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Every brand needs protection, and Alison extends her knowledge of intellectual property and corporate law to our cannabis clients, ensuring their businesses are protected.

California cannabis manufacturing
California cannabis manufacturing

We wrote about cannabis edibles regulations under the proposed manufacturing rules issued pursuant to the MCRSA, but clients have been asking about what, if anything, has changed due to passage of Senate Bill 94. Here’s what SB 94, aka “MAUCRSA,” has to say, generally, about edibles:

MAUCRSA mandates edible cannabis products must meet the following requirements:

  1. Not be designed to appeal to children, or be easily confused with commercially sold candy or foods that do not contain cannabis;
  2. Produced and sold with a standardized concentration of cannabinoids not to exceed 10 mg of THC per serving;
  3. Delineated or scored into standardized serving sizes if the cannabis product contains more than one serving;
  4. Homogenized to ensure uniform disbursement of cannabinoids;
  5. Manufactured and sold under sanitation standards that comport with California State Department of Health regulations;
  6. Provided to consumers with sufficient information to enable informed consumption of the product, including the potential effects of the cannabis product and directions for its consumption; and
  7. Marked with a universal symbol that will be set by the California Department of Health.

But as for the other rules promulgated by the California Department of Health pursuant to the MCRSA? They are no longer applicable, and we will have to wait for another set of proposed rules to drop before we know exactly what the regulations will look like. If you weren’t happy with the first set of rules under the MCRSA, you shouldn’t get your hopes up for big changes as the odds are good that most of these rules will remain the same under MAUCRSA as it is widely expected the California Department of Health will issue a new set of rules very similar to the first. As a refresher, here are some of the cannabis products NOT allowed under the first set of rules that could change, but probably won’t:

  1. Cannabis-infused alcoholic beverages;
  2. Cannabis products containing any non-cannabinoid additive that increases potency, toxicity or addictive potential, or that would create an unsafe combination with other psychoactive substances, including nicotine and caffeine;
  3. Cannabis products that must be held below 41 degrees Fahrenheit to be safe for human consumption;
  4. Vacuum packed cannabis products;
  5. Canned cannabis products;
  6. Cannabis-infused juice;
  7. Perishable bakery products that must be held at temperatures below 41 degrees Fahrenheit, including cream or custard-filled pies, pies or pastries which consist in whole or in part of milk or milk products, eggs, or synthetic fillings, or meat-filled pies or pastries;
  8. Dairy products of any kind (yes, this appears to include butter);
  9. Meat products;
  10. Seafood products.

Also note that the initial set of proposed rules prohibited licensees from manufacturing cannabis products by applying cannabinoid concentrate or extract to commercially available snack candy or food items, also known as “re-manufacturing.” Though MAUCRSA (SB94) does not speak to this issue, the California Department of Health will likely take the same stance as they redraft the next set of proposed rules. Those hoping to secure manufacturing licenses pursuant to the MAUCRSA will need to stay tuned, and pay close attention to the revised rules as they develop.

To help you better understand what MAUCRSA means for your cannabis business, three of our California attorneys will be hosting a free webinar on August 8, 2017 from 12 pm to 1 pm PT. Hilary Bricken from our Los Angeles office will moderate two of our San Francisco-based attorneys (Habib Bentaleb and me) in a discussion on the major changes between the MCRSA and MAUCRSA, including on vertical integration and ownership of multiple licenses, revised distributorship standards, and what California cannabis license applicants can expect more generally from California’s Bureau of Cannabis Control as rule-making continues through the remainder of the year. We will also address questions from the audience both during and at the end of the webinar.

To register for this free webinar, please click here. We look forward to your joining us!

California cannabis lawyers California may take its cannabis advertising restrictions to the next level if Senate Bill 162 makes it through the Assembly Appropriations Committee. SB 162, which the Senate passed unanimously last month, would prohibit future cannabis licensees from advertising their cannabis products “through the use of branded merchandise, including, but not limited to, clothing, hats, or other merchandise with the name or logo of the product.”

This legislation would fill some of the gaps in the proposed rules for the implementation of both Proposition 64 and the MCRSA, now known cumulatively as the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”). Many opponents of Proposition 64 raised concerns that legalization would lead to increased public consumption due to the measure’s “lax rules on marketing.” Well, if there was any concern over allegedly lax marketing standards, California’s legislature is now swinging in the extreme opposite direction by essentially eliminating any branded merchandise for cannabis businesses.

