Key business lessons from Sweet Leaf’s loss of 26 marijuana licenses in Denver

Sweet Leaf stripped of 26 of its Denver marijuana licenses for alleged illegal sales looping scheme, Key business lessons from Sweet Leaf’s loss of 26 marijuana licenses in Denver

Earlier this month, Denver stripped Sweet Leaf of all 26 of its city-issued marijuana licenses for what authorities characterized as a management-directed illegal sales “looping” scheme that allowed customers to buy cannabis multiple times a day. Sweet Leaf maintains its innocence.

The news garnered a lot of attention from cannabis sector experts, who generally agreed that in an industry so heavily regulated, business owners shouldn’t risk losing a hard-earned license by engaging in behavior they think might squeeze through a legal loophole.

Their advice:
  • Train your managers and employees about the importance of complying with the law.
  • When in doubt about the legality of a particular business practice, consult an attorney.

Below are insights from MJ insiders about the lessons learned from Sweet Leaf’s woes as well as new details  related to the company’s downfall in Denver:

Sweet Leaf stripped of 26 of its Denver marijuana licenses for alleged illegal sales looping scheme, Key business lessons from Sweet Leaf’s loss of 26 marijuana licenses in Denver

Kristi Kelly

• Kristi Kelly, executive director, Marijuana Industry Group in Colorado (which, Kelly reports, has about 550-600 licensed members): “What I can tell you is that it’s had an important effect on illustrating the need to have compliance training from the top down. I feel it’s created an appetite even more for creating checks and balances. Now everyone knows exactly what the expectations are. I don’t see how something so significant can take place and not change behavior.

“I have no idea how pervasive it was, but I would venture to guess that after people started understanding the issue, I would be shocked if it were still happening. What we are seeing from our members is more engagement in the interpretation of the regulations. It’s become very clear that a misunderstanding or misinterpretation anywhere on the continuum can have very severe business consequences. We provide education, and then it becomes a business decision on how (a company) chooses to interpret.”

Sweet Leaf stripped of 26 of its Denver marijuana licenses for alleged illegal sales looping scheme, Key business lessons from Sweet Leaf’s loss of 26 marijuana licenses in Denver

Robert Mikos

• Robert Mikos, professor, Vanderbilt Law School: “One big lesson that shouldn’t need to be taught is not to believe you’ve got some clever way of evading the law … They thought, ‘We have a gimmicky way that’s going to help boost our business.’ I think people need to recognize especially in a highly regulated industry that the law is reasonable and rational, and that the people who write the law are pretty smart. These gaps in legal coverage are few and far between.

“Before you engage in some action like this, you need to vet it with a smart and seasoned attorney. (Sweet Leaf) might have found some sloppy wording, but it’s always important to remember there’s a lot of overlap in laws, so even if you’re not violating this particular regulation, it doesn’t mean you’re free and clear. You might be guilty of other things that put you in violation of the law.”

Sweet Leaf stripped of 26 of its Denver marijuana licenses for alleged illegal sales looping scheme, Key business lessons from Sweet Leaf’s loss of 26 marijuana licenses in Denver

Kris Krane

• Kris Krane, president, 4Front Ventures: “Given all of the attention given to the Sweet Leaf case, my guess is businesses will be more cautious about this in the future, knowing that regulators are paying attention. What stops businesses from doing this are good operating protocols and staff training.

“If the staff is trained to understand that looping is a violation that could cost a business its license, there’s no reason for the staff to allow it. Salespeople or budtenders don’t work on commission, so there’s no added incentive to them to allow this. If the owners make it a priority in training, as they should all compliance issues, it should be easily avoidable.”

Sweet Leaf stripped of 26 of its Denver marijuana licenses for alleged illegal sales looping scheme, Key business lessons from Sweet Leaf’s loss of 26 marijuana licenses in Denver

Rachael Ardanuy

• Rachael Ardanuy, Denver cannabis attorney: “The best practice is to reach out to your counsel before making any sort of decision you’re not sure about. Double-check with experienced counsel in the industry before going full steam ahead with that kind of sales tactic.

“Folks invest a lot in the business and have a lot to lose. These licenses are very precious and a big privilege.”

When in doubt, seek expert advice

Ardanuy shared an anecdote from the spring of 2017, when a cannabis client told her a competitor was padding sales by selling product to some of the same customers multiple times a day.

“They said, ‘We feel like it’s wrong, but we also see our neighbor making a ton of money doing it, and we feel like we’re missing out on a lot of dollars,’” Ardanuy recalls the client saying.

By that time, Denver police already were investigating Sweet Leaf.

Within six months, Sweet Leaf’s Denver stores would be shuttered for the allegedly illegal sales practices and a dozen budtenders would be arrested.

But Ardanuy said she wasn’t aware of the Sweet Leaf investigation at the time and her client didn’t directly name the competitor.

On her client’s behalf, Ardanuy asked regulators for a “statement of position” on the statute governing daily marijuana sales limits, a request for clarification that any cannabis business can make in Colorado.

Jim Burack, director of the Colorado Marijuana Enforcement Division, replied in a letter in May 2017 that multiple transactions “may be viewed by the division as an attempt to evade quantity limitations.”

Ardanuy, then with the law office of Lauren C. Davis, said she didn’t feel that answer was crystal clear, but her client ultimately decided against copycatting the practice.

“It was a good decision for sure,” Ardanuy, who is now running her own practice, told MJBizDaily.

The state clarified the sales rule in early 2018.

Sweet Leaf plans to fight back

No charges have been filed against Sweet Leaf co-owners Matthew Aiken, Christian Johnson and Anthony Sauro, but the Denver District Attorney’s Office is still investigating.

In filings, Sweet Leaf has claimed facts were created “out of thin air” and that the decision to revoke its licenses was wrong.

The company has several shops in other Colorado municipalities and in Portland, Oregon, that aren’t affected by the decision and remain open.

“Sweet Leaf continues to maintain our innocence, and we will continue to fight these Stalinist tactics used by the City of Denver,” Aiken, the company’s CEO, wrote in a statement emailed Tuesday to MJBizDaily.

“We will rigorously exhaust every option of appeal.  Furthermore, we will continue to fight for the rights of our industry to be treated like businesspeople.”

Meanwhile, state monitoring sales practices

Shannon Gray, spokeswoman for Colorado’s Marijuana Enforcement Division, won’t say if the behavior of the state’s marijuana companies has improved since the Sweet Leaf decision.

She wrote in an email that she can’t disclose whether any businesses are under investigation.

Gray did note that the state continues to review operations through “targeted inspections, including active compliance checks and point-of-sale enforcement efforts.”

Jeff Smith can be reached at [email protected]