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Since joining Harris Bricken in 2010, Hilary has earned a reputation as a fearless advocate for local businesses. Hilary’s clients—start-ups, entrepreneurs, and companies in all stages of development—value her bold approach to business strategy.

Cannabis litigationCalifornia is in the process of transitioning from its gray market of medical cannabis collectives to a full-blown, heavily regulated regime under the Medical Cannabis Regulation and Safety Act (“MCRSA“). At the end of April, California dropped more than 200 pages of regulation for retailers, distributors, transporters, manufacturers, and cultivators, and it’s now taking public comment on the initial rules. Note that our firm will be hosting a free webinar on June 1 to discuss how applicants can secure licenses under the new regime. Though these rules will no doubt change before (and even after) they are finalized, what won’t change are NIMBYs  who don’t want cannabis businesses near them.

When cannabis businesses come into a community, there can and often will be all kinds of local impact and chaos. We’ve written in the past about various NIMBY lawsuits and how quickly local governments can flip when it comes to non-conforming uses and land use disputes, and that will be the case in California as well, just as it has been the case in all regulated cannabis states.

The entry of the cannabis industry to a state means an influx of entrepreneurs and, with them, an increase in rents in the areas in which they locate. And always there are the angry neighbors who don’t want to smell cannabis harvests every six weeks or so. Most cities and counties zone for growers and manufacturers to be on the outskirts of town or in industrial or agricultural zones and retailers to be in commercial or industrial areas. Occasionally, cities and counties will allow cannabis home farms, but that’s more the exception than the rule.

One of the first notable land use disputes since passage of the MCRSA took place in Santa Rosa, though it’s surely not going to be the last. Most importantly, there is much to be learned from that case. The city of Santa Rosa has welcomed California’s to-be regulated cannabis economy by allowing cultivators and manufacturers to operate in industrial zones. But at least one land developer cried wolf because the city is allowing medium-scale cultivation to move in next door to a long-time planned (but not yet built) residential development.

In February of this year, Fleuron, Inc. applied to and secured approval from the city (through a use permit) to build a 10,000 plus-square-foot cannabis cultivation and processing facility in an industrial zone (on Maxwell Court), part of which was supposed to transition into a residential area. A land developer, who pursued development of apartments for the past 13 years next to where Fleuron wants to build, opposed and appealed the city’s decision and went on record stating that “[i]t is impossible for housing to be built in an area with cannabis uses.” This developer also cited a variety of alleged issues attendant to cannabis grows, like nuisance, public safety, environmental and economic issues. Another nearby apartment land developer said that his investors are “nervous” at the prospect of having a marijuana cultivation site as a neighbor. And a nearby auto-body shop claims to have seen a recent 15% increase in rent attributable to cannabis operators coming in.

Just this week, the city council unanimously rejected the land developer’s appeal against the issuance of Fleuron’s use permit. The city’s mayor even stated that, right now, cannabis seems more “viable as a business than housing.” And council members touted Fleuron’s ownership as “well-regarded, professional businessmen following the rules Santa Rosa established.” Chalk this up as a clear victory for the cannabis industry. But there will no doubt be many more such fights as neighbors in the past have brought nuisance lawsuitsRICO actions, and lawsuits claiming bad odors. Our cannabis lawyers are aware of cases brought against cannabis businesses for creating “marred mountain views,” for making horse riding “less pleasant” during cannabis harvest time, and for loss of business at a hotel where guests allegedly cancelled their reservations upon finding out they were located next to a cannabis business that had not yet even opened.

Though many (most?) NIMBY lawsuits against cannabis businesses have little basis in reality or fact, this does not seem to stop determined NIMBYs from suing neighboring cannabis businesses to try to stop them from ever getting off the ground. NIMBYs are a fact of life in the cannabis industry (our cannabis litigation lawyers have defended enough of these to know this), but smart planning, transparency, and running a compliant business are usually enough to beat them.

California cannabis retailer rules
California medical cannabis retailer rules

This post is on California’s initial rules governing medical cannabis retailers as part of our ongoing series analyzing California’s initial medical cannabis rules pursuant to the Medical Cannabis Regulation and Safety Act (“MCRSA“). For information regarding the licensing rules for California cannabis manufacturers and cultivators, go here and here.

The MCRSA defines “dispensary” as “a facility where medical cannabis, medical cannabis products, or devices for the use of medical cannabis or medical cannabis products are offered, either individually or in any combination, for retail sale, including an establishment that delivers, pursuant to express authorization by local ordinance, medical cannabis and medical cannabis products as part of a retail sale.” There are  two kinds of dispensary licenses under the MCRSA: Type 10 for a general dispensary and Type 10A, defined as just a “dispensary.”

