CannaList Conversations with Katy Young of Ad Astra Law Group San Francisco

We recently sat down with Katy Young to discuss the legal aspects facing the Cannabis Industry, the International Cannabis Association, Social Equity programs, and much more.

Katy is the Managing Partner at Ad Astra Law Group, LLP – a fun and diverse group of lawyers focused on litigation matters in the areas of business, employment, real estate, and intellectual property. In addition, some of our attorneys handle select transactional issues, such as human resources advising, business advising, contract matters, trademark, and estate planning services.

She is currently serving as the President of The International Cannabis Bar Association (formerly the National Cannabis Bar Association). Formed in 2015 by a group of lawyers who saw a need to educate and connect with other cannabis industry lawyers to provide excellent, ethical, and advanced legal assistance to this growing industry.

The INCBA strives to improve the level of legal service available to the cannabis industry and to make the everyday practice of law for the attorneys serving this industry more efficient, more secure, and more accessible through educational events, an international network of the most experienced legal counsel in cannabis, and advocacy for the legal profession and those engaged therein.

Katy offers us a primer of the legal landscape of the California Cannabis industry.

Good morning. We are here today with Katy young for Ad Astra Law Group. Katy, how are you?

I’m doing well, thanks. Nice to see you.

It’s good to see you. Always a pleasure to talk to you. What’s going on these days?

What is not going on? as you said, I’m the managing partner of Ad Astra Law Group in San Francisco. In my spare time, I’m the president of the international cannabis bar association. I’m a mom of two. one of the busiest people you’ll meet on the planet, and I’m through my work; I’m an activist for cannabis legalization and normalization in California and beyond.

Did you start the law group with a focus on cannabis, or did it evolve?

It evolved. I started the law firm back in 2014 with a couple of partners – based on the principle of most law firm’s life is kind of storied to be awful. I worked in big law when I first came out of law school and was mistreated as an associate but got outstanding experience.

Yeah, I watched the Good Wife. So, I’m entirely up on all that stuff!

Yeah, yes. That’s one of the more realistic shows. I tend not to watch lawyer shows for that reason because I’m like, that’s not how it happens. But, I digress, so I started Ad Astra as a response to typical law firm life.

In 2015, just a year after the law firm formed, I got a referral to a cannabis consulting group in Oakland with a contract dispute breach. I do breach contract disputes, and I know a lot about cannabis, and I like it, so I went in.

Personal experience, right?

Yes absolutely. I met this husband and wife team that owned this business in Oakland, facing this breach of contract lawsuit. I chatted them up and explained to them that I had back in college; I wrote position papers about the racist roots of cannabis prohibition and why it should be decriminalized across the country. So it’s always been something near and dear to my heart, and then the cannabis world is very much who you know.

They asked me, “Have you ever represented anyone in cannabis before?”

And thankfully, I was able to say yes because I had an ex-boyfriend from high school who was a grower in Oakland who’s got more money than sense sometimes, and I bailed him out of a couple of bad partnerships and a couple of bad contracts. So I could say yes, I worked with you know this individual on some of his various business pursuits. They knew him because this world in Oakland is pretty small, so they called him up, and he said, “Yeah, Katy is legit. I’ve known her since junior high.” 

So I got that one client, and that started a chain as that client then had multiple different disputes – a dispute with their employees, they had a securities fraud issue in addition to the breach of contract. So I mean, this poor business was catching it from all angles.

I went to my two other co-founding partners and said, you know, I think we found something here. No other law firms are advertising that they’ll do this kind of work. I discovered this group of kick-ass women lawyers out of San Francisco. They led the charge on sophisticated transactional lawyering for cannabis businesses before California’s Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) of 2018. This was back in 2015. I told my partners, “I think we found something here. Let’s pursue this because we have sophisticated business litigation skills, employment litigation skills, real estate litigation skills to bring to the cannabis industry.”

Previously, most legal matters at that point were done by criminal defense attorneys who had, out of necessity, had to switch their practice from doing the hard work of keeping people out of jail for accessing medicine—changing then to forming corporations, writing contracts, and then litigating when those things go wrong.

