Filed Washington State Court of Appeals Division Two
August 2, 2022 IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
DIVISION II THE SUNSHINE TIKI HUT, LLC d/b/a THE No. 55380-5-II SUNSHINE TIKI HUT,
Appellant,
v. UNPUBLISHED OPINION
WASHINGTON STATE LIQUOR AND CANNABIS BOARD,
Respondent.
MAXA, P.J. – Sunshine Tiki Hut (STH), a previously licensed cannabis1 producer and
processor, appeals the superior court’s affirmance of final orders of the Washington State Liquor
and Cannabis Board (LCB). The LCB’s orders concluded that STH committed 12 violations of
cannabis regulations and as penalties imposed fines and cancelled STH’s cannabis license.
The LCB’s enforcement division (Enforcement) issued four administrative violation
notices (AVNs) alleging that STH had committed multiple violations of cannabis regulations and
listed various penalties, including cancellation of STH’s license. STH requested an
administrative hearing on all of the violations. An administrative law judge (ALJ) granted
Enforcement’s summary judgment motion regarding 11 of the violations and ruled that the
imposed penalties were appropriate. STH filed a petition for review with the LCB in which STH
1 The Supreme Court in State v. Fraser recognized that using the term “marijuana” instead of “cannabis” is rooted in racism. 199 Wn.2d 465, 469 n.1, 509 P.3d 282 (2022). The legislature has enacted a law to replace “marijuana” with “cannabis” throughout the Revised Code of Washington with various effective dates depending on the statute.” Id.; see LAWS OF 2022, ch. 16, § 1. Accordingly, as the court did in Fraser, we use “cannabis” instead of marijuana unless quoting. No. 553805-II
expressly referenced nine of the violations but did not reference the other three. In separate
orders for each AVN, the LCB affirmed the ALJ’s grant of summary judgment on all of the
violations and modified the ALJ’s order to grant summary judgment on an additional violation.
STH appealed the LCB’s final orders to the superior court, which affirmed.
We hold that (1) the ALJ did not err in hearing Enforcement’s summary judgment motion
despite STH’s argument that the motion was filed and served after the deadline for summary
judgment motions; (2) STH waived its challenge to the first operating plan, waste disposal and
third traceability violations under RCW 34.05.554(1) by not raising those violations in its
petition for review; (3) STH’s challenges to the remaining violations are not moot even though
license cancellation was the penalty for the third traceability violation; (3) the LCB properly
granted summary judgment in favor of Enforcement regarding the first surveillance,
financier/source of funds, second traceability, and second surveillance violations; and (4), the
LCB erred in granting summary judgment in favor of Enforcement regarding the first
traceability, misrepresentation of fact, criminal conduct, obstruction, and second operating plan
violations because there are genuine issues of material fact regarding those violations.
Accordingly, we affirm in part and reverse in part the LCB’s orders granting summary
judgment in favor of Enforcement. Although STH’s license cancellation as penalty remains, we
remand to the LCB for further proceedings consistent with this opinion.
FACTS
Background
Mark Coy is the primary owner and licensee of STH. STH obtained a cannabis
producer/processor license in 2015, and operated a cannabis producer/processor business in
Hoquiam.
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From March 2017 to September 2018, Enforcement issued four AVNs, which included
12 separate violations, to STH for violating cannabis regulations. The AVNs listed penalties that
ranged from monetary fines to license cancellation. The following descriptions of the facts
supporting the violations found by the ALJ and the LCB are from reports prepared by LCB
enforcement officers.
AVN 7R7080A
First Operating Plan Violation
On March 21, 2017, several LCB law enforcement officers conducted an inventory
verification on STH’s premises. As Coy was giving the officers a tour of the premises, officer
Carly Reynoldson noticed two large hoop houses or greenhouses2 that did not appear on an
approved outdoor grow floor plan. Sergeant Vanessa Garris observed that the inside perimeter
fencing had either been removed, blown over, or some sections has no fencing at all. No request
to change or remove any fence line had been approved.
Waste Violation
During the walkthrough, Reynoldson saw a small incinerator and asked Coy about how
he disposed of product, Coy told her “Oh we just burn it.” Clerk’s Papers (CP) at 241.
Reynoldson instructed Coy that he could not do that as it was a violation of WAC 314-55-097.
Sergeant Stacy Cutlip reported the same observations and response from Coy.
First Surveillance Violation
Coy was asked to pull up 45 days of surveillance recordings, which was required by
regulation. Coy could only pull up a total of 13 days.
2 According to Coy, the hoop houses were temporary covers to protect the plants from the elements.
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Traceability Violation
In reviewing cannabis concentrates that were packaged for distribution, Garris found that
there were three different lots that were reported incorrectly in the traceability system. The first
lot number was reported in traceability as having a quantity of 994 grams, but Garris located less
than 300 grams plus 144 individual packaged units and less than 150 grams of unpackaged
concentrate. The second lot number was reported in traceability as having a quantity of 1,189
grams, but Garris located less than 100 grams of unpackaged concentrate plus 140 individual
packaged units. The third lot was reported in traceability as having a quantity of 1,382 grams,
but Garris located less than 100 grams of unpackaged concentrate plus 145 individual packaged
units.
