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.

Oregon Cannabis SeminarOn June 9, my Portland colleague Will Patterson and I will present at an all-day continuing legal education (CLE) event called The Business of Marijuana in Oregon. This will be my third year presenting at the event and my second year as chair. The roster of speakers lined up for this CLE is better than any year to date, and everyone, including non-lawyers, would be well served to attend. For a full event description, including topics, speakers and registration links, click here.

Looking back over the past few years, it is amazing to see how much things have changed in Oregon cannabis. At this point, the OLCC’s recreational marijuana program has begun to hit its stride, with over 2,500 applicants now on file with the state. We are proud to call many of these Oregon producers, processors, wholesalers and retailers our clients, alongside the many investors and ancillary service providers we represent.

Sometimes, it is said that pioneers get slaughtered and settlers get rich. Now that the Oregon regulatory groundwork has largely stabilized, we have begun to see a second wave of entrepreneurs move in on the local industry. Many of these entrepreneurs bring skills, capital and experience from other regulated markets, while others are new to the space. Over the next year or so, with the increase in market entrants, we expect to see a fair amount of market consolidation throughout the Oregon cannabis industry.

Oregon attorneys and business owners alike need to be familiar with the unique regulatory concepts and industry dynamics that will be discussed on June 9, in order to best serve the Oregon cannabis industry. These concepts include state administrative governance and pending legislation, developments in the highly dynamic federal sphere, and practical approaches to working with and in the cannabis industry.

We hope you will join us on June 9 for an eight-hour survey of Oregon cannabis that is both broad and deep. And if you are a Harris Bricken client or a friend of the firm, please click here to request a promotional discount code, which can be applied to either the webcast, or to in-person attendance.

See you soon.

California cannabis manufacturing lawNow that California’s Department of Public Health (through its Office of Manufactured Cannabis Safety) has released its initial rules for cannabis manufacturing, our California cannabis attorneys are fielding numerous calls from existing cannabis businesses (along with new entrants into the field) with a simple question: How do these rules affect me? Last week we covered some of the technical provisions of the rules. Since the regulations for manufacturing come in at a hefty 95 pages, I thought it would be helpful to go over some more rules and how they can affect your cannabis manufacturing business in California. First, it’s important to note that these regulations may change after the public and interested stakeholders have a chance to comment on them, but this is still a significant first step in clarifying what was previously a confusing landscape. The regulations for manufacturing are a clear and effective attempt by California to enact robust regulation to comply with the Cole Memo issued by the U.S. Department of Justice. Here are some areas of importance for anyone looking to engage in cannabis manufacturing in the Golden State:

Types of Licenses. The regulations state that California’s Department of Public Health will issue four types of licenses: Type P, Type N, Type 6, and Type 7. Type N licensees can conduct infusions and can package and label their own products while Type P licensees can do only packaging and labeling for other licensed cannabis manufacturers. Type 6 (non-volatile) and Type 7 (volatile and non-volatile) licensees can conduct extractions and infusions, and can package and label their own products. If you obtain a license there are two important things you need to consider: 1) Unless you obtain a type 7 license you will need to submit a new application if you want to change the type of manufacturing you are conducting; and 2) You need to be sure your cannabis manufacturing operations are in a location that can be sustained because relocating any portion of your manufacturing operation to new premises will require you submit a new license application.

DON’T PROCRASTINATE! If you have a cannabis manufacturing business that is legally operating in California before January 1, 2018, you will be able to continue operating it until the Department of Public Health approves or denies your application. This is extremely important considering it’s the next best thing to getting priority of review – which only applies to cannabis manufacturers that were operating and in good standing with their local jurisdiction as of January 01, 2016.

DO YOU REALLY KNOW YOUR BUSINESS PARTNER?! We’ve already covered who is considered an owner under California’s new cannabis regulations and it’s important you go over the ownership classifications because it can have profound implications on your business. Your application can be denied for a number of acts that your business partner may have committed. Strict attention must be paid to past acts because these prior offenses can torpedo your application and they’re not all obvious. Ever heard of the California Food Sanitation Act? How about the Sherman Food, Drug, and Cosmetic Law? You don’t need to know them inside and out but you do need to make sure your business partner never violated either of those acts because they can be grounds for denying your application.

DON’T EVEN THINK ABOUT IT. The rules state that no applicant or associated applicant shall hold a Type 8 (testing) or Type 11 (distribution) license. The rules also state “a manufacturer licensee shall not manufacture, prepare, package or label any products other than cannabis products at the licensed premises.” If you hoped to merge your cannabis manufacturing operation with a non-cannabis business for increased efficiency, sorry but NO SOUP FOR YOU. Lastly, the rules prohibit a manufacturer licensee from subletting any portion of the licensed premises.