Originally, Prop. 64 limited ads in broadcast, cable, radio, print and digital mediums to placements where at least 71.6% of the audience is reasonably expected to be at least 21 years old, based on reliable, up-to-date audience data. This restriction was not included in any of the proposed rules for the MCRSA (which has now been repealed), but it is included in SB 162.

Prop. 64 required any advertisements or marketing by a state-authorized marijuana licensee satisfy the following:

  1. Accurately and legibly identify the licensee responsible for the content;
  2. Use a method to confirm age if involving direct, individual communication by the licensee; and
  3. Be truthful and appropriately substantiated.

Prop. 64 also specifically prohibited licensees from advertising or marketing marijuana in the following ways;

  1. On a billboard located on an Interstate Highway or State Highway that crosses the border of any other state;
  2. In a manner intended to encourage people under 21 to consume marijuana;
  3. With symbols, language, music, gestures, cartoon characters or other content known to appeal primarily to people under 21;
  4. On an advertising sign within 1,000 feet of a day care center, K-12 school, playground, or youth center; and
  5. Through free giveaways of marijuana or marijuana accessories as part of a business promotion.

SB 162 includes these restrictions, but takes things one huge step further with its extremely broad ban on branded merchandise. Ostensibly, the ban could extend to employee t-shirts or uniforms bearing the brand of the licensee, and would prohibit merchandise produced by an unlicensed third-party if that merchandise were created on behalf of a licensee (or if that third-party company was owned by a licensee in their individual capacity).

These advertising restrictions in SB 162 are more restrictive than we’ve seen in any of the other adult-use states in which our cannabis lawyers worked, and we’re pretty shocked California is trying to kill this kind of creativity because they truly believe that if kids see branded merchandise they’ll start using cannabis. Washington State, for example, prohibits licensees from selling branded merchandise in their stores or facilities such as hats and t-shirts, but allows separate or affiliated ancillary companies to sell this merchandise on a licensee’s behalf. And Washington does not prohibit the sale of branded paraphernalia, which would likely be included under the definition of “branded merchandise” in SB 162.

We think this piece of legislation goes way overboard in its attempt to regulate advertising. These types of onerous restrictions will not allow licensed businesses under the new regulatory regime to thrive, and it will definitely kill the swag game at all cannabis-related events in The Golden State, undermining cannabis business’ ability to grow, compete, and spread their brands. We will be keeping tabs on the progress of SB 162, and will provide an update on its final fate, but we really hope the California legislature comes to its senses and stops this form of modern reefer madness.

Cannabis trademark law
Will the wraps come off cannabis trademarks?

Last week, in an 8-0 opinion in the Matal v. Tam case, the United States Supreme Court ruled that the disparagement clause of the Lanham Act violates the First Amendment’s free speech clause. For those unfamiliar with the case, in 2011, Simon Tam attempted to register The Slants (the name of his band), as a federal trademark. But the USPTO examining attorney rejected the application, on grounds that the name was an offensive reference to Asians.

Section 2(a) of the Trademark Act, 15 U.S.C. §1052(a), bars any trademark registration of immoral, deceptive or scandalous matter, and states that no trademark may “disparage … or bring … into contempt or disrepute” any “persons, living or dead.” Some characteristics of a mark that can result in rejection include references to sex, offense to religion, race or to honor, and references to illegality. Interpretation of this prohibition is (and you probably would guess) both subjective and fluid, creating a good deal of uncertainty as to what actually constitutes disparagement.

According to Tam, “he and his bandmates wanted to reclaim the term as a badge of pride.” The Court of Appeals, and now the Supreme Court, found that the disparagement clause “offends a bedrock First Amendment principle: speech may not be banned on the ground that it expresses ideas that offend.” In Justice Kennedy’s concurring opinion, he stated that a “law that can be directed against speech found offensive to some portion of the public can be turned against minority and dissenting views to the detriment of all … The First Amendment does not entrust that power to the government’s benevolence. Instead, our reliance must be on the substantial safeguards of free and open discussion in a democratic society.” We couldn’t agree more.

So how does this opinion affect cannabis trademark applications? Substantively, not a lot. Obtaining a federal trademark registration for use on cannabis-related goods presents a host of challenges, and none of that has changed. You still must make legal use of your mark in commerce to obtain a federal trademark registration.

But we were seeing the rejection, at least initially, of some trademark applications for goods and services that were ancillary to the cannabis industry – goods and services that CAN qualify for registration – based on references in the mark to immoral or scandalous matter. Ultimately, subjective denial of a trademark application based on the nature of speech it contains should not generally be within the power of the PTO. It stands to reason that if disparaging marks cannot be denied registration and are protected by the First Amendment, the same principal ought to apply to “immoral” or “scandalous” marks. Thus, the PTO may not be able to reject applications that make reference to things like being “high,” which could be considered “immoral” or “scandalous,” because those references are protected by the First Amendment.