Garris observed similar discrepancies when weighing the dried flower cannabis. Several
paper bags of cannabis did not match the weight or quantity reported in traceability. There was
approximately 3,126 grams of cannabis missing for which Coy had no explanation.
AVN 7R7312A
Financier/Source of Funds Violation & Misrepresentation of Fact
Enforcement received a complaint from Mark Brewer, who claimed that he had invested
money in the company. Enforcement confirmed that Coy cashed a check from Brewer in the
amount of $5,000.
Enforcement served STH with a request for records and interviewed Coy. Coy stated that
he purchased a greenhouse with the $5,000. Coy paid Brewer back $7,700 for the greenhouse
and other business supplies.
The investigation also revealed that $42,733.37 had been deposited into Coy’s business
account. That money was transferred from Coy’s personal account, where $74,733.37 had been
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deposited from a title company. When asked about the money, Coy stated in a text that he
refinanced the business using a mortgage company by the name of Anton Miller and that the loan
documents were in the records he turned over.
Enforcement discovered that checks were made out monthly to Anton Miller. Coy stated
that Anton Miller was the mortgage company he got the loan through. The investigation
revealed that Anton Miller was a man living in Lakewood, not a mortgage company. Officers set
up another interview with Coy on November 8, 2017, where Coy stated that Miller was a man
who had loaned him $80,000.
AVN 7D8169A
Second Traceability Violation
On June 16, 2018, the LCB responded to a situation at STH. They discovered around 30
pounds of finished cannabis product in paper bags in a storage room. All but a few of the bags
did not have the required traceability tags. But the bags that did have tags did not show up in
traceability when the officers checked. None of the STH employees could explain why the
product was in the storage room and untagged.
Second Surveillance Violation
During the same call, officers walked into the room where the surveillance system was
located and noticed that several of the cameras were blacked out. Officers asked one of the
employees to show surveillance video from the previous 45 days as well as some dates when
equipment had been stolen. But the employee told the officers that he did not have access to the
cameras, and that only Coy had access.
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AVN 7D8270A
Criminal Conduct
On September 25, 2018, Hoquiam Police officer David Blundred initiated a traffic stop of
a vehicle near STH’s facility. As he approached the vehicle, he noticed a large black garbage
bag in the back seat. Blundred made contact with Joshua Harris, who was driving, and Doreen
Williams. Williams said Harris was giving her a ride home and that she was a volunteer at STH.
Blundred asked to search the vehicle, and Harris consented.
As Blundred went to open the black bag, Williams grabbed the bag with both hands and
tried to pull it away from him. Eventually Williams released the bag. When Blundred looked
into the bag, he saw several large bags of processed cannabis buds. Williams admitted to taking
the cannabis from STH. Blundred called Coy, who said that Williams was an STH employee.
Coy said that he did not want to see Williams in trouble and declined to press charges.
Obstruction of LCB Officers
After the incident with Williams, the police and LCB conducted a follow up inspection
on September 27, 2018. The officers knocked on the front door, but no one answered. The
officers then walked to a side gate where they saw Williams and called for her to open the gate.
But she ignored them. The officers called Coy and told him they saw Williams inside and were
there for an inspection check. Several minutes later, Coy called back and told the officers that
Williams would be opening the front door. By the time Williams opened the door, the inspection
had been delayed by approximately 42 minutes.
The next day officers reviewed the video from the previous day. The video revealed that
as the officers were attempting to enter the property, Zackary Payne, another STH employee,
was running away and hid behind a greenhouse. The video also revealed that Williams was
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watching the officers on the camera even though she told officers she was not aware of their
presence.
Second Operating Plan Violation
The previous day, the officers had observed a motor home parked inside the gates of the
premises. After inspecting other parts of the premises, Williams and the officers returned to the
RV. Williams admitted that she knew Payne was in the RV. After the officers knocked, Payne
eventually came out of the RV. When asked what the RV was used for, Payne said it was used
as an office and breakroom. Officers observed cannabis on the floor and drying on cabinet
handles. There were also traceability tags on the floor of the RV that appeared to be removed
from plants.
Third Traceability Violation
The next day Cutlip and other officers conducted a follow-up investigation to check
cameras and confiscate the untagged marijuana officers observed the previous day. While
photographing the premises, Cutlip noticed a storage room at the end of one of the grow rooms.
Cutlip checked the storage room and found three chest freezers that were filled with bags of
processed marijuana, some of which had traceability tags, but the majority of which did not.
