Cannabis Production

So you’ve set your sights on joining the next generation of Oregon cannabis producers. Congratulations! You’ve identified talented growers, you’ve resolved the intractable indoor vs. outdoor cannabis growing dilemma, you’ve saved up some money, and now you are eager to get your cannabis operation up and running.

But what’s next? Your first question is a classic: Where will I grow?

When you apply for an Oregon Liquor Control Commission license, you will need to prove you have a deed or lease to an eligible property. A letter of intent to lease or to purchase will also suffice, but the OLCC will not actually issue the license until you close the lease or sale. You should work with a realtor with experience in the cannabis industry to identify a few possible locations. As you begin your search, remember the following:

Not all counties and cities are alikeOn the most basic level, you need to be aware of the various cities or counties that have banned recreational producers outright. The OLCC maintains a list of these hostile local governments and you may be sad to hear that Grass Valley, Oregon is still off-limits!

Even the cannabis friendly local governments vary significantly in their local requirements, with some counties going to great efforts to be cannabis friendly, and others putting up an unfortunate amount of red tape. An exhaustive county-by-county or city-by-city analysis is beyond the scope of this post and we recommend you speak with cannabis entrepreneurs and professionals who have worked with your top choices for county or city to get a sense of potential local government roadblocks.

Distribution Channels. Though rural land is likely cheaper, your best markets will likely be in the cities. It is never too early to begin cultivating relationships with wholesalers, processors and even retailers to help bridge this gap. Proximity to testing labs is also a plus.

Perform Your Due DiligenceOnce you find a location in a friendly area with room for your operation, you need to ensure that the property complies with all state, county, and municipal requirements and regulations. This can be done by thoroughly reviewing county codes, city comprehensive plans, land use regulations, relevant zoning ordinances, and CC&Rs and, in some cases, talking with the appropriate government officials. You also need to be sure your property has access to adequate water as you will be required to show proof of “water rights,” and adequate power.

Failing to do due diligence on a property can have disastrous consequences. We recently had a cannabis client come to my law firm ready to close on a perfect piece of real estate in a location with a cannabis-friendly local government. This company had even paid for certain improvements to the property, and it was just days away from closing on the property transaction. Fortunately, as soon as we were provided the counties’ records on the property, we noted a provision from the 1980s that prohibited their business. We identified this issue just in time to prevent the purchase and free up our client to move on to greener pastures.

Once you’ve acquired rights to your perfect cannabis property, you are ready to apply for a Land Use Compatibility Statement (LUCS) from the local jurisdiction and to begin preparing the property for the OLCC licensing/inspection process. Check back soon for part 2 of this series.

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.

I recently had the pleasure of attending the Cultivation Classic 2017, the “world’s only cannabis competition exclusively for ethically-grown product free of pesticides, defining craft and celebrating community.” Producers from around Oregon, including several of our clients, came together in a friendly competition to celebrate Oregon’s unique cannabis culture and ethos. Alongside the competition, the organizers put together a series of panels discussing a range of social, political, and legal issues facing the Oregon cannabis industry. The first panel featured the launch of a new industry group devoted to defining and supporting Oregon’s craft cannabis community.

This Craft Cannabis Alliance is an association of cannabis and cannabis-related businesses dedicated to creating an Oregon craft cannabis industry to rival Oregon’s renowned craft beer industry. Alliance Executive Director Adam Smith, a founder of Students for Sensible Drug Policy, took the stage to explain what “craft” means to these industry leaders:

Pictured left to right: Adam Smith, Cannabis Craft Alliance; Ashley Preece, Ethical Cannabis Alliance; Jodi Haines, Alter Farms
Pictured left to right: Adam Smith, Craft Cannabis Alliance; Ashley Preece, Ethical Cannabis Alliance; Jodi Haines, Alter Farms

These industry leaders are working to ensure that sustainable, ethical craft cannabis growers retain a seat at the table as Oregon’s cannabis industry matures. Gabriel Cross, CEO of Odyssey Distribution, LLC, expressed a sentiment shared by many of his fellow founding members.

“As a values-driven company, how we do things is as important to us as the bottom line. The CCA shares many of our values, and more importantly will bring together values-driven cannabis companies under one roof. We have a rare opportunity right now to define how an entire industry operates.”

One of the thorniest issues the CCA will face is the task of defining what “local control” means within the context of Oregon’s craft cannabis culture. Long-time readers of this blog will recall that Oregon originally implemented strict and confusing control and ownership residency requirements on recreational cannabis businesses. This created a host of problems, and the Oregon legislature responded by swinging the pendulum in the other direction, opening Oregon’s cannabis industry to unrestricted foreign investment and control. Over the coming months, the CCA will be working to find a balance its members believe will allow Oregonians to share in the profits of the state’s newest state-sanctioned “crop” without choking off the supply of vital capital that residents from other states can bring.

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

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

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

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

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

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

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

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

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

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

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

Cannabis attorneysMarijuana is a valuable asset and insurance can be a necessary tool in protecting that investment. We have written about how marijuana inventory can be covered under a general liability insurance policy. However, not all courts are willing to hold that an insurance policy covers cannabis.