I saw the opportunity, called my insurance broker, and told her what I was up to. She said, “Well, I’m way ahead of you, sister. I’ve been writing cannabis lines for years because that’s where I see the market going.” It was just absolutely kismet – Right place, right time. Preparation met opportunity.

I said yes. Then that one client that first hired me when they had those multiple problems, they got pretty far behind in their invoice with me, and I was like – “guys, what are we going to do about this? They said, “Look, we never met anyone like you, we intend to pay every cent, but as you know, you know money’s tight because I just settled a bunch of cases for them. So how about we pay you over time, but in exchange for the slow pay, the interest rate is going to be we take you around to every party in every conference and introduce you to everyone we know?” 

That was an absolute “Hell. Yes.” that’s how I met, through a trademark issue that this first client had, the founders of what was then the National Cannabis Bar Association – a group of really kick-ass women lawyers out of Oakland who focus was on transactional and intellectual property rights and who had started this bar association. so I got in with them. I hung around with this group of amazing lawyers until they elected me as their leader. So it all worked out for me.

There you go, so let’s be clear, though. You’re not talking about business setup; you’re handling dispute matters.

Right, we are fighters, not lovers. I will not form a corporation. I generally will not write a contract, but I will tell you that’s a terrible contract that you’re about to sign. Please, God. Don’t sign that. I will defend you if someone says you’ve breached an agreement. I will bring a claim if someone’s defrauded you or your business partner is messing with you.

The types of cases that I love the best are partnership disputes where the owners of generally a closely held business, sometimes larger corporations have either shareholder disputes or fights amongst the board of directors and disputes between the directors and officers. So we do a fair amount of corporate dispute work that way. 

Often it’s LLC members who are fighting each other for control of the limited liability corporation. We do series work. Pretty much any time you’re taking money from an investor and not giving them voting, it’s probably a security issue, and it needs to be cleared through the feds even though cannabis is still federally illegal. There are still securities laws that apply across the board.

Now the same thing for employment disputes. And even though banking is difficult to access – you still have to pay your clients and your employees on time and withhold the taxes. And as you know, there’s no such thing as an independent contractor in California anymore after the Dynamics case that came out years ago.

We also handle many disputes in the real estate space. For example, with the purchase and sale of land used for cannabis grow, leasing disputes for indoor grows, dispensaries, you name it – we represent businesses across the supply chain from seed to sale. Ancillary businesses, you name it. And if the shit hits the fan in your business, I’m the one to call. 

You’ve been doing this, what is it? Six going on seven years. The cannabis landscape has changed considerably during that period. You’ve seen the green rush. It’s come and gone. What are the biggest changes that you see in the industry right now?

Within California, I see increased sophistication in the level of disputes that come across my desk. At this point, a couple of years in from the January 1, 2018 implementation of the regulations under MAUCRSA – we’ve had a couple of years under our belts. The companies that we’re never going to survive have mostly died off, or they’ve been absorbed. The ones that will make it are the lasting ones, and litigation is a real risk for all businesses because people believe that money grows on trees. It is tough to turn a profit in the cannabis business in the united states, given the effect of IRS section 280e – Section 280e forbids companies from deducting any expenses from their gross income when it involves “trafficking” schedule I and II controlled substances.

(Newly released IRS documents detail efforts to collect taxes from marijuana companies under 280E)

I’m seeing that many companies that are still around it are getting better assistance from knowledgeable professionals who know how to cost, segregate and allocate funds amongst multi-entity business structures to make what is ultimately a viable family of companies.

I see more big law firms enter the space and offer more sophisticated legal work.

I’m seeing even the mom and pop operators from before who are resistant to deal with lawyers because of their long history of really not accessing the justice system. However, these folks are now coming around to okay it’s time for me to enter the regulated market. It’s time for me to come out of the woodwork because the state wants people to register and get licensed as a legal entity in the state of California to conduct cannabis business.

The state is trying to squelch out the illicit market, which is still thriving and alive.

Speaking of the state, one of the things that we’re seeing is this idea of social equity. Can you talk a bit about where the movement is, what that means, and what we can expect?

