We all are feeling the tremendous impacts of the COVID-19 pandemic on our work and our personal lives.
BAR CENTER CLOSED AND STAFF WORKING REMOTELY THOUGH AT LEAST APRIL 3
Dear Members,
We are providing an additional update on the SDCBA’s response to the impact of COVID-19. We continue to prioritize the health and safety of our members and staff, while also playing a constructive role in supporting local health officials and government leaders as they work to contain the virus and protect our community as a whole.
The green rush is on in California. The State already holds the lion’s share of the $5.7 billion cannabis industry, and the market is primed for unprecedented growth with the recent legalization of recreational use for adults. Cannabis law has come a long way since California became the first state to legalize medical cannabis use over 20 years ago. However, there is still a long road ahead to create a fully operational and legitimate market.
Industry participants and law enforcement have faced an uphill battle attempting to navigate the ever-changing landscape of cannabis laws. Since the Compassionate Use Act (CUA) broadly established an affirmative defense for the medical use of cannabis in 1996, and then the Medical Marijuana Program Act (MMPA) established an affirmative defense for collectively and cooperatively producing and distributing medical cannabis in 2003, the industry has largely operated in a legal gray area. Poorly drafted legislation provided little guidance on the breadth and depth of legalization, and the case law developed slowly over the years. Judges and prosecutors in many jurisdictions throughout California strictly interpreted cannabis laws, which led to unnecessary arrests, wasted resources and, in some cases, wrongful convictions. In San Diego alone, we saw three landmark cannabis decisions that began as erroneous rulings summarily denying patient-defendants their right to present an affirmative defense and were ultimately overturned on appeal. See People v. Konow, 102 Cal. App. 4th 1020 (2002), as modified (Nov. 6, 2002), review granted and opinion superseded, 63 P.3d 212 (Cal. 2003), and revised, 88 P.3d 36 (2004); People v. Jackson, 210 Cal. App. 4th 525 (2013), as modified on denial of reh’g (Nov. 20, 2012); People v. Orlosky, 233 Cal. App. 4th 257 (2015). Notably, the liberal MMPA allows a defendant to present a defense to cannabis-related offenses under a variety of circumstances. A written doctor’s recommendation is not required; oral approval is enough. People v Jones, 113 Cal. App. 4th 341 (2003). A written agreement is not required to form a collective or cooperative; the act of informally associating is enough. People v. Orlosky, 233 Cal. App. 4th at 573. Business formalities such as accounting records and nonprofit formation are merely elements for a jury to consider in determining whether a collective or cooperative is operating lawfully. These principles have in large part been developed through case law at the expense of unlucky judges and prosecutors. What this means for criminal defense attorneys and for our clients is that under the MMPA, we can use the gray area to our advantage. However, law enforcement can use that same gray area to arrest our clients, seize their assets and initiate criminal and/or civil action.
In order to eliminate these uncertainties, decriminalization should go hand-in-hand with regulation. The changing legal landscape has been driven by changing perceptions. For the first time in our nation’s history, the majority of the public is in favor of cannabis legalization. People now view cannabis offenses as less serious than they would other criminal offenses. However, mere decriminalization does not guarantee the safety and efficacy of cannabis and cannabis-related activities. The experiences of states like California, who have boldly legalized cannabis in spite of the continued federal prohibition, have taught lawmakers about how and why to regulate cannabis. The California Legislature recognized that, in order to move into a legitimate industry, regulations needed to be enacted, restrictions put in place and taxes imposed. With the Medical Cannabis Regulation and Safety Act (MCRSA), the state of California attempted to comprehensively govern the cultivation, manufacturing and sale of medical cannabis and medical cannabis products. The Legislature adopted important elements from the measures that passed in Colorado, Washington and Oregon, while avoiding some of the mistakes initially seen with the regulatory frameworks in those states. A centralized Bureau was established within the Department of Consumer Affairs to create all of the detailed regulations that would control and govern how cannabis businesses would operate.
