California cannabis edible rules
Too cute for California cannabis edibles?

We’ve written before about California’s extremely onerous proposed advertising restrictions, but last week, California’s legislature gave its final approval to another restrictive piece of legislation, Assembly Bill 350, that would ban edibles that appeal to children.

These types of legislation are nothing new. In Washington State, for example, cannabis processors must obtain approval from the Washington State Liquor and Cannabis Board (LCB) for all marijuana-infused products, labeling, and packaging before offering these items for sale to licensed retailers. And specifically, the LCB rules prohibit any marijuana product from being “designed to be especially appealing to children.”

Every state that has legalized cannabis in some capacity has adopted rules aiming to keep cannabis out of the hands of children – a priority that states must consider regulating in accordance with the 2013 Cole Memo. But the question of how to accomplish this – how onerous edibles regulations must be – has been highly controversial. Maureen Dowd’s infamous New York Times piece recounting her traumatizing “overdose” on marijuana-infused chocolate was one of many that helped fuel the fire of fear surrounding cannabis edibles.

But in California, at least until now, cannabis edibles have been completely unregulated. Infused products that look exactly like the candies we all know so well – gummy bears, lollipops, etc. – have been a staple in California dispensaries, and form the basis of many businesses. But it was only a matter of time before the state cracked down on these types of products, which can arguably be easily confused with the candy our children love.

The purpose of AB 350 is to flesh out the requirements for edible cannabis products produced by Level 1 (nonvolatile) and Level 2 (volatile) manufacturers pursuant to the Control, Regulate and Tax Adult Use of Marijuana Act (AUMA). The legislation provides that edible cannabis products shall be:

  1. Not designed to be appealing to children or easily confused with commercially sold candy or foods that do not contain cannabis. Cannabis products shall not be made in the shape of a person, animal, insect or fruit;
  2. Produced and sold with a standardized concentration of cannabinoids not to exceed ten (10) milligrams of THC per serving;
  3. Delineated or scored into standardized serving sizes if the cannabis product contains more than one serving and is an edible product in solid form;
  4. Homogenized to ensure uniform disbursement of cannabinoids throughout the product;
  5. Manufactured and sold under sanitation standards established by the State Department of Public Health, in consultation with the Bureau, that are similar to the standards for preparation, storage, handling, and sale of food products;
  6. Provided to customers with sufficient information to enable the informed consumption of the product, including the potential effects of the cannabis product and directions as to how to consume the cannabis product; and
  7. Marked with a universal symbol, as determined by the State Department of Public Health through regulation.

Although AB 350 will throw a wrench in the business plans of many currently operating cannabis manufacturers, we aren’t surprised in the least to see California adopting these types of restrictions aimed at keeping cannabis out of the hands of children. We’ll be keeping a close eye on whether Gov. Brown signs this bill, how broadly the state interprets these provisions, and what products ultimately will and will not be allowed.

Los Angeles cannabis regulations
Los Angeles just came out with new cannabis regulations

California has lately been on its game with progressive changes to is cannabis laws. Last week, AB 133 passed, making needed technical fixes to the Medicinal and Adult Use Cannabis Regulation and Safety Act (“MAUCRSA” a/k/a SB 94). And then last Thursday, California’s Bureau of Cannabis Control publicly revealed details behind its temporary licensing program (see here for the Bureau’s brochure on that process). And now the City of Los Angeles just released its 42-page revised draft regulations under Proposition M and they contain some interesting, comprehensive, and important changes from the original draft (if anyone forgets what Prop. M is, go here).

Here are some of the highlights from the revised ordinance if you’re looking to have a cannabis business in Los Angeles:

  1. Remember the controversial certificates of approval? Those have been eliminated in favor of a straight licensing program that includes provisional and permanent City licenses. This new licensing program will give applicants greater and better-protected rights to operate within the City’s borders. Upon initial approval, you will receive a provisional license and once you get your state license to operate, the City will issue you a permanent City of Los Angeles license.
  2. Under the original Prop. M draft regulations, certificates of approval were set to issue in four waves in this particular order: Prop. D-compliant existing medical marijuana dispensaries (EMMDs), non-retail registrants (i.e., growers and manufacturers), the social equity program, and then the general public. Formerly, non-retail registrants were only eligible for a certificate of approval in that second wave if they could show they were operating in the City before January 1, 2016. That’s all changed as there is no longer any non-retail registry priority.
  3. The City of Los Angeles Department of Cannabis Regulation will still give first priority in processing EMMD applications that “demonstrate to the Department the EMMD has operated in compliance with the provisions of the limited immunity and tax provisions of Proposition D.” Note that in the previous draft rules, the City required “substantial compliance” with Prop. D. Once applications become available, these EMMD applicants will have only 60 days to get their applications in and, after that, that application window closes indefinitely. And, just like in the original rules for EMMDs, “any mitigating circumstances due to gaps in operations, location change or involuntary closure, ownership, tax payments, etc. must be described in detail for the Department to consider eligibility.”
  4. EMMDs will only be allowed to apply for Retailer Commercial Cannabis Activity (including delivery), which may include on-site cultivation as allowable under Prop. D. On-site cultivation in this scenario may not exceed the size of the EMMD’s existing canopy or square footage of building space as documented by a lease or Certificate of Occupancy prior to January 1, 2017. A maximum of three Licenses per EMMD with a valid Business Tax Registration Certificate will be allowed–the example the City gives is: One Type 10 (retailer), One Type 10 (retailer with delivery) AND one Type 2A OR Type 3A (on-site cultivation if applicable).
  5. One of the biggest boons for EMMDs (and for any cannabis applicant in the city of L.A.) is that “changes in ownership status from non-profit status to for-profit status are allowable.” Now is the time for all LA operators to get away from their precarious non-profit mutual benefit corporations and other bizarre corporate setups and convert to a legal, for-profit business entity that lines up with the California Corporations Code.
  6.  The City of Los Angeles is still working on its social equity program. It is expected that will be finalized and made part of the Prop. M rules sometime in October.
  7.  The general public will be allowed to apply for licenses at the same time as the social equity program opens up. The most positive change for the general public is that they are no longer limited to the number of licenses that will issue in the social equity program. Without a doubt, the general public now has a much better chance to participate in L.A.’s cannabis scene.
  8. Here’s the deal on license caps in the City: all retailers and microbusinesses in the City will be limited to three licenses at the most. There are no license caps for cultivators so long as a given business does not have more than 1.5 acres of plant canopy within the City. Type 7 volatile manufacturing is now allowed (previously it wasn’t), and there are no set caps on manufacturing licenses within the City. There also is no licensing cap for distributors.
  9. As part of the application process, applicants must provide a site diagram to the City. The premises must be a contiguous area and may only be occupied by one business. However, multiple businesses may be located on the same property (as established by an assessor’s parcel number) if each premises has “a unique entrance and immovable physical barriers between unique premises.” Our cannabis lawyers have dealt with these sorts of restrictions in other states and they are usually not a problem and should be dealt with in your lease.
  10.  Applicants must provide a detailed description and plan for hiring “local residents, including making an ongoing good-faith effort to ensure that at least 30 percent of hours of their respective workforce be performed by residents of the City of Los Angeles, of which at least 10 percent of their respective workforce shall be performed by Transitional Workers whose primary place of residence is within a 3-mile radius of the proposed Business.”
  11. An applicant with ten or more full-time equivalent employees must enter into a labor peace agreement.
  12. On the M & A front, neither the City licenses nor the businesses are transferable once a provisional or permanent license issues, but you can still apply to the City to change the business structure, which does allow for you to sell the business so long as the City of Los Angeles approves the sale. See here for more on buying cannabis businesses in Los Angeles.
  13. No licensed retailer of alcoholic beverages or tobacco products can apply for a City of Los Angeles cannabis license.
  14. Foreign companies from outside the U.S. are not allowed in the City, but the City specifically states that this prohibition “does not preclude out-of-state investment in a Business proposing to conduct Commercial Cannabis Activity.” If you are thinking about investing in a California cannabis businesses, you should be sure to join us at our September 28th California Cannabis Investment Forum in San Francisco. But do NOT wait because we must limit the number attendees to 250 and we are getting dangerously close to that already.
  15. The City is still discussing what to do about zoning for cannabis businesses and changes to that proposed ordinance are sure to affect your ability to secure an eligible property.

All in all, Los Angeles is finally starting to embrace comprehensive cannabis control and oversight with a regulatory system that should catapult it into its rightful place as a cannabis powerhouse with serious operators.

California Cannabis LawyersYesterday, at the California Cannabis Business Conference in Anaheim (attended by our Southern California cannabis attorneys), the California Bureau of Cannabis Control (the “Bureau”) released information regarding temporary license applications under the Medicinal and Adult Use Cannabis Regulation and Safety Act (“MAUCRSA”), which we now know will start to issue on January 1, 2018–see the Bureau’s brochure on temporary licensing details here, and note that the other agencies have not yet released any information on temporary licenses for manufacturers and/or cultivators.

The Bureau will likely begin accepting applications prior to that date, but no temporary license application will be effective before January 1, 2018. Additionally, the Bureau expects that the next round of draft (temporary) rules pursuant to MAUCRSA will issue sometime in mid to late November, coinciding with the release of the temporary license application.

