All of us at Canna Law Blog were saddened to learn that the estimable Mark Kleiman passed away over the weekend. Kleiman was probably the most influential scholar on cannabis policy. His views were creative and nuanced, data-driven and humanitarian. He was a strong opponent of the War on Drugs going back to the early 1980s, yet he also opposed a full commercial model for marijuana legalization. Instead, he argued for a middle ground that would end prohibition and mass incarceration, while preventing the rise of Big Marijuana and its potentially detrimental public health consequences.

Our Seattle lawyers have distinct memories of watching Kleiman serve as Washington’s appointed “Pot Czar” as it built out the first state cannabis program in 2014. We spoke alongside him on issues as far afield as tribal cannabis programs back in those days, and we conferred with him over the years and used his writings to teach law students annually going back to 2016.

Kleiman was excellent in interview, lecture and print formats. For just a few of his greatest (and most accessible) hits, check out the following:

If we were to identify the most prominent theme in Kleiman’s scholarship, it would probably be that the lack of a coherent national policy on cannabis legalization is bad for everybody. States will race to the bottom on regulation and pricing, making the same mistakes as they did with alcohol and tobacco; public health will suffer.

Kleiman also did not shy away from saying things the cannabis industry and its regulators didn’t want to hear, on issues from cannabis use disorder as a real and growing problem, to his strongly held belief that taxes should be assessed on each product’s intoxicating power. Our cannabis business lawyers did not always agree with Mark, but to a person we always considered him well-informed, thoughtful, and honest.

Kleiman left at a very interesting time for cannabis policy in the United States. Federal cannabis policy is still a disaster. States are building their programs on revenue-raising models, rather than emphasizing public health. The industry is dividing into THC companies and CBD companies. International norms are changing fast. Overall, it feels like things are moving more quickly than ever, but in a more chaotic manner than ever before.

The next few years will see continued need for strong voices on cannabis policy. Think tanks like the Brookings Institution and RAND Corporation continue to do important work, along with advocacy organizations like the Drug Policy Alliance and Marijuana Policy Project. As far as individuals, though, Kleiman was probably the single most respected and important voice in the field. He leaves an enduring legacy and giant shoes to fill.

Mark Kleiman will definitely be missed.

SAFE act cannabis banking

Tomorrow, a Republican-controlled Senate Banking Committee hearing will examine cannabis businesses’ lack of access to banking services to further consider the SAFE Banking Act. The July 23, 2019 hearing will include Senators Jeff Merkley (D-OR) and the legislation’s chief GOP cosponsor, Cory Gardner (R-CO). As we’ve discussed on the blog previously, the legislation would allow financial institutions to serve state-legal marijuana businesses without fear of federal repercussions. Supporters of the Act have stressed the public-safety concerns that have resulted from the lucrative cannabis industry conducting business on a cash-only basis.

Scheduling of the hearing took industry officials by surprise based on prior comments. In April and May 2019, Chairman of the Committee, Senator Mike Crapo (R-ID), indicated he might refuse to give the topic a hearing: “as long as cannabis is illegal under federal law, it seems to me to be difficult for us to resolve ‘the financial services piece.’” The scheduling comes after pressures have increased, with state banking associations, the National Association of State Treasurers, the top financial regulators of twenty-five states, a majority of state attorneys general, and bipartisan governors of twenty states all having now endorsed the legislation and calling on Congress to act.

The hearing, titled “Challenges for Cannabis and Banking: Outside Perspectives,” will include witnesses such as representatives of the Credit Union National Association (CUNA), executives from the banking industry like Citywide Banks, prohibitionist group Smart Approaches to Marijuana, and CEO of marijuana retail chain LivWell Enlightened Health, John Lord. CUNA President and CEO, Jim Nussle, already commented:

At its heart, cannabis banking is a public safety issue. It’s an $8.3 billion industry that’s currently being forced to operate almost entirely in cash. … While 33 states, territories and DC have legalized cannabis, it’s been overwhelmingly difficult to provide these businesses financial services because handling transactions are currently considered money laundering. Credit unions have been leading the way in helping to get this money off the streets. We are dedicated to finding a solution to this ongoing challenge that impacts every community around the country and look forward to working with Senate leaders during this hearing and with Congress at large.”

