Last Friday, July 12, 2018, all three agencies overseeing California’s implementation of MAUCRSA dropped proposed permanent regulations that will eventually replace the readopted emergency regulations that are active now. For the text of those proposed regulations go here, here, and here. Importantly, these regulations are just proposed; they are not in effect and they won’t be in effect until after the 45-day public comment period so long as the agencies move to adopt them without changes.
The proposed rules don’t make massive changes to the existing regime. In fact, many of these rule additions and clarifications should have already been in the mix as fundamental, common sense standards for operation in line with former federal enforcement priorities. More than anything else, these proposed rules represent technical fixes to pretty large gaps in the existing emergency rules.
All three California agencies tasked with regulating cannabis are now finally on the same page about the disclosure and vetting of “owners” versus “financial interest holders” and, importantly, if an “owner” is an entity only “the chief executive officer and members of the board of directors of the entity shall be considered owners.” In addition, the agencies clarified that none of them will issue temporary licenses after December 31, 2018. This was already in MAUCRSA, but the agencies clarified that temporary licenses with an expiration date after January 1, 2019 will be valid only through that date with no additional 90 day extensions. This is significant since a temporary license is the only way licensees can operate post-local approval but before receiving their annual license. Further, all three agencies are addressing issues regarding CEQA compliance prior to licensure and responses to disaster relief, and M and A licensees can still do business with each other to get product to market. Each agency has also upped the required details on annual licensing submissions relative to standard operating procedures (SOPs) and plans.
The highlights of the more specific significant changes/additions/clarifications from the three agencies are:
- Department of Food and Agriculture, CalCannabis Cultivation Licensing (oversees cultivators and processors):
- Individuals and entities will still only be allowed to have one Type 3 medium license, and there’s still no limit on the number of Type 1 or 2 cultivation licenses anyone can have (other than those limitations set forth by cities and counties, if any).
- Outdoor licensees won’t be able to use use any light deprivation techniques.
- Licensees are prohibited from accepting returns of cannabis plants or nonmanufactured cannabis products after transferring possession of cannabis plants or nonmanufactured cannabis to another licensee after testing is performed.
- Nurseries can now develop and maintain dedicated R&D areas in their facilities.
- Department of Public Health, Manufactured Cannabis Safety Branch (oversees manufacturers):
- CDPH-MCSB implemented some notable changes to their definitions of certain cannabis terms. For example, the term “concentrate” would now include inhaled products (such as shatter, dab, or wax) and “edible cannabis product” and would include “a cannabis product that resembles traditional foods or beverages and cannabis products that dissolve or disintegrate in the mouth.” They’ve also proposed the terms “infused pre-roll,” which would mean “a pre-roll into which cannabis concentrate or other ingredients have been incorporated” and “orally-consumed concentrate” to mean “cannabis concentrates that are consumed by mouth and are not otherwise considered edibles.”
- You can’t manufacture, prepare, package or label any products other than cannabis products at a licensed premises. “Cannabis products” also includes packaged cannabis, pre-rolls, and products that do not contain cannabis, but are otherwise identical to the cannabis-containing product, and are intended for use as samples.
- You can’t manufacture, prepare, package, or label cannabis products in a location operating as a retail food establishment or as a processed food registrant, and you can’t do the same in any location licensed by the Department of Alcoholic Beverage Control.
- Edible potency limitations are staying the same (no more than 10 mg of THC per serving and no more than 100 mg per package), but “orally-dissolving” edibles can have up to 500 milligrams THC per package, if: (1) The cannabis product consists of discrete servings of no more than 10 milligrams THC per piece; (2) The cannabis product is labeled “FOR MEDICAL USE ONLY;” and (3) The cannabis product is only available for sale to a medicinal-use customer.
- There are now increased packaging and labeling requirements for pre rolls and dried flower, and the labeling requirements generally for all products have increased.
- Use of the word organic (or any variation of that word) on any product label is now going to be false or misleading unless the National Organic Program (the federal regulatory program governing organic food) “authorizes organic designation and certification for cannabis and the cannabis or cannabis product meets the requirements for such designation and certification.”
- Child-resistant packaging would be eliminated, but tamper-evident packaging would still be required for cannabis products.
- Bureau of Cannabis Control (oversees retailers, delivery only retail, microbusinesses, distributors, and labs):
- Making up your own SOPs would no longer be a requirement for the annual license. Instead, the state would have you input all of your SOP information into pre-established forms.