These proposed regulations for cannabis manufacturers could not have come out at a better time, as the lack of legal specificity for cannabis manufacturing had been dampening the enthusiasm and desire of those looking to operate a marijuana manufacturing business in California. Before these new rules issued, our California cannabis attorneys were starting to see a slow but steady increase in sophisticated clients looking to start a California cannabis manufacturing business, but even just since they have come out the number has soared.

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.

Cannabis scienceLast week we dropped some science about the current state of cannabis research with a focus on a recent study reviewing all research to date on the positive and negative health effects of cannabis. The “overwhelming takeaway” was that additional research was needed.

We wanted to highlight another study from early April that was published in the Journal of Psychopharmacology. The study doubles down on the potential political ramifications of cutting-edge cannabis research. The team, inspired by earlier studies suggesting that medical cannabis leads to a reduction in opioid overdose deaths, decided to determine whether cannabis’ “substitution effect” applies to other medications. Among New England dispensary members, the results of medical cannabis are stark:

  • 76.7% of respondents reported that they reduced their opioid use since starting medical cannabis.
  • 71.8% reported reductions in anti-anxiety medications.
  • 66.7% reported reductions in migraine medications.
  • 65.2% reported reductions in sleep medications.
  • 42% reported reductions in alcohol consumption.
  • 37.6% reported reductions in antidepressants.

These results reconfirm that medical cannabis reduces opioid use, and now we also know that medical cannabis reduces use of alcohol, antidepressants, and a field of other medications. The team is quick to caution that these results were based on self-reporting and then repeated a far too common refrain, “Additional research is needed.”

Perhaps we could expect to see that research soon, if only the current political climate were not so vehemently anti-science. President Trump recently said: “Drug overdoses are now the leading cause of accidental death in our country. And opioid overdose deaths have nearly quadrupled since 1999 . . . Our Attorney General, Jeff Sessions, is working very hard on this problem. It takes a lot of his time, because this causes so much of the problem that you have to solve – that problem.”

Roughly translated, the President and his staff have recognized that opioid abuse has reached epidemic proportions that require immediate action. The science clearly gives us one piece of the solution: decriminalize cannabis. But with an administration willing to make the insultingly anti-scientific claim that cannabis is “only slight less awful” than heroin, we the people (and Trump’s supporters in particular) will likely be left waiting for a rational administration.

 

California Cannabis lawyersThough the Medical Cannabis Regulation and Safety Act (“MCRSA“) initially failed to specifically define the term “manufacturer,” California finally rectified the situation with the Department of Public Health’s Office of Manufactured Cannabis Safety‘s release of the initial MCRSA manufacturing rules last Friday.

“Manufacturer” now means the production, preparation, propagation, or compounding of cannabis products, including extraction processes, infusion processes, the packaging or repackaging of manufactured medical cannabis or medical cannabis products, and labeling or relabeling the packages of manufactured medical cannabis or medical cannabis products.

In addition, “manufacturing” or “manufacturing operation” means all aspects of the extraction and/or infusion processes, including processing, preparing, holding, storing, packaging, or labeling of cannabis products. Manufacturing also includes any processing, preparing, holding, or storing of components and ingredients.

We also know what nonvolatile and volatile solvents mean, which terms were previously undefined in the MCRSA.which This is important because it will determine what kind of California cannabis manufacturing license you’ll get. “Nonvolatile solvent” means any solvent used in the extraction process that is not a volatile solvent, including carbon dioxide. “Volatile solvent” means any solvent that is or produces a flammable gas or vapor that, when present in the air in sufficient quantities, will create explosive or ignitable mixtures. The state’s examples of volatile solvents include, butane, hexane, propane, and ethanol. A Type 6 cannabis manufacturing licensee can only use nonvolatile solvents, but a Type 7 licensee can use both nonvolatile and volatile solvents in its extractions and infusions.

There are also additional manufacturing license types in the initial rules that weren’t included in the MCRSA. A “Type P” license is for entities that only package or repackage medical cannabis products or label or relabel the cannabis product container to go to retail. Entities that engage in packaging or labeling of their own product as part of the manufacturing process do not need to hold a separate Type P license. There is also a “Type N” license for manufacturers that produce edible products or topical products using infusion processes, or other types of medical cannabis products other than extracts or concentrates, and that do not conduct extractions. The Type P and Type N licenses are subject to the same restrictions as a Type 6 license.

Overall, only certain kinds of extractions are allowed for the manufacturing licensee. The state mandates the only cannabis manufacturing allowed is mechanical extraction, such as screens or presses; chemical extraction using a nonvolatile solvent such as a nonhydrocarbon-based or other solvent such as water, vegetable glycerin, vegetable oils, animal fats, or food-grade glycerin; chemical extraction using a professional closed loop CO2 gas extraction systems; chemical extraction using a volatile solvent; and any other method authorized by the state. All chemical extractions must take place within a professional, closed-loop system, which also has its own state law requirements. The rules also contain strict packaging and labeling requirements, require all personnel to be sufficiently trained, and mandate that the manufacturing licensee must ensure strict quality assurance processes and protocol, including for recalls and product complaints.