While the state was figuring out how to control the medical cannabis industry, several different interest groups began organizing recreational cannabis initiatives in order to alter the regulatory landscape. The initiative that ultimately made it to the ballot and gained enough votes to pass in 2016 was Proposition 64. A citizen’s initiative, Proposition 64 was much more business-friendly than the MCRSA. There were some key differences between the two pieces of legislation. For example, Proposition 64 did away with restrictions on vertical integration and cultivation limits, and created an open distribution model. The Brown Administration and the State Legislature realized that they would have to reconcile the differences between MCRSA and Proposition 64. The result was a budget trailer bill, known as Senate Bill 94, which was signed into law on June 27, 2017, to create a unified regulatory framework. Senate Bill 94 repeals and replaces much of MCRSA, and regulatory agencies will now have to quickly modify the proposed medical regulations in order to begin licensing by the statutorily imposed deadline of January 1, 2018.
What does SB 94 mean for existing cannabis businesses? Twelve months from the date that the state begins accepting applications, collectives and cooperatives will have to become licensed at the state level. If businesses do not receive a state license within that 12-month period, they must cease operating. The gray area that collectives and cooperatives have been relying on for years just turned very black and white. By early 2019, if you have a state license, you are legal; if not, you are illegal. In order to obtain a state license, there are many hoops to jump through. For example, you must establish that you are in full compliance with local laws and regulations before the state will issue a license. Over 98 percent of the industry is currently operating without any local authorization, approval, licenses or permits. This means that most businesses operating today will either close their doors, or be forced entirely into the black market. On the other hand, people who have hidden in the shadows for years will have an avenue to come forward and join the tightly regulated marketplace. Investors from out of state will also be coming to California to capitalize on this emerging industry.
For attorneys who are practicing in this field, we have to be prepared to evolve. The fun days of arguing affirmative defenses in court are slowly fading away. Criminal defense cannabis practices will be left with low-level misdemeanors, felony extraction cases, local municipal code violations and the occasional cannabis DUI. Fairly dry corporate and regulatory work will fill the void. Attorneys interested in practicing cannabis law should focus on areas related to the new regulated market. There are great opportunities for employment attorneys, in-house counsel, real estate attorneys, land-use attorneys, securities attorneys and attorneys practicing in so many other crossover areas. Just as the industry is adapting to a regulated market, we too must be prepared to move into the future.
Michael Cindrich is a solo practitioner.
This article originally appeared in the
July/August 2017 issue of San Diego Lawyer.
‘Those familiar with the blossoming cannabis industry are readily familiar with certain limitations imposed upon the “legal” cannabis business. From tax inefficiencies spurred by Internal Revenue Code 280E to limitations on change in ownership (i.e., M&A), navigating the capital markets can be an exercise of corporate and securities gymnastics. And through In re Healing Nature, LLC,1 the United States Bankruptcy Court has confirmed that ancillary companies may also lose their place in the Chapter 11 line.
The business enterprise described in the United States trustee’s motion to dismiss describes a business enterprise familiar to the cannabis space: an operating entity, a property owning “landlord” to the same, and a service providing “management company” to the same. The businesses all shared common ownership though engaged one another through commercial relationships. The debtor here was the landlord entity, leasing real property to the plan touching-operating entity.
In a diatribe sure to make the current Attorney General proud, the trustee dutifully recited those provisions of the Controlled Substances Act implicated by the business’s operations. The trustee contended that, in line with precedent out of Colorado, the Chapter 11 plan should be dismissed because the debtor could not lawfully reorganize. The lease of real property to a “criminal enterprise” is in gross mismanagement of the estate, so the story goes.
Now, to be fair, the debtor was no poster child of a Chapter 11 candidate. The enterprise held no insurance on the commercial property, had filed incomplete and inaccurate financials (at best), was untimely in filing documents with the trustee, and apparently had no reported income on paper. If this were indeed Seinfeld’s “Soup Nazi” line, this landlord would not have even made it through the entrance door.