- You won’t be able to pump in the smell of cannabis to your licensed premises via a vaporizer device or diffuser.
- The state is cracking down on cannabis giveaways and generally getting stricter on licensee advertising attractive to children.
- “Limited access area” security now applies to all licensees, not to just retailers.
- On rejections and returns, licensees now have to reject whole shipments and they can’t just pick and choose inventory they want to keep from those shipments.
- Distributors are receiving more clarity in their rules such that they can now package prerolls but can’t store live plants, they can transport tested product to more than one retailer, distributor, or microbusiness, and they can perform just quality assurance reviews of product if another distributor has already had that product tested.
- Retail exit packaging has to be resealable, child-resistant, and opaque.
- Statewide delivery would be permitted regardless of jurisdiction. The specific rule states that “A delivery employee may deliver to any jurisdiction within the State of California.” Given the hostility of some cities and counties to any form of commercial cannabis activity, or those cities that require you to have local approval to deliver (like Los Angeles), this is bound to cause conflict between the state and the locals.
We’ve gone over the obstacles to obtaining federal trademark protection at length, but given recent inquiries our cannabis trademark attorneys have been receiving lately, it seemed high time to revisit what exactly makes a trademark “strong” or “weak.”
I regularly have clients come to me with catchy marks they or their brand consultants have developed, but are not eligible for trademark protection. There is a spectrum of strength when it comes to trademarks. The distinctiveness, or strength, of a mark will determine both how well the mark performs from a marketing and branding perspective, as well as the level of legal protection to which it is entitled. When a mark is highly distinctive, identifying the owner of the mark as the source of the goods sold, the mark is strong. And when a mark is not inherently distinctive, or when a mark is the same or very similar to one already used by others, the mark is weak. Here are the types of marks on the spectrum, from strongest to weakest:
- Fanciful Marks: These marks are inherently distinctive and consist of a combination of letters with no meaning; they are invented words. Some examples of famous fanciful marks are EXXON and KODAK. These marks can be more difficult from a marketing perspective initially, because the public must be educated through advertising before they will associate the owner’s goods or services with the mark.
- Arbitrary Marks: These marks are composed of a word or words that have a common meaning, but have no relation to the goods or services to which the mark is applied. Perhaps the most famous example of an arbitrary mark is APPLE, used on computers. As with fanciful marks, these marks are highly distinctive.
- Suggestive Marks: Suggestive marks hint at or suggest the nature of a product without specifically describing the product. An example of this type of mark is AIRBUS for airplanes. These marks can be appealing from a marketing perspective, because they require less education of consumers than arbitrary or fanciful marks, but they are also typically entitled to less extensive legal protection.
- Descriptive Marks: These marks are comprised of words that actually describe the goods or services provided; descriptive marks are too weak to function as a trademark and cannot be registered. Note that it is possible to register a descriptive mark if it has obtained secondary meaning due to use in commerce for some years – in the nascent cannabis industry, however, it is unlikely many marks would meet these requirements.
- Generic Words: These words and phrases are so inherently descriptive of a product or service as to be incapable of functioning as a trademark; they are the common names of the product or service in question, and cannot be registered.
One of the most common grounds for rejecting a trademark application is that the proposed mark is “merely descriptive.” For example, “World’s Best Cannabis” would be merely descriptive for cannabis and cannot be registered. Trademarks that are merely the name of an individual, for example, are also ineligible for federal trademark protection. So, a name like “Alison’s Cannabis” wouldn’t fly. Similarly (and this is one we see often in the cannabis industry), marks that are primarily geographically descriptive will be refused registration by the USPTO. For example, “Seattle Cannabis Company” and “Washington Grown” are primarily geographically descriptive and thus not eligible for federal trademark protection.
And on the flip-side, marks can be rejected for being deceptively misdescriptive as well. Interestingly, the USPTO, in its online guidance and resources, gives the following example of a deceptively misdescriptive mark: “[T]he mark ‘THC Tea’ would be deceptively misdescriptive of tea-based beverages not containing THC.” So if you are registering your mark for ancillary goods or services, as we’ve previously suggested, be mindful that including a reference to cannabis in your mark will not render the mark deceptively misdescriptive of those goods or services.