The MCRSA restricts vertical integration of cannabis licenses by limiting applicants to one or two licenses in certain separate licensing categories (Governor Brown’s Trailer Bill will change this if it passes this summer). A Type 10 licensee can only be a retailer and until January 1, 2026, a Type 10A licensee can be a retailer at no more than three retail locations by holding three separate Type 10 licenses: that of a manufacturer and a cultivator (so long as the Type 10A license has no more than four acres of total canopy size of cultivation throughout the state).

In addition to the mandatory submissions for “owners” and their spouses we discuss here, California cannabis retailers must also submit a complete list of every individual with a non-controlling interest in the retailer, though there are no indications non-controlling interest holders will be vetted by the state in the same way “owners” will be.

Retail applicants must submit all of the following to the State of California as well:

  1. A list of funds belonging to the retailer held in savings, checking, or other accounts maintained by a financial institution.
  2. A list of investments made into the retailer entity.
  3. A list of all gifts of any kind given to the retailer for its use in conducting commercial cannabis activity.
  4. Whether an owner or their spouse has a financial interest in any other cannabis license. “Financial interest” means an investment into a commercial cannabis business, a loan provided to a commercial cannabis business, or any other equity interest in a commercial cannabis business.
  5. A list of all convictions (excepting juvenile crimes and traffic infractions under $300 that didn’t involve alcohol, controlled substances, or dangerous drugs) as well as a rehabilitation list for each conviction.
  6. Application for fingerprints through the Department of Justice.
  7. Documentation issued by the local jurisdiction in which the applicant proposes to operate certifying the applicant is in compliance with all local ordinances and regulations, or will be in compliance with all local ordinances and regulations by the time the Bureau issues a license.
  8. Evidence that the proposed dispensary location is at least a 600-foot radius from any school. In addition, the retail premises must be in a contiguous area and may only be occupied by one licensee, and retailers cannot sublet any portion of the retail premises.
  9. If you have 20 or more employees, an attestation that the applicant has entered into a labor peace agreement and you must provide a copy of that agreement.
  10. A $5,000 surety bond.
  11. A scaled diagram of the dispensary premises that shows “the boundaries of the property and the proposed premises to be licensed, showing all boundaries, dimensions, entrances and exits, interior partitions, walls, rooms, windows, doorways, and common or shared entryways. The diagram must show the areas in which all commercial cannabis activities will take place, including but not limited to, limited-access areas.”
  12. A list of your quality assurance, security, and inventory practices.
  13. Proof of acknowledgement from the dispensary property owner that you can use the property for dispensing and a copy of your lease agreement if you have it. Or if you own the property, provide the deed.

Regarding retailer operational standards, the retailer is responsible for sufficiently tracking and tracing all of its inventory and for record keeping — certain records must be kept for at least seven years. The retailer must also follow all security, surveillance (including installation of 24-hour recording cameras of a certain pixellation that covers certain areas of the operation by a specific number of feet), alarm, and premises access requirements. The retailer is also responsible for cannabis waste-management destruction and disposal. And though California cannabis retailers cannot package or label any cannabis goods, they still must provide “exit packaging” for products, which basically means re-sealable and opaque child resistant packaging. And if a retailer discovers any defective product, it may return the medical cannabis goods only in exchange for a non-defective version of the same medical cannabis goods. So, no cash refunds.

As far as customers go, between the hours of 6 a.m. to 9 p.m., only verified qualified patients or primary caregivers over 18 can freely shop in the dispensary. Nonetheless, anybody younger than 18 can enter the dispensary to purchase medical cannabis goods if they are a medical cannabis patient accompanied by their parent, legal guardian, or primary caregiver. Customers are free to inspect medical cannabis goods through secured containers, but no sampling is allowed. A customer purchase no more than 8 ounces in a single day, unless their physician’s recommendation authorizes more.

Under the MCRSA, “delivery” means “the commercial transfer of medical cannabis or medical cannabis products from a dispensary, up to an amount determined by the bureau to a primary caregiver or qualified patient . . .  or a testing laboratory.” “Delivery” also includes “the use by a dispensary of any technology platform owned and controlled by the dispensary . . . that enables qualified patients or primary caregivers to arrange for or facilitate the commercial transfer by a licensed dispensary of medical cannabis or medical cannabis products.” So long as city or county law allows for delivery, dispensaries must deliver all product themselves; they cannot use a third party contractor or courier to do it. All deliveries must be done in person by a retail employee who’s at least 21, and all deliveries have to go to physical addresses in California. When making deliveries, dispensary employees cannot carry more than $3,000-worth of cannabis goods at any time. No delivery can be made to an address on “publicly owned land or any address on land or in a building leased by a public agency.” Finally, delivery hours are from 6 a.m. to 9 p.m.

These rules are currently in a 45-day comment period and are by no means final. So, stay tuned to see if and when the Bureau makes additional changes. I am sure these rules seem onerous to many of you, and they are. But for what it is worth, they are in many respects very similar to the laws in various other states where we have helped our clients secure cannabis licenses — Oregon, Washington, Colorado, Nevada and Alaska, for instance — and so as difficult as they may seem, it is certainly possible to satisfy them.