Summary of Alleged Violations
The violations and penalties stated in the four AVNs are summarized in the following
chart:
AVN 7R7080A Violation Date Standard Penalty Aggravated Penalty First Operating Plan March 21, 2017 $1000 Waste March 21, 2017 $2,500 First Surveillance System March 21, 2017 $2,500 First Traceability March 21, 2017 $2,500 AVN 7R7312A Violation Date Standard Penalty Aggravated Penalty Financier/Source of July 21, 2016 Cancellation Funds Misrepresentation of Fact Oct. 17, 2017 Cancellation
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AVN 7D8169A Violation Date Standard Penalty Aggravated Penalty Second Traceability June 18, 2018 Not applied $30,000 Second Surveillance June 18, 2018 $10,000 AVN 7D8270A Violation Date Standard Penalty Aggravated Penalty Criminal Conduct Sept. 24, 2018 Not applied Cancellation Obstruction Sept. 27, 2018 Not applied Cancellation Second Operating Plan Sept. 27, 2018 Not applied Cancellation Third Traceability Sept. 27, 2018 Not applied Cancellation
Administrative Hearing
STH requested an administrative hearing for each of the violations, and all were
consolidated into a single case by the Office of Administrative Hearings (OAH). The ALJ set
February 1, 2019 at 5:00 PM as the deadline for filing and service of summary judgment motions,
February 15 as the deadline for responses, and February 22 as the deadline for replies. On
February 1, Enforcement faxed 11 pages of its summary judgment motion and the first pages of
two of its supporting declarations to the OAH at 4:23 PM. Faxing only a portion of the motion
was consistent with an email from the OAH stating that documents would be considered timely
if the OAH received the first 15 pages via fax before the due date, as long as a hard copy is
mailed the same day. Enforcement then mailed its entire motion with exhibits to the OAH and to
Coy before 5:00 PM. Coy received the motion on February 2.
In opposition to summary judgment, Coy filed a separate affidavit that stated, “I would
like the tribunal to know that service of Enforcements Motion for Summary Judgment was
served late on 2/2/2019. The deadline was 2/1/2019 by 6:00 PM.” CP at 1192. This issue was
not mentioned in STH’s memorandum in opposition to summary judgment. On March 4, STH
filed a second reply in which it moved to dismiss Enforcement’s summary judgment motion
because it was untimely served and filed.
On the merits, Coy submitted a pro se memorandum in opposition to Enforcement’s
summary judgment motion. He certified under penalty of perjury that the statements he made in
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the memorandum were true and correct. The memorandum challenged each of the alleged
violations, and included factual statements from Coy.
The ALJ issued an initial order addressing Enforcement’s summary judgment motion.
The ALJ first denied STH’s motion to dismiss the LCB’s summary judgment because STH’s
second reply was untimely and STH did not move to dismiss in its first memorandum in
opposition.
The ALJ then granted summary judgment in favor of Enforcement regarding most of the
alleged violations. The ALJ denied summary judgment regarding a few of the alleged violations,
including the criminal conduct allegation in AVN D8270A as stated in conclusion of law 6.73.
Regarding that violation, the ALJ concluded that there was a question of fact whether Williams
was acting within the scope of her employment with STH and therefore whether STH was
responsible for her conduct.
Petition for Review
STH filed a petition for review of the ALJ’s initial order with the LCB. STH generally
sought review of the ALJ’s summary judgment order, asserting that the ALJ erred because “there
was a genuine issue of material fact in almost every violation.” CP at 1410 (emphasis added).
The petition specifically referenced most of the violations, but did not reference the first
operating plan violation, the waste disposal violation, or the third traceability violation. STH
also sought review of the ALJ’s denial of its motion to dismiss Enforcement’s summary
judgment motion based on untimeliness.
Enforcement also petitioned for review with the LCB regarding the ALJ’s conclusion of
law 6.73, regarding the alleged criminal conduct violation.
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The LCB issued four separate final orders addressing each of the four AVNs. The orders
for the first three AVNs affirmed the ALJ’s initial order and adopted the ALJ’s findings of fact
and conclusions of law. The order for the fourth AVN, 7D8270A, denied STH’s petition for
review and granted Enforcement’s petition for review. The LCB adopted a modified conclusion
of law 6.73, which granted summary judgment in favor of Enforcement regarding the criminal
conduct violation.
Regarding penalties, the LCB’s order for AVN 7R7312A affirmed cancellation of STH’s
license and the order for AVN 7D8270A revoked STH’s license. Because STH’s license was
cancelled, the other two orders stated that monetary penalties would not be collected. However,
the order for AVN 7R7080A stated that the $8,500 penalty must be paid if LLC members of
STH applied for a new license. And the order for AVN 7D8169A stated that the violations
would remain on record.
STH appealed the LCB’s final orders to superior court. The superior court affirmed the
LCB’s orders. STH appeals the superior court’s affirmance of the LCB’s final orders.
ANALYSIS
A. STANDARD OF REVIEW
Our review of an agency decision is governed by the Administrative Procedure Act
(APA). RCW 34.05.570(3). In reviewing a claim under the APA, we sit in the same position as
the superior court and review the agency’s order based on the administrative record. Pac. Coast
Shredding, LLC v. Port of Vancouver, USA, 14 Wn. App. 2d 484, 501, 471 P.3d 934 (2020).
If an administrative decision is based on summary judgment, we overlay the APA and
summary judgment standards of review. Haines-Marchel v. Wash. State Liquor & Cannabis Bd.,
1 Wn. App. 2d 712, 728, 406 P.3d 1199 (2017). We review an agency’s summary judgment
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ruling de novo, viewing the facts and all reasonable inferences in the light most favorable to the
nonmoving party. Hamilton v. Pollution Control Hr’gs Bd., 5 Wn. App. 2d 271, 281, 426 P.3d
281 (2018). Summary judgment on an issue is warranted only if there are no genuine issues of
material fact. Id.