If you’re starting from scratch in branding your company or products, it’s a great idea to run any proposed marks by your trademark attorney before you invest too heavily in brand development. An experienced cannabis trademark attorney will be able to quickly identify marks that are merely descriptive, and can advise whether you run the risk of adopting a mark that is deceptively misdescriptive. And remember, if you don’t intend to obtain a federal trademark registration of your brand, that is still not a reason to adopt a descriptive or weak mark. If your name is a no-brainer, chances are that someone else has already thought of it and used it as well. Or if they haven’t adopted it yet, they likely will down the road. When the market becomes flooded with similar names, it becomes difficult for consumers to tell them apart. Putting in the initial work to develop a strong brand is always worth the effort, especially in a rapidly growing legal cannabis industry.
Indiana has uniquely positioned itself with some of the most robust regulations of hemp-derived CBD products. On March 21, 2018, Senate Bill 52 became law, allowing the distribution and retail sale of “low-THC hemp extract,” defined as a product “(1) derived from Cannabis sativa L. that meets the definition of industrial hemp; (2) that contains not more than 0.3% delta-9-THC (including precursors); and (3) that contains no other controlled substances.”
Exciting news, right? Indiana is a red state that has been slow to implement any kind of meaningful cannabis regulations. Prior to SB 52, Indiana implemented a strict CBD-only medical marijuana program and an industrial hemp program that has not really launched.
That’s what makes SB 52 so interesting. It shows that Indiana is cognizant of the existence of CBD products and has made a decision to allow their sale. The catch is that those sales are restricted to a certain class of CBD products, and they are heavily regulated.
Specifically, under SB 52, “low-THC hemp extracts” are only permitted for sale in Indiana if they are extracted from hemp that was tested by an accredited, independent laboratory. The distributor of low THC hemp extracts must have lab results showing “(1) the low THC hemp extract is the product of a batch tested by the independent testing laboratory; and (2) the independent testing laboratory determined that the batch contained not more than three-tenths percent (0.3%) total [THC], including precursors, by weight, based on the testing of a random sample of the batch.”
Assuming these products clear testing, the sellers of low THC hemp products must distribute them in packaging that includes the following:
(1) A scannable bar code or QR code linked to a document that contains information with respect to the manufacture of the low THC hemp extract, including the:
(A) batch identification number;
(B) product name;
(C) batch date;
(D) expiration date, which must be not more than two years from the date of manufacture;
(E) batch size;
(F) total quantity produced;
(G) ingredients used, including the:
(i) ingredient name;
(ii) name of the company that manufactured the ingredient;
(iii) company or product identification number or code, if applicable; and
(iv) ingredient lot number; and
(H) download link for a certificate of analysis for the low THC hemp extract.
(2) The batch number.
(3) The Internet address of a web site to obtain batch information.
(4) The expiration date.
(5) The number of milligrams of low THC hemp extract.
(6) The manufacturer.
(7) The fact that the product contains not more than three-tenths percent (0.3%) totaldelta-9-tetrahydrocannabinol (THC), including precursors, by weight.
That may read like a long list, but it’s roughly equivalent to what we see as far as packaging and labeling requirements for cannabis products in Washington, Oregon and California, the states in which our cannabis business attorneys are located.
This will also prove challenging for distributors who send products across the country as they now must consider Indiana’s labeling requirements. This will likely lead to some CBD distributors deciding not to sell products in Indiana. Other’s may choose to comply with Indiana’s labeling restrictions and place Indiana-complaint labels on products that are made available in other states.
Indiana is unique in the sense that it allows CBD and also regulates its sale so robustly. Let’s hope for more positive cannabis developments in the Hoosier State.
Every business thrives on brand differentiation. One of the most effective ways to promote public identification and recognition is to enhance and protect your brand. Your brand is of course your name but it is also your logo. Beyond that, really, it’s everything about you.
As far as “formal” branding elements, logos are right there at the top. Still, there is a fair bit of confusion among business owners and even lawyers about how logos are legally protected. Are they to be registered as trademarks? Copyrights? Are logos registrable as both?
Let’s look at trademark first. Trademarks are words, phrases, symbols or designs that identify the source of a product and help distinguish that product from that of competitors. However, as we have written about extensively on this blog, federal trademark protection is not typically available to cannabis businesses because the federal illegality of “marijuana” prevents owners from demonstrating lawful use of their marks in commerce—a prerequisite imposed by the United States Patent and Trademark Office.