The concept of social or economic equity in cannabis is huge. If you followed or knew anything about the history of the prohibition of cannabis in the United States, it came about in the Nixon administration. It mainly targeted our black and brown brethren to keep them away from cannabis. It was never meant to stay on schedule one forever.

No one believes that cannabis is more dangerous than cocaine, and yet that’s the way it’s classified. As a result, our jails are full of our black and brown brothers and sisters who are being prosecuted for what white men are now making a killing off of.

The idea of racial, or excuse me, of social and economic justice is being implemented in uh states with medicinal and or adult-use cannabis rules. To the extent that you, or your family in some cases, have been a victim of the failed war on drugs concerning cannabis, the jurisdiction is going to give you somewhat of a pass to the front of the line to be one of the first to get a license to open and operate a cannabis-based business in the jurisdiction. For instance, if you have a conviction for possession or sale in Oakland, you would be given this proverbial pass to the front of the line in the form of a different license type called a social equity license with some more lax rules. Community members can then form micro-businesses that are vertically integrated on a smaller scale. There are all sorts of perks for social equity applicants, which is the term for it.

In San Francisco, when the city of San Francisco rolled out its social equity program and for a long time, it was the god truth that there was no hope of opening a cannabis business in San Francisco unless you got in on a social equity license.

It’s a great idea in theory but, in practice, is fraught with all sorts of problems. Problem number one – I think because of the systemic violence and racism directed at communities of color, folks are generally less interested in coming out and saying, “Hey, I’ve been convicted for cannabis possession and sale, and I want to operate a legal business in inside the city of San Francisco. now let me go ahead and file this application with the man.” There’s a disconnect.

Secondly, even with the social equity license type, the cost of starting a cannabis business in California is because you have to have pretty much funded the entire company, starting with the lease and through your security plan and your environmental review before applying. All that has to be in place before your application gets approved. So it’s a huge capital outlay before there’s any money that could even possibly come in because the licensing isn’t in.

So it means that social equity applicants, who generally tend to be less capitalized and less educated than, for instance, the money parts that come in there with investors, are taken advantage of. So what ends up happening is other groups come in and say, okay, we also want to operate a dispensary in San Francisco. Still, we’re not going to be able to get in for years because we’re not social equity applicants. So they pair up with the equity applicants, and then a lot of these work out nicely. Business people who use their funding and their Harvard business degrees to move the needle forward on cannabis normalization and cannabis decriminalization. They are moving the needle forward on social equity and social justice, and cannabis.

There are just as many if not more who are a wolf in sheep’s clothing and unfairly form an entity where the social equity applicant enters into extraordinarily abusive contracts that ultimately strip the social equity applicant of the power that the equity program wants them to have. For instance, in San Francisco, the social equity applicant is supposed to be the CEO and at least a 40% owner of the company to retain control.

We all know that control is money, and money is controlled. As I said, it’s a great idea in theory, but it needs some work in practice. Also, it’s not statewide; every jurisdiction gets to determine whether and how to allow commercial cannabis within the jurisdictional limits.

That means that they can ban all commercial cannabis activity or choose to have different licensing types, including having a social equity license. So far, only a few jurisdictions out of the 537 in California offer a social equity tier of licensure.

The idea is being refined over time, and I hope that we can integrate more of the social justice aspect of cannabis decriminalization.

I should also mention the impact of AI, artificial intelligence; with the passing of California’s Medical and Adult-Use Regulation and Safety Act – they’re supposed to be expungement of previous convictions statewide. It’s on the person with the conviction to get their expungement, whereas the city of San Francisco used an ai program to go ahead and automatically expunge those convictions that were out there. The city of new york is doing the same thing because New York just legalized it.

It’s fabulous and somewhere else if I recall.

New Mexico, yesterday.

Yeah, the green wave is sweet. You heard it here.

Exactly, you’ll ride that high tide.

How do all these activities tie back into what you guys are doing with the international cannabis bar association?

The cannabis bar association is just where it’s at for cutting-edge knowledge on not only the politics of cannabis but the evolving law and cannabis. It’s the place to meet other professionals who are super knowledgeable in their area because one thing that’s important about cannabis is that it’s hyper-local – state by state, the regulations differ city by city, county by county the regulations differ. That’s what seems to be true across the country.

