Doggy daycare resorts, bed bug chasers, hypnosis centers- what hasn’t been franchised?  Many attorneys, myself included, represent franchisors in a very wide variety of industries all over the United States.  What happens when you get that call from a client saying “I want to franchise my marijuana business!”

The marijuana franchise trend has already started to take off driven by the creative spirit  of ‘ganjapreneurs’. Ear15200982_llier this month Fuel Fuels, Inc. sold its first Cafe Serendipity franchise which offers a wide variety of marijuana products, accessories, edibles and beverages. Cafe Serendipity plans to eventually roll out franchises all over United States believing that it can grow its market share by offering consistently quality products. Colorado based brothers Andy and Pete Williams are discussing turning their medical marijuana dispensary, “Medicine Man” into a Las Vegas franchise. weGrow, a supersized store offering a wide selection of hydroponic growing equipment to the marijuana industry started offering franchises in 2010.

So is 2014 the year where franchising in the marijuana industry is set to take off?  Answer: Probably not.

First and foremost, marijuana is still illegal under federal law.   As the Franchise Times questioned at the start of the medical marijuana movement can a franchise system be successful when the Franchise Disclosure Document has a risk factor stating that Under federal law, operating this franchise is a felony punishable by a minimum five-year prison sentence? Two years ago, the American Bar Association’s  The Franchise Lawyer published an excellent article detailing the pitfalls and legal perils of franchising a marijuana business.  The article emphasized the need address a whole host of potential roadblocks and touches upon such important legal issues as:

  1. Whether legal advice from an attorney to a marijuana franchisor or franchisee client about its business venture loses the attorney-client privilege under the “crime-fraud” exception which states that communications made to perpetrate a crime are not protected given that the whole business itself violates federal law?
  2. What are the federal tax implications?  Can a marijuana franchise deduct business expenses when the tax code prohibits costs related to trafficking controlled substances?
  3. What risks are disclosed in the FDD and what happens if the operation manual conflicts with law?

As this industry grows, budding new legal issues will continue to pop up.   It is clear, however, that any prospective franchisor or franchisee client must find legal representation that can navigate not just the franchise regulatory legal matters, but also tax laws, ethics laws and state and local statutes.  We will continue to keep you updated on this interesting topic as new legal precedent is established, even if we likely won’t be enjoying the fruits of the first ganjapreneurs!