California cannabis: think local
California cannabis. Think local.

To the excitement of many, California’s Medical Cannabis Regulation and Safety Act (MCRSA) does not include a residency requirement akin to those we’ve seen in other states, like Washington. Though in theory this could change, such an about face is unlikely given the proposed rules that dropped a few weeks ago. And though Chapter 5, Section 26054(a) of Proposition 64 (dealing with recreational cannabis regulation) does contain a residency requirement, it is likely the medical and recreational cannabis rules will ultimately be synced, eliminating that requirement. For reference, however, that section of Proposition 64 states:

“[n]o licensing authority shall issue or renew a license to any person that cannot demonstrate continuous California residency from or before January 1, 2015. In the case of an applicant or licensee that is an entity, the entity shall not be considered a resident if any person controlling the entity cannot demonstrate continuous California residency from and before January 1, 2015.”

That residency requirement will expire on December 31, 2019 unless the California state legislature renews it. Also important to note is that even if this residency requirement were to go into effect, it would apply only to “controlling persons.” But again, we believe that as the medical and recreational cannabis rules are finalized and synced up, the residency requirements of Proposition 64 will be eliminated.

But this has not stopped local jurisdictions, including cities and counties, from implementing varying levels of residency requirements, or de facto residency requirements, on their own. For example cannabis licenses in the City of Los Angeles will likely be limited to state residents since the City is issuing first round licenses only to Proposition M Priority eligible applicants (i.e., the ~135 Pre-ICO cannabis collectives currently operating in the City under Prop. D immunity from prosecution). In theory, at least, the proprietors of these businesses, who would have been required to possess qualified patient authorizations, would have needed to be California state residents. In other words, the City of Los Angeles is limiting licenses to those who have operated locally since at least 2007, which functions as de facto localism.

Los Angeles’ proposed regulations also require applicants provide a detailed plan for hiring local residents, including making an “ongoing good faith effort to ensure that at least 30 percent of hours of their respective workforce be performed by residents of the City of Los Angeles, of which at least 10 percent of their respective workforce shall be performed by Transitional Workers whose primary place of residence is within a 3-mile radius of the proposed Business.”

The city of Oakland has developed what is perhaps one of the most contentious residency requirements via its Equity Permit Program. This program aims to address inequity in the local cannabis industry by prioritizing permit issuance to those with roots in certain identified Oakland neighborhoods that have been historically impacted by disproportionate drug law enforcement, and to members of the Oakland community who have been arrested and convicted of cannabis crimes in Oakland in the last 20 years. The law moves qualifying Equity Applicants, defined as Oakland residents with an annual income at or less than 80% of the City average and who either lived in certain defined Oakland police beats for 10 of the last 20 years, or who have been convicted of a cannabis crime committed in Oakland within the last 20 years, to the front of the cannabis permitting line, and it also creates access to approximately $3.4 million in earmarked interest-free business loans and other assistance.

When issuing permits for any kind of cannabis business, the City must give half (i.e. maintain a 1-to-1 ratio) of all permits issued in its initial issuance phase to these Equity Applicants.  Oakland local law also requires dispensary staff be at least 50% Oakland residents, with at least half of those residents from areas identified as having high unemployment or low household incomes.

Other local jurisdictions are implementing or considering similar means of enacting residency restrictions, despite the state’s leniency on the issue. It is therefore imperative to review the local laws under which you intend to operate, particularly if you are not a California state resident.

 

 

 

California Cannabis Law Senate Bill 94
California just came out with its Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”)

The California Legislature today passed Senate Bill 94, which effectively repeals the Medical Cannabis Regulation and Safety Act (“MCRSA”) and incorporates certain provisions of the MCRSA in the licensing provisions of the Control, Regulate, and Tax Adult Use of Marijuana Act (“AUMA” aka Proposition 64). As we’ve covered extensively, draft rules for the MCRSA dropped in late April, but speculation has been rampant that the state would integrate the rules for both medicinal cannabis (MCRSA) and adult use cannabis (AUMA). SB 94 does just that by creating the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”).