We review an agency’s legal conclusions de novo. Pac. Coast Shredding, 14 Wn. App.
2d at 502. We give “substantial weight to its interpretations of the law when subjects fall within
its area of expertise.” Id. However, “[w]hile we give agencies great deference to their
interpretation of rules within their area of expertise, we may substitute our interpretation of the
law for that of an agency.” Quinault Indian Nation v. Imperium Terminal Servs., LLC, 187
Wn.2d 460, 474, 387 P.3d 670 (2017).
B. ALJ’S CONSIDERATION OF SUMMARY JUDGMENT MOTION
STH argues that the ALJ erred in hearing and deciding Enforcement’s motion for
summary judgment because it was untimely. We disagree.
Here, the ALJ set February 1, 2019 at 5:00 PM as the deadline for filing and service of
summary judgment motions. Enforcement faxed 11 pages of the motion and the first pages of
two of the supporting declarations to OAH before 5:00 PM on February 1, pursuant to OAH’s
instructions. And Enforcement mailed the complete motion to OAH before 5:00 PM. We
conclude that the ALJ did not err in considering the motion.
In any event, STH did not argue that Enforcement’s summary judgment motion was not
filed on time in its first response. STH mentioned only that it had not been served with the
motion until February 2, but did not claim that the motion had not been timely filed with the
OAH. STH did not raise the issue of when the motion was filed until its untimely second
response. We conclude that the ALJ did not err in ruling that STH had waived its challenge to
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the timeliness of Enforcement’s summary judgment motion by not including that challenge
before the February 22, 2019 reply deadline.
C. WAIVER OF UNREFERENCED VIOLATIONS
The LCB argues that STH waived its challenges to the first operating plan violation, the
waste disposal violation, and the third traceability violation because it did not raise those
challenges in its petition for review to the LCB. We agree.
RCW 34.05.554(1) states that “[i]ssues not raised before the agency may not be raised on
appeal.” The purpose of this rule is to protect the integrity of the administrative process. B & R
Sales, Inc. v. Dep’t of Lab. & Indus., 186 Wn. App. 367, 381, 344 P.3d 741 (2015). For an issue
to be properly raised, “there must be more than simply a hint or a slight reference to the issue in
the record.” King County v. Wash. State Boundary Rev. Bd., 122 Wn.2d 648, 670, 860 P.2d
1024 (1993).
Here, STH generally sought review of the ALJ’s summary judgment order. In the “Issues
Presented for Review” section, the petition stated that the ALJ erred because “there was a
genuine issue of material fact in almost every violation.” CP at 1410. The only reasonable
interpretation of this phrase is that not all the violations were being challenged. And then in the
body of the petition STH had headings for nine of the violations, but not the other three.
Nowhere did the petition state or even suggest that STH was seeking review of the three
unreferenced violations.3
The LCB also argues that STH waived some of the other violations because it did not
present sufficient argument regarding those violations in the petition for review. But we
3 STH argues that he satisfied RCW 34.05.554(1) by asserting challenges to these violations before the ALJ. We disagree. Because a petition for review was filed, the term “agency” in RCW 34.05.554(1) necessarily refers to the LCB rather than to the ALJ.
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conclude that under the circumstances of this case, referencing these violations in a bolded
heading is sufficient to satisfy RCW 34.05.554(1).
We conclude that STH’s petition for review was sufficient to challenge all the violations
included in the ALJ’s summary judgment ruling. Therefore, we conclude that STH waived its
challenges to the first operating plan violation, the waste disposal violation, and the third
traceability violation. Therefore, we affirm the LCB’s grant of summary judgment in favor of
Enforcement regarding those violations.
D. MOOTNESS OF REMAINING CHALLENGES
The LCB argues that STH’s challenges to the remaining violations are moot because (1)
we have affirmed the third traceability violation, (2) license cancellation was the penalty for that
violation, and (3) the LCB agreed not to enforce the monetary penalties for several of the
remaining violations. We disagree.
First, we conclude below that summary judgment was not appropriate for the first
traceability violation. Therefore, what the LCB characterized as the third traceability violation
would only be the second traceability violation. It is unclear whether license cancellation still
would be the penalty for a second traceability violation.
Second, STH received monetary penalties for the violations in two of the AVNs.
Although the LCB asserts that it is not collecting those penalties at this point, the $8,500 penalty
will have to be paid if STH submits a new application and the other violations will remain on
record. Therefore, STH and Coy potentially face consequences beyond license cancellation.
The LCB argues that future consequences are speculative. But we are not prepared to conclude
that the uncollected penalties could never impact STH or Coy in the future.
Therefore, we will consider STH’s challenges to the remaining nine violations.
