Washington Court of Appeals Defines the LCB’s Cannabis Tied House Regulations

by Amrit Sharma

The Washington State Liquor and Cannabis Board (LCB) was responsible for creating one of the
first sets of regulations for cannabis in the United States. However, with the growth of the
industry, new disputes are arising that require clarification to the LCB’s regulations and
enforcement. The Washington State Court of Appeals recently set limits on the LCB’s issuance
of pre-enforcement letters while clarifying the tied house rule.

What is a tied house regulation? 
It is a trade practice in which a production company induces a retailer to purchase its products.
Tied house regulations are not foreign to manufacturing, agriculture, and retail markets. The
Washington cannabis license structure includes three tiers: producers, processors, and retailers.
Producer and processor licenses can be held together, generally because of the logistics of
producing and processing cannabis plants. However, retail licenses holders may not commingle
businesses with producers or processors due to fears of vertical monopolies within the industry.

The LCB expanded the statutory guidelines of tied house regulations. WAC 314-55-018 limits
ANY cannabis license holders or their agents from getting into any agreement that “causes undue
influence” over another cannabis license holder or agent. This regulation aims to prevent one tier
of the cannabis market supply chain from owning or controlling another tier.

Because “undue influence” has not been defined, the water gets murky when determining if
undue influence exists in cannabis agreements involving individuals who have ownership
interests in multiple companies.

A recent Washington Court of Appeals case, Yaron v. Conley, 17 Wn. App. 2d 815, 488 P.3d
855 (2021), addressed the problem of tied houses.

Yaron v. Conley Facts 
AVH & BJ Holdings owned by Joseph, Bracha, and Auroraview Holdings, whose majority
owner was Plaintiff Yaron. AVH & BJ Holdings owned commercial property in Kirkland, which
they leased to JRM, LLC. Joseph wholly-owned JRM. The lease allowed JRM to sublease with
the prior written consent of the landlord. Accordingly, JRM subleased a commercial property
unit to Dynamic Harvest, a cannabis producer, with AVH & BJ Holdings’ written approval.

In a separate transaction, Defendant Conley wholly-owned Mary Jane, a cannabis retail license
for use in Kirkland, and was interested in leasing retail space from AVH & BJ Holdings. They
agreed to lease to Defendant Conley in exchange for ownership interest in her cannabis retail
license. Conley agreed, and JRM subleased another unit of the commercial property to Conley.

Yaron and Joseph submitted a Change in Governing Persons application to include them on
Mary Jane license; however, they did not disclose their various interests in the Kirkland property.
The LCB approved the change on the condition that an operating agreement was put in place.

Conley, Yaron, and Joseph executed a one-page operating agreement that vaguely provided all
major “business decisions” must be agreed upon by all parties.

The LCB’s investigation later discovered Joseph’s ownership interest in the Kirkland property.
As a result, Joseph was forbidden from being a true party of interest to a cannabis retailer
because he directly leased property to Dynamic Harvest, a cannabis producer. Joseph’s
ownership interests represent our classic example of a tied house violation because he had direct
control (through his ownership in JRM) over the sublease to Dynamic Harvest.

Throughout this process, Defendant Conley, feeling bullied, corresponded with the LCB to
determine the best route to remove Yaron from her cannabis retail license and get approval for a
new retail location. Conley disclosed Yaron’s membership interest in Auroraview (part owner of
AVH & BJ Holdings) to the LCB.

The LCB’s Pre-enforcement Letter
The LCB responded with a pre-enforcement letter to Mary Jane stating Yaron violated the tied
house regulation. Conley and Yaron had 45 days “to remove [Yaron] from any ownership
interest” in either the cannabis retail license or Auroraview. Yaron objected to the alleged tied
house violation and moved to cure it by divesting his ownership interest in Auroraview. Conley
called a member meeting of Mary Jane and unilaterally decided to remove Yaron as a member.

Yaron sued Conley for breach of contract, breach of fiduciary duty, and declaratory and
injunctive relief. In response, Conley claimed the operating agreement was illegal because it
violated public policy.

The trial court agreed with the LCB’s authority to interpret WAC 314-55-018 to conclude that
Yaron violated the rule and thus his ownership in the retail license was against public policy.

First, the appellate court defined “undue influence” as a relationship that destroys the free agency
of an actor. Under this definition, Yaron’s ownership in the retail cannabis license paired with his
ownership of commercial property that subleases a unit to a cannabis producer does not violate
the tied house regulation because Yaron did not have control of the producer’s rent or business.

Joseph, however, is a classic example of what the tied house regulation forbids because of his
ownership in the cannabis retail license and direct control over the terms of the producer’s

Second, the LCB’s pre-enforcement letter was not official agency policy and, therefore, should
not be given any deference. Agencies may interpret their rules, but they must explain their
reasoning and allow the public’s concerns to be addressed through the rule-making process. On
the other hand, this pre-enforcement letter was informal agency communication that did not
address how Yaron violated agency regulations.

In addition, the retail operating agreement was not a violation of public policy. No language in
the agreement involved or referred to cross-tier financial interests with cannabis licensed

Changes to WAC 314-55-018
The LCB has set forth new changes to WAC 314-55-018, which were submitted in final form
October 28, 2021. The rules included Marijuana Transportation and Marijuana Research licenses
under the fold of the WAC. However, the draft rules have been in place for a few years, and do
not change anything in practice.

If you end up with an Administrative Violation (AVN) or find yourself in a business dispute over
the regulatory impact on your business, contact our litigation attorneys. We are here to help!