Here are 10 of the most important highlights of today’s bill:

  1. The governing bureau will now be the Bureau of Cannabis Control (“the Bureau”).
  2. The types of licenses available for commercial adult-use cannabis activity and commercial medicinal cannabis activity will be the same. The licenses available under both the MCRSA and the AUMA will continue to be available for both kinds of activity, and for specialty cottage cultivation licenses and microbusiness licenses, and, commencing on January 1, 2023, licenses for large outdoor, indoor, and mixed-light cultivation will also be available for both medicinal and adult-use cannabis activity.
  3. Producing dispensary and transporter licenses will not be available.
  4. Quality assurance, inspection, and testing requirements of cannabis and cannabis products prior to retail sale will change. Distributors will be required to store cannabis batches on their premises during testing, testing lab employees will be required to obtain samples for testing and transport those samples to testing labs, and distributors will be required to conduct a quality assurance review to ensure compliance with labeling and packing requirements, among other things.
  5. Though the MCRSA limited the combinations of medicinal cannabis licenses a person may hold until January 1, 2026, the MAUCRSA will not apply these limits (other than that testing laboratory licensees are prohibited from obtaining licenses to engage in any other commercial cannabis activity);
  6. The residency requirements of the AUMA are repealed. In other words, out of staters and even residents of other countries can freely participate.
  7. Additional advertising requirements, including regulation of online advertising and the creation of a universal symbol for edible cannabis products will be implemented.
  8. The cannabis excise tax will be measured by the average market price (as defined) of the retail sale, instead of by the gross receipts of the retail sale.
  9. Applicants for cultivation licenses will need to identify the source of water supply.
  10. The Bureau will no longer have the authority to regulate and control industrial hemp.

The above is only a rough summary of the new legislation. We will be breaking down the details in the coming days so stay tuned.

California cannabis edibles: just say no to butter
California cannabis edibles: just say no to butter

If you missed our webinar last week on California’s new medical cannabis rules and you just can’t wait for us to publish the recording here on the blog (coming soon!), this post will deal with California’s proposed medical cannabis manufacturing rules for edibles, on which we received a ton of great questions. To get started, a couple of key definitions from the rules:

“Manufacture” means the production, preparation, propagation, or compounding of cannabis products. The term “manufacture” includes the following:

  • Extraction processes;
  • Infusion processes;
  • Packaging or repackaging of manufactured medical cannabis or medical cannabis products.

“Edible Cannabis Product” means manufactured cannabis intended to be used, in whole or in part, for human consumption.

In addition to extensive sanitation, recall, customer complaint and operational requirements for edibles manufacturers, the proposed rules include quite a list of prohibited products and based on our experience in other states with regulated cannabis, we anticipate the list will only grow over time. Here is a sampling of some of the products that will not be allowed under the proposed manufacturing rules:

  1. Cannabis-infused alcoholic beverages;
  2. Cannabis products containing any non-cannabinoid additive that increases potency, toxicity or addictive potential, or that would create an unsafe combination with other psychoactive substances, including nicotine and caffeine;
  3. Cannabis products that must be held below 41 degrees Fahrenheit to be safe for human consumption;
  4. Vacuum packed products;
  5. Canned cannabis products;
  6. Cannabis-infused juice;
  7. Perishable bakery products that must be held at temperatures below 41 degrees Fahrenheit, including cream or custard-filled pies, pies or pastries which consist in whole or in part of milk or milk products, eggs, or synthetic fillings, or meat-filled pies or pastries;
  8. Dairy products of any kind (yes, this appears to include butter);
  9. Meat products;
  10. Seafood products.

For obvious reasons, the issue of whether or not cannabis-infused butter will be allowed is a big one. Though cannabis butter would be prohibited under the current draft rules, we’ve seen other states, like Washington, carve out exceptions for products  made with cannabis butter. However, even Washington prohibits selling cannabis butter as a stand-alone product.

One other glaring omission from the current rules is a prohibition on cannabis products that appeal to children, although this legislation is likely coming down the pipeline. Many states prohibit products like gummy bears and lollipops that mimic candies appealing to children. Though California seems to be taking a less restrictive approach than other states in which my firm’s cannabis lawyers work, it’s highly unlikely it will leave this issue completely unaddressed. In this vein, California’s proposed rules do prohibit licensees from manufacturing cannabis products by applying cannabinoid concentrate or extract to commercially available snack candy or food items. Though the definition of “commercially available” is not entirely clear, at least part of the intent here is to prevent consumer confusion between cannabis-infused and non-cannabis products present in many homes – children are often the ones confused in this manner.

