Preparing for legalized marijuana in N.J.: A primer

Aligned on one side is the promise of a new, multibillion-dollar industry that will inject fresh life into cities like Newark and Atlantic City, energize New Jersey’s real estate market, and produce new millionaires, all while generating hundreds of millions of dollars (or more) in tax revenues for the state and its municipalities. Aligned on the other side is the need to create a state oversight agency and regulatory regime that will allow the industry to operate safely and responsibly and avoid, if possible, the attention of federal authorities. Welcome to legalized marijuana. Welcome — perhaps soon — to New Jersey.

One of Gov. Phil Murphy’s most oft-quoted campaign pledges was to legalize marijuana for recreational use. So far, he remains committed. And he has legislative support. Senate Bill 830, sponsored by Sen. Nicholas Scutari (D-Linden), has been introduced in the state Senate, and a companion bill, 1348, has been introduced in the Assembly. Those bills are not final, and will likely undergo significant revisions before passage, but their breadth demonstrates the enormity of the state’s task in creating and regulating an industry that is illegal under federal law. Equally, those bills highlight the legal minefield that individuals and businesses will have to navigate to gain entrance to the marijuana industry and continue to navigate once there.

The proposed legislation contemplates the creation of a “Division of Marijuana Enforcement” within the Attorney General’s Office. The director of the division would be nominated by the governor, confirmed by the Senate and report to the attorney general. The division would be responsible for, among other things: establishing a regulatory regime to govern the licensure and oversight of the marijuana industry from cultivation to retail sale; grant, refuse and suspend licenses; set fees; and regulate the advertising of marijuana. This sounds orderly and neat enough; it is anything but.

Whether the bills are enacted as written or amended, somewhere in state government, an entirely new regulatory apparatus will have to be established and populated with lawyers, investigators and forensic accountants. Once peopled, the agency will be forced to tackle difficult questions: How will the state ensure product safety, since there is obviously no testing by the Food & Drug Administration? How will the state monitor and track sales? What prior criminal convictions or other negative background information will preclude an individual or business from obtaining a license? Which advertisements will be acceptable and which not? Will internet advertisements — with the risk of being viewed by minors — be permitted? And how will the state ensure ongoing compliance with its chosen regulatory framework?

New Jersey’s experience with medical marijuana provides clues to how the state will answer these questions and, importantly, lessons from which would-be entrants to the marijuana industry can learn. Although nominally housed in the Department of Health, New Jersey’s medical marijuana program is really a collaborative effort between the Department of Health and the Attorney General’s Office, with the latter taking the lead on conducting background investigations consistent with the regulations. That is, New Jersey already has an unofficial (and much smaller) Division of Marijuana Enforcement in the Attorney General’s Office. And not everyone is happy. Applicants complain of intrusive background investigations. Patients and advocates complain that the state is slow to approve and open dispensaries. No doubt, some of this was due to former Gov. Chris Christie’s view of the medical marijuana program and legalized marijuana generally. And, in fact, among Gov. Murphy’s first acts was to commission a 60-day review of the state’s medical marijuana program, presumably with an eye to expanding access and the number of dispensaries. But a change in governor may not bring with it a change in the law enforcement apparatus or law enforcement thinking.

Whenever marijuana is legalized and whatever the final legislation looks like, two things are all but certain: There will be a robust background investigation process for entrants to the industry, and even if there is no Division of Marijuana Enforcement in the Attorney General’s Office, it will be the Attorney General’s Office that is responsible for conducting background investigations. Between the New Jersey State Police and investigators from the divisions of Criminal Justice and Gaming Enforcement, the Attorney General’s Office is the only state agency capable of competently vetting individuals and businesses. In fact, the Department of Health borrowed investigators from the Division of Gaming Enforcement — which is responsible for, among other things, vetting applicants for casino licenses — to conduct background investigations for the medical marijuana program.

And, guess what? Law enforcement officers who built their careers around enforcing the state’s drug laws are not uniformly enthusiastic about legalizing marijuana. In a recent interview with The Star-Ledger, Rick Fuentes, the former colonel of the State Police for 15 years, explained that he is so opposed to legalizing marijuana that, had he not retired, he would have stepped aside upon legalization. Much of the current leadership of the State Police no doubt feels similarly.

So, what does this mean for legalized marijuana in New Jersey, and how can individuals and businesses interested in entering the industry ready themselves? A few things are clear:

  • While the legislation currently introduced will change, and there may never be a Division of Marijuana Enforcement, the Attorney General’s Office and law enforcement will have an outsized role in establishing and regulating the industry. Investigators are going to look at applicants with a wary (and, more likely, jaundiced) eye. If the medical marijuana program is prelude — which we believe it is — applicants that include former law enforcement officers or prosecutors as part of their business will fare best.
  • Including former law enforcement officers or prosecutors in business plans is important for another reason — the federal government. Marijuana remains illegal under federal law, and the Department of Justice, at least under Attorney General Jeff Sessions, remains committed to enforcing the law. A license from the state of New Jersey does not provide immunity from federal prosecution. Obtaining advice from a former federal prosecutor on what piques the interest of the Department and the Drug Enforcement Administration — and what does not — may. It could be the difference between remaining in business and becoming the target of a money laundering or trade-based money laundering investigation — particularly when federally chartered banks have refused to deposit monies derived from legal marijuana sales.
  • The regulations are as important — and maybe more important — than the legislation. The currently introduced legislation spans 65 pages, but leaves most critical questions unanswered. The Division of Marijuana Enforcement is charged with adopting rules around: licensing, including licensing goals and whether and what criminal convictions should disqualify applicants from licensure; advertising; sales; packaging, branding, labeling and testing; security of marijuana facilities; and, generally, to “adopt, amend or repeal regulations as necessary to carry out the intent and provisions of this act.” Hiring a Trenton-savvy attorney, especially one with intimate knowledge of the Attorney General’s Office and the regulatory process, is a must.
  • Any business must have a robust compliance plan. The currently introduced legislation allows the Division of Marijuana Enforcement to conduct announced and unannounced visits, to investigate licensees without search warrants and compel, at any time, the productions of books, records and even testimony. If individuals and businesses are to be licensed and remain licensed, they will have to show compliance both in theory and practice. That means having a written compliance plan and a law firm to regularly test that plan — under attorney-client privilege — before the state does.

The months and years ahead promise to be exciting and potentially very lucrative, but individuals and businesses interested in entering the marijuana industry cannot afford to be passive. Now is the time to consider corporate form, ensure that background investigations will not prove a stumbling block to licensure, construct compliance plans and consult with competent and knowledgeable counsel.

Francis J. Giantomasi is a member of the firm Chiesa Shahinian & Giantomasi P.C. and is one of New Jersey’s foremost real estate and land use attorneys. Lee Vartan is also a member of the firm. Prior to joining CSG, he spent nearly a decade in government service. He played an integral role in establishing and enforcing the regulatory regime that governs medical marijuana dispensaries.