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E. SUMMARY JUDGMENT REGARDING EACH VIOLATION
STH argues that the LCB erred in affirming the ALJ’s grant of summary judgment in
favor of Enforcement because genuine issues of material fact exist for all of the alleged
violations. We affirm the LCB’s grant of summary judgment in favor of Enforcement regarding
the following violations: (1) first surveillance, (2) financier/source of funds, (3) second
traceability, and (4) second surveillance. We reverse the LCB’s grant of summary judgment in
favor of Enforcement regarding the following violations: (1) first traceability, (2)
misrepresentation of fact, (3) criminal conduct, (4) obstruction, and (5) second operating plan.
1. AVN 7R7080A
a. First Surveillance Violation
The grant of summary judgment on the first surveillance violation was based on STH’s
failure to maintain 45 days of video surveillance footage on its recording system. STH argues
that the LCB erred in granting summary judgment in favor of Enforcement on this violation. We
disagree.
Former WAC 314-55-083(3) (2016) requires that surveillance cameras be set up in all
controlled areas on the licensed premises. In addition, “[t]he surveillance system storage device
must be secured on the licensed premises in a lockbox, cabinet, closet, or secured in another
manner to protect from employee tampering or criminal theft. All surveillance recordings must
be kept for a minimum of forty-five days on the licensee’s recording device.” Former WAC
314-55-083(3). The WACs do not define “surveillance system storage device” or “recording
device.”
At their inspection, enforcement officers were only able to retrieve 13 days of
surveillance footage. In STH’s summary judgment opposition, Coy stated, “The system is such
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that every week or two we download the video from the system to a hard drive which always
contains 45-days’ worth of recordings. This hard drive is onsite and can be viewed with a
laptop.” CP at 1197. Coy also stated that an LCB officer had approved this system.
STH may have complied with the spirit of former WAC 314-55-083(3) by having 45
days of surveillance footage available for review on the premises. However, former WAC 314-
55-083(3) requires that the footage be maintained on the licensee’s “recording device.” A hard
drive is not a “recording device.” We conclude that summary judgment was appropriate on the
first surveillance violation.
b. First Traceability Violation
The grant of summary judgment on the first traceability violation was based on the
discrepancy in the weights of cannabis marked with traceability codes that LCB officers
discovered, which resulted in an underreporting of product in STH’s possession. STH argues
that the LCB erred in granting summary judgment in favor of Enforcement on this violation. We
agree.
Former WAC 314-55-083(4) states that
To prevent diversion and to promote public safety, marijuana licensees must track marijuana from seed to sale. Licensees must provide the required information on a system specified by the WSLCB. All costs related to the reporting requirements are borne by the licensee. Marijuana seedlings, clones, plants, lots of usable marijuana or trim, leaves, and other plant matter, batches of extracts, marijuana- infused products, samples, and marijuana waste must be traceable from production through processing, and finally into the retail environment including being able to identify which lot was used as base material to create each batch of extracts or infused products.
Traceability requires that “[a]ll marijuana, usable marijuana, marijuana-infused products,
marijuana concentrates, seeds, plant tissue, clone lots, and marijuana waste must be physically
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tagged with the sixteen digit identification number generated by the traceability system and
tracked.” Former WAC 314-55-083(4)(h).
In STH’s summary judgment opposition, Coy had a response to the weight discrepancy
allegations:
The officers did not account for all the material in the grow. Licensee had 4 orders staged and over 2,000 joints rolled that they did not account for. The jars were ground material ready to make joints. They were with the bag of marijuana. The bags were marked with the 16-digit number and the jars were with them. All material was accounted for in the LCB system. ... The marijuana concentration that appeared to be packaged and ready for distribution in small white plastic containers that Sgt. Garris claimed were reported to state traceability incorrectly were all properly marked in the LCB traceability system. All bags of marijuana were accounted for in the LCB system. When licensee combined plants to make a batch or lot they keep the old tags inside the bags in case there is a problem with the product licensee can see which plant it came from. If there is more material than can fit in one bag, they put it into two. Licensee placed one sticker on one bag and mark it “1 of 2” and the other “2 of 2”. Licensee then place the bags together on the shelf. The LCB did not keep the material together as they removed it from the store room. The officer asked why so much material was missing. Licensee stated that “I didn’t know.” Licensee did not know because he did not know what they had looked at, accounted for, or even found. After viewing the video and reviewing their reports, Licensee now can confidently say they did not account for all the material we had. Licensee did not have any missing material, the officers failed to account for all the material licensee had onsite. All product and material were present on premises.
CP at 1198-99 (citations omitted).
Viewing the facts and reasonable inferences in the light most favorable to STH, the
weight discrepancy resulted from LCB officers not considering that STH was in the middle of
processing the cannabis and from the officers’ failure to account for all of the cannabis that was
present. Coy stated that after reviewing the video and the officers’ reports, he was able to
confirm that there was no missing cannabis. As a result, there is a genuine issue of fact whether
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there was a weight discrepancy in the marijuana in STH’s possession. We conclude that the
LCB erred in granting summary judgment on the first traceability violation.