Ultimately, many California cannabis manufacturers will need to rethink the types of products they offer for sale once they begin operating with a state license. Many of the products currently on the market here simply will not comply with the new rules, and a thorough understanding of what products are prohibited will be critical to developing a viable business plan as a cannabis manufacturing licensee.

 

 

California cannabis priority licensingAs part of our series on the initial rules implementing California’s Medical Cannabis Regulation and Safety Act (“MCRSA”), this post will break down the issue of “priority” in licensing – meaning, whose state medical cannabis license applications will be processed first once the licensing window opens early next year. Under the MCRSA, and pursuant to AB 266, at Article 4, Section 19321:

“In issuing licenses, the licensing authority shall prioritize any facility or entity that can demonstrate to the authority’s satisfaction that it was in operation and in good standing with the local jurisdiction by January 1, 2016.”

This language left us with a couple of questions, including how to define “operation” and “in good standing with the local jurisdiction.” But the Bureau of Marijuana Control provided answers to these questions in the proposed text of the regulations applicable to all medical marijuana license applicants and licensees. In keeping with, and expanding upon, the above statement from the MCRSA, the proposed rules state:

“Priority review of the application shall be given to applicants that were in operation and in good standing with the local jurisdiction by January 1, 2016, and whose business ownership or premises are currently the same as they were on January 1, 2016. Priority applications shall be processed for review in the order in which they are received.”

The rules define “operation” as the date on which the applicant began actively conducting the same commercial cannabis activity as the license type for which the applicant is applying. And for purposes of the rule, “actively conducting” means “engaging in the transportation, distribution, testing, or sale of medical cannabis goods as authorized by the local jurisdiction.” So if you merely had an entity formed by January 1, 2016, or were operating in contravention of local law, you will not qualify for priority review under the proposed rules.

To prove the date on which an applicant began actively conducting commercial cannabis activity, the applicant must attest to the date under penalty of perjury, and must provide evidence of the date operations began, which may include:

  1. Articles of incorporation;
  2. Certificate of stock;
  3. Articles of organization;
  4. Certificate of limited partnership;
  5. Statement of partnership authority;
  6. Tax form;
  7. Local license, permit, or other written authorization;
  8. Receipts; or
  9. Any other business record.

The proposed rules also provide clarification as to what an applicant will need to provide to show “good standing” with their local jurisdiction. Proof of good standing must be evidenced by a document issued or signed by the local jurisdiction that contains the following:

  1. Name of the applicant;
  2. Address of the premises to be licensed;
  3. License type that the applicant is applying to the bureau for;
  4. Name of the local jurisdiction;
  5. Name of the local jurisdiction office that issued the license, permit, or other authorization for the applicant to conduct commercial cannabis activity in the jurisdiction as required by Business and Professions Code section 19320;
  6. Name and contact information for the person authorized by the local jurisdiction to sign on its behalf;
  7. Signature of the person authorized to sign on behalf of the local jurisdiction; and
  8. A statement to the effect of: “The above named party has been issued a license, permit, or other authorization from this jurisdiction to conduct commercial cannabis activity. The above named party began operation and was in good standing in this jurisdiction on or before January 1, 2016.”

Of course, the proposed rules wouldn’t be complete without at least some ambiguity. The rules not only state that an applicant must have been operating and in good standing with the local jurisdiction prior to January 1, 2016, but also that the applicant’s “business ownership or premises are currently the same as they were on January 1, 2016.” We are still seeking clarification from the BMCR on this one, as it is unclear whether the entity structure and ownership must be exactly the same, whether a board member of a non-profit mutual benefit corporation could apply on behalf of that company, whether ownership doesn’t matter so long as the premises are currently the same as they were on January 1, 2016, etc. This provision leaves room for interpretation, and we anticipate having a better idea of what this requirement will entail by the time the rules are finalized.

Even though there is some ambiguity in the proposed rules, if you think you may qualify for priority review in licensing, now is the time for you to begin gathering your documentation to prove the date on which you began operating, as well as proof that you were in compliance with local law.

California cannabis cultivation license
California cannabis cultivation licensing procedures. Maze-like.

The Medical Cannabis Regulation and Safety Act (“MCRSA”) left us with many questions regarding how cannabis cultivation would be regulated. But now that the California Department of Food and Agriculture (“DFA”), through its CalCannabis Cultivation Licensing division, dropped 58 pages of proposed regulations for the Medical Cannabis Cultivation Program we have plenty of answers. Though these rules are not final, they provide us with the general framework for the forthcoming medical cannabis cultivation (and processing) licensing regime in California.