So given the court flowed a litany of case law — some coming from traditionally “legal” states like Colorado and Oregon — what is the significance here? Perhaps sadly, not much. Though the Ninth Circuit has issued canna-friendly case law on certain 280E matters, there is yet to be a similar allowance granted in the bankruptcy context. For the time being, it seems the industry will just have to enjoy the soup available and make do without its bread.
1 Bankr. E.D. Penn., Case No. 18-111121-amc.
On June 27, 2018, the United States Supreme Court issued perhaps the most significant decision to impact collective bargaining this century in Janus v. American Federation of State, City, and Municipal Employees, Council 31 (AFSCME).1
In a 5-4 decision, the Court declared as unconstitutional the common requirement that public employees who opt not to join a union still be required to pay “agency” fees to that union.2 In an attempt to mitigate the effects of the Supreme Court’s decision, the California Legislature enacted, and Governor Jerry Brown signed into law, Senate Bill 866.3 The interaction between SB 866 and the Janus decision, and how California public employers should navigate the two, is addressed below.
Janus v. AFSCME
Until now, public employees in 22 states, including California, who declined to join a designated union were not assessed full union dues but instead had to pay what was generally called an “agency fee” to cover the costs of collective bargaining that would benefit them. The union would set the agency fee annually and send nonmembers a notice explaining the basis for the fee and the breakdown of expenditures.
The plaintiff in this case, Mark Janus, was employed by the Illinois Department of Healthcare and Family Services as a child support specialist.4 Under Illinois law, Janus was forced to subsidize the union that represented his unit, even though he chose not to join and strongly objected to the positions taken by the union in collective bargaining.5 Janus challenged the constitutionality of such public-sector agency fee arrangements and asked the Supreme Court to overrule Abood v. Detroit Bd. of Ed.,6 which approved them.7
In a widely expected result, the Supreme Court found agency fees to violate the Free Speech Clause of the First Amendment.8 The Court reasoned that requiring public sector employees to pay an agency fee to a union violated the free speech rights of nonmembers by compelling them to subsidize private speech on matters of public concern.9 In doing so, the Court overruled Abood, rejecting the arguments that agency fees are necessary to achieve “labor peace” and to avoid free-riders.10 The majority ordered that “[n]either an agency fee nor any other payment to the union may be deducted from a nonmember’s wages, nor may any other attempt be made to collect such a payment, unless the employee affirmatively consents to pay.”11
California Senate Bill 866
Governor Brown signed SB 866 on the same day that Janus was decided. The bill was designed to give public sector unions more control over the dues authorization process by (1) ensuring employer cooperation in administering dues deductions and (2) limiting employer communications concerning employee representation.
Specifically, SB 866 mandates that employers must continue to allow payroll deductions for union dues.12 Additionally, any requests by an employee to start or cease deductions must be submitted to the union.13 The union is then responsible for notifying employers about changes to employees’ deductions, including the amount of dues to be deducted from individual employees’ paychecks.14 The public employer must honor the authorizations provided by the union and may not request a copy of the employee authorization from the union unless a dispute arises about its existence or terms.15 The union must indemnify any costs incurred by the employer in defending claims brought by employees regarding payroll dues deductions.16
Concurrently, if a public employer decides to “disseminate mass communications” to its employees or applicants concerning union membership, the employer must first meet and confer with the union concerning the content of the communication.17 If the employer and union cannot agree about the communication and the employer decides to issue its proposed message, it must also distribute a communication of reasonable length provided by the union.18
What Janus & SB 866 Mean for Public Employers
The mandate from Janus is clear: public employers must immediately stop deducting agency fees from non-union employees’ pay unless they have affirmative consent from the employees to do so. While SB 866 directs employers to “honor the terms of the employee’s written authorization for payroll deductions,” Janus requires this to be limited to dues deductions for union members, not agency fees for non-members. However, employers must continue to honor payroll-deduction requests of members under SB 866.