A temporary license is a conditional license that will allow a business to engage in commercial cannabis activity for a period of up to 120 days (i.e., 4 months). Within that 120 day period, the business with a temporary license must apply for their full state license. If the operator is unable to finalize their state license within that period (through no fault of their own), the state will grant extensions to the temporary licensee until the full license is issued.

The requirements for obtaining a temporary license to engage in commercial cannabis activity are as follows:

  1. Local jurisdiction authorization. Applicants must provide a copy of a valid license, permit, or other authorization to operate issued by the applicable local jurisdiction that allows the applicant to conduct commercial cannabis activity at their proposed location.
  2. Name. Applicants must indicate the name of the individual(s) or business entity applying.
  3. License type requested. Applicants must specify which of the license types (Distributor, Retailer, Microbusiness, Etc.) they are applying for.
  4. License designation. Applicants must indicate whether they are applying for an adult use (A-license) or medicinal (M-license) license.
  5. Contact information. Applicants must provide a designated primary contact including first and last name, title, address, phone number(s) and email address(es).
  6. Owners. Applicants must provide the name, mailing address, and email address of each “owner” that meets the criteria of Business and Professions Code Section 26001 (i.e., you own 20% or more of the company, you’re the CEO, you’re a director on the board of a non-profit, or you exercise any direction, control, or management of the company).
  7. Physical address. Applicants must provide the physical address of the location at which they intend to operate.
  8. Authorization to use location. Applicants must provide a copy of the title or deed to the land where the proposed premises is located, or a document from the landowner, such as a lease agreement, stating that the applicant has the right to occupy the property and may use the property for commercial cannabis activity.
  9. Premises diagram. Applicants must provide a diagram of the business’s layout at the proposed location.

It is important to note that local approval still reigns supreme–without the necessary city or county permits and/or licenses, applicants will not be able to obtain temporary or actual state licenses.

Receiver time?

Back in 2014, we wrote that bankruptcy is not an option for marijuana businesses. That issue has been litigated here and there since then, but as of today, cannabis businesses are no better off than before. The hard reality is this: all bankruptcy cases are handled in federal courts under rules outlined in the U.S. Bankruptcy Code. Those courts have held that it would be impossible for a U.S. Trustee to control and administer a debtor’s assets (cannabis) without violating the federal Controlled Substances Act.

Bankruptcy laws are designed to afford a fresh start to honest but unfortunate debtors, while providing equal treatment to creditors. Without recourse to bankruptcy, parties can only: (1) liquidate without court supervision, or (2) explore state court receivership. Liquidating without court supervision offers no protection to pot business creditors. State court receivership does afford protections, but adds complexity because states closely regulate who is allowed to possess and sell marijuana (through licenses). For a while, it was an open question as to whether a state court receivership would actually work in the cannabis context. Recently, one actually did.

In the case at issue, a landlord (creditor) had leased space to a licensed marijuana business tenant (debtor). The tenant failed to pay rent, and the landlord evicted the tenant and acquired a judgment for unpaid rent. Because RCW 7.60.010 et seq. provides that a Washington state court may appoint a receiver over a marijuana business, the landlord convinced the court to issue an order appointing a receiver to sell the tenant’s cannabis and satisfy the judgment. The landlord then successfully navigated the licensure issue with the Washington State Liquor and Cannabis Board, sold the pot, and collected on its judgment.

Washington is not the only pro-cannabis state with statutes and administrative rules that seek to bridge the bankruptcy gap by allowing creditors to seize and sell cannabis. In Oregon, OAR 845-025-1260 provides “Standards for Authority to Operate a Licensed Business as a Trustee, a Receiver, a Personal Representative or a Secured Party.” Our Oregon and Washington cannabis lawyers have assisted numerous clients in acquiring and perfecting security interests under the relevant rules. We expect California to adopt a similar regime.

One of the reasons creditors get such high rates of interest for loans to cannabis businesses—in addition to the fact that banks won’t lend to them—is because many pot businesses lack lienable collateral. For many of them, the net worth of the business is mostly tied up in the cannabis itself. It is now clear that, at least in Washington, the cannabis can be liquidated by a third party, whether or not the pot was initially proferred by the debtor as collateral for a loan. In that way, cannabis businesses are being treated by progressive states much like non-pot concerns.

That we finally have had one successful state court receivership probably won’t nudge circumspect lenders to reach out to the cannabis industry. However, cannabis businesses can feel encouraged that their number one asset (their cannabis) may have marketable value when looking for loans; and lenders can feel hopeful that if everything falls apart, there may be liquidation value in the cannabis crop. None of this “solves” the bankruptcy issue, but it’s a step in the right direction.