“Cultivation” means any activity involving planting, growing, harvesting, drying, curing, grading, or trimming of cannabis. And “Processing” means all activities associated with drying, curing, grading, trimming, storing, packaging, and labeling of nonmanufactured cannabis products. The rules define “Nonmanufactured cannabis product[s]” as dried flower, shake, leaf, and pre-rolls intended to be sold for use by medical cannabis patients. Nurseries are also encompassed within the cultivation rules, and are defined as licensees that produce only clones, immature plants, seeds, and other agricultural products used specifically for the planting, propagation, and cultivation of medical cannabis. The rules governing cannabis manufacturing, including extraction and infusion, were developed by the Department of Public Health.

The DFA will offer 14 different cultivation licenses (including the initial application fee – a higher annual license fee will also be required), as follows:

  1. Specialty Cottage Outdoor ($65) – an outdoor cultivation site with up to 25 mature plants;
  2. Specialty Cottage Indoor ($100) – an indoor cultivation site with 500 square feet or less of total canopy;
  3. Specialty Cottage Mixed-Light ($285) – a mixed-light cultivation site with 2,500 square feet or less of total canopy;
  4. Specialty Outdoor ($130) – an outdoor cultivation site with less than or equal to 5,000 square feet of total canopy, or up to 50 mature plants on noncontiguous plots;
  5. Specialty Indoor ($1,070) – an indoor cultivation site between 501 and 5,000 square feet of total canopy;
  6. Specialty Mixed-Light ($555) – an indoor cultivation site between 2,501 and 5,000 square feet of total canopy;
  7. Small Outdoor ($265) – an outdoor cultivation site between 5,001 and 10,000 square feet of total canopy;
  8. Small Indoor ($1,935) – an indoor cultivation site between 5,001 and 10,000 square feet of total canopy;
  9. Small Mixed-Light ($1,105) – a mixed-light cultivation site between 5,001 and 10,000 square feet of total canopy;
  10. Medium Outdoor ($765) – an outdoor cultivation site between 10,001 square feet and one acre of total canopy;
  11. Medium Indoor ($4,260) – an indoor cultivation site between 10,001 and 22,000 square feet of total canopy;
  12. Medium Mixed-Light ($2,435) – a mixed-light cultivation site between 10,001 and 22,000 square feet of total canopy;
  13. Nursery ($60) – cultivation of cannabis solely as a nursery; and
  14. Processor ($310) – a cultivation site that conducts only trimming, drying, curing, grading or packaging of cannabis and nonmanufactured cannabis products.

The basic background and corporate information required for the cultivation license application will be nearly identical to the information required of applications for manufacturing, retail, distribution and transportation licenses. Once the application becomes available in early 2018, applicants will need to submit required background information on all owners. An “owner” is the CEO or any person or entity within a publicly traded company that has, in aggregate, greater than a 5% ownership interest and, for all other business entity applicants, “owner” means any individual who has, in aggregate, greater than a 20% ownership interest (excluding the ownership of a security interest in, lien on, or any other encumbrance of the business entity applicant). And if there’s a business that has an ownership stake of greater than 20% in the entity applying to the state, its CEO and all directors are considered owners. Finally, an individual is considered an owner if he or she participates in directing, controlling, or managing the applicant. This includes “discretionary powers” to, among other things, direct and/or control the hiring and firing of personnel, contracting for the sale of goods on behalf of the applicant, and making policy decisions on behalf of the applicant.

As with the other license types, if an owner is married, their spouse does not need to go through the rigorous background check process or get fingerprinted, so long as he or she is not an Owner of the applicant, as defined above, although the spouse must nevertheless be disclosed to the state.

Applicant owners will need to provide the state with a detailed description of any criminal convictions, excepting juvenile adjudications and traffic infractions. Cultivation license applicants must also provide a statement of rehabilitation for each conviction. This statement must be written by the owner and contain all evidence the application would like the DFA to consider that demonstrates the owner’s fitness for licensure. Such evidence may include a certificate of rehabilitation under Section 4852.01 of the Penal Code, or dated letters of reference from employers, instructors, or professional counselors that contain valid contact information for the person providing the reference.

With regard to the cultivation site, applicants must provide evidence that the applicant has the legal right to occupy and use the proposed location. If the applicant is the owner of the location, this evidence should include a copy of the title or deed to the property. If the applicant is not the owner of the property, the applicant shall provide the DFA with the following:

  1. A document from the property owner that states the applicant has the right to occupy the property and acknowledges that the applicant may use the property for commercial cannabis cultivation;
  2. Property owner’s mailing address and phone number; and
  3. Copy of the lease or rental agreement, or other contractual documentation.