Importantly, any requests by members to cancel or change a deduction must be handled by the union and the revocability of an authorization will be determined by its terms.19 Public employers should identify any agency-shop MOU provisions or “maintenance of membership” clauses in their labor agreements and ensure an applicable severance provision exists to hold such clauses invalid without requiring renegotiation.
Finally, SB 866 reiterates that employers are prohibited from deterring or discouraging applicants for public employment from becoming members of an employee organization or deterring or discouraging current members from continuing or discontinuing membership.20 Union representatives, however, are still guaranteed a chance to recruit new public employees after they are hired.21
In this changing public employment landscape, it is imperative that public employers understand both Janus and SB 866 going forward.
| 1 138 S. Ct. 2448 (2018). 2 Id. at 2459. 3 S.B. 866, 2017-2018 Reg. Sess. (CA 2018) (enacted). 4 Janus, 138 S. Ct. at 2461. 5 Id. 6 431 U.S. 209 (1977). 7 Janus, 138 S. Ct. at 2462. 8 Id. at 2486. 9 Id. at 2459–60. 10 Id. at 2466. 11 Id. at 2486. |
12 S.B. 866 § 1. 13 Id. 14 Id. 15 Id. 16 Id. 17 Id. § 2. 18 Id. 19 Id. § 1. 20 Id. § 2. 21 Id. § 3. |
Jason Fischbein
As attorneys, we are all familiar with the trust fund accounting requirements found in Rule 4-100 of the State Bar of California Rules of Professional Conduct. Failure to follow Rule 4-100 can result in significant disciplinary action. But, the importance of proper trust fund accounting is not limited to the Rules of Professional Conduct. As discussed below, failure to maintain accurate trust fund records can end up costing you thousands in additional taxes and penalties.
In this 2017 case, the taxpayer (an attorney) was audited for tax years 2008, 2009, and 2010. During the audit, the IRS determined the taxpayer underreported gross income, which resulted in aggregated tax deficiencies of $469,187 (plus an additional $93,837 in accuracy related penalties). The IRS analyzed the taxpayer’s bank statements in determining his gross income. Upon receiving the statutory notice of deficiency, the taxpayer timely petitioned the United States Tax Court for review.
At trial, the taxpayer challenged the validity of the IRS’s method of reconstructing his income. Generally, taxpayers are required to maintain records sufficient to establish their federal income tax liabilities. In cases where the taxpayer fails to maintain adequate records, the IRS may reconstruct the income by any reasonable means. In Canatella, the IRS relied on the bank deposits analysis method in reconstructing the taxpayer’s income. The bank deposits method assumes all deposits are taxable income. However, the IRS must account for transfers between accounts and make adjustments for non-taxable deposits, to the extent of its knowledge.
One of the major issues in this case dealt with “client trust fund accounting.” Specifically, whether the taxpayer could exclude all deposits to bank accounts he used for trust fund deposits. Generally, money a taxpayer receives in trust for another person or entity is not includible in the taxpayer’s gross income. Although the court concluded some of the deposits were in trust, and therefore non-taxable, it did not accept the taxpayer’s assertion that all deposits were in trust. The court reached this conclusion because the taxpayer did not follow the CA Rules of Professional Conduct related to Trust Fund Accounting. Accordingly, the court analyzed a total of three disputed deposits based on the facts and circumstances surrounding the transactions (instead of relying on the general rule above).
The first deposit analyzed by the court, for $61,467, was made to an account not labeled as a “trust account” but claimed to be used as one by the taxpayer. The taxpayer used the account to deposit fees, pay business expenses, and pay personal bills. The court found that the taxpayer failed to follow the labeling, anti-commingling, and record-keeping requirements for maintaining a client trust account. As a result, $41,467 was included in the taxpayer’s gross income ($20,000 was excluded because the taxpayer paid it to a client).