CEO of the Cannabis Trade Federal, Neal Levine, said in a statement that he hoped the organization’s testimony will contribute to the “growing momentum behind meaningful and historic cannabis policy reform”:

This hearing is yet another sign that Congress is taking the cannabis banking problem seriously and intends to take action to correct it,” said Levine. “Cannabis businesses operating legally under state and local laws should have the same access to banking and financial services as any other type of business.”

As a reminder, the companion legislation cleared the House Financial Services Committee with a bipartisan vote in March and now has 206 cosponsors (almost half the body!).  The Senate legislation is presently backed by 32 out of 100 senators. The House version of the SAFE Banking Act was expected to be voted on by the full chamber by now, but it’s been delayed – a spokesperson for Representative Ed Perlmutter (D-CO) indicated: “House Democrats have a robust agenda which has made it tough to get time on the legislative calendar. … But as we continue to talk with people, we keep gaining more and more support and look forward to a strong vote on the floor of the House soon.” Tomorrow’s hearing is another step in the right direction.

colorado hemp

The Agriculture Improvement Act of 2018 (“2018 Farm Bill”) legalized hemp by removing the crop and its derivatives from the definition of marijuana under the Controlled Substances Act (“CSA”) and by providing a detailed framework for the cultivation of hemp. The 2018 Farm Bill gives the US Department of Agriculture (“USDA”) regulatory authority over hemp cultivation at the federal level. In turn, states have the option to maintain primary regulatory authority over the crop cultivated within their borders by submitting a plan to the USDA. This federal and state interplay has resulted in many legislative and regulatory changes at the state level. Indeed, most states have introduced (and adopted) bills that would authorize the commercial production of hemp within their borders. A smaller but growing number of states also regulate the sale of products derived from hemp.

In light of these legislative changes, we are presenting a 50-state series analyzing how each jurisdiction treats hemp-derived cannabidiol (“Hemp-CBD”). Each Sunday we will summarize a new state in alphabetical order. So far, we have covered AlabamaAlaska, ArizonaArkansas, and California. This week we turn to Colorado.

When it comes to hemp, few states have embraced hemp like Colorado.  According to a report prepared by Marijuana Business Daily,  in 2018, Colorado allocated 12,042 outdoor acres and 2.35 million square feet indoors to the cultivation of hemp.  If you buy a product containing hemp, in any state across the country, it likely came from Colorado.

The state’s cultivation program is overseen by the Colorado Department of Agriculture (“CDA”). “Industrial hemp” or “hemp” means “the plant Cannabis sativa L. and any part of the plant, including the seeds of the plant and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of no more than three-tenths of one percent on a dry-weight basis.” CDA oversees the cultivation of hemp does not regulate the processing of hemp into other products, including Hemp-CBD other than requiring that cultivators disclose agreements with Colorado hemp manufacturers.

However, in 2018 Colorado enacted House Bill 18-1295 (“HB 18-1295”), codified in part in C.R.S. 25-5-426, which establishes that the manufacturing of an “industrial hemp” or “hemp product” must comply with Colorado’s Food and Drug Act. HB 18-1295 defines an “industrial hemp product” as “a finished product containing industrial hemp that”:

  • Is a cosmetic, food, food additive, or herb;
  • Is for human use or consumption;
  • Contains any part of the hemp plant, including naturally occurring cannabinoids, compounds, concentrates, extracts, isolates, resins, derivatives; and
  • Contains a delta-9 tetrahydrocannabinol concentration of no more than three-tenths of one percent.

Manufacturers of industrial hemp products must register with the Colorado Department of Public Health and Environment (“CDPHE”).

Colorado imposes certain labeling requirements on hemp products:

  • An identity statement, which indicates what the product is (not a brand name).
  • A net weight statement.
  • A list of all ingredients.
  • The company name with an address

The label must also clearly identify that it includes hemp as an ingredient and if there is CBD, the amount of CBD and whether it is an isolate. Labels must also include the statement “FDA has not evaluated this product for safety or efficacy,” and may not contain any health claims.

In this 50-state series, we’re moving through states alphabetically. However, if we were ranking the states, Colorado would almost certainly come in first due to its full-on embrace of hemp. The state was one of the first to legalize recreational marijuana so we’d give them a pass if they were to slow things down when it came to hemp. Obviously, that’s not the route taken by the Centennial State. In addition, in light of the uncertainties surrounding how the FDA would regulate Hemp-CBD, the state has tasked CDPHE with overseeing the manufacture of products containing hemp and Hemp-CBD. Kudos to Colorado for boldly moving forward with hemp.

elizabeth warren marijuana

Each Saturday, we have been running a series of blog posts that take a close look at each of the Democratic Party candidates for President in 2020. We examine each candidate’s historic approach to marijuana law and policy, and we also canvas their current respective stances on marijuana.