California cannabis lawIt’s finally happened. Three of the California agencies implementing the Medical Cannabis Regulation and Safety Act (“MCRSA”) released their initial draft rules last Friday. These long-awaited rules make up the bulk of the regulatory standards for: transportation, distribution, and retailers (as developed by the Bureau of Medical Cannabis Regulation/Bureau of Marijuana Control); cultivation (as developed by the Department of Food and Agriculture through its CalCannabis Cultivation Licensing arm); and manufacturing (as developed by the Department of Public Health through its Office of Manufactured Cannabis Safety).

Within their 209 pages of regulatory mandates, these rules are a serious step toward California finally bringing its entrenched medical cannabis marketplace in line with federal enforcement priorities. Though our California cannabis attorneys will be blogging in depth about each license type and their respective regulations in the upcoming week, we wanted to first provide you with a brief overview of these initial rules. This post does that by highlighting the basic requirements under each set of the initial rules.

Under the initial rules, the basic background and corporate information submissions to the state are nearly identical for cultivators, manufacturers, retailers, distributors, and transporters. Each of these license types will have to submit to the state 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. Lastly, an individual is considered an owner if he or she participates in directing, controlling, or managing the applicant, which 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.

If an owner is married, the spouse does not have to go through the intense background checking process or get fingerprinted so long as he or she is not an owner in or controlling the applicant. Either way though, the spouse must be disclosed to the state.

The rules also require applicants submit to the state the first and last name of a primary contact person for the application and the organizational structure of the applicant. Applicants must also submit a copy of their business formation documents. The rules nowhere prohibit out-of-state companies from applying for licenses so long as they are registered to do business in the State of California. All owners must be disclosed to the state along with their stated ownership interest in the applicant and they also must disclose if they (or their spouse) have a “financial interest” in any other licensee applicant, which includes any “investment in a commercial cannabis business, a loan provided to a commercial cannabis business, or any other equity interest in a commercial cannabis business.”

For retailers, distributors, transporters, and cultivators, owners must also supply a detailed description of any convictions, excepting juvenile adjudications and traffic infractions. Owners of retailers, distributors, and transporters need not disclose traffic infractions under $300 “that did not involve alcohol, dangerous drugs, or controlled substances.” Owners of manufacturing businesses must disclose all convictions substantially related to operating a manufacturing facility in addition to a specific list of other convictions that can be found at Section 40128(3)(A) of the manufacturing rules. Depending on license type, owners may or must also provide a statement of rehabilitation for each conviction.

Retailers, distributors and transporters will face the most financial scrutiny as the state will require that they submit the following:

  1. A list of funds belonging to the commercial cannabis business held in savings, checking, or other accounts maintained by a financial institution.
  2. A list of investments made into the commercial cannabis business; and
  3. A list of all gifts of any kind given to the applicant for its use in conducting commercial cannabis activity.

Notably, none of the rules for any license type contain any residency requirements on ownership, financing, or investment. These licenses will not be transferable and any change of ownership structure will require either a new license application or at least notification to the regulating agency before it can happen.

The rules also mandate that applicants provide a premises diagram along with other substantive information about their operations, including security layouts and plans, surveillance standards, standard operating procedures, and quality assurance controls and practices. All applicants must also submit proof of their right to their real property location that demonstrates they can use it for their specific license type. Every applicant that employs more than 20 employees must also provide a copy of its labor peace agreement to the state. And, though Governor Brown’s technical fix bill hasn’t passed yet, all license applicants must demonstrate either prior compliance with or the capability of compliance with local law before they can receive a California state license.

Priority status” has also finally been defined across the license categories. Generally, the MCRSA states that “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.” All of license types must show their ownership or premises are currently the same as they were by January 1, 2016 and also that they are in “good standing.” Proof of “good standing” is generally met by providing the state “a document issued or signed by the local jurisdiction that contains: the name of the applicant; the address of premises to be licensed; the name of the office that issued the local license, permit, or other authorization; the name, contact information, and signature of the individual authorized to sign on behalf of the local jurisdiction; and a statement to this effect: 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 is currently in operation and is operating in good standing in this jurisdiction.” And in order to prove the date on which commercial cannabis activity began before January 1, 2016, all priority license applicants have to show their dated articles of incorporation, certificate of stock, articles of organization, certificate of limited partnership,  statement of partnership authority, tax form(s), local license, permit, or other written authorization, collective or cooperative membership agreement, receipts, or any other business record.

Overall, these rules are a pretty thorough first shot out of the gate for regulating commercial cannabis activity in California. Nonetheless, these are draft rules and that means what you are seeing now will no doubt be different from what comes out in their final version. The three California agencies tasked with these regulations will be holding public hearings in June to get feedback on these rules, so, if you are in the process of mapping out the future of your California cannabis business, you should keep an eye on these initial rules and their evolution so you can plan accordingly.