Next, the court reviewed a $40,960 inter-account transfer that took place a day after receiving a $150,000 settlement check. The taxpayer claimed the transfer was made in order to hold the funds for another client. However, he failed to provide a trust ledger or other substantiating documents to prove-up the assertion. Therefore, the court included this deposit in the taxpayer’s gross income.
The third deposit was another $150,000 settlement and the check was paid to “Joan Roback and Cotter & Del Carlo, her attorneys.” Three days after the deposit, the taxpayer paid $80,000 to Joan Roback. Additionally, he transferred $32,000 to his operating account, leaving $38,000 in the alleged non-IOLTA trust account. The court excluded $80,000 from the taxpayer’s gross income but included the remaining amounts because, again, the taxpayer failed to provide a ledger required under Rule 4-100.
Client trust fund accounting is an important function of attorneys’ ethical and professional responsibilities. Following the guidelines in Rule 4-100 and implementing a strong trust fund accounting system will protect your practice in several ways. First, it will prevent disciplinary action, which will allow you to focus on growing your practice and serving your clients. Second, in the event of a tax audit, it will allow you to avoid protracted negotiations/litigation with the IRS or other tax agency.
Shawn Spaulding is an attorney at law.
This article originally appeared in the
May 2018 issue of For the Record
By an order filed May 10, 2018, the California Supreme Court changed California’s legal ethics landscape.
The Court approved, without change, 27 of the comprehensive set of 70 proposed new or amended Rules of Professional Conduct that the Commission on the Revision of the Rules and the Board of Trustees had recommended for adoption. The Court also approved with minor modification another 42, and denied approval of only one of the 70 rules submitted. The new rules become effective November 1, 2018.
Many of the changes are based on the ABA Model Rules of Professional Conduct, in effect in almost every other jurisdiction in the United States — thus making California’s professional responsibility standards more uniform with national practice.
The changes will be significant for California lawyers, touching almost every area of practice including fees (what must be deposited into a trust account and returned to the client at the end of the representation); litigation practice (including fairness to the opposing party and the duty not unduly to delay litigation); candor to the tribunal (with the obligation even after the fact to correct a false statement of fact or law); the responsibility of supervising lawyers (with possible vicarious liability); prohibiting discrimination, harassment or retaliation in the practice of law; sexual relations with clients (not allowed unless the client is a spouse or domestic partner, or the sexual relationship predated the lawyer-client relationship); inadvertently transmitted confidential information (the ethical duty adopted in Rico v. Mitsubishi, now a rule of professional conduct, subjecting a lawyer to discipline); and many others.
In upcoming issues, San Diego Lawyer will provide detailed analysis of the most significant rule changes.
Edward McIntyre is an attorney at law and co-editor of San Diego Lawyer.
This article originally appeared in the
May/June 2018 issue of San Diego Lawyer
Police have a new addition to try and fight the war on impaired driving: the Drager 5000. This device swabs the person’s mouth/cheek area to screen saliva for non-alcoholic intoxicating substances, including amphetamines, cocaine, marijuana and prescription drugs. This test is given before arrest, and acts as a field sobriety test. For attorneys who may provide guidance on this new device, there are a few important things to note, both scientifically and legally:
The Drager 5000 simply screens for the presence of certain types of drugs. Science refers to this as “presumptive” testing, and science also requires if you do a presumptive test and get a result, then you must do a second test as a confirmation. Also, as a presumptive test, it does not quantitate a certain amount. So, even if the device reports a number, it’s certainly not to say that number is a scientifically valid number by any means. The easiest way to think about this is a metal detector: While a metal detector may sense or detect some type of metal, it may not know (and probably does not know) the type or amount of metal.
This test is usually not required — and usually you can refuse this test. California law requires (per implied consent) that a driver submit to a chemical test after arrested on suspicion of driving under the influence (of either alcohol, drugs or both in combination). This Drager mouth swab test is not that implied consent chemical test, and is offered before arrest.