All cannabis cultivation sites must be located at least a 600-foot radius from a school, as defined by Section 11362.768 of the Health and Safety Code. Applicants will also need to show they have a valid seller’s permit, or are currently applying for a seller’s permit, have obtained a surety bond in the amount of not less than $5,000, payable to the DFA, have permits issued by the applicable Regional Water Quality Control Board or State Water Resources Control Board (the rules contain very detailed requirements for proving that water for cultivation is properly sourced), and have conducted a hazardous materials record search of the EnviroStor database for the proposed premises, among many other requirements.

Importantly, applicants will also need to show that they are either operating in compliance with, or that their location will comply with, applicable local law, and that the necessary local permits and approvals have been obtained. With local regulations varying widely from city to city, and county to county, it will be critical to get a head start on ensuring local law compliance for your cultivation business.

The details on “priority status” can be found here, and for cultivation businesses that do not meet the requirements for priority status, but were operating prior to January 1, 2018, the state will provide a grace period for operations during the license application status. If a cultivation business was in operation prior to January 1, 2018, it may continue to operate while its application is pending if a completed application is submitted to the DFA no later than 5:00 pm PST on July 2, 2018, and the continued operations of the applicant are the same activities in which the applicant is seeking licensure. If the license application is denied, the applicant must cease operating until a license is obtained.

The DFA will not restrict the total number of cultivation licenses a person is authorized to hold, so long as that person’s total licensed canopy does not exceed 4 acres. Unless a person has a Producing Dispensary license, that person shall be limited to one Medium Outdoor, or one Medium Indoor, or one Medium Mixed-Light license. Additionally, the rules state that multiple cultivation licenses and license types may be located on the same property, but each licensed premises must have a unique entrance and immovable physical barriers between each uniquely license premises.

We’ll be delving more deeply into the additional requirements for cannabis cultivation licenses in the coming weeks, including operational and site requirements. And we’ll also be breaking down the rules for cannabis transportation, distribution and retailers in a forthcoming post.

Stay tuned.

Cannabis licensing dealsAs we wrote a few days ago, the Washington State Legislature recently passed SB 5131, which updates Washington’s cannabis laws and includes a provision that explicitly addresses licensing agreements. The bill has yet to be signed by Washington Governor Jay Inslee, but we are nevertheless exploring what the implications of these new regulations will be for our clients with existing and pending intellectual property licensing deals.

Section 16 of the bill reads as follows:

Sec. 16.   A new section is added to chapter 69.50 RCW to read as follows:

  • A licensed marijuana business may enter into a licensing agreement, or consulting contract, with any individual, partnership, employee cooperative, association, nonprofit corporation, or corporation, for:
    • Any goods or services that are registered as a trademark under federal law or under chapter 19.77 RCW;
    • Any unregistered trademark, trade name, or trade dress; or
    • Any trade secret, technology, or proprietary information used to manufacture a cannabis product or used to provide a service related to a marijuana business,
  • All agreements or contracts entered into by a licensed marijuana business, as authorized under this section, must be disclosed to the state liquor and cannabis board.

On its face, this provision does little to change things for those with existing licensing deals, except that those deals will now need to be disclosed to the licensee’s enforcement officer. But the provision does validate the position that these types of licensing agreements were permissible under the rules all along, which provides some level of security to the parties as to the legitimacy of the contracts.

The big question that remains unanswered is whether the State’s acknowledgement of the permissibility of “licensing agreement[s]” is also an acknowledgement of the permissibility of standard trademark licensing practices, including royalties. Currently, it is impermissible under the rules for a licensor to receive a royalty based on sales or profits from a licensee, where that licensor has not been vetted by the Liquor and Cannabis Board (LCB) as a true party of interest. Undisclosed true party of interest relationships are grounds for license cancellation by the LCB, so it’s important to structure these deals so they do not implicate Washington’s true party of interest rules when dealing with an out-of-state licensor, or a licensor that simply would not meet the state’s requirements.