2. AVN 7R7312A
a. Financier/Source of Funds Violation
The grant of summary judgment on the financier/source of funds violation was based on
STH’s receipt of funds from Brewer and Miller without the LCB’s approval. STH argues that
the LCB erred in granting summary judgment in favor of Enforcement on this violation. We
Former WAC 314-55-035(5) (2016) states, “After licensure, a true party of interest,
including financiers, must continue to disclose the source of funds for all moneys invested in the
licensed business. The WSLCB must approve these funds prior to investing them into the
business.”
In 2017, “financier” was defined as
any person or entity, other than a banking institution, that has made or will make an investment in the licensed business. A financier can be a person or entity that provides money as a gift, loans money to the applicant/business and expects to be paid back the amount of the loan with or without interest, or expects any percentage of the profits from the business in exchange for a loan or expertise.
Former WAC 314-55-010(10) (2016).
The evidence showed that Brewer issued a $5,000 check to STH, which STH cashed, and
then STH later paid him back. Coy stated that he used the $5,000 to purchase a greenhouse. In
STH’s summary judgment opposition, Coy stated that “Brewer brought some products that he
said worked great. Licensee accepted the products and paid him for them.” CP at 1199.
Regarding Miller, it is undisputed that Miller loaned $74,733 to Coy, and $42,733 of that amount
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was transferred to Coy’s business account. Coy stated that he gave Miller a mortgage on the
property where STH operated.
STH argues that it did not violate former WAC 314-55-035(5) because neither Brewer
nor Miller invested in the licensed business as required in that regulation. Brewer merely
provided money so STH could buy a greenhouse. Miller’s loan merely allowed STH to convert
an asset – its equity in the real property – into cash. However, former WAC 314-55-035(5) does
not focus on whether a third person has invested funds in the licensed business. That regulation
requires disclosure of the source of funds that the licensee invests in the business. Brewer was
the source of funds that STH invested in the business by buying a greenhouse. Miller was the
source of funds that STH directly invested in the business by transferring some of the money to a
business account. Therefore, STH had to obtain the LCB’s approval before investing those funds
in the business.
In addition, both Brewer and Miller fit into the definition of a financier in former WAC
314-55-010(10). Both loaned money to STH with the expectation that they would be paid back.
We conclude that summary judgment was appropriate on the financier/source of funds
violation.
b. Misrepresentation of Fact Violation
The grant of summary judgment on the misrepresentation of fact violation was based on
Coy’s statement to officers that Miller was a mortgage company. STH argues that the LCB erred
in granting summary judgment in favor of Enforcement on this violation. We agree.
Former WAC 314-55-050(3) (2016) states that the LCB can suspend or cancel a license if
an applicant “makes a misrepresentation of fact, or fails to disclose a material fact to the WSLCB
during the application process or any subsequent investigation after a license has been issued.”
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Here, Coy did state by text that Anton Miller was a mortgage company. But LCB’s
investigation showed that Miller was an individual, not a mortgage company. STH argues that
when Coy referred to Miller as a mortgage company, it was a colloquial phrase meant to convey
that Miller was the lender to whom he sent payments. STH claims that the officers simply
misunderstood Coy. STH also points out that it previously had provided the loan documents to
the LCB showing that Miller was a private lender. Finally, when officers requested a face-to-
face interview with Coy, he clarified that Miller was a man and not a company.
In STH’s opposition to summary judgment, Coy stated, “Anton Miller is who the
Licensee makes his mortgage payments to for the property. . . . This is the information that
Licensee provided when asked. There was no misrepresentation of Anton Miller and his role.”
CP at 1203.
The plain language of Coy’s text seemingly stated that Miller was a mortgage company,
which would be a misrepresentation. However, texts can be misinterpreted, and viewing the
evidence in the light most favorable to STH allows an inference that Coy simply meant to say
that Miller was the mortgage holder and not a mortgage company. As a result, a genuine issue of
fact exists as to whether Coy made a misrepresentation to the LCB.
We conclude that the LCB erred in granting summary judgment on the misrepresentation
3. AVN 7D8169A
a. Second Traceability Violation
The grant of summary judgment on the second traceability violation was based on
officers finding 30 pounds of marijuana in unmarked paper bags in the storage room on STH’s
19 No. 553805-II
premises in June 2018. STH argues that the LCB erred in granting summary judgment in favor
of Enforcement on this violation. We disagree.
In STH’s summary judgment opposition, Coy addressed only a related allegation that
officers found marijuana plants that were tall enough to be recorded in traceability. But the ALJ
did not grant summary judgment on that allegation. Coy did not challenge the evidence that
officers found unmarked bags of marijuana in the storage room. He made only a general
statement, in the context of the marijuana plants, that “[a]ll plants and material are properly
marked and recorded in the LCB system.” CP at 1200.
STH asserts that because Enforcement failed to properly account for separate bags of
cannabis in the first investigation, it is reasonable to infer the same thing happened in the second
investigation. But that inference is not reasonable. Weighing bags of cannabis that were being
processed is completely different than finding unmarked bags of cannabis in a storage room.
STH also suggests that the statement that all material was properly marked is sufficient to avoid
summary judgment. But such a general, vague statement that arguably related only to the plants
does not create a question of fact given the very specific evidence about unmarked bags of
cannabis in the storage room.