While there is no California Vehicle Code section exactly on point (yet) for this device, it’s akin to the same test given to test for the presence of alcohol before arrest.
This code section, California Vehicle Code 23612(i) mandates that if an officer decides to use this preliminary alcohol screening test, s/he must — is required to — advise the person they have the right to refuse this test. And a person refusing this preliminary field test cannot be used against the person or even admitted as evidence (see People v. Jackson (2010) 189 Cal. App. 1461, 1469). Now, certain groups of people cannot refuse this preliminary pre-arrest test (if you’re under 21 years old or on probation for a DUI/wet reckless), but you have the full right to refuse as long as you’re not in those classes.
In June 2014, in preparation for when this time would come, I attended a training for the Drager 5000. Rarely are machines perfect, and at that time there were issues … and those issues may still be present currently. For example, the device prompts when maintenance is needed, but the user can bypass this prompt. Same for the expiration dates for the sampling strips used: the machine prompts for when those strips are out of date, but the user can bypass that prompt too.
The machine has the ability to download the last 500 samples through a USB connection, but you need its software to do so.
These are interesting times, as the city has received grant money to prosecute drug impairment DUIs. The best thing you and your clients can do is educate yourselves on the law and science. Because this can affect and report people who are using, even if they’re taking their prescribed dosage of meds.
Eric Ganci is a solo practitioner.
This article originally appeared in the
July/August 2017 issue of San Diego Lawyer
On April 30, 2018, the California Supreme Court issued a much-anticipated decision in Dynamex Operations West, Inc. v. Superior Court (Case No. S222732). The decision represents a substantial change to a fundamental California employment law standard: the test for whether a worker is classified as an employee or an independent contractor.
Many employers – and especially those in the gig economy – immediately face increased exposure for misclassification because the Dynamex decision establishes more stringent requirements for employers to properly classify workers as independent contractors. Misclassifying a worker exposes the employer to significant liability for unpaid wages, taxes and a myriad of penalties for violations of the Labor Code.
Historically, the multi-factor analysis focused on the amount of “control” the employer could exert over a worker’s performance. The new test, termed the “ABC Test,” is meant to clarify the formerly murky standard by requiring the hiring entity to conclusively establish the following elements in order for a worker to be properly classified as an independent contractor:
(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and
(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
Without question, the Court intended for this decision to significantly broaden the definition of “employee” in California. However, the Court restricted the applicability of the test to enforcement of obligations found in California wage orders, such as restrictions concerning minimum wage, maximum hours, overtime, and meal/rest breaks. In other words, the common-law test should remain in effect at least for the time being in areas such as unemployment, workers’ compensation and discrimination.
The impact of the Dynamex decision is impossible to overstate. Given the questions the Court left unanswered by this decision, it will likely be left to the lower courts (or legislature) to provide clarity for practitioners and employers. Most pressing is whether or not Dynamexapplies retroactively. Unfortunately, the decision did not provide clarity on that important issue. Many commentators believe that Dynamex constitutes an interpretation of existing law, and as a result, applies retroactively. This would place all California employers that complied with the prior test in peril. Moreover, lower courts will have little guidance in actually applying the ABC Test, considering the Court provided only the outside plumber or electrician as examples of those properly classified as independent contractors. Such workers would qualify as contractors under any standard. This ambiguity will almost certainly lead to heavy litigation and inconsistent appellate decisions.
It is not uncommon for businesses to toe the line in classifying workers as independent contractors, whether to save money or attract workers interested in the freedom that accompanies contractor status. With its decision in Dynamex, the Court just moved the line. Businesses who classified workers as independent contractors may be immediately exposed to liability. Practitioners would be well advised to reach out to their clients to discuss this significant development.
Patrick Klingborg is an associate with Lincoln, Gustafson & Cercos, LLP and Phillip Simpler is an associate with Paul, Plevin, Sullivan & Connaughton LLP.
This article originally appeared in the
May 2018 issue of