Over the past three weeks, we covered Joe BidenBernie Sanders and Kamala Harris. Today, we turn to Elizabeth Warren, the Senator from Massachusetts.

Grade: B+

Stance on marijuana: This past April, Senator Elizabeth Warren clearly vocalized her support for cannabis legalization at a CNN town hall. On social media, Warren has also come out strongly in support of legalization. Warren’s website, however, does not specifically advocate for legalization but rather for “rewriting our laws to decriminalize marijuana.” It is unclear whether this is an important distinction in Warren’s platform as a presidential candidate.

History with marijuana legislation: Warren’s stance on marijuana has evolved over the course of her senate career. In 2011 during her first campaign for Senate, Warren expressed openness to legalizing medical marijuana but opposed legalization in general. At the CNN town hall this past April, Warren declared that she had supported Massachusetts’ ballot initiative to legalize marijuana back in 2012. In reality, Warren was hesitant to offer her support for the ballot initiative, vacillating between silence and tentative approval. In a 2018 interview with Rolling Stone Magazine, Warren also exaggerated her support for Massachusetts’ 2016 ballot initiative to legalize marijuana; she said she had endorsed it, but her only statement about the initiative was that she was “open to the possibility of legalizing marijuana.”

In 2018, however, Warren pushed for marijuana reform through both her rhetoric and legislative action. In 2018, she co-wrote a letter to President Donald Trump asking him to reinstate the Cole memo. Later that year, she co-sponsored the STATES Act, a bi-partisan bill which, if passed, would amend the Controlled Substances Act to allow States to “implement their own marijuana laws without federal interference.” She also co-sponsored the Marijuana Justice Act (which would legalize marijuana if passed) as well as multiple other marijuana reform bills.

Warren became a vocal advocate of legalization just a year before announcing her intention to run for president in December of 2018. Considering that the majority of Americans support legalization, this shift in Warren’s platform was most definitely a deliberate move as Warren geared up for her presidential campaign.

Conclusion: Warren receives a “B+” grade on cannabis. She obviously wants to come across as a long-time advocate for marijuana reform. Despite her claims, however, Warren did not consistently support legalization of marijuana before 2016. Additionally, the statement on Warren’s website regarding marijuana calls for decriminalization, rather than legalization, even though Warren herself has called for legalization. Fortunately, Warren’s recent legislative action surrounding marijuana is promising, indicating Warren would likely reform marijuana laws if elected President.

washington marijuana residency requirement

On June 26, 2019 the Supreme Court of the United States (SCOTUS) issued a ruling in Tennessee Wine and Spirits Retailers Association v. Thomas invalidating a two-year residency requirement for Tennessee retail liquor stores. The Washington State Liquor and Cannabis Board (LCB) has a similar six-month durational-residency requirement required for any person applying to be a true party of interest (TPOI) in a marijuana business. The Thomas decision could mean that days are numbered for Washington’s durational residency requirement.

Tennessee requires alcoholic beverages distributed in the state to pass through a three-tiered system overseen by the Tennessee Alcoholic Beverage Commission (TABC). TABC issues licenses to producers, wholesalers, and retailers of alcoholic beverages. Producers may sell only to wholesalers, wholesalers only to retailers, and retailers may sell to consumers. In order to hold a retailer license, an individual must show that he or she has been a resident of Tennessee for the last two years. SCOTUS noted that this requirement is very restrictive, especially when it is applied to corporations:

The rule for corporations is also extraordinarily restrictive. A corporation cannot get a retail license unless all of its officers, directors, and owners of capital stock satisfy the durational-residency requirements applicable to individuals. In practice, this means that no corporation whose stock is publicly traded may operate a liquor store in the State.