In USAA v. Tracy (D. Haw. Mar. 16, 2012), a US District court in Hawaii ruled that a homeowner’s insurance policy does not cover medical marijuana. On May 18, 2010, USAA Casualty Insurance Company issued Barbara Tracy a homeowners’ insurance policy. Tracy was a medical marijuana patient who was permitted under Hawaiian state law to possess and grow marijuana. A thief stole 12 of Ms. Tracy’s marijuana plants, valued at $45,600, from Tracy’s property and she submitted a claim to USAA. USAA made an initial payment on the claim but Tracy argued that the amount was insufficient. USAA informed Tracy it would not make any further payment on the policy. Tracy sued USAA for breach of contract, seeking additional funds for the stolen cannabis plants. USAA moved for summary judgment to have Tracy’s claim dismissed, arguing that her marijuana was not covered under her policy.

USAA’s policy covered theft of “trees, shrubs, and other plants” and Tracy argued that this should include her marijuana plants. USAA first contended that Tracy did not have an insurable interest in medical marijuana. Hawaiian Law defines an insurable interest to be any “lawful and substantial economic interest in the safety or preservation of the subject of the insurance free from loss, destruction, or pecuniary damage.” USAA argued that an interest in medical marijuana is not “lawful” because Hawaii’s medical marijuana law “does not legalize the medical use of marijuana, but provides an affirmative defense to marijuana-related state law crimes for the medical use of marijuana.” USAA also pointed to the fact that Hawaii’s medical marijuana law states that “this part shall not be construed to require insurance coverage for the medical use of marijuana.” The court rejected both arguments by determining that Hawaii does permit the use of medical marijuana, making it lawful, and that although Hawaii’s medical marijuana law did not require insurance coverage, it does not prohibit insurance coverage. The court determined that Tracy did have an insurable interest in marijuana as legally compliant medical marijuana user.

However, the court was persuaded by USAA’s second argument that it could not purchase medical marijuana using insurance proceeds as that would violate federal law. The court cited to cases that established that Hawaiian courts can refuse to enforce contracts that violate federal law. The court ruled Tracy’s possession and use of marijuana violated federal law because it directly conflicted with the federal Controlled Substances Act, even though she was compliant with state law.  The court concluded that the insurance policy purportedly covering her marijuana plants was an illegal contract that could not be enforced and that USAA had no obligation to provide her insurance proceeds for the plants. As a result, it granted USAA summary judgment, holding that it did not owe Ms. Tracy anything more.

For more on insurance and marijuana, please see the following:

Cannabis attorneysToday’s Cannabis Case Summary looks at a novel example of the intersection between state-legal  cannabis and employment law. The plaintiff, Bobbie Henry, worked at an Outback Steakhouse in Flint, Michigan, from 1997 to 2014 when she was fired along with four other employees because of drug-related activities. Henry, a registered medical marijuana caregiver under Michigan law, sued Outback, alleging her medical marijuana activities were used as a pretext for age discrimination and her termination on that basis was defamatory. Unfortunately for Henry, a federal judge disagreed and the U.S. District Court for the Eastern District of Michigan granted Outback’s motion for summary judgment.

The meat (pun intended) of this case is in its facts, which involve two different groups of Outback employees involved in two very different kinds of “drug activity.”

One was made up of Henry and a second Outback employee who was a registered medical marijuana cardholder and a patient of Henry’s. Henry transferred cannabis to the co-worker patient in her role as a registered medical marijuana caregiver permitted by state law.

The second was a group of four employees the kitchen manager had observed exchanging a “small black object” he suspected was an illegal substance for cash. The employees claimed it was a “bridge card,” but after an investigation and a conference call with management the four employees were terminated for cause. The four employees did not go quietly, however, and in exit interviews alleged Henry was “selling drugs” and “dealing dope” at the restaurant. When confronted, Henry claimed that though she did sell medical marijuana to her co-worker patient she did not sell medical marijuana to her co-worker patient on company property. She was terminated the same day for behavior “unbecoming” of the company.

Henry sued Outback, first alleging that her medical marijuana-related activities were used as a pretext for age based discrimination. Henry’s claim was based on the fact that she was the longest-tenured member of the team and had been there for fourteen years before being terminated, despite winning service awards for “Top Performing Bar Team.” She also pointed to an unlitigated situation where a second employee had been terminated for what he felt was age-based discrimination.

The court looked at the pretext issue and was unsympathetic towards Henry, pointing out that she admitted to having a medical marijuana card and to selling drugs to a co-worker. Based on these two things, the court concluded there was a legitimate, non-pretextual reason for Outback to terminate Henry. The court secondarily found that Outback, as Henry’s employer, had a qualified privilege to discuss allegations that she sold medical marijuana to co-workers, which she did not dispute.