Even if state cannabis law reform in Washington makes the state law compliance piece of any trademark licensing deal more straightforward, these deals are still by no means as cut and dry as your typically IP licensing deal. Ownership of IP in the cannabis industry remains a tricky issue, in large part because the USPTO will not issue federal trademark registrations for cannabis-related marks. Cannabis companies routinely come to us with proposed licensing deals where basic due diligence quickly reveals the licensor simply does not own what it purports to own. As a refresher, if you are looking to get a license for another company’s IP, here are the most basic questions you should be able to answer about that other company and its IP:

  • Does the licensor own any federal trademark registrations?
  • If so, what goods and/or services do those trademark registrations cover?
  • Was the description of goods and/or services filed with the USPTO accurate and true? Were there possible misrepresentations?
  • Are the trademark registrations based on actual use, or upon intent-to-use?
  • What representations and warranties is the licensor making (or, often more importantly, not making) regarding the marks?
  • If the licensor doesn’t own any federal trademark registrations, is it licensing someone else’s trademarks?
  • Does the licensor have a master licensing agreement? Do the terms of any proposed sub-licensing agreement mirror that master licensing agreement?
  • What quality control standards will you be held to by the trademark owner? Could these standards amount to impermissible control over a licensee under Washington’s cannabis rules?
  • Has the trademark owner warranted to keep all USPTO filings up-to-date?
  • Does the licensor own any state trademark registrations?
  • If so, has the licensor made lawful use of its mark in commerce in the state of registration?
  • Does the licensor have any common law trademark rights? Can the licensor even legally acquire common law trademark rights in your jurisdiction?

This is a substantial list, but it only scratches the surface of the issues you and your cannabis IP counsel must consider before you enter into any IP licensing deal. Parties are often quick to skip straight to negotiating commercial terms for a deal, without ever assessing whether the rights they are licensing actually exist. Just as with any other type of property, like a house or a car, a licensor of intellectual property must actually own the rights to that property to be able to confer those rights to another party. Seems basic, but it’s truly shocking to see the deals we’ve seen put together by attorneys who either do not know cannabis or, more often than not, do not know the intricacies (or even the basics) of intellectual property law.

Though cannabis IP licensing deals remain complicated, it’s encouraging to see the Washington State Legislature acknowledge and condone their existence. We’ll be following this bill closely to see whether its passage results in any changes to the current difficulties surrounding a royalties-based payment structure.

So stay tuned.

California cannabis trademarkOne of the biggest hurdles for California cannabis brand owners has been the inability to secure California state trademark registrations for their marks. This has been a point of confusion for many clients who have successfully registered their trademarks in states like Washington, Oregon and Colorado, and hoped to do the same in California.

Until recently, the California state government has been steadfast in refusing to register marks used on cannabis, despite cannabis having been legal in California since 1996. This policy was rooted in Sections 14270-14272 of the Model State Trademark Law of the California Business and Professions Code (CBPC), which are simply titled “Miscellaneous.” Section 14272 states the following:

The intent of this chapter is to provide a system of state trademark registration and protection substantially consistent with the federal system of trademark registration and protection under the Trademark Act of 1946 (15 U.S.C. Sec. 1051 et seq.), as amended. To that end, the construction given the federal act should be examined as non-binding authority for interpreting and construing this chapter.

Recall that there are three ways in which a brand owner can establish trademark rights:

  1. By using the mark in connection with their goods or services (legally) in commerce;
  2. By registering the mark with the United States Patent and Trademark Office (USPTO); and
  3. By registering the mark with an appropriate state trademark registry.

California cannabis companies have, to date, needed to rely on federal trademarks registered with the USPTO (if they could get them for ancillary goods or services), and common law rights that may not even exist in California, given Section 14272 of the CBPC.

But Assembly Bill 64 will change all this. Recognizing the inconsistency between current state trademark law provisions and the new cannabis regulations, AB 64 states the following:

This bill, for purposes of marks for which a certificate of registration is issued on or after January 1, 2018, would, notwithstanding those provisions, authorize the use of specified classifications for marks related to medical cannabis and nonmedical cannabis goods and services that are lawfully in commerce under state law in the State of California.

This is great news for California cannabis companies, but there are a few things to keep in mind:

  1. State trademarks will not be available until January 1, 2018, and then only for cannabis companies that operate in compliance with California state law. Unlicensed cannabis businesses will not be eligible for California state trademark protection;
  2. The same difficulties surrounding cross-state IP licensing deals will still exist in California (see Cannabis IP Licensing: It’s Complicated); and
  3. Federal trademarks are still unavailable for goods and services that violate federal law, so developing a brand protection strategy that involves federal trademark registrations for ancillary goods, and state trademarks for cannabis goods, will still be key. See Cannabis Trademarks: Back to the Basics

Though the protection afforded by a state trademark is geographically limited to the state of registration, state trademarks do provide some level of protection greater than common law rights. And AB 64 will give California cannabis business owners much greater flexibility in developing a brand protection strategy that encompasses their cannabis products.