Local controls are the political compromise to address the nimby problem of NIMBY – not in my backyard. The cannabis bar association’s mission is education. To give to other professionals, share the most cutting-edge continuing legal education about the issues facing the cannabis industry and how lawyers are handling it. Some of the best lawyers in the world who do this work form a community used for networking and passing referrals. Frankly, we throw the best parties; we’ve been thrown out of every vegas hotel room we’ve been into.

Do you remember parties, Mr. Doherty?

No, it’s been a very long time since I left my house.

Right, I put on a zoom top for you, and I did my hair and took a shower put on some makeup. So I am feeling very fancy today.

Right, I have been in a hole. That’s why I’m this pasty. I haven’t been out of the house in a year.

Got it; the other tenants of the bar association are access and leadership. Access to other members who are super knowledgeable in their area of the law. A super supportive network.

By definition of being involved in the cannabis bar association this early on, we are leaders in the space for cannabis lawyering, especially the dispute work that I do. There is not a lot of precedents out there. I can say no other cases. This is how the so-and-so court handled this dispute between cannabis businesses in the past. It almost does not exist, so by definition, a lot of the work I’m doing and my colleagues doing is leading-edge work. Not just cutting edge, but bleeding edge. We are forming and shaping the legal landscape. I like to tell people that I do the same kind of work as everyone else except that I’m doing it surfing on a hot lava flow.

How has the federal environment changed? A couple of years ago, I know they were going into Oakland and doing raids and all that kind of stuff? Are they ignoring that? Are they enforcing anything? When will things change on the federal level? What’s your take on that?

The federal enforcement perspective right now primarily relies on what’s called the Rohrabacher–Farr Amendment, which is a budget right that prevents the federal department of justice from spending any funds to prosecute a state-legal medical cannabis business – not adult-use but medical – to the extent that that medical cannabis business is entirely compliant with the state’s underlying laws.

Suppose you’ve read through the cannabis regulations under MAUCRSA and what’s come out since it’s practically impossible to comply with all things at all times. So the risk of federal enforcement is still out there, and in no other industry are we generating multi-billions of dollars in flagrant violation of federal law. But, the department of justice is mainly hamstrung to do anything about it.

Let’s see what happens. The Rohrabacher–Farr Amendment gets redone every year. I think it was just renewed, so we’re not seeing much enforcement going on. There’s still always the risk of civil asset forfeiture for professionals and landowners because to the extent that the business is non-compliant or violates the controlled substances act, there’s a risk that the federal government could come in and seize your assets. Not see that very much anymore, and so the name of the game is compliance. To the extent that the business is compliant with the rules of their jurisdiction, the risk of federal enforcement is pretty low.

The other thing, too, is if you’re compliant with all of those regulations, then you’re steering clear of what we called the dirty eight from the Cole Memorandum back in 2013. This was federal government guidance back in 2013 that said basically to the extent that state-legal medical cannabis businesses are not selling to kids or growing on federal land or, you know, cartel activity – there’s a list of eight things that the government has an enforcement priority on. These things that make sense – don’t sell to kids. Don’t sell the cartels—that sort of deal.

Attorney General Jeff Sessions rescinded the Cole Memo in 2018, but in its place, prosecutors should essentially use their discretion given the limited resources that the government has. But, of course, this is government-speak, for I’m making this big chest-puffing move to go ahead and rescind the cole Memo but carry on as usual.

What about the medical card game – there used to be the doctor that would give you a card for medicinal if you went in with 25 bucks and a headache – have they gone away, or are they still out there?

They’re still out there. Indeed, their industry has taken a hit, but medicinal use is still huge. There’s a different taxation level for it. You can have more plants at your residence if you have a medicinal card. So there still are benefits, and certainly given what I just articulated about federal government enforcement. So if you’re at all concerned, go for the medical cannabis space. If you’re a consumer, get your medical cannabis card. It’ll help you sleep better at night.

Not the end of the world, but certainly, that industry took a hit because not everyone needs that card anymore. Not everyone needs a medical recommendation anymore to obtain cannabis. You have to be over 21.