Importantly, the manufacturing rules also tell us what kinds of manufactured products can be on the market in addition to their potency limitations. California isn’t going to allow cannabis-infused alcohol, caffeine, or nicotine products and no cannabis product can be made of “potentially hazardous food.” Potentially hazardous food means any food “capable of supporting the growth of infectious or toxigenic microorganisms when held at temperatures above 41 degrees Fahrenheit.” Products that have to be refrigerated at a temperature of less than 41 degrees and any dairy or meat products are also not allowed. Edibles can’t contain more than 10 milligrams of THC per serving or more than one hundred 100 milligrams of THC per package of finished product. And, for non-edible manufactured cannabis, no finished package can contain more than 1000 milligrams of THC.

Lastly, the initial licensing fee for a manufacturer license applicant is $1,000 for each application filed. Then the annual license fee is on a sliding scale based on the licensee’s annual gross revenue, starting at $2,000 if you’re making up to $100,000 on up to a $50,000 annual license fee if you’re making over $5 million yearly.

Overall, California’s manufacturing rules don’t break the mold. Their manufacturing standards appear to fairly closely track the other regulated cannabis states and even mirror some of the manufacturing regulations in the adult use states. And, though these are just the initial rules, we don’t expect much change other than the probable addition of more prohibited products to the list of no-gos, such as other states have done when it comes to gummy bears or other products that may appeal to kids.

Marijuana lawIf you hadn’t noticed, the federal government was set to shut down on Friday due to lack of funding. Thankfully, our House and Senate representatives reached a tentative deal yesterday morning to avoid that. Better still, the budget deal extends the Rohrbacher-Farr Amendment provisions, which prohibit the U.S. Department of Justice from spending money to interfere with implementation of state medical marijuana laws. The legislation should pass later this week.

The new medical cannabis rider will likely be referred to as the Rohrbacher-Blumenauer amendment, or something similar, as Earl Blumenauer (D.-OR) has replaced outgoing house member Sam Farr as a co-sponsor of the rider. Here is the rider’s current proposed language:

SEC. 537. None of the funds made available in this Act to the Department of Justice may be used, with respect to any of the States of Alabama, Alaska, Arkansas, Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming, or with respect to the District of Columbia, Guam, or Puerto Rico, to prevent any of them from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.

By our count, that’s 44 states, plus D.C., Guam and Puerto Rico. For some reason, at least two states with new medical cannabis laws are left out. Those states include North Dakota, where voters approved a medical marijuana ballot initiative in November, and Indiana, whose governor signed a restrictive CBD medical cannabis bill into law late last week. Hopefully these omissions were just an oversight and North Dakota and Indiana make the final cut.

The FY2017 budget deal also extends protection of state industrial hemp programs from federal interference, and prevents Washington, D.C. from spending its own money to tax and regulate marijuana sales. An overview prepared by House Democratic Appropriations Committee members noted that the bill does not, however, include language protecting banks from penalties for working with state-legal marijuana businesses, which some in Congress had pushed for.

Like everything else in the spending bill, Section 537 is not a permanent solution of any sort – it merely kicks the can down the road until September 30, when FY2017 ends. Section 537 also is not the long-term fix medical (and adult use) cannabis businesses need, especially in the era of Jeff Sessions and a brutal executive branch.

Looking ahead, we do know from conversations with Rep. Blumenauer’s office that FY2018 legislation being drafted by lawmakers includes extension of the helpful Section 537 language. We also know that most of President Trump’s large proposed cuts take place in the FY2018 budget, and that his cuts do not include Rohrbacher-Blumenauer– at least for now.

But this is where it gets tricky. If medical marijuana safeguards are not present in the FY2018 House proposal, supporters will have to push for amendment on the House floor or in the Senate Appropriations Committee. That’s a tough slog, because House leadership has begun to restrict the scope of policy riders allowed to come to the floor. Last summer, for example, proposed amendments on banking services for marijuana businesses, and on Washington, D.C.’s ability to spend money regulating cannabis, were blocked from floor consideration altogether.

Note that over the past few years, Rohrbacher-Farr has withstood DOJ challenges and garnered a significant uptick in support. In 2014, the measure was approved in the House by a relatively narrow vote of 219-189. In 2015, the approval margin grew to 242-186. Since the last House floor vote, several more states have enacted medical or adult use cannabis laws, and a number of prohibitionists who opposed those measures have been replaced with freshman supporters.

Today, cannabis reformers are confident that if they can get an FY2018 amendment to a House vote, it will easily pass again. It also appears likely that advocates have the votes to pass a broader amendment protecting all state marijuana laws from federal interference — including those allowing recreational use. A measure along those lines came just nine votes short of passing on the House floor in 2015.

Why Congress won’t just change the law, rather than restricting its enforcement, is a question for another day. For now, though, medical marijuana businesses can breathe a bit more easily, at least until September 30.

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.