This case is just another example of how a state’s permissiveness of medical marijuana or adult-use cannabis will usually not impose a duty on an employer to tolerate marijuana use or override other legal doctrines that give power to employers. Even though Henry was apparently correct that she was in compliance with Michigan law, a little discretion could still have gone a long way. We cannot resist noting the foolishness of an employer terminating a good employee for helping a co-worker.

NOTE: The above is part of our plan to summarize all cannabis civil cases with a published court decision. By civil case, we mean any case that involves cannabis or the cannabis industry that is not a strictly criminal law matter. These cannabis case summaries are intended both to keep you up to date on cannabis laws as interpreted by the courts and also to serve as a resource for anyone conducting cannabis law research. We also will seek to provide key unpublished cannabis law decisions as well, when available.

California cannabis bankingPolitical change comes in fits and starts. Cannabis laws did incredibly well at the state level in the 2016 election cycle, but it looks like we are going to be facing the status quo at the federal level for the foreseeable future. That is good news to some extent, as it is seeming less and less likely that the worst case scenario of the Trump/Sessions Department of Justice will come to fruition. We aren’t expecting to see mass arrests, seizures, and shut-downs in the cannabis industry. On the other hand, we also aren’t expecting to see any major positive changes on cannabis banking or taxes coming out of this government either. The unsteady status quo will remain, where agencies at the federal government will continue to grapple with balancing the criminality of marijuana with the fact that they cannot treat it as wholly criminal, lest they bring about more crime by burying their heads in the sand.

With banking in particular, things have remained relatively consistent since 2014. In February of that year, the Department of Justice and the Financial Crimes Enforcement Network (FinCEN) at the Department of Treasury released simultaneous memoranda creating a civil structure where financial institutions like banks and credit unions that provide services to the cannabis industry could comply with their regulatory obligations. They would still potentially be committing crimes, but the DOJ would treat them as the lowest enforcement priority.

That 2014 announcement of criminal and administrative enforcement strategy was scoffed at by large financial institutions, for good reason. If you are Bank of America, marijuana simply isn’t a large enough market for you to take any sort of criminal risk. But for smaller banks and credit unions, especially those that had been hit hard by the financial crisis, the memoranda provided just enough cover to take the cannabis risk. Between 2014 and now, Washington and Colorado have developed a small but stable network of financial institutions willing to serve the cannabis industry. Oregon has fewer institutions, but it is coming along as well.

California, however, was left behind, and medical marijuana businesses there still struggle to find banks willing to take their money. This is because of the particular wording in the 2014 FinCEN guidance. In order to comply with their regulatory obligations, part of what banks and credit unions that work with marijuana-related businesses have to do is verify that their cannabis business customer is duly licensed by a state that has robust regulations for its marijuana businesses. Until now, California has not had state-licensed marijuana businesses. It has worked under a series of vague state laws, with individual cities and counties coming up with their own regulations for marijuana businesses that have ranged from outright bans to open licensing processes. These local regulations have worked well in some circumstances, but they are insufficient for banks or credit unions that want to provide services to the marijuana industry without facing FinCEN’s wrath.

This is important for the banks because it isn’t only FinCEN that cares about compliance with their guidance. Federal providers of deposit insurance (the FDIC for banks and the NCUA for credit unions) are unlikely to renew a financial institution’s insurance policy if it looks like that institution is working with marijuana businesses but not following the FinCEN guidance. And that deposit insurance is key in separating banks and credit unions that provide real security for your funds and fly-by-night institutions that could potentially lose all your money.

But things are finally changing in California as we coming up on the issuance of state cannabis licenses in January 2018. This will finally give California’s banks and credit unions a system that allows them to comply with the FinCEN and DOJ guidance. And we predict that much like in other states, the early movers will be small banks and credit unions that are willing to take on a little bit of risk to gain the first-mover advantage. I have said for a long time that I don’t think a “cannabis-only” financial institution is the answer. A bank that only serves cannabis businesses would be subject to too much risk because it is only exposed to a single industry that happens to be criminal at the federal level. They would be completely uninsurable. So the best bet is for financial institutions that already have robust and diverse holdings to work with a number of cannabis businesses up to a maximum based on the size of the rest of the bank’s or credit union’s business.

For banks and credit unions looking to do this, it isn’t too early to start working on developing cannabis specific procedures. Well-run financial institutions have a compliance program in place that includes standard operating procedures and one or more employees dedicated to complying with the Bank Secrecy Act and other federal regulations. Those compliance officers will need to update standard operating procedures to include additional scrutiny for marijuana businesses and regular account updates. It is imperative for financial institutions to make sure those procedures are well-tailored so they are sufficient to meet the FinCEN guidelines while not being so cost-prohibitive that the bank or credit union will lose money on cannabis clients.

Most financial institutions in Washington and Colorado and Oregon that operate in the cannabis industry do so with little fanfare and rely on customer networking to get business. That will likely be the case in California as well, so there may not be much fanfare from banks and credit unions that are getting into the market. But we are confident that very at least some California banks and credit unions will start taking on cannabis accounts in the coming months.

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.