California Cannabis LawyersThis past Friday, three of the California state agencies charged with implementing the Medical Cannabis Regulation and Safety Act released their initial draft rules that will govern all medical cannabis commercial activity in California. These long-awaited rules make up the regulatory standards for: transportation, distribution, and retailers (as developed by the Bureau of Medical Cannabis Regulation/Bureau of Marijuana Control); cultivation (as developed by the Department of Food and Agriculture through its CalCannabis Cultivation Licensing arm); and manufacturing (as developed by the Department of Public Health through its Office of Manufactured Cannabis Safety). The summary/statement of reasons for each set of rules can be found here, here, and here.

As expected, the regulations are voluminous and comprehensively cover everything from what applicants must submit to receive a cannabis license (including required background checks) to all operational standards for each type of license, including, packaging and labeling standards, ownership qualifications, defining how to meet “priority status,” quality assurance testing, distributor controls, delivery, hours of operation, sales limitations, licensing fees, environmental protection standards, medium cultivation license limits, traceability requirements, pesticide limitations, quality control standards for manufacturing, security and surveillance, extraction standards, product recall procedures, edible product serving size limitations, and what products will be allowed in the marketplace.

Notably, these initial rules say nothing about any regulations under the Adult Use of Marijuana Act and we probably won’t see those rules until Governor Brown’s technical fix bill passes this summer. We are though betting those rules will be similar if not identical to some of these MCRSA rules, at least when it comes to operational standards. Note though that these are initial MCRSA rules and they are not yet official. Friday marks the beginning of a 45-day public comment period. So don’t be surprised if these agencies go back to the drawing board after taking public comments at various public hearings the’ve set for themselves. You can find the public hearing schedule here.

Nonetheless the release of these regulations is a huge deal and our California cannabis attorneys (Hilary Bricken, Alison Malsbury, Habib Bentaleb, Daniel Dersham, and Carlton Willey) will throughout the upcoming week be writing about each license type and its corresponding MCRSA regulations. And later next month, we’ll be hosting a webinar to discuss these regulations and what they will mean for your California marijuana business and licensing application.

Please stay tuned.

California marijuana lawWith passage of the Medical Cannabis Regulation and Safety Act (“MCRSA”) in 2015, California took a huge step towards regulating its medical cannabis industry after more than twenty years of minimal state government oversight under Proposition 215. Under the MCRSA, California medical cannabis businesses should expect a bevy of regulations spanning packaging and labeling requirements, mandatory quality assurance testing, advertising, seed to sale tracking, environmental impact restrictions, plant canopy and potency limitations, and financing and ownership restrictions. You should also expect the same level of regulation and government oversight under the Control, Regulate, and Tax Adult Use of Cannabis Act (“AUMA”), California’s legalization of recreational marijuana initiative that passed in 2016.

Though the AUMA and MCRSA are similar, they have distinct differences that will impact how cannabis licenses may be obtained and how cannabis businesses may be operated. Among other things, the AUMA and MRCSA differ on licensing timelines; priority licensing; mandatory distributorships; license categories and types; local approvals necessary before licensure by the state; ownership restrictions; residency requirements; and traceability systems. The MCRSA limits vertical integration of licensees, generally allowing cannabis licensees to hold licenses in no more than two separate categories and only in certain combinations while the AUMA has no such vertical integration restrictions.

In response to these AUMA and MCRSA conflicts, California Governor Jerry Brown recently proposed a technical fix Budget Trailer Bill. The fact sheet attached to that Bill states that as California  “moves forward with the regulation of both medicinal cannabis and adult use, one regulatory structure for cannabis activities across California is needed to maximize public and consumer safety.” Ultimately, Governor Brown’s Bill seeks to to merge the MCRSA and the AUMA into one master regulatory structure with two separate licensing tracks for medical and adult use cannabis operators. Governor Brown’s 79-page proposal generally favors the more liberal regulatory standards set out in the AUMA, and it would specifically do the following:

  1. Change the name of the AUMA to the Medicinal and Adult-Use Cannabis Regulation and Safety Act;
  2. Mandate anyone seeking to operate an adult use cannabis business apply for “A-Licenses,” and those seeking to open a medical cannabis business apply for “M-Licenses.” You can apply for both licenses and operate both kinds of businesses, but you cannot co-locate those businesses on the same premises;
  3. Remove AUMA’s requirement of “continuous residency” in California from at least January 1, 2015;
  4. Allow licensees to submit proof of local approval to the state but leave it up to local governments to ensure the license applicant is in compliance with local laws;
  5. Keep AUMA’s near total vertical integration of licenses except for testing labs, which must be independent of other licensees;
  6. Allow AUMA’s open distributor model for both medical and adult use cannabis businesses by allowing “a business to hold multiple licenses including a distribution license … [to] make it easier for businesses to enter the market, encourage innovation, and strengthen compliance with state law”;
  7. Define “applicant” as “an owner applying for a state license,” with at least a 20 percent ownership in the cannabis business or any person who participates in the “direction, control, or management” of the cannabis business.
  8. Require each cannabis business owner pass a fingerprinting and criminal background check and each applicant disclose “every person with a financial interest in the person applying for the license as required by the licensing authority”;
  9. Support the AUMA’s more liberal allowance for cultivation licenses;
  10. Add a new cultivation license — Type 1C, “specialty cottage” — which will mean California will have 20 types of cannabis business licenses;
  11. Require microbusinesses (licenses only available under the AUMA) to secure regulatory approval from the California Bureau of Cannabis Control and the California Departments of Food and Agriculture and Public Health;
  12. Mandate the AUMA and MCRSA have the same environmental protections and restrictions on licensees; and
  13. Task California’s Department of Food and Agriculture, (not its Bureau of Cannabis Control) with creating California cannabis appellation standards by January 1, 2020.