Then, of course, the illicit market is still thriving. But, if you’ve only got 20 bucks, I’m sure there’s a guy on a corner in Oakland that will help you out.

Is the illicit market thriving because of the taxes being imposed?

It is the cost of being compliant. It is very is expensive to produce legal cannabis. Then the taxation on top of that. Many people, the elderly, and some more economically distressed communities, if they have a choice between seventy dollars for an eighth, that’s organic, and it’s been tested – the weed in the pretty jar – or the ounce for 200 from their local dealer. People will still get the ounce of weed that their friendship grew instead of the fancy cannabis.

I kind of think that all legal cannabis, to an extent, is luxury cannabis. Also, communities of color have been systematically trained to fear any law enforcement. So many people don’t necessarily want to walk into a dispensary and show their id – because they’ve been systematically trained that only bad things can come from this sort of thing. So again, it harkens back to the illicit market. It’s just easier to go with what you know.

Yeah, I mean. Show your id, be tracked be in their system, your purchases recorded. Beyond law enforcement, there are other concerns. I know there’s a lot of cybersecurity concerns around. This is medicinal, so it should be private. This is health information and health data. We don’t want that information conveyed to our employer—things like that. We have to worry whether these medical dispensaries are HIPPA compliant.

I don’t know this for certain, but it strikes me that to the extent that you have a recommendation from your doctor, it is protected by HIPPA. I don’t think we have any law on this. Still, to the extent that someone wanted to subpoena a dispensary’s records to see if you purchased from that particular dispensary if you had a medical card – I would argue that motion all day. I would argue in court and say no, no, it’s covered by HIPPA. This is private, protected medical information.

With California’s relatively new privacy act, which is the equivalent of the European GDPR. I think it’s CCPA.

There are many software solutions that cannabis businesses in California need to implement to become CCPA compliant, meet those privacy concerns, and delete people’s data upon request. The other essential thing is how they choose to communicate, particularly with the medicinal clients. On a non-cannabis-related example, we have a client that is a chiropractor that was texting to patients.  We advised them to stop. But, unfortunately, you can’t do that because texting is not a secure channel to convey health information.

I would also mention that text messages are a big deal for cannabis dispensaries because TCPA (Telephone Consumer Privacy Act) litigation is rash. So to the extent that you’re getting text messages from your dispensary and haven’t specifically approved those, you are in violation. There is a cottage industry of plaintiff’s lawyers going around and suing everyone for these TCPA violations. The TCPA cases are the most commonly filed federal lawsuit. So they are a real risk for those not in compliance.

I’ve had some TCPA cases where my client was a wealthy corporation that bought an existing delivery service and didn’t vet their text message practices and got hit with a gnarly lawsuit for that. There’s not a defense to that.

Right, not doing your due diligence is not a defense. So what do you see on the horizon? What should we expect when things return to whatever normal will be?

I think more and more people are getting used to the idea of cannabis in the mainstream and I think certainly covet. Having cannabis workers deemed as essential workers have helped change the stigma. Then with the new Biden/Harris administration – I expect that Kamala Harris – a politician, woman of color from the San Francisco bay area who has seen firsthand because of her experience as a prosecutor- will address the devastation that cannabis prohibition causes communities.

Also, cannabis does have medicinal properties. I think I saw a headline yesterday saying that the Biden administration is eyeing what to do about medical cannabis, so if anything, the federal government will address medical cannabis.

It’s a safer approach. 

Right, because no one’s going to argue with sick kids’ right to access medicine. Stony adults like you and I (recreational usage) will not be the topic to move the needle. I expect to see some movement in the Biden/Harris administration, starting with medicinal use.

I have heard through my connections that Senator Cory Booker’s office is already working on it and spending this year writing a policy that will be voted on next year, which seems like a reasonable timeline.

I’ve been saying for a long time. I think we’re two years out. Don’t hold your breath for any of that, but as the green wave is sweeping the nation, we now have 18 or so states and DC with some form of medical or adult use.