Alameda cannabis lawyersCalifornia has 58 counties and 482 incorporated cities across the state, each with the option to create its own rules or ban marijuana altogether. In this California Cannabis Countdown series, we cover who is banning cannabis, who is waiting to see what to with cannabis, and who is embracing California’s change to legalize marijuana — permits, regulations, taxes and all. For each city and county, we’ll discuss its location, history with cannabis, current law, and proposed law to give you a clearer picture of where to locate your California cannabis business, how to keep it legal, and what you will and won’t be allowed to do.

Our last California Cannabis Countdown post was on Oakland and before that San FranciscoSonoma County, the City of Davis, the City of Santa RosaCounty and City of San BernardinoMarin CountyNevada County, the City of Lynwood, the City of CoachellaLos Angeles County, the City of Los Angeles, the City of Desert Hot SpringsSonoma County, the City of Sacramento, the City of BerkeleyCalaveras CountyMonterey County and the City of Emeryville.

Today’s post is on Alameda County.

Welcome to the California Cannabis Countdown.

Location.  Alameda County is the 7th most populous county in the state of California. Its county seat is in Oakland and it occupies much of the East Bay region. It’s home to the Alameda County Fair and the Alameda County Fairgrounds, which can boast to being the home of the oldest one-mile horse racing track in America. Hope that tidbit comes in handy on trivia night.

History with Cannabis and Current Cannabis Laws. Back in 2005, Alameda County (this post is addressing only Alameda County and not the City of Alameda) began regulating cannabis by passing a medical cannabis dispensary ordinance. Though we’re always happy to see cities and counties embrace cannabis businesses with sensible and reasonable regulations, Alameda’s first foray should be described as a very timid one. Alameda’s ordinance only addressed medical cannabis dispensaries and it capped the number of dispensary licenses at three and it also limited the amount of cannabis a dispensary could keep on its premises.

With friendlier regulations in Oakland, Berkeley, Richmond, and Emeryville, this first ordinance put Alameda at a competitive disadvantage with potential cannabis businesses when compared to those cities. With the passage of the Medical Cannabis Regulation Safety Act (MCRSA), Alameda County (along with a number of other California jurisdictions) decided it was time to amend their cannabis ordinance. In June of 2016, the Alameda County Community Development Agency and the Castro Valley Municipal Advisory Council held a meeting to begin the process of updating Alameda’s cannabis ordinance. If you’ve ever followed a cannabis ordinance as it winds its way through your local jurisdiction you are well aware that after one meeting comes many others – supervisor meetings, planning commission meetings, citizen advisory committee meetings, and interdepartmental working group meetings, just to name a few. Like Gremlins, the meetings just continue to multiply. Let me not be too harsh on Alameda because slow progress is better than no progress and definitely better than these alternatives.

Proposed Cannabis Laws: On August 1, 2017, the Alameda County Board of Supervisors conducted the first reading of its proposed amendments to their cannabis ordinance and on September 12th of this year (we like to keep you up to date here on the Canna Law Blog) the Board held a second reading of their cannabis ordinance. Here’s a list of the some of the highlights of Alameda’s cannabis ordinance:

  • Increases the number of dispensaries allowed from three to five.
  • Allows delivery of medical cannabis from permitted dispensaries within the county and from outside jurisdictions from 9:00am to 9:00pm.
  • Allows the sale, distribution, and delivery of edibles.
  • Removes the 100-pound limit on the amount of cannabis that can be stored by a dispensary on its premises.
  • Implements a two-year pilot program authorizing medical cannabis cultivation. This pilot program will authorize up to six cultivation permits – up to two indoor cultivation operations and four mixed-light operations. Outdoor cultivation is prohibited.
  • Nurseries may be permitted where cultivation is permitted.
  • Cultivation sites will have to be at least one thousand feet from any pre-K to 12th grade school, licensed child or day care facility, public park or playground, drug or alcohol recovery facility or public recreation center.

Although the caps imposed on medical cannabis dispensaries and cultivators will limit the innovation, investment, and tax revenue generated by Alameda County cannabis businesses, this is still a step in the right direction and we should not let perfect be the enemy of the good. We’re also optimistic that Alameda County will continue on its path towards increased legalization – perhaps with fewer meetings next time.

California cannabis Having begun my cannabis legal career in Washington State, which is a cannabis marketplace that started with a loose collective model and then morphed into the heavily regulated medicinal and adult use marketplace it is today, I know firsthand that it will be no small task to get right on cannabis regulation here in California now. As we all know by now, cannabis regulations are constantly changing and in California such changes seem already to be hitting us nearly every month. California seems hellbent on getting revising (and re-revising) its regulations so as to get a strong regulatory grip over what will soon be the most profitable and dynamic legal cannabis market in the world (by far).