Fortunately, trademark law is not the sole intellectual property (“IP”) tool a cannabis business can use to protect its logo. Copyright protection may be available as well. Unlike trademark law, copyright law does not prohibit the type of work that is eligible for copyright protection. Accordingly, cannabis-related works, including logos, often may be copyrighted.
To benefit from copyright protection, a cannabis logo must:
- Be original to the author, which means the author must have created the work independently (e., the work must not be copied);
- Possess a “minimal degree of creativity;” and
- Be fixed in a tangible form that is sufficiently permanent to be reproduced.
Therefore, logos that are adequately original and ornate have a strong chance of being copyright protected. Note that such logos would be copyright protected even without registration. It is however in the business’s best interest to register its logo with the U.S. Copyright Office. Registration affords significant benefits, particularly in the context of copyright infringement, because it gives the business the right to sue and to be awarded statutory damages and attorney’s fees should it prevail on an infringement claim. In addition, copyright registration is relatively straightforward and inexpensive.
Regardless of those benefits, it is important for cannabis businesses contemplating the federal registration of their logos to understand the possibility that their copyrights might be unenforceable. Because all copyright infringement cases must be adjudicated by a federal court, there is a risk that the federal illegality of cannabis would arise in certain facets of litigation and hinder the enforceability of the copyright. (The same would be true in cannabis patent enforcement cases, as we discussed here.) However, such risk is currently speculative as no cannabis copyright infringement case (or patent infringement case) has been litigated.
Assuming the copyrighted logo of a cannabis business is enforceable, it affords the business the exclusive right over the logo’s reproduction and public display. In addition, copyright protection gives the cannabis business the ability to receive compensation for the use of the logo by others. Not only does copyright protection help the cannabis business enhance its public recognition, it also enables the business to capitalize on its IP assets and helps it secure market dominance and profitability, and this for the life of the copyright holder, plus 70 years.
In conclusion, given the fact that cannabis businesses are presently barred from securing federal trademark registration for their logos, they should consider copyright registration for qualifying logos, in order to achieve brand differentiation and secure a critical competitive advantage. The value proposition for copyrights is all the stronger given the inexpensive and straightforward nature of the registration process.
Recently, there has been some talk here in Oregon that the state is not doing enough to support licensed cannabis businesses economically. These businesses generated more than $70 million in state tax revenue in FY 2017, after all. Although that revenue does not yet approach the combined $373 million in average annual revenue for beer, wine and spirits (combined), it appears to be closing the gap quickly, despite no option for interstate sales.
Comparing marijuana and alcohol receipts in Oregon is an awkward proposition, given the fact that Oregon marijuana revenues are collected through sales tax, whereas beer and wine vendors pay the state an excise tax, and liquor is distributed and sold by the state itself. At the end of the day, though, the economic impact of regulated cannabis will continue to gain on–and eat into–the alcohol economy, both in Oregon and nationwide. That is especially true if we factor in industrial hemp.
So what is the state doing to subsidize cannabis businesses in Oregon? Not much. The state did pass House Bill 4014 a few years back, which allows cannabis establishments to deduct business expenses allowable under the federal tax code when filing state returns; but that modest gesture pales in comparison to the institutional support given to craft beer and wine. Specifically, here are a few of the ways the wine industry is supported and subsidized by the state of Oregon:
- The state created the Oregon Wine Board (OWB) to promote development of the wine industry within the state, and coordinate both domestic and report marketing efforts for the industry. OWB receives administrative support from the Oregon Department of Consumer and Business Services, and spends around $2.2 million annually on promoting the Oregon industry.
- The state created the Oregon Wine Research Institute, housed at Oregon State University, to support Oregon grape growing and wine production.
- Oregon statutes offer a tax exemption for the first 40,000 gallons, or 151,000 liters, of wine sold annually by any producer in Oregon, which effectively exempts 90% of them from paying any state excise tax.
- The state offers grants for vineyards in an effort to increase tourism, as well as OWB grants related to viticulture and enology.
- Oregon winery license fees are paltry compared to cannabis license fees. (Both licenses are issued and billed through the Oregon Liquor Control Commission.)
The above list is not exhaustive: It represents about five minutes of Google research. And at first glance, the favoritism shown to alcohol by the state feels unfair: As with the local wine industry, the Oregon cannabis industry has a world-renowned product, crowned with distinctive appellations. So why doesn’t the state do much for cannabis, aside from fulfilling its democratic mandate to roll out the program, and defending that program from the feds?