We conclude that summary judgment was appropriate on the second traceability
b. Second Surveillance Violation
The grant of summary judgment on the second surveillance violation was based on the
allegation that some cameras on the video surveillance screen were blacked out and a second
failure to provide 45 days of surveillance footage. STH argues that the LCB erred in granting
summary judgment in favor of Enforcement on this violation. We disagree.
20 No. 553805-II
As noted above, former WAC 314-55-083(3) requires a licensee to maintain a video
surveillance system with camera coverage of all areas where marijuana is grown, processed,
moved and/or destroyed. The video surveillance footage must be kept for 45 days on the
recording device. Former WAC 314-55-083(3). In addition, all videos must be produced to an
LCB officer “upon request.” Former WAC 314-55-083(3).
Regarding the failure to produce 45 days of surveillance video, Coy stated that “[t]here
was nobody there to access the system,” CP at 1200, and “Licensee was not even on premises,”
CP at 1203. Enforcement’s evidence showed that Coy was the only person who had the
password to access the surveillance system recordings. STH argues that not providing the
password to employees was required by former WAC 314-55-083(3), which requires the
surveillance system storage device to be secured to prevent employee tampering.
STH had no way of providing the surveillance footage to officers because no one was
available to access the system. Nevertheless, STH did not provide that footage to officers “upon
request” as required in former WAC 314-55-083(3). Therefore, we conclude that summary
judgment was appropriate on the second surveillance violation.
4. AVN 7D8270A
a. Criminal Conduct Violation
The grant of summary judgment on the criminal violation was based on Williams’s
possession of a large quantity of cannabis stolen from STH. The ALJ denied summary judgment
on this violation, but the LCB granted summary judgment based on Williams’s violation of
RCW 69.50.401. STH argues that the LCB erred in granting summary judgment in favor of
Enforcement on this violation. We agree.
21 No. 553805-II
WAC 314-55-110(3) states that licensees and their employees must comply with various
laws, including chapter 69.50 RCW. WAC 314-55-110(1) states that “licensees are responsible
for the operation of their licensed business in compliance with the marijuana laws and rules of
the WSLCB.” And licensees also “have the responsibility to control their conduct and the
conduct of employees . . . on the licensed premises at all times.” WAC 314-55-110(4). Former
RCW 69.50.401(1) (2015) makes it unlawful for a person to possess a controlled substance with
the intent to deliver.
In STH’s summary judgment response, Coy stated, “The Licensee was unaware of what
[Williams] was doing. She was stealing from the company and as soon as the Licensee became
aware of her breaking company and LCB rules she was fired.” CP at 1203.
First, STH emphasizes that WAC 314-55-110(4) makes licensees responsible to control
the conduct of employees “on the licensed premises.” Because Williams was arrested off the
premises, STH argues that WAC 314-55-110(4) does not apply. The LCB argues that
Williams’s diversion of cannabis started on the premises. We conclude that a genuine issue of
fact exists as to whether Williams’s violation of RCW 69.50.401(1) – which the LCB identified
as the criminal violation – occurred on or off STH’s premises.
Second, STH argues that a licensee can be liable for an employee’s conduct under WAC
314-55-110(4) only if the employee was acting within the scope of employment. Under tort
principles, an employer is liable for an employee’s conduct only if that conduct was committed
within the scope of his or her employment and acting on the employer’s behalf. Anderson v.
Soap Lake Sch. Dist., 191 Wn. 2d 343, 373, 423 P.3d 197 (2018). The LCB argues that tort
principles are inapplicable to marijuana regulations. The LCB apparently adopted this
interpretation of WAC 314-55-110(4) in its final order.
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We agree with STH, and hold that a licensee can be liable for an employee’s conduct
under WAC 314-55-110(4) only if the employee was acting within the scope of employment.
While we give “agencies great deference to their interpretation of rules within their area of
expertise, we may substitute our interpretation of the law for that of an agency.” Quinault Indian
Nation, 187 Wn.2d at 474. There is no indication in WAC 314-55-110(4) that a licensee can be
strictly liable for an employee’s conduct outside the scope of employment. And a genuine issue
of fact exists as to whether Williams was acting within the scope of employment at the time she
allegedly violated RCW 69.50.401(1).
We conclude that the LCB erred in granting summary judgment on the criminal conduct
b. Obstruction Violation
The grant of summary judgment on the obstruction violation was based on Williams’s
and Payne’s deliberate delay in granting LCB officers access to STH’s premises. STH argues
that the LCB erred in granting summary judgment in favor of Enforcement on this violation. We
Former WAC 314-55-185(1) (2016) states that a licensee’s premises must be available at
all times for inspection. In addition,
every person being on a licensed premises or with a transporting vehicle, or having charge thereof, must admit an enforcement officer of the WSLCB demanding to enter therein in pursuance of this section in the execution of his/her duty, and must not obstruct or attempt to obstruct the entry of such officer, or refuse to allow an officer to examine the premises, vehicles, records, and products subject to this section of the licensee.
Former WAC 314-55-185(2).
As noted above, licensees “are responsible for the operation of their licensed business in
compliance with the marijuana laws and rules of the WSLCB” and “have the responsibility to
23 No. 553805-II
control their conduct and the conduct of employees . . . on the licensed premises at all times.”