Cue AB 133, which is the most significant and realistic technical fix bill to California’s cannabis marketplace since passage of SB 94 this summer. SB 94 represents a regulatory union between medical and adult use cannabis from the get-go. Most other states that have legalized recreational cannabis already had a robust (though unregulated) medical cannabis market that they let remain for a while to the detriment of regulated operators, but California has decided from the outset that the two cannabis industries (medical and recreational) would be combined under one regulatory regime. However, there are flaws in SB 94 and a lot of gaps and ostensible impossibilities when it comes to logistics and operational standards. Though regulating agencies (like California’s Bureau of Cannabis Control) might normally be expected to interpret and fill in the blanks on legislation via rule-making, California isn’t leaving anything to chance with its proposal of AB 133.

If passed, AB 133 would make SB 94 even more business-friendly for operators and consumers. AB 133 would do the following:

  • Cannabis deliveries would allowed by a retailer using any technology platform owned, leased, or controlled by the retailer. Currently, retailers can only use technology platforms they own and control to undertake deliveries.
  • Holders of multiple cannabis licenses would no longer be required to keep their licenses “separate and distinct.” This likely will mean you can combine your multiple licenses or your adult use and medical operations on a single “premises.”
  • AB 133 would repeal the requirement that licensed medicinal cannabis manufacturers only manufacture cannabis products for sale by a medicinal cannabis retailer.
  • Verification of local approval would change for applicants that voluntarily provide proof of such approval to the state during the licensing process. Essentially, if you provide this proof to the State of California, it will presume you’re in compliance with local laws unless otherwise notified by the city or the county.
  • If you’re a cultivator and your water source stems from diversion, you will have until October 31, 2017 to get that use authorized and to disclose that diversion to the state (rather than the July 31, 2017 deadline that’s already come and gone).
  • If you’re under 21, you can be on the premises of an A-licensee so long as the A-licensee also holds an M-license at the same location. And if you’re over 21, you can be on the premises of an M-licensee so long as that licensee also holds an A-license at the same location.
  • Caregivers would be allowed on premises to purchase medical cannabis for verifiable qualified patients, but the Bureau of Cannabis Control would set forth the specific rules around these purchases.
  • Cannabis cooperatives would be barred from undertaking contracts, etc. with other cooperatives in other states.
  • The unlawful possession of concentrated cannabis amounts would be increased from 4 grams to 8 grams.
  • The cannabis cultivation tax would apply only to harvested cannabis that “enters the commercial market” and cannabis that “enters the commercial market” would re redefined to be cannabis or cannabis product that completes and complies with a quality assurance review and testing, except immature cannabis plants and seeds,
  • You won’t pay your cannabis excise taxes directly to the Board of Equalization anymore; you will instead pay them to the California Department of Tax and Fee Administration.

Though passage of AB 133 is not a cure-all for all that ails us in SB 94, it is a good start toward ensuring that some of the wider gaps in California’s existing cannabis legislation are headed off at the pass of rule-making. Most importantly, California is still on track to be one of the most business-friendly regulatory states, but we’ll see what future rule-making (and local restrictions) do to that status as fall approaches.

Cannabis Development Agreements
Development agreements should be in your real estate tool kit.

We’ve seen this movie before: a city gets excited about commercial cannabis opportunities and passes an ordinance allowing indoor medical cannabis cultivation. After the law goes into effect, neighbors complain about odors or aesthetic issues or just because they don’t want anything to do with cannabis in their neighborhood. Sooner or later, the right neighbor complains to the right city council member and cannabis suffers a major setback with a restrictive ordinance or even a moratorium. The city declares the “offending” cannabis business use to be nonconforming and issues a notice and order to abate. The cannabis business finds itself hundreds of thousand dollars in debt on its construction/build-out project without a path forward for being able to operate and a permit it can’t take elsewhere because it runs with the land.

How then should a would-be cannabis tenant or purchaser avoid this risk, or at least mitigate against it, before jumping into a huge investment for improving the land? A development agreement is one solution.

A development agreement is essentially a contract between a property owner/developer and a municipality that specifies how a given parcel will be improved and used for a certain finite period of time, and specifying how the planning and zoning laws for that parcel will change or not change during that time. Municipalities benefit from development agreements because by reducing risk they encourage development and increase property tax revenues. The property owner/developer benefits by having much greater certainty regarding the uses to which the property may be put.

The added certainty of stable zoning makes developers and their investors and lenders more willing to invest their time, effort, and financial resources into improving the land. Without a development agreement, developers typically must risk paying architects, engineers, and contractors before they can obtain a building permit from the municipality. Developers and municipalities often end up litigating over vested rights and the permitting process. Under California’s vested rights doctrine, only after developers obtain the building permit can they be certain their parcel will remain unaffected by future zoning law changes — and even this isn’t always a total certainty, as California courts have found exceptions that allow zoning changes, depending on the circumstances.

Given its unpredictability and its huge potential, California’s commercial cannabis industry is a prime candidate for development agreements, yet they are still rarely used for cannabis business land development. I see this as due to a combination of things, ranging from local government reluctance to tie land within city limits to uses the federal government still deems unlawful, to cannabis lawyers (especially those who only recently switched from representing cannabis criminal defendants) simply not knowing about development agreements. See How To Choose Your Cannabis Business Lawyer.

Whatever the reason, less certainty in already uncertain times is bad for all parties involved.

Cities want to attract responsible, experienced developers to improve land and public infrastructure and increase property values and tax revenues. Developers and their associates seek certainty that the improvements they pay to add to their land may be legally utilized. Cities that pass ordinances to allow cannabis business activities, as well as would-be purchasers and developers, should be considering development agreements as part of their commercial cannabis development plans.

California cannabis
When it comes to cannabis, Cali is the lead penguin.

Cannabis legalization inevitably leads states and local governments to at least discuss the impact of cannabis tourism. In your standard legalization regime, adults 21 and older from anywhere in the world can (and absolutely do) come to certain U.S. states to buy and consume cannabis from regulated storefronts whose cannabis products come from regulated cultivators, manufacturers, and (sometimes) distributors. Most state governments have put at least some kibosh on cannabis tourism for fear of incurring the wrath of the federal government. This is why cannabis cups with product on site are on the decline and why we don’t see states rushing to legalize cannabis lounges or clubs. Washington State has pretty much outlawed any form of meaningful cannabis tourism and Colorado has effectively done the same, with a only a few individual cities there pushing for consumption sites/rights under local laws.

There is though a bright and shining light at the end of the tunnel when it comes to cannabis tourism — California. With California’s passage of SB 94 (a/k/a the Medicinal and Adult Use Cannabis Regulation and Safety Act) we may actually see cannabis tourism take off and sustain itself here in the Golden State. It certainly does not hurt that cannabis is an entrenched cultural phenomenon here,

In addition to its SB 94-sanctioned event permit, California immediately stands out for two reasons: its legalization of on-site consumption hosted by licensees in certain scenarios and its creation of microbusiness licensees.

SB 94 will allow for cannabis consumption at retail and microbusiness establishments:

a local jurisdiction may allow for the smoking, vaporizing, and ingesting of cannabis or cannabis products on the premises of a retailer or microbusiness licensed under this division if all of the following are met:
(1) Access to the area where cannabis consumption is allowed is restricted to persons 21 years of age and older.
(2) Cannabis consumption is not visible from any public place or nonage-restricted area.
(3) Sale or consumption of alcohol or tobacco is not allowed on the premises.

For a state to out and out permit on-site consumption at a licensed business is pretty novel at this point. Of course, the catch is that the local government must approve such a set up (which will be a tough sell in some places), but California has fully opened the door on the conversation. Being able to consume in a store or microbusiness will undoubtedly drive consumers (and tourists) to these locations, giving retailers and microbusinesses the chance to have that Amsterdam-style coffee house feel that has so far been mostly lacking in every other cannabis-legal state.

And the microbusinesses themselves will be able to operate in a sort of winery type setup where you have smaller, more craft vertically integrated operators making everything (or nearly everything) in-house. If California can create winery like experiences for cannabis it will absolutely change the way cannabis is admired and enjoyed, which will assuredly capture the interest of locals and tourists alike. This opening up for public consumption will also go a long way in reducing the cannabis stigma.

Then there’s the question of whether we can expect California to embrace things like canna-crawls, bud and breakfasts, etc. In our experience, most state departments of transportation will not sanction licensing or permitting anything related to a canna-crawl and cities and counties are mostly turned off by the concept of cannabis-friendly hotels. Again, though, because cannabis is such a big part of California’s existing economy, such ideas hold less of a taboo here. Indeed, for just a few examples, Humboldt County just proposed an ordinance to allow for cannabis farm stays (i.e., bud and breakfasts), the City of Nipton will apparently (allegedly) turn into a “pot paradise” hospitality destination, and Coachella will have at least one cannabis cultivation-adjacent hotel in its future.

California cannabis is going to be huge — by many accounts, more than ten times bigger than Washington State, Oregon, and Colorado combined. If California successfully provides for public consumption and benefits from cannabis tourism (even if only in select cities and towns) the reverberations from this will be felt nationwide.

Get your marijuana product recall plan in place. Now.
Get your cannabis product recall plan in place. Now.

Time and again I have warned cannabis industry participants that federal prohibition means nothing when it comes to liability created by defective products. Colorado is a prime example of the threat and the power of cannabis product recalls. And though for years now we’ve seen various cannabis businesses in Colorado pull their products from the shelves for illegal pesticides and/or manufacturing under unsanitary conditions, we have yet to see an official product recall for cannabis in the State of California. And why would we? The state hasn’t had any legitimate, enforceable, or uniform regulations to corral cannabis operators into worrying about consumer safety (other than self-imposed best practices). Though it’s pretty clear recalls should already be happening in California based on some of the available product in the state’s medical market, they haven’t yet, but they will.

With the passage of the Medicinal and Adult Use Cannabis Regulation and Safety Act (“MAUCRSA” aka SB 94), medical and adult use cannabis in California will soon be under one regulatory regime. Outside of MAUCRSA’s mandatory quality testing and packaging and labeling thresholds, what will California’s ultimate quality assurance and consumer protection operational standards look like? MAUCRSA regulations will fill in the baseline blanks and that will happen this fall, according to the state.

I’ve practiced law in enough regulated cannabis states to know that quality assurance, testing, and protecting the public through total product perfection isn’t going to be easy or cheap and it’s going to be mandatory if you want to keep your cannabis license. Still, even with your best quality assurance game face, you may not (more like never) escape the toe catch that is products liability. And with California being such a litigious state, as the Wall Street Journal editorial board recently pointed out, it’s only a matter of time before even more plaintiffs start suing cannabis operators alleging defective, dangerous, or mislabeled products and Prop. 65 violations.

If you’re not familiar with product liability, the most important thing you need to know is that the cannabis industry is not immune from it just because cannabis remains federally illegal. And now that you know that, I suggest you read at least some of the following to better grasp how product liability laws can impact or even derail your cannabis business:

Just the mere fact that my firm’s cannabis attorneys have written so many blog posts and articles on cannabis safety and cannabis product liability ought to tell you how truly important this issue will be in California once things truly get rolling here.

What then should you as a California cannabis business owner do to protect yourself from product related lawsuits and government actions? Again, the MAUCRSA regulations will no doubt create a baseline of what operators need to do if their products are defective, but you’ll need to go above and beyond that to ensure you’re ready to take on a recall situation or to defend yourself in the event of a product liability lawsuit.

Oftentimes, one of the best ways to mitigate against product liability claims is by instituting a product recall. In most industries, recall standards are dictated by either federal or state law or both. But since cannabis is federally illegal, neither the Food and Drug Administration (FDA) nor any other federal agency has rules or guidelines on how to undertake a cannabis recall.

However, since the federal government “tolerates’ only the cannabis regimes of states with robust marijuana regulations, it is not surprising that most states with commercial marijuana laws require their licensed marijuana businesses have a recall plan in place as a condition for receiving state licensing — and California will probably be no different. But few states have much in the way of specifics on what should go into a cannabis business’s recall plan. When our cannabis attorneys draft marijuana licensing applications for our clients, we are careful to make sure the recall steps we map out in the licensing application recall plan can actually be fairly easily accomplished. A gold-plated grandstanding recall plan may sound great when you are working to secure your cannabis license, but if you can’t execute on or afford that plan, you are only creating trouble for your cannabis business down the road.

In crafting a realistic cannabis product recall plan, you should, at minimum, consider or do the following:

1. Create an overall recall strategy.

2. As part of your recall plan, create definitions and standards for classes of recall and the depth and scope of any given recall. If your state or local laws do not provide basic recall standards for cannabis businesses, check out the FDA’s website under Guidance for Industry: Product Recalls, Including Removals and Corrections.

3. Appoint a recall committee within your company, to be led by experienced personnel capable of evaluating and investigating product complaints to determine if a recall is warranted. This also entails your developing a product complaint form that will be utilized by customers. It is better to learn about product problems early.

4. Develop a complaint receipt and evaluation method to ensure your product complaint processing and investigations are logical, efficient, and comprehensive. There are few things worse than receiving product safety complaints and then ignoring them until the situation is out of control.

5. Truly ponder what your product complaint investigation will entail. What facts should your recall committee be gathering when seeking to determine if a product complaint is valid or if a recall is warranted? What should your recall look like, as based on the facts and circumstances and the threat your product may pose to consumers and vendors?

6. Create a distribution list so your product recall committee can quickly and easily identify all affected products and product lots for disposition and potential destruction. The distribution list should — at minimum — include the names of all affected consumers and vendors, their contact information, and the dates on which the products were sold to them or consumed by them, and it should also include any side effects, injuries, or illnesses resulting from product use. Time is of the essence here. My law firm had a regional food client that inadvertently failed to issue a recall notice to one of many supermarket chains to which it sold its food. This supermarket chain was so angry about having been kept out of the loop that it refused ever to purchase our client’s product again. Then other supermarket chains learned of our client’s failure to notify this one supermarket company and they too ceased all of their purchasing. Needless to say, our client company no longer exists. Don’t let this sort of thing happen to you.

7. Institute a method of stock recovery so all tainted product in inventory is effectively quarantined from sale and distribution.

8. Generate your recall notice and be very careful with your wording in how you alert vendors and consumers to the recall. You want to effectively communicate that a product has been affected and how to deal with that, but you also want to minimize whatever liability your product problems may create for the company. On a case by case basis, consideration should also be given to drafting a press release to help the company’s PR. For this you absolutely need attorney help.

9. Make sure to as quickly as possible (preferably in advance) alert your outside advisors (your lawyers, your insurance broker, etc.) regarding your recall.

10. Set out in your recall plan your options for product disposition. Will you destroy a product? Cleanse and then repurpose it? Lay out your options in your plan now so you are not scrambling to try to figure out your possible options later, when you have no time to do so.

11. Record everything you do. Document every effort you make and record all your communications with consumers and vendors. If there is a legal action later, you will want to be able to show the court that you took all reasonable steps to ensure consumer safety.

In addition to formulating a solid and reliable recall plan, you also might want to consider conducting a mock recall to ensure your recall systems will work when the real deal occurs. Compliance audits can also be a big help in shoring up loose ends on a recall.

Cannabis product recalls are only going to increase in California as robust regulations under MAUCRSA hit all cannabis operators, so get your cannabis product recall plan in place now.

 

California cannabis processors

Three of our California cannabis lawyers recently did a webinar on the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”) and how it repealed the Medical Cannabis Regulation and Safety Act (“MCRSA”) while consolidating some of MCRSA’s provisions with the licensing provisions of the Adult Use of Marijuana Act (“AUMA”). If you missed the webinar don’t you worry, we’ve got you covered right here. During the webinar we received so many great questions from our attendees (close to 1,500 people signed up!), we decided to address them here on the Canna Law Blog. Last week we discussed the future and unknowns surrounding onsite consumption in California. This week we’re going to discuss California cannabis processors.

If you find yourself thinking you never read anything about about cannabis processors in the MAUCRSA, go ahead and give yourself a pat on the back because it does in fact nowhere mention processors, nor is there any mention of processors in the California assembly and senate bills that made up the MCRSA. Upon passage of the MCRSA, the California Department of Food and Agriculture (“CDFA”) held eight public workshops to solicit feedback from the public and interested stakeholders. After the workshops, the CDFA published a scoping report detailing some of their findings. When the CDFA released its proposed regulations for the medical cannabis cultivation program it also released a companion Initial Statement of Reasons (“ISOR”) and it is in the ISOR where we are first introduced to processors.

In the ISOR, the CDFA states “it was brought to the Department’s (that’s the CDFA) attention that some cultivators send untrimmed, uncured, or unpackaged cannabis to locations off-site for processing” and decided to add the processor as a new license type. Under the proposed regulations, a processor can also hold different types of cultivation licenses but would not be allowed to grow cannabis plants at the processing facility. The proposed annual license fee for processors was $2,790 – which was on the lower end for cultivation license type fees. The CDFA went on to define a processor in the proposed medical regulations as a cultivation site that conducts only trimming, drying, curing, grading or packaging of cannabis and non-manufactured cannabis products.

What caught many people’s attention is how CDFA classified pre-rolls as a type of non-manufactured cannabis product. Though consumer feedback on the quality of pre-rolls varies, there’s also a burgeoning marketplace for cannabis businesses that promote quality and brand themselves accordingly. The CDFA also envisioned an increased interest in processor licenses as they assumed approximately 20% of California’s cannabis production would be processed through California licensed cannabis processors. As you can imagine, our cannabis attorneys were getting a boatload of inquiries regarding this license type, but then California Governor Jerry Brown signed MAUCRSA into law and just like Keyser Söze, it was gone.

But is the processor license type gone for good here in California? Will those with cultivation licenses under MAUCRSA be allowed to conduct cannabis processing on their premises or will the CDFA bring back from the dead the processor as a separate license type in California? We’ll have to wait until the CDFA publishes its new proposed regulations in the fall under an emergency rule-making process so that the state will be able to issue cannabis licenses beginning on January 02, 2018. Since the processor license type was so short-lived, even if the CDFA does re-create it as a license type it will probably take some time for cities and counties to add processors to their licensing structure.

We’ll keep you posted on any new developments.