California’s Legislature must approve Governor Brown’s Bill by a two-thirds vote, and that is expected to occur (at least in some form) this summer.

Canada cannabis marijuanaMaking good on Prime Minister Justin Trudeau’s 2015 campaign promises, Canada’s Liberal Party-led government last week announced a suite of bills to legalize recreational marijuana use throughout Canada. Also last week, I was on “To the Point” with Warren Olney to try to answer two big questions regarding Canada’s legalization plans: How will Canada legalize and what impact will that have on the United States?

First though, some history.

Canada already has legalized medical marijuana and its production, including production of “non-dried marijuana,” and some of its current producers, such as Tweed and Tilray, are well-recognized brands both within and outside Canada. What is little known about Canada’s medical cannabis regime, however, is that Canada never legalized medical marijuana distribution or dispensaries; Canadian medical marijuana patients order and receive their medical marijuana through Canada’s mailing system. Despite dispensaries being illegal, many operate relatively freely due to local law enforcement tolerance in certain Provinces. All of that will change when Canada legalizes marijuana, and the pending legalization bills are widely expected to pass.

With a desired goal of July 1, 2018 to get legalization off the ground, Canada is nothing if not ambitious. The legalization bills contain many interesting restrictions and standards, including the following:

  • The legal age to purchase up to an ounce of marijuana will be 18, but the Provinces are free to set higher age limits.
  • Individuals 18 and older can grow up to four plants per household for personal use.
  • Tourists cannot bring cannabis into Canada, but they can purchase and use it while there.
  • The provinces will almost exclusively regulate retail and marijuana distribution, as well as the retail price of marijuana. They can even own their own retail establishments if they wish.
  • Provinces will be able to decide whether alcohol and marijuana can be sold at the same retail location.
  • According to the federal government’s own press release, “those jurisdictions that have not put in place a regulated retail framework, individuals would be able to purchase cannabis online from a federally licensed producer with secure home delivery through the mail or by courier.”
  • Marijuana vending machines and self-service displays are banned.
  • The federal government will regulate marijuana producers.
  • Advertising, promotions, and marketing cannot appeal to children and they will be heavily regulated by the federal government, including the possibility of no branding at all on the production side.
  • Regulations regarding packaging and labeling are mandated, but they need to be debated by government first.
  • No federal taxes or licensing fees are contained in the bills.
  • Cannabis cannot be used to infuse alcohol, nicotine, or caffeine and vice-versa.
  • More than 2 nanograms of active THC in the blood is a criminal driving offense punishable with a fine and the presence of more than 5 nanograms is a more serious offense, and officers will test driving impairment by using “fluid” samples, including saliva and blood samples.

As these cannabis bills make their way through Canada’s Parliament, there will no doubt be robust debates among lawmakers and regulators on everything from potency limitations to the kinds of cannabis products that will be available to quality assurance testing requirements. One of the most grueling debates will likely be over whether the Provinces should be the ones running all marijuana retail establishments.

To date, the U.S. only has one city-owned marijuana retail store. Needless to say, the idea of government owned and distributed marijuana hasn’t taken off in the U.S., both because it’s still federally illegal here and because we simply do not have a tradition of government ownership of anything retail. So even if Canada does embrace a “government weed” model, it’s unlikely this will cause the U.S. to influence our own state-by-state legalization scheme with private marijuana markets.

Sacramento cannabis permits

If you are looking to secure a California cannabis business license you should start getting ready now for some seriously tough regulatory regimes. Our cannabis lawyers have had to wade through massive bureaucratic red tape in securing marijuana business licenses for our clients in many different states and in even more counties and cities, but we see California — under its Medical Cannabis Regulation and Safety Act and its Adult Use of Marijuana Act — as likely leading the country in red tape. And of all the California counties and cities, Sacramento is right now leading the pack in tough local law marijuana regimes. Marijuana operators should expect to pay a serious premium if they want to operate in the capital of the Golden State.