There are probably several factors at play:
- “Marijuana” remains a Schedule I controlled substance at the federal level. While states may see a path forward to licensing cannabis businesses under the Tenth Amendment (see here and here), actually using public dollars to support specific businesses may feel like a bridge too far.
- More people oppose the cannabis industry than the alcohol industry, so subsidies would likely face strong pushback from a vocal segment of the population.
- Many of the Oregon wine subsidies listed above were enacted in periods of greater budget stability for the state, back when timber revenues and related federal subsidies were a real thing, and the state pension system was not $22 billion in the hole. Today, those alcohol subsidies are entrenched (although recent efforts at further subsidies have failed.)
- The Oregon cannabis lobbies are smaller than alcohol lobbies.
- The creation of a cannabis regulatory regime has been a heavy legislative lift over the past few years here in Oregon, crowding out other conversations related to cannabis.
With all of that said, Oregon could probably do more for the cannabis industry, and it could be more creative. California has at least explored the idea of a state-chartered bank. Along those lines, Washington has helped its legal businesses to open bank accounts, and Hawaii has announced a cashless system for buying medical marijuana. None of these actions are subsidies, but they do make business operations easier and they ultimately contribute to economic efficiency.
Other jurisdictions have gone even further. Colorado, for example, has had a research grant program going back to 2014. And certain cities, like Oakland and San Francisco, have offered bona fide, traditional subsidies like free rent and incubator programs for select marijuana entrepreneurs. So it is possible to funnel public funding into cannabis businesses — at least certain types of businesses, in certain cases.
Oregon will kick off another legislative session in early 2019. Most likely, the state will discuss important regulatory issues, like our U.S. Attorney’s concern with oversupply, alongside the usual re-tread items, like social consumption and event permits. Although these new business permissions would be marginally helpful, hopefully there is also room for discussion on how the state can support its regulated cannabis industry more directly, as it does with alcohol. Then, when federal prohibition ends in a couple of years, we will want it looking something like this.
The Washington State Liquor and Cannabis Board (WSLCB) may finally be noticing that its current treatment of “true party of interest” violations is neither just nor sustainable. During an extended conversation at its monthly executive management team meeting in June, the WSLCB discussed potentially adopting a hidden ownership amnesty program. Basically, any existing businesses that had mistakenly created a true party of interest relationship would have a limited time to come forward and declare any owners or other true parties of interest in licensed marijuana businesses that had not been disclosed and vetted in the past. The licensee would then be able to get the person vetted, though some penalty other than license cancellation would potentially still be on the table.
The details are not set, and the WSLCB executive team is going to continue meeting and discussing the issue over the coming months. For those licensees in the middle of investigations or regulatory hearings with the WSLCB, there’s not much hope to pull from this. Even if the WSLCB moved with lightning speed to adopt something, the agency was clear that it would not avail anyone currently undergoing a formal investigation or violation hearing.
That the WSLCB is discussing the topic of leniency at all indicates that they are cognizant of problems with current regulations and enforcement, though their idea of an amnesty or leniency program won’t do anything to solve the underlying issues. The foremost issue right now is that the timing of getting financing approved doesn’t work. The WSLCB currently demands that all money contributed to a licensed business be approved prior to it being spent on behalf of the business. The approval process for capital can take months, even if the capital contributors have already been approved as owners or financiers of the business in the past. But the types of emergencies that require short-term capital infusions tend not to wait months for regulators to approve. Businesses are forced to violate a rule by either having current owners contribute new capital or having outsiders provide financing prior to getting WSLCB approval.
There are plenty of solutions to the financier predicament that the WSLCB could adopt. They could allow for after-the-fact vetting of certain types of loans. They could modernize and streamline their financial approval process. They could keep the exact same system and just hire more people so that new funds could get investigated and cleared immediately. Any move to temporarily allow for relaxed penalties for regulatory violators to come forward isn’t necessarily a bad thing, but the same problem will continue again and again. Academically speaking, the WSLCB is applying an over-inclusive rule to business actions that range from willfully criminal to entirely benign. This over-inclusive application of the law “makes regulatory unreasonableness not an occasional weakness but a pervasive problem.”
The WSLCB’s current investigative and enforcement strategy feels targeted at unlucky businesses that have made mistakes. This is part of why their trigger-happy nature regarding license cancellation is so frustrating. Two of the cancellation cases that my law firm is currently working on have come because of voluntary disclosure of information by a licensee. There certainly are bad actors in the marijuana industry that are intentionally defrauding the WSCLB and may well have ties to organized crime, but the WSLCB seems to leave those businesses alone. It is tough, challenging work to investigate illegal activity when the actors are working hard to cover up the illegal activity. It is much easier to go after the low-hanging fruit of licensees that are fully transparent about their activities.
Fundamentally, the WSLCB underestimates the deterrent effect of large monetary fines and underestimates the huge collateral damage that business shutdowns can create. If the WSLCB wants to create real compliance, it is going to need to make some more drastic changes than temporary amnesty/leniency programs.
California 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 embracing cannabis (and how), and everyone in between. 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 the City of Antioch, and before that the City of San Jose, the City of Cotati, the City of San Luis Obispo, the City of Redding, the City of San Rafael, the City of Hayward, Alameda County, Oakland, San Francisco, Sonoma County, the City of Davis, the City of Santa Rosa, County and City of San Bernardino, Marin County, Nevada County, the City of Lynwood, the City of Coachella, Los Angeles County, the City of Los Angeles, the City of Desert Hot Springs, Sonoma County, the City of Sacramento, the City of Berkeley, Calaveras County, Monterey County and the City of Emeryville.
Today’s post is on the County of Contra Costa. Welcome to the California Cannabis Countdown.
Location. Home to Mt. Diablo, Contra Costa County occupies the northern portion of the East Bay with its county seat in Martinez. The County has two cannabis friendly cities within its border: Richmond and El Cerrito. During the hot days of summer, you can make your way to Six Flags Hurricane Harbor in Concord.
History with Cannabis: Contra Costa County did not embrace cannabis businesses like many of its other Bay Area neighbors (San Francisco, Oakland, Berkeley, and Santa Rosa to name just a few). In 2008, the Board of Supervisors adopted an ordinance prohibiting the establishment of medical marijuana dispensaries. On October 24, 2017, the County passed an ordinance prohibiting commercial cannabis activities and regulating personal cultivation. However, because nearly sixty-one percent (61%) of the County’s residents voted in favor of the Adult-Use of Marijuana Act (a /k/a Prop 64), an outright prohibition was not feasible in the long-term. Regular readers of this series can guess what happened next: The County held a number of hearings, with input from a number of local departments, to study the issue. It’s been a slow haul but the County’s been moving in the right direction – incremental progress is better than no progress.
Recent Cannabis Laws: On June 26, 2018, the Board of Supervisors held a public hearing on a cannabis ordinance regulating commercial cannabis activities in the County. The ordinance passed and Contra Costa County joined the enlightenment era — Welcome! The ordinance will not take effect for thirty (30) days. It will take some time before the County is issuing cannabis licenses to businesses but it is always good news when a new jurisdiction revokes its prohibition. The new ordinance does the following:
- Authorizes up to four (4) storefront retailer permits. Storefront retailers are authorized to make deliveries;
- Authorizes up to ten (10) cultivation permits (outdoor, mixed-light, and indoor are allowed). However, if a licensee holds both a retailer and cultivation permit, that cultivation permit will not count against the cap;
- Authorizes up to two (2) manufacturing permits (non-volatile only) in an agricultural zoning district. However, manufacturing permits in non-agricultural districts and those integrated with a cultivation permit in an agricultural district will not count against the cap;
- Authorizes distribution. The ordinance does not address whether there will be a cap on distribution permits;
- Authorizes testing facilities. The ordinance is also silent on a cap for testing facilities;
- Delivery retailers licensed outside the County are permitted to make deliveries within it so long as they obtain a County business license;
- The County will develop procedures and scoring criteria for prospective cannabis businesses;
- Requires a cannabis business to obtain a health permit from the County; and
- Cannabis permits will have an initial term of five years;
Proposed Cannabis Laws: The Board of Supervisors will hold a hearing today on a proposed tax schedule for cannabis businesses (Come on, you knew taxes were on the way). If the Board approves the tax measure it will be placed on this November’s ball and require the approval of a majority of voters in the County to take effect. The proposed taxation schedule is as follows:
- Indoor cultivation: $7 a square foot up to $10 a square foot;
- Greenhouse cultivation: $4 a square foot up to $7 a square foot;
- Outdoor cultivation: $2 a square foot up to $4 a square foot;
- Nurseries: $1 a square foot up to $2 a square foot;
- Manufacturing: 2.5% of gross receipts up to 4% of gross receipts;
- Distribution: 2% of gross receipts up to 3% of gross receipts; and
- Retailer: 4% of gross receipts up to 6% of gross receipts.
For its foray into regulating cannabis activities, this is a big step for the County and we applaud the fact that it will authorize seed-to-sale license types. Would we like to see the removal of permit caps? Sure, but with local jurisdiction prohibitions still being one of biggest impediments to the cannabis industry in California, we will gladly welcome Contra County into the fold.
Last week, Lagunitas Brewing Company announced the launch of Hi-Fi Hops, an IPA-inspired sparkling water in collaboration with CannaCraft (under its AbsoluteXtracts brand), a Santa Rosa-based cannabis company. Both the LAGUNITAS and ABSOLUTEXTRACTS marks appear on the packaging for the beverage, and so I thought this would be a great opportunity to explore some of the considerations that should go into any co-branding deal.
Co-branding is a common marketing strategy wherein two or more brands collaborate to create a product that is representative of both or each of the brands. Co-branding can be a great opportunity for publicity and can also serve as an opportunity to introduce one of the co-brander’s customers to the other co-brander’s product. It can be an effective tool for expanding the reach of your brand into other markets if executed properly. Co-branding can also serve to enhance the value of the goods if both of the brands are well-known and respected by their consumers.
But what happens if the deal isn’t well thought out? Co-branders run the risk of diluting their brand, or if they are a small company, finding their brand overshadowed by the larger, better established brand. If an agreement is poorly drafted, you may find yourself in a situation without much control over the product or its quality, and a sub-par product could ultimately lead to negative publicity and reputation damage.
With these points in mind, here are some of the things you should be thinking about before entering into a cannabis co-branding deal:
- Choose your co-branding partner wisely.
We’ve talked about this in the context of IP licensing generally, but the same rules apply here. Make sure you feel comfortable with the company you intend to partner with. In a co-branding deal, it’s important that the products or services offered by each co-brander are complementary and that each party stands to gain through affiliation with the other. Ask yourself whether partnering with this other company would expand your consumer base and introduce potential new customers to your product, and whether your brand would provide the same benefit to your partner. The goal with these types of deals is to create a win-win situation for both parties.
In the cannabis industry in particular, it’s also important to make sure that your potential co-branding partner is on solid legal footing. Do your due diligence, and make sure they’re operating in compliance with all applicable state and local laws. If they aren’t, you run the risk not only of reputational harm, but of legal liability.
- Don’t relinquish too much power.
While it’s fine and may make sense for one partner to take the lead in pushing the co-branding deal forward, it’s important for both partners to have input into how the deal is executed. Don’t ever turn over all decision-making authority to your partner, as it’s important to exercise control over how your brand is used at all times. Failure to police your trademarks could lead to big issues down the road.
- Make sure your agreement is solid and your intellectual property (IP) is protected.
Finally, as always, make sure you aren’t relying on a template or generic agreement. Co-branding agreements are all unique and can be more complex than your typical trademark licensing agreement, not to mention the added complexity of one or more parties being in the marijuana industry.
These agreements will have some similarities to trademark licensing agreements, since each party will, in a sense, be licensing their brand to the other. It is therefore important that each party maintain independent control over their own marks and how they are used throughout the deal. Neither party wants its mark(s) to be diluted or tarnished through the co-branding venture. And each party needs to come out of the deal with all of its IP ownership rights intact.
Control, as I mentioned above, is one of the key considerations in any co-branding deal: Quality control provisions should be fleshed out, and each party should clearly specify how its trademarks are to be used and displayed, where they will be permitted to be used, and how the product will be marketed.
Each party should feel comfortable with the termination provisions of the agreement, and should be able to exit the deal if, for example, sales targets are not met, laws or regulations change in a way that renders the deal legally problematic or legal enforcement actions are taken against either of the parties, if there is infringement or misuse of the trademarks, or if the other party does anything that could negatively impact your brand or tarnish your reputation. To that end, make sure the agreement contains comprehensive representations and warranties from each party, as well as mutual confidentiality and indemnification provisions. Some of these provisions should survive termination of the agreement.
This is just the tip of the iceberg in putting together a cannabis co-branding deal. These types of ventures can be exciting and drum up a lot of publicity, which has the potential to greatly benefit both parties. But it is essential to carefully consider how your co-branding agreement is drafted, and to make sure that you and your intellectual property are adequately protected.
For California landlords leasing to cannabis businesses, we’ve previously discussed how compliance with state and local law, perhaps even more so than the specter of federal enforcement, should be a top concern when structuring the tenancy and drafting the lease. As the state ramps up its efforts to transition the industry to a robust regulatory regime, one result of those efforts that is playing out across the state is that cultivator tenants, particularly outdoor grows, are abandoning their cultivation operations rather than paying for cleanup or dealing with state or local enforcement actions.
Sometimes this is due to a lack of wherewithal to become a licensed operation and pay the costs of compliance. Other times it’s due to a change in local law that renders the operation a nonconforming use. And still other times it’s the result of a private or government-initiated nuisance action (although these actions can sometimes create other problems). But the result is often the same: The property is left abandoned and trashed, cannabis growing material such as dangerous fertilizers are left spread across the site, and, often, illegal stream diversions or alterations have been illegally constructed, posing a threat to wildlife, water quality, and natural water drainage systems. The result is an environmental disaster and a landlord left holding the bag, often with a hefty administrative fine or nuisance abatement assessment to boot. Below are some of the many considerations that should go into structuring a cannabis lease when it comes to preventing these types of situations from happening in the first place.
- Reviewing tenant SOPs as part of the vetting process. Before even putting pen to paper on a lease, landlords should consider requiring potential tenants to produce their standard operating procedures (SOPs) and other relevant cultivation planning documents to demonstrate what materials they will be using to cultivate, where they will be obtaining their water, how they will be disposing of waste, and how the site layout will be organized. Much of this information will have to be provided to local and state agencies anyways in order for the tenant to obtain its cultivation licenses and permits. The lease can also include tenant obligations to list all hazardous materials it intends to use at the site and to provide material safety data sheets (MSDS) for each. If the tenant doesn’t have a proper site use plan in place before they sign a lease, then chances are things will not end well for the landlord.
- Maintaining strict control over tenant improvements in the lease and allowing for discretionary inspection. Commercial cannabis is a strictly regulated industry (for good reason), and the lease should afford similar control for the landlord over how a tenant uses the leased premises. Indoor cultivation leases may require discretionary landlord approval at multiple stages for any alterations to the building, and outdoor cultivation leases may also require the same level of approval for changes to the land, however insignificant. The lease can give teeth to these restrictions by allowing for landlord and government inspections, and affording the landlord early termination options for a tenant’s failure to comply.
- Including strong tenant indemnifications for remediation. Indemnity clauses provide a guaranty that a tenant will hold the landlord harmless and defend it against certain types of claims. A common such clause pertains to remediation of hazardous substances on site, where the tenant promises to pay for any costs associated with spills or contamination. Cannabis cultivation leases can add to that by including cleanup costs for any damages caused or messes left behind by cultivation operations, and defense costs for any governmental remediation actions or private nuisance actions requiring abatement.
- Including early termination options for government enforcement actions and third-party lawsuits. If the government or a private actor sues the landlord or the tenant because the tenant is causing a nuisance by creating a mess (and not just by conducting the permitted use—another example of a carve-out that tenants will want to include), the landlord will want to be able to abate the problem quickly by terminating the tenancy and enforcing the tenant’s indemnity obligations. To that end, the lease can include a landlord early termination option to end the tenancy and evict the tenant on short notice, should the landlord opt not to deal with convincing the tenant to comply.
- Adjusting the security deposit to the size of the cultivation operation. While commercial security deposits are normally one or two months’ rent, there’s nothing requiring them to be. Because the stakes for noncompliance are so high in this industry, landlords may consider upping the deposit to an amount sufficient to properly deal with a cleanup of the tenant’s operation, should tenant fail to comply and abandon the premises. The lease can also be written so that the security deposit essentially acts as a bond for performance of the indemnification obligations, though in California there are necessary statutory waivers to be included in the lease.
California is serious about dragging its cannabis industry into regulatory compliance, and that includes a lot of cultivation site cleanup and forward-looking maintenance. California is also extremely serious about compliance with its environmental laws, as the world already knows, and we are fortunate for that. Landlords should be aware of the consequences of the leased premises turning into a nuisance or environmental violation, and consider how to build the tenancy to protect against such problems from the get-go by drafting a proper lease agreement. When everyone’s on the same page about strict compliance and good environmental stewardship, everybody wins.