That’s part of the bar association’s mission to ensure that those lawyers in states that are brand new to cannabis can learn from the very best in the business from across the world. As you know, all these new localities that are implementing medicinal and adult-use cannabis laws – they’re not coming up with this stuff from scratch. They’re watching what’s happening in other states, and so we very much learn from each other and build the landscape as we’re going along.

One of the challenges that we still see is some big players – big gorillas in the space – tend to stomp all over local. So how do we deal with that?

It’s a tricky question. This is why many people voted against Prop 64, which would have been the adult-use canvas legalization or decriminalization in California. Many people voted against it because they saw coming to the exact thing that had happened. After all, the big conglomerates, the big multi-state operators, have come in. the Canadian public markets have come into California and bought up many mom-and-pop shops. And, it’s overall turned out pretty badly for the mom and pops out there because, as I cited earlier. It’s tough and expensive to get a licensed legal cannabis business going in the state of California.

I had someone call me. “I have got a hundred thousand bucks. can I start a business?” I replied, “10x that and then get a few more investors and then call me back; maybe I introduce you to someone who can do it, but no you and your hundred thousand dollars you got, you got nothing going on here.”

Then there’s a legacy cash problem of a lot of these long-time industry pioneers. They’ve got money that’s never entered the system, so there are some issues there. I see many unlicensed yet very talented growers enter contracts with licensed pro facilities to sort of sharecropping – it’s a terrible racist word – but in one of the cases I have in Sacramento, the parties referred to their arrangement as a sharecropping agreement. My clients spent their own money to outfit the outdoor grow and harvest the cannabis themselves. Then the guy who owned the licensed grow showed up, sold the weed, and didn’t pay my guys a dime.

Not a lot of recourse. There are lawsuits, that’s what we’re doing, but it’s a terrible form of recourse. Lawsuits are awful for everybody involved. Mom and pops out there are getting taken advantage of. Especially by the Canadian money that came in. in 2019, I saw a rash of those sorts of cases where mom and pop sold out to Canadians in a reverse merger and not realizing that for the low, low cost of the 300,000 they got up front, they’ve lost control of their entire life’s business.

We saw that in Europe, where you know, they just came in and took over. In Europe, what they did – it’s primarily medicinal – they only offered a few licenses. Then, of course, to participate, as you said, you’d have millions. There was no local growth. There was no local entrepreneur. That was never going to happen.

We hope this will change with recreational. What we’ve always sort of thought from our side was that when we get into more of a recreational usage model, then maybe what will happen is you’ll start to see more of like sort of the craft beer model – where people who care about where it’s grown, whether it is indeed organic – what’s grown with, whether or not it’s grown in a sustainable environment versus you know the way we produce medicinal products which are not sustainable. Current grows to take tons of energy and stuff like that.

I’m glad you mentioned the connoisseur theory. I should mention the push for appellations in cannabis. The same way that we have appellations for wine. This one was grown in the Napa region, or this one was from Champagne, France. Having that same agricultural model applied to cannabis. Craft cannabis will focus on where it is grown, how the soil, and the water source – that sort of thing because they are outside—not grown under lights.

We’re beginning to see this in the medicinal packaging. There’s a push to have the packaging be more sustainable because there are so many proofing requirements.

Yeah, we’re hoping to see hemp products for packaging.

Right, yeah, full use of the plant and stuff like that.

Any closing thoughts or something profound – which I know is putting a lot of pressure on you coming up with something profound – any closing thoughts before we go?

I’m just full of wisdom. I can say that the best advice I can give you is the best advice I can give you – or if you’re looking to get into the industry, the best advice I can give you is to hire the right professionals. They know this space like the back of their hand, know the regulators, and understand what’s going on

your friend’s son in law school is not the lawyer for you on this matter. So if you’re having trouble finding someone, go check out the association.

Just because you’ve been smoking a long time doesn’t make you an expert!

Correct, maybe an expert on smoking but not the law. This was fun, thank you.

We very much appreciate your time, and we look forward to staying in touch.

Let me say one more thing if you’re interested in joining the bar association, use my last name – Young – y-o-u-n-g – for a 15% discount on your membership.

See that; it’s worth it to pay attention to the end.

CannaList Conversations with Katy Young of Ad Astra Law Group San Francisco

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