Companies in the cannabis industry face a wide range of regulatory challenges and legal risks, from seed-to-sale tracking to section 280E of the Internal Revenue Code. One area that is commonly overlooked but poses an exceptionally high level of risk is environmental, health, and safety (EHS) compliance. Failing to follow federal and state EHS regulations can result in costly outcomes, including massive fines and even jail time for recalcitrant operators, as well as reputational damage and loss of investment.
Many companies and even some state inspectors are unaware federal EHS rules apply to operators despite the plant being illegal under federal law. Most also do not realize these bedrock EHS laws often contain citizen suit provisions, which enable private citizens and other community and advocacy organizations to bring private right-of-action cases directly against operators—or the government—in federal court to force compliance and impose penalties. Some state EHS laws contain similar provisions that can lead to the same outcomes.
Federal environmental laws that provide for citizen suits include the Clean Water Act, the Safe Drinking Water Act, the Clean Air Act, and the Resource Conservation and Recovery Act. On average, civil penalties can reach up to $37,500 per violation per day, three years in jail, or both. Maximum penalties can be upward of $250,000 and five years in jail.
In addition, some laws, such as the Clean Water Act and the Clean Air Act, have quantitative and qualitative standards that are easily detectable simply by observation at a property boundary, in a stream, or from a smokestack. These include water discoloration, foam in the water, or opacity of emissions. Other laws have mere nuisance regulations (think odor from cannabis cultivation) that easily can trip up operators.
These types of citizen actions now are being leveled against the industry. Earlier this month, a California nonprofit sued the owner of an Oakland facility in a United States district court, demanding injunctive relief and civil penalties for two years of Clean Air Act violations. According to the complaint filed by the Environmental Democracy Project, diesel generators operating without proper permits emitted tons of cancer-causing diesel particulate matter and other pollutants that are inhaled by residents of the facility’s living and working space, as well as the surrounding community. The plaintiffs are seeking to shut down the facility’s operations and fine the “maximum [penalty] amount allowable under the Clean Air Act,” which could amount to $37,500 per violation per day. Two years of penalties could exceed $200 million. In addition, the state has filed a separate action seeking retroactive penalties that could result in an additional fine of $2 million.
These types of environmental compliance actions also can originate within a company. Under the Occupational Safety and Health Administration Act (OSHA), whistleblower protections exist for current or former employees who report workplace safety and health violations.
In most cases, citizen suits stem from companies failing to maintain EHS licensing, reporting, or compliance, or from overlooking or disregarding critical stakeholders such as employees, local officials, or community groups. They also can be driven by individuals or organizations that have either an ax to grind or other personal interests in the outcome, including aggrieved former employees, anti-cannabis groups, competing businesses, or unethical lawyers seeking to create litigation to obtain attorneys’ fees.
Any of these scenarios could result in massive fines and jail time for employees or board members.
5 simple steps to reduce exposure and mitigate damage
Companies would be wise to adhere to the old Benjamin Franklin adage, “An ounce of prevention is worth a pound of cure.”
Businesses are best served by evaluating fundamental EHS compliance issues on the front end so they don’t find themselves paying even more for them later. An audit by practitioners experienced in EHS compliance can save companies a whole world of hurt.
Self-reporting EHS violations or oversights might lead to corrective action, consent orders, or fines, but these outcomes are nothing compared to the devastating penalties companies might face if violations are exposed through citizen suits or discovered later by regulators.
Unless there is an immediate threat to human health or the environment, a company reporting such noncompliance issues often is afforded the opportunity to bring their operations into compliance and negotiate whatever civil penalties they face, if any.
Maintaining a regular schedule of EHS compliance monitoring can save a company time and money, as well as mitigate potential civil and criminal penalties.
Common OSHA violations such as blocked exits, lack of working fire extinguishers, employee exposure to hazardous substances, or electrical dangers can be detected early and resolved if a company makes EHS compliance part of an overall compliance monitoring plan.
Implement an environmental management system (EMS)
EMS programs help organizations address regulatory requirements in a systematic and cost-effective manner, reducing their risk of non-compliance and enhancing their EHS practices.
Companies can go even further and have their EMS certified under ISO 14001, a required certification that is coming soon to U.S. cannabis companies and already is in place for European operators.
Hire environmental, health, and safety (EHS) professionals
EHS is a specialized field, and there aren’t many professionals with deep EHS experience in the cannabis industry.
Companies facing citizen suits or governmental EHS actions would be wise to hire professionals who understand the nuances of EHS laws and regulations and have relationships with EHS regulators, rather than relying on their general cannabis compliance consultant or counsel.
Marc Ross, Esq., is head of impact and ESG (environmental, social, and governance) at Vicente Sederberg LLP. He also co-chairs the environment, health, and safety practice at the firm and serves as vice-chair of the environmental stewardship and ESG committee for the U.S. Cannabis Council. His areas of expertise include ESG; corporate social responsibility; justice, equity, diversity, and inclusion; community engagement; employee engagement; strategic philanthropy; and sustainability.