plant. Those regulations are making it almost impossible for people to operate these businesses and be successful. The regulations are not always correctly connected to reality or what makes sense in any industry.
Then strangely you actually have the opposite side of that sword in certain states, where the industry hasn't been regulated very much at all. There are no real signs of actual enforcement and no limits on licensing, which has led to overproduction to the point where nobody can be successful. I imagine that, like any new industry that never had rules to start with, we are going to find a middle road to this. It's a fascinating challenge, and exciting to be at the forefront of it. There are not too many things like this. Where all the advancements, legal and with the plant itself, are unfolding during your career.
LD: What do you think the future holds?
AP: I think it is important to think about the future. But I do not necessarily try to predict the future. I suppose most people would say Federal legalization in the next five years. I am optimistic. But I mostly try and focus on the future of my clients. And that seems to be local. And local politics is a strange animal with many fiefdoms.
LD: Are you involved in lobbying?
AP: Yes and no. If you are not at the table, you are on the menu. We make sure to be part of the conversation and work for the change we want to see. Whether through our litigation efforts or our work with the trade groups in the industry. So, I guess we do lobby. We are influencing the actions and policies of regulatory agencies every day in the work we do. And I can say we are doing it for the better. This whole experience, from the beginning of my career, was to get to the point where people were going to be in a better place, because of this plant. We continue to live by that.