On February 2, 2016, the Sacramento City Council adopted Section 17.228.127 of the Sacramento City Code allowing non-residential properties to be used for commercial cannabis cultivation with a Conditional Use Permit.  As defined in Title 8 of the City of Sacramento City Code, cannabis cultivation means “to plant, grow, harvest, dry, cure, grade or trim marijuana.”  Cannabis cultivation can only be done indoors within a fully enclosed building not visible from a public right-of-way.  

On November 22, 2016, Sacramento adopted Ordinance No. 2016-0051 to regulate marijuana cultivation businesses. Under this 44-page ordinance (among its many provisions on security, management, record keeping, signage, and general facility restrictions) cultivation permits may be issued for the following three different cultivation permit types:

  • Class A for indoor cultivation of no more than 5,000 sq. ft. of total canopy size
  • Class B for indoor cultivation of no more than 10,000 sq. ft. of total canopy size
  • Class C for indoor cultivation sites up to 22,000 sq. ft. of total canopy size

Cannabis cultivation will be allowed only in Agricultural, General Commercial, Heavy Commercial, Light Industrial, and Heavy Industrial zones.

As of April 3, 2017, prospective marijuana cultivation businesses can begin requesting appointments with the Planning Division at the Community Development Department to file for the required Conditional Use Permits (“CUP”). Contemporaneous with filing for the CUP, applicants must also file for a Business Operating Permit (BOP) with the City’s Revenue Division. Getting your CUP and BOP for cultivating marijuana will be no small task.

You will be required to provide the following for the CUP:

  1. A completed “Planning Entitlement Application”;
  2. A draft Security Plan, Community Relations Plan and Odor Control Plan;
  3. A written description of the project being proposed for development, which must include a description of the project and detailed scope of work for which the CUP review is being requested and how the project will address any potential negative
    effects on the community. A Design Concept Narrative is also required for Site Plan and Design Review entitlement.
  4. Multiple scale developmental plans that are incredibly detailed and are to include site plans with vicinity map, building elevations, landscape plans, floor plans, reduced plans, streetscape drawings, and color photos of the proposed facility, all of which are subject to a design review by the Planning Division.

You will also be required to submit the following for the BOP:

  1. A Marijuana Cultivation Business Permit Application;
  2. Proof of non-profit status (until state licenses issue in the future);
  3. A Neighborhood Responsibility Plan;
  4. A business operations plan, which must include:
    1. Business Plan;
    2. Community Relations Plan;
    3. State Licenses (once issued);
    4. Tax Compliance;
    5. Insurance;
    6. Budget;
    7. Price List;
    8. Floor Plan;
    9. Site Plan;
    10. Security Plan;
    11. Water Efficiency Plan;
    12. Lighting Plan;
    13. Odor Control Plan;
    14. Energy Efficiency Plan; and
    15. Owner’s Statement of Consent.
  5. Criminal History/Background Check Forms and fingerprinting, which apply to all “interested parties,” none of whom can be convicted felons and which Sacramento defines as follows:
    1. Persons with at least a 10% interest in the marijuana cultivation business;
    2. Partners, officers, directors, and stockholders of every corporation, limited
      liability company, or general or limited partnership that owns at least 10%
      of the stock, capital, profits, voting rights, or membership interest of the
      marijuana cultivation business or that is one of the partners in the
      marijuana cultivation business;
    3. The managers of the marijuana cultivation business; and
    4. The staff of the marijuana cultivation business.

And now for the fees–fees for the CUPs range from $16,640.24 at the Zoning Administrator Level if not making any changes to an existing building or site to $33,610.28 for Planning and Design Commission Site Plan and/or Design Review on buildings 125,000 square feet or greater. Fees for the BOP range from $9,700 for a Class A grow to $28,910 for a Class C grow. And all of these fees have corresponding renewal fees. The bottom line? It’s not going to be cheap or easy to secure a license to operate in Sacramento as a grower.

Applicants have until June 30, 2017 to submit their completed CUPs and BOPs. With the volume of information and compliance proof required, you should begin now if you want a future cultivating cannabis in Sacramento.

California cannabis lawyersIt started in Oregon with the breaking of “A Tainted High.” It then moved to Colorado with 19 marijuana and marijuana product recalls in 19 weeks in 2015. Washington then overhauled its pesticide program to prevent illegal pesticides on its regulated cannabis products (which eventually led to the state adopting recall rules). Now, California is finally learning how dangerous its cannabis can be, and its only a matter of time before California state regulators use the Medical Cannabis Regulation and Safety Act (“MCRSA“) and Adult Use of Marijuana Act (“AUMA“) to institute regulations to reduce the use of toxic and harmful marijuana pesticides.

Since none of California’s existing medical marijuana laws mandate any kind of quality assurance or pesticide testing, California cannabis patients have been taking their chances that their medicine is safe for consumption. You will be hard-pressed to find medical marijuana dispensaries in California that follow Proposition 65, which added marijuana smoke to its list of potentially cancer-causing products in 2009.

But that’s all about to change.