In 2012, the Tennessee attorney general issued an opinion stating that the durational residency requirement violated the Commerce Clause of the constitution and TABC stopped enforcing the requirements against new applicants. After TABC recommended approval of several applicants who did not meet the residency requirement, Tennessee Wine and Spirits Retailers Association (Association), a trade association of in-state liquor stores, threatened to sue. In turn, TABC’s executive director filed a declaratory judgment in state court to settle the question of the residency requirements’ constitutionality. The case was removed to federal court and the requirements were deemed unconstitutional. The Association appealed and the Court of Appeals for the Sixth Circuit affirmed the decision. The Association appealed the decision on the constitutionality of the 2-year residency requirement.

The Court’s analysis focused on whether or not Tennessee’s law was “saved” by Section 2 of the 21st Amendment. The 21st Amendment ended alcohol prohibition and Section 2 gives each State leeway in regulating alcohol in light of public health and safety measures. The Court determined that Section 2 did not save Tennessee’s durational-residency requirement stating that Section 2 “is not a license to impose all manner of protectionist restrictions on commerce in alcoholic beverages. Because Tennessee’s 2-year residency requirement for retail license applicants blatantly favors the State’s residents and has little relationship to public health and safety, it is unconstitutional.”

However, the Court also determined that the residency requirement violated the Commerce Clause of the Constitution. The Commerce Clause provides that “Congress shall have Power. . . to regulate Commerce with foreign Nations, and among the several States[.]” SCOTUS has interpreted a “dormant Commerce Clause” (DCC) which implies that the Commerce Clause does not allow states to implement protectionist measures that inhibit trade among states. We have been writing about this in the context of cannabis residency restrictions for a long time.

Under the DCC, “if a state law discriminates against out-of-state goods or nonresident economic actors, the law can be sustained only on a showing that it is narrowly tailored to advance a legitimate local purpose.” SCOTUS determined that “Tennessee’s 2-year durational-residency requirement plainly favors Tennesseans over nonresidents, and neither the Association nor the dissent below defends that requirement under the standard that would be triggered if the requirement applied to a person wishing to operate a retail store that sells a commodity other than alcohol.”

Under this analysis, Washington’s residency requirement appears out-of-line with the DCC and, by extension, unconstitutional. Like Tennessee’s regulation of liquor, Washington uses a three-tiered system to regulate marijuana sales, licensing producers, processors, and retailers. All TPOIs in all license types must meet Washington’s six-month residency requirement. This restriction significantly impacts corporations, even more so than Tennessee’s requirements because it is imposed on all shareholders and their spouses. That means that a person holding less than 1% of an ownership interest and her spouse must qualify as Washington residents.

Marijuana is a unique commodity given that it remains illegal under federal law. It is also illegal under Washington law to import marijuana from any other state. All Washington marijuana must be grown in-state. However, Washington’s 6-month is a clear protectionist measure favoring Washington owners. It would be hard for Washington to argue that this is the narrowest way for Washington to undertake the legitimate interest of regulating marijuana, given that many other legal states have either never imposed such residency requirements or have removed them or loosened those requirements. Utah was the latest state to do so with its medical marijuana regulations, as reported by the Salt Lake Tribune.

Though, the Thomas decision is arguably distinguishable from the current residency situation in Washington marijuana, it certainly does not help the state’s case if the requirement is challenged. Washington’s residency requirement is strict and controversial. As marijuana legalization spreads across the country it seems like the residency requirement is not sustainable, long term. It remains to be seen whether the Thomas decision is the last straw.

california cannabis regulations ownership

We’ve written a lot about cannabis M & A, entity selection choices, and financing on the Canna Law Blog and how these transaction and changes do not amount run of the mill transactions because of the invasive regulatory overlay in almost all states. California though stands alone when it comes to the regulatory gauntlet on changes of ownership, entity, and or financing for a cannabis business. In particular, those licensees governed by the Bureau of Cannabis Control (“BCC”) (specifically, retailers, distributors, labs, and delivery services) face the worst of it though California Department of Public Health and California Department of Food & Agriculture are no picnic either. And where a lot of publicly traded money (including from Canada) is now playing in the California cannabis space, issues of changes of ownership, changes of entities, and changing financial interests are hotter than ever with a good amount of licensees breaking the laws and rules without even knowing it.

1.     Change in Ownership.

Don’t forget that state licenses are not transferable: only the businesses that hold those licenses can be bought and sold. So, changes of ownership are inevitable as the secondary market for licenses picks up. Under current, final BCC regulations (which were adopted on January 16 of this year), in the event of “the sale or other transfer of the business or operations covered by the licensee… if one or more of the owners of a license change, the new owners shall submit [all owner information] for each new owner to the [BCC] within 14 calendar days of the effective date of the ownership change.”