WAC 314-55-110(1), (4).
STH does not dispute that Williams and Payne obstructed the officers in their
investigation. But in STH’s summary judgment opposition, Coy stated, “If [Williams]
obstructed the officer, it was without licensee’s knowledge or consent. This kind of behavior is
outside the scope of work and is not tolerated. Licensee had nothing to do with this incident.”
CP at 1201. Coy also stated that “[h]e never told any employee to refuse to allow Enforcement
full access to the premises.” CP at 1203. STH argues that it should not be liable for the
employees’ actions because it can be inferred that they were obstructing the officers to prevent
detection of their own unlawful acts that were not in furtherance of STH’s business.
As discussed above, we hold that a licensee can be liable for an employee’s conduct
under WAC 314-55-110(4) only if the employee was acting within the scope of employment.
And a genuine issue of fact exists as to whether Williams and Payne were acting within the
scope of employment at the time they obstructed the LCB officers. We conclude that the LCB
erred in granting summary judgment on the obstruction violation.
c. Second Operating Plan Violation
The grant of summary judgment on the second operating plan violation was based on the
RV being on STH’s property without the LCB’s approval. STH argues that the LCB erred in
granting summary judgment in favor of Enforcement on this violation. We agree.
As discussed above, former WAC 314-55-020(12) (2016) requires that each applicant
submit an operating plan, which includes a site plan that shows the entire operation being
proposed. In addition, the licensee must notify the LCB in advance of any changes to its
24 No. 553805-II
operating plan, and LCB approval is required before a change may be implemented. Former
WAC 314-55-020(12).
In STH’s summary judgment opposition, Coy stated that he reviewed the surveillance
video and determined that nobody was residing in the RV, it was being moved offsite
continuously, and it was moved offsite every night. This evidence is sufficient to create a
genuine issue of fact as to whether the presence of the RV constituted a change to STH’s
operating plan.
The LCB concluded that even if the RV was moved offsite every night, its presence on
STH’s premises at any time without the LCB’s approval was a violation of former WAC 314-55-
020(11)(b). But we disagree with such a broad reading of former WAC 314-55-020(11)(b).
The LCB claims that because the RV blocked cameras that were on the operating plan, it
was an operating plan violation. But former WAC 314-55-020 does not dictate this. The
requirement that the cameras record all controlled areas 24 hours per day is contained in former
WAC 314-55-083(3). At best, the RV blocking the cameras would be a surveillance system
violation, not an operating plan violation.
The LCB also claims that the presence of the RV is an operating plan violation because
employees were storing cannabis in it. The LCB does not offer any evidence that the cannabis
found in the RV was prepared or processed inside the RV as part of STH’s operations. Coy
stated, “If there was any material inside the motorhome and it is determined to be from [STH].
License did not approve it and it was stolen material.” CP at 1201.
We conclude that the LCB erred in granting summary judgment on the second operating
plan violation.
25 No. 553805-II
5. Penalties
STH does not challenge the penalties the LCB imposed for the violations that we affirm.
Therefore, we affirm those imposed penalties. Significantly, license cancellation was the penalty
for the financier/source of funds violation. We reverse the penalties for those violations we find
a genuine issue of material fact exists and remand for further proceedings regarding those
violations.
Presumably, the penalties for the second and third traceability violations were based on
the conclusion that STH had committed the first traceability violation. Because we reverse the
grant of summary judgment on the first traceability violation, on remand the LCB should address
the penalties on the second and third traceability violations based on that reversal pending final
resolution on the merits on the first traceability violation.
F. ATTORNEY FEES ON APPEAL
STH argues that this court should award it attorney fees and costs under RCW
4.84.350(1). We deny STH’s request for attorney fees.
RCW 4.84.350(1) provides that
Except as otherwise specifically provided by statute, a court shall award a qualified party that prevails in a judicial review of an agency action fees and other expenses, including reasonable attorneys’ fees, unless the court finds that the agency action was substantially justified or that circumstances make an award unjust. A qualified party shall be considered to have prevailed if the qualified party obtained relief on a significant issue that achieves some benefit that the qualified party sought.
“Qualified party” includes the sole owner of a corporation only if its net worth does not exceed
$5 million. RCW 4.84.340(5).
Here, STH has not provided any evidence that it constitutes a “qualified party” under
RCW 4.84.350(1). In addition, even though STH is the prevailing party regarding some of the
26 No. 553805-II
violations, we conclude that the LCB’s action regarding those violations was substantially
justified. Accordingly, we deny STH’s request for attorney fees.
CONCLUSION
We affirm in part and reverse in part the LCB’s orders affirming the ALJ’s grant of
summary judgment in favor of Enforcement. Although STH’s license cancellation as penalty
remains, we remand to the LCB for further proceedings consistent with this opinion.
A majority of the panel having determined that this opinion will not be printed in the
Washington Appellate Reports, but will be filed for public record in accordance with RCW
2.06.040, it is so ordered.
MAXA, P.J.
We concur:
LEE, J.
VELJACIC, J.