AB 266 of the MCSRA requires medical cannabis be tested:

Medical cannabis and medical cannabis products shall be tested by a registered testing laboratory, prior to retail sale or dispensing, as follows: Medical cannabis from dried flower shall, at a minimum, be tested for concentration, pesticides, mold, and other contaminants.
And AB 243 of the MCRSA states as follows:
The United States Environmental Protection Agency has not established appropriate pesticide tolerances for, or permitted the registration and lawful use of, pesticides on cannabis crops intended for human consumption pursuant to the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. 136 et seq.). The use of pesticides is not adequately regulated due to the omissions in federal law, and cannabis cultivated in California for California patients can and often does contain pesticide residues. Lawful California medical cannabis growers and caregivers urge the Department of Pesticide Regulation to provide guidance, in absence of federal guidance, on whether the pesticides currently used at most cannabis cultivation sites are actually safe for use on cannabis intended for human consumption.

Under the MCRSA, California’s Department of Pesticide Regulation (DPR), in consultation with the Department of Food and Agriculture (DFA), is charged with developing standards for using pesticides in cannabis cultivation and “the maximum tolerances for pesticides and other foreign object residue in harvested cannabis.” And the DPR, in consultation with the State Water Resources Control Board, must promulgate pesticide regulations for indoor and outdoor cultivating of medical cannabis equivalent to existing standards of the Food and Agricultural Code.

All of this will eventually make California the most conscientious state on both marijuana pesticides and cannabis’s impact on the environment. Each regional water board and the State Water Resources Control Board may address water waste and discharge of  pesticides and herbicides, which is far more than any other state has done, despite cannabis’s obvious environmental impacts. As far as adult use cannabis pesticide testing goes, the AUMA mandates compliance with the pesticide regulations set forth under the MCRSA by the Bureau of Medical Cannabis Regulation.

We do not yet know what California’s pesticide and testing regulations will look like in final form, but we’re sure to find out in late April when the Bureau will release its first set of draft MCRSA regulations. But our cannabis lawyer’s vast experience in regulated marijuana states tells us that you should, at minimum, expect mandatory analyses of the following:

  1. Microbiological screenings;
  2. Foreign matter inspection;
  3. Residual solvent tests; and
  4. Pesticide and other chemical residue and metals screening.

Though pricey for both the state and for marijuana businesses, mandatory cannabis testing is necessary to give California’s cannabis customers confidence in the state’s marijuana marketplace. The State of California will set the floor for consumer safety through quality assurance testing (and packaging and labeling rules) and all California marijuana businesses should prepare now for the consequences of potentially faulty testing, products liability claims (including against retailers), and start developing their own recall plans.

Cannabis business lawyersIn a multitude of marijuana-regulated states, certain individuals and companies cannot own or even finance a marijuana business due to state regulations on residency and criminal and financial background checks. This means the cannabis business lawyers at my firm often get clients interested in getting involved with an ancillary cannabis business so as to avoid these heavy regulations.

Whether it is technology, real property development, or consulting,  how you structure your services or licensing agreement can control whether the ancillary company violates applicable state marijuana regulations. And marijuana equipment leases are no different. Done right, leasing expensive equipment to marijuana producers and processors is a great way to service state licensed marijuana businesses without violating state rules. However, just like real property lease agreements, garden variety off the shelf boilerplate marijuana equipment lease agreements will not cut it in the cannabis space. So here’s what you need to know when leasing equipment to a licensed or permitted marijuana business in a heavily regulated marijuana state:

  1. Marijuana Regulations: How the Lessor Gets Paid. Every equipment lease agreement must be structured so as not to violate applicable marijuana rules in a given state. This usually means the lease agreement must clearly address how the lessor will get paid and that payment plan cannot violate state law. In a number of states, if the lessor takes an equity interest in the marijuana company in exchange for lease payments, or if the lessor is entitled to receive net or gross profit from the marijuana business, or if the lessor’s equipment lease payments hinge on the marijuana business’s financial performance or harvest or manufacturing yield, the lessor must be disclosed to and vetted by the relevant government agency. Most states require a fixed fee for rental payments and anything different will likely lead the state to believe the lessor is really a hidden profit sharer. The higher the lease payments, the more likely regulators are to think there’s some unlawful profit sharing taking place. Be sure you can defend your above-market-rate charges.
  2. Marijuana Regulations: Lessor Control Over the Marijuana Company. In addition to lease equipment payments, state regulators also want to know and approve of any person or company exercising any control over the marijuana company. States don’t usually fully define what constitutes an impermissible level of control, but you can assume the definition will be fairly broad and will be analyzed on a case by case basis. In the context of an equipment lease, an impermissible control provision would be the lessor restricting the marijuana business from renting equipment from another equipment lessor. And if the lessor wants to throw in some consulting services as a supplement to leasing the equipment, the lessor’s control over the staff of the marijuana business regarding the use of the equipment may also create a control violation if lessor oversight goes too far.
  3. Marijuana Regulations: Contract Rules. As an equipment lessor, you have to make sure your lease doesn’t violate any applicable state law contract rules. For example, in Washington State, the term of the contract cannot be indefinite — it needs a termination date. This stems from state regulations prohibiting third parties from locking marijuana businesses in too long to term contracts that could create “undue influence” over the licensee. We constantly see equipment leases that violate this simple rule.
  4. Security Interests. Make sure your security interest in your equipment is valid. In most states, state regulators should have no issue with a lessor’s security intern est in its equipment. However, if the lessor tries to maintain a security interest in marijuana inventory or ithe licensed business itself, it is going to have a control problem. State receivership proceedings may be another collection option, but you need to make sure that’s a realistic scenario in your state and that your equipment lease carefully details how that will happen.
  5. Defaults. The rules governing cannabis businesses are unpredictable and ever-changing and this means you as the lessor must stay on top of the rules and make sure you remain in compliance with them. This also means your equipment lease needs to account for very specific events of default that should include the marijuana business having to maintain good standing with regulators and any permissible appeal/cure period if the marijuana business is hit with a marijuana regulation violation that carries shutdown or crippling fines as penalties.
  6. Access to the Equipment. You can’t just come and check up on your equipment whenever you want. All states control physical access to the marijuana business itself, so be sure your equipment lease takes that into account. Most times, you’re going to have to consent to applicable security procedures, including scheduled visits, the donning of ID badges, and being escorted at all times by an employee of the marijuana business.
  7. Disputes and Repossession of Equipment. Because many marijuana businesses fail in their first year, you need to be ready for the eventuality of a default on your equipment lease. Your contract should include the right laws and the right venue for your dispute. Since marijuana is still federally illegal, you should consider private mediation and/or arbitration of your disputes and you should ensure that any court filings go through state court, which is more likely to recognize and honor your equipment lease than would a federal court. We sometimes use provisions mandating state court and prohibiting removal to federal court. You’ll also want to give yourself an easy route to repossess the equipment, so don’t ignore the benefit of providing for self-help repossession methods in your equipment lease agreement, so long as they don’t violate applicable marijuana rules.

Just as is true of cannabis commercial property leases, your cannabis equipment leases need to account for all sorts of cannabis-specific situations.

Marijuana and cannabis safety standards ASTMASTM International recently announced plans to launch a new committee on creating technical standards and guidance materials for the full life cycle of cannabis products. The new ASTM cannabis committee initially plans to focus on developing voluntary consensus standards related to cannabis in the following six technical areas:

  • Indoor and outdoor horticulture and agriculture
  • quality management systems
  • laboratory
  • processing and handling
  • security and transportation
  • personnel training, assessment, and credentialing

The development of uniform standards for cannabis related products, systems and services is critical to the cannabis industry because there is no currently no consensus on how cannabis products should be produced and processed to ensure product quality and safety. Because cannabis and its derivatives are still illegal under federal law, federal agencies such as the Food and Drug Administration (FDA) have not enacted anything that resembles the regulations it has implemented for tobacco products or medications or food. Some states, such as Colorado and Washington, have some quality control and assurance rules, especially regarding the safety of edibles and the use of pesticides. However, many aspects of cannabis remain wholly unregulated at the state level, and the patchwork of state regulations introduced thus far by various states have been inconsistently drafted and implemented.

ASTM International is one of the world’s largest voluntary standards developing organizations and it has helped develop over 12,000 industry standards for materials and products ranging from aluminum to zippers. ASTM International draws input for proposed standards from volunteer members from around the world that represent a broad range of industry stakeholders such as producers, users, consumers, government and academia. ASTM standards are voluntary, but many government regulators cite to them in their laws, regulations and codes, thus giving them the force of law. They also are commonly referred to in court cases.

The process of drafting, reviewing, and approving ASTM standards for the cannabis industry will take time. Once a technical committee for cannabis is established, ASTM will establish subcommittees to address individual technical areas. Each subcommittee will establish a task group responsible for researching and drafting a proposed standard. The draft standard will then be reviewed and voted upon by the technical committee and then it will go to the full ASTM membership. Depending on the committee and subject matters, ASTM standards can be drafted, reviewed, and approved in as little as nine months, or can take more than a year.

This process of developing industry standards for cannabis presents an opportunity for a data-driven conversation on how the cannabis industry should evolve and mature. Identifying objective standards for best-practices in the processes of growing, producing, processing, transporting, and packaging cannabis products will be a necessary step if the cannabis industry is going to mature and sustain itself on a broader (and potentially international) scale. When railroads were first introduced in the United States, locomotives and railroad tracks used different gauges in different parts of the country because the railways initially were built only to serve local needs. The cannabis industry is in a similar early stage of development, with individual states drafting and implementing cannabis regulations that are inconsistent with others in other states. Ultimately, the development of industry standards is a necessary step that will help the cannabis industry grow beyond its current state limits and speed up the day when our country sees cannabis as just another legal product.