Doesn’t sound so bad other than the 14-day timeline, but here’s the real catch:

The business may continue to operate under the active license while the [BCC] reviews the qualifications of the new owner(s) in accordance with the [Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”)] and these regulations to determine whether the change would constitute grounds for denial of the license, if at least one existing owner is not transferring his or her ownership interest and will remain as an owner under the new ownership structure. If all owners will be transferring their ownership interest, the business shall not operate under the new ownership structure until a new license application has been submitted to and approved by the [BCC], and all application and license fees for the new application have been paid.”

Translated: if you want your cannabis business to continue to operate while the new owners are vetted by the BCC, you need to leave on an original “owner” from the time of initial licensing. Note that “ownership interest” is not defined under the BCC rules or by MAUCRSA. However, to conservatively satisfy this rule, licensees should ensure that at least one original owner maintains at least 20% in equity in the cannabis company (where the definition of owner includes the ownership of 20% or more of a cannabis company).

In California M&A, what this has led to most of the time is two closings, an initial and a final. At the initial closing, the purchaser takes 80% of the cannabis company and one original owner stays on 20%. Then, once the purchaser is recognized as an “owner” by the BCC (which there is no official approval for that, but that recognition will show up in the licensee’s licensing portal), the purchaser moves to close on the final 20%. Importantly:

“[a] change in ownership does not occur when one or more owners leave the business by transferring their ownership interest to the other existing owner(s). In cases where one or more owners leave the business by transferring their ownership interest to the other existing owner(s), the owner or owners that are transferring their interest shall provide a signed statement to the Bureau confirming that they have transferred their interest.”

The last important issue to point out is that the BCC will not pre-vet owners or a transaction; the purchaser has to close, become an “owner”, submit the change of ownership request (via this form) with all corresponding owner information within the 14-day deadline, and then hang on while it’s vetted by the BCC.

2.     Change in Financial Interest Holders.

Unlike other industries, cannabis companies cannot take money from just anyone for financing. With very few exceptions in California, anyone who loans money to, makes an investment in, or has an equity interest (i.e., profit share interest) in a cannabis business must be disclosed to the state as a “financial interest holder” upon the filing of the license applicant’s annual application. And there is now continued reporting requirement when your financial interest holders change. Pursuant to BCC regulations:

“[w]hen there is a change in persons with financial interest(s) in the commercial cannabis business that do not meet the requirements for a new license application under this section, the licensee shall submit [required financial interest holder information]  within 14 calendar days of the change. In turn, any time a new entity or person lends money to a cannabis business, that transaction has to be reported within 14 days to the BCC.”

Same thing goes for the extension of equity interests/profit sharing, and if a person or entity profit shares at 20% or more, they may be considered an owner, which must adhere to the “change of ownership” reporting above. Again, proceed with caution on new financing sources in California.

3.     Changes to Entity.

Because of the Compassionate Use Act of 1996, many California cannabis operators (and retailers in particular, especially in the City of L.A.) operated as non-profits. And a lot of those operators were grandfathered in for continued operations in their cities and counties, which if you want to get a state license, you must first secure local approval, so these operators have some very valuable entitlements. If you’re a non-profit and you want to sell that entity, you can’t: there’s no equity to sell in a non-profit, so you must reincorporate as an entity that creates equity to sell (and don’t forget that many of these old non-profits don’t even have bylaws or structures that permit for a lawful conversion). In California, as a non-profit corporation, you must first convert to a corporation and that corporation can then reincorporate as any other business entity, including a limited liability company. However, in California cannabis, you can no longer convert without consequence if you have a state license. Earlier in July, the BCC had posted on one of its FAQ pages, the following statement:

“Licenses issued by the Bureau are issued to a specific person (business entity or individual). Licenses may not be transferred to a new entity or individual. If a licensee wishes to convert their business entity, such as from an LLC to a corporation, they must submit a new application and obtain a new license under the new entity. A licensee who wishes to convert from a non-profit to a for-profit, or vice versa, should contact the Bureau to confirm whether the conversion would require a new application.”

However, the BCC recently changed this language to say:

A licensee that changes their business entity type will usually be required to submit a new application and obtain a new license issued to the new entity. However, a licensee who is converting business entity types must meet all of the requirements of the Corporations Code to be considered the same entity for the purposes of licensing and may not be required to submit a new application.

Translated: if you’re converting your non-profit corporation to a for-profit corporation and your California entity number and other corporate data do not change, the chances of you having to get a new license are probably low. However, if you convert into anything beyond a for-profit corporation and your corporate identification number and data changes, you’re probably going to have to get a new license whether or not there’s also a change of ownership.

Again, regular business changes that happen every day in corporate America are severely curtailed in cannabis and especially in the Golden State. If you’re contemplating any of the above changes, you really need to do your homework before execution or you could end up losing your licensing and incurring months of delay in trying to secure a new state license. Proceed with caution accordingly.

cannabis regulatory agency litigationCannabis companies in regulated states like California often find themselves needing to report to their licensing agency or the municipal government that gave them permits when it comes to pretty much any change in their business, owners, or financiers. These communications typically include:

  • Requesting to modify business operations or their premises
  • Reporting changes to the business
  • Reporting the addition or change of owners or financial interest holders
  • Asking questions about the agencies’ interpretation of rules
  • Self-reporting potential rule violations in order to mitigate potential enforcement
  • Responding to allegations from agencies that rules have in fact been violated

In any of these situations—or in virtually any other situation where a cannabis company is interacting with a state or local agency—it’s important to know exactly how to interact with regulators and what exactly to say and how.

First, what you say to regulators matters. A lot. Our cannabis attorneys have seen licensees ask routine regulatory questions, only to be told that they are violating some obscure rule, which jeopardizes the license. It’s often a challenge to communicate with agencies or governments, but that’s especially so for cannabis companies that don’t have a firm understanding of the applicable laws, regulations, and guidance materials (and especially often buried FAQs) that agencies may rely on to interpret their own rules (such as final statements of reasons for rules, guidance issued in press releases, etc.). While there are situations where even the most seasoned experts can’t avoid enforcement by the agencies, it’s still important to understand the rules before you ever open your mouth to a regulator.

Second, when you communicate with agencies or governments, you are creating a record that can either be used by you or against you. If a cannabis company ever finds itself in a position where it needs to appeal an agency decision, the communications it’s had with the agency on a specific point will be relevant in that appeal. The cannabis company will want the neutral evaluator to see that the company adequately explained how it was in fact complying with the agency’s rules or taking steps to mitigate any potential rule violation before the agency penalized it. If you have an opportunity to effectively communicate with an agency and make your case in writing, you shouldn’t hesitate.

Third, and most importantly, if a rule violation penalty is inevitable, you’re going to be neck-deep in the Administrative Procedure Act of your state, which is pretty difficult to sort on your own. Prosecuting an administrative appeal requires fairly significant litigation experience as well as a deep understanding of an agency’s rules and general administrative procedures. These appeals can carry serious consequences if not charted properly, so get your administrative appeal plan and strategy together now.

The bottom line is that regulatory compliance hinges a lot on your communications with your direct government overseers, and you need to learn the dance of how to interact with those regulators accordingly before you find yourself wading into serious rule violations from which you cannot recover.

cannabis litigation oregon
We think Rockefeller was on to something.

“A friendship founded on business is a good deal better than a business founded on friendship,” said John D. Rockefeller. In our experience, this adage applies with force in the cannabis industry where –because of its black-market origins – people became accustomed to business arrangements founded on a handshake when recourse from the legal system was not an option. Times have changed and so should the practice of cannabis businesses as demonstrated by a $4.2 million lawsuit recently filed in Oregon state court.

The principals of Mason Family Farms (“Mason”) were close friends with Edward Passadore. In 2015, Mason sought to enter Oregon’s recreational marijuana market by establishing a 15,000 square foot indoor cultivation facility in Lowell, Oregon. Passadore, who owned a property management company and founded several other companies (together referred to here as “Passadore”), convinced Mason that he and his associates had the expertise and experience to construct and deliver a licensed “turnkey” grow operation.

The year 2015 was a heady time for Oregon’s newly legalized recreational marijuana industry. Mason anticipated that its cultivation operation would produce approximately 5 ½ harvests per year of 463 pounds of marijuana per harvest. At a wholesale price of $2,000 / lb, Mason expected to net approximately $711,000 in profit per harvest.  (Regular readers know that by early 2019, Oregon’s supply had vastly exceeded demand, causing prices to crater and that Oregon recently adopted various measures intended to curb supply).

Sometime in early 2016, Mason and Passadore reached an agreement by which Passadore would construct the grow operation for $1,000,000. According to the complaint, Passadore agreed to secure all necessary permits and licenses, construct the project, secure water rights, set up security, and take all other necessary actions. The parties anticipated the project would cost $1,000,000 of which 17.5% total project cost would be paid to Passadore, for a total anticipated cost of $1,175,000.  Passadore allegedly orally promised the project would be completed by December 2016.

Remarkably for a $1 million deal, the contract was a apparently a combination of oral and written promises and Passadore retained the only signed copy of the contract. The unsigned version of the contract attached to the complaint does not include an integration clause, which typically exclude from the contract terms all prior oral or written agreements. (This is Contract Law 101.) The writing does not contain a deadline for completing the project and is missing numerous other terms you’d normally see in a build-out arrangement, e.g.: change orders, permit requirements, indemnity, insurance, third-party liability, contractor-subcontractor, found in basic construction contracts. (Check out the AIA Contract Documents, https://www.aiacontracts.org/.)

The written contract called for an initial deposit of $500,000 – which Mason provided to Passadore by the end of March 2016.  In May 2016, Passadore ordered two large greenhouse kits for delivery.  In July 2016, Mason provided Passadore the remaining $500,000. The time for completion came and went and in January and May 2017, Mason provided Passadore with additional money bringing the total money deposited to $1.6 million.

Construction on the project dragged on into the summer of 2017 and then ground to a halt when the electrical subcontractors stopped work after learning that Passadore had not obtained the required permits. Construction recommenced in the fall of 2017, but by early 2018 Mason had taken over and terminated its relationship with Passadore. Mason then spent another $672,000 to get the operation up and running by April 2018. By then, the wholesale price of marijuana had dropped to $800 / lb.

(Note: Mason earned a 1st Place – Greenhouse award at the 2018 Oregon Growers Cup for its White Tahoe Cookies #1 strain).

Meanwhile, Mason had become suspicious of the documentation Passadore had provided concerning the costs of the project. Mason repeatedly demanded supporting documentation, which it never received and came to believe that Passadore had falsified or misreported numerous charges. Passadore also allegedly commingled funds between companies and changed the names of various companies to confuse Mason and attempt shield assets.

This brings us to complaint. Mason alleges causes of action for declaratory judgment, equitable accounting, breach of contract, and seeks to pierce the corporate veil of Passadore’s various entities. (For the unfamiliar, veil piercing is briefly discussed here). The complaint seeks $897,000 in contract damages as the difference between the contract price and the amount Mason expended to complete the project and $3,357,000 in lost profits based on the theory that Passadore caused Mason to lose out on seven harvests. (Feel free to email me if you’d like a copy of the complaint).

The lessons here are obvious, but we keep seeing marijuana and hemp businesses make the same avoidable mistakes. For some primers on entering into and succeeding in the cannabis industry, take a look at:

canada cannabis patent

Currently, seven of Canada’s top ten cannabis patent holders are major multi-national pharmaceutical companies, according to a joint research project by Washington D.C.-based New Frontier Data and London-based cannabis bio-technology firm, Grow Biotech. The list includes Ciba-Geigy AG (Switzerland) with 21 patents; Pfizer Products (United States) with 14; and Telefonaktiebolaget LM Ericsson (Sweden) with 13. Merck Sharp and Dohme Corporation, the fourth largest pharmaceutical company in the world, has 11 cannabis-related patents, and recently announced a partnership to pursue collaborations with Intec Pharma Ltd., a clinical-stage biopharmaceutical company that has developed a propriety oral drug delivery system for delivery of CBD and THC in treating pain. This got me wondering: why are the mega companies choosing to file their cannabis patents in Canada as opposed to the United States?

With cannabis now legal in Canada for both medical and recreational use, as well as legal for medical use in 33 states and D.C. and recreational use in 11 states and D.C., it’s no secret companies are ramping up their R&D and rushing to pursue patent protection. As we’ve referenced before, data shows that the number of U.S. cannabis patent holders has nearly quadrupled since 2016. The U.S. Patent and Trademark Office issued 127 patents containing the words “cannabis” or “cannabinoid” in their claims in 2018. Similarly, the Canadian Intellectual Property Office (“CIPO”) issued 22 such patents in 2018. While numbers on both sides of the border are growing, it could be that the pharmaceutical titans are heading to Canada because the status of “marijuana” in the United States as a Schedule I substance creates patent-related issues that mega companies want to avoid (such as giving sworn statements to the USPTO that the company is, in fact, possessing marijuana in conjunction with its patent application).

On a much simpler, practical note though, they’re probably heading there because it proves to be cheaper and quicker to obtain cannabis patents in Canada. Given how rapidly the cannabis industry is evolving, obtaining patents in the cannabis field first presents several advantages (such as being able to assert your patents against competitors or using your patents with definitive claims to improve your negotiation position during business transactions).

Looking into the process, it may be a year after the request for examination is made before CIPO issues a first Examiner’s Report in a Canadian patent application. In some cases, the subsequent Examiner’s Report or Notice of Allowance may issue in about six to nine months after the applicant’s response. This means it may take a little less than two years (or more) from the time of requesting examination to obtaining a Canadian patent, which is comparable to the timeline in the United States. But! The Canadian patent system offers an excellent option for accelerating examination via a request for Special Order. A Special Order may usually be obtained without difficulty upon payment of a government fee of CAD $500 (at the time of writing this article, that’s USD $382.31). In comparison, a similar program in the United States for accelerating examination, namely the Track 1 examination program, has a filing fee of USD $4,000.

Under CIPO’s current service standard, a Special Order will get the applicant a response within two months from when the correspondence is received. Therefore, by using a Special Order, it may be possible to significantly shorten the length of time from requesting examination to patent grant.

One thing to note is that in Canada, certain subject matter is excluded from patentability. One major example: plants. Plants are not patentable in Canada because its laws provide that “higher life forms” (which includes plants and animals) are not patentable subject matter. In contrast, a cell of a higher life form, methods of making higher life forms, as well as use of a higher life form, may constitute patentable subject matter. So, in order for a breeder or grower to obtain a patent, they must be able to show that the new cannabis cultivar can be identified by technical features (like genetic modifications).

Since it’s possible to obtain patents for inventions related to cannabinoid formulations, etc. in both Canada and the United States, maybe the best approach is to build a balanced Canadian and U.S. patent portfolio. This would allow a company to protect its assets and maximize its shield against competition in both jurisdictions.

california hemp cbd

The Agriculture Improvement Act of 2018 (“2018 Farm Bill”) legalized hemp by removing the crop and its derivatives from the definition of marijuana under the Controlled Substances Act (“CSA”) and by providing a detailed framework for the cultivation of hemp. The 2018 Farm Bill gives the US Department of Agriculture (“USDA”) regulatory authority over hemp cultivation at the federal level. In turn, states have the option to maintain primary regulatory authority over the crop cultivated within their borders by submitting a plan to the USDA. This federal and state interplay has resulted in many legislative and regulatory changes at the state level. Indeed, most states have introduced (and adopted) bills that would authorize the commercial production of hemp within their borders. A smaller but growing number of states also regulate the sale of products derived from hemp.

In light of these legislative changes, we are presenting a 50-state series analyzing how each jurisdiction treats hemp-derived cannabidiol (“Hemp-CBD”). Each Sunday we will summarize a new state in alphabetical order. So far, we have covered AlabamaAlaska, Arizona and Arkansas. This week we turn to California.

I personally think that it’s a bit difficult to talk about Hemp-CBD in a vacuum in California, because the laws we have here are much more focused on the actual hemp plant itself. So today, I’m going to talk not only about Hemp-CBD, but also about laws on cultivation and processing.

Hemp Cultivation

Of all the things you can do with hemp in California, cultivation is probably the safest and most “legalized”.  It’s had a relatively long and complex history in this state, beginning most significantly in 2013, when California passed Senate Bill 566, the California Industrial Hemp Farming Act (or “CIHFA”). The CIHFA amended CA law to redefine “marijuana” to exclude industrial hemp, and to define industrial hemp. It also added a section to the Food and Agriculture Code that would regulate the production of hemp by established agricultural research institutions (“EARIs”) and commercial cultivators. Even though there was a law allowing commercial cultivation, it didn’t actually take place until many years later.

The next year, the federal Agricultural Act of 2014 (or “2014 Farm Bill”) was passed. As readers of this blog probably know by now, section 7606 of the 2014 Farm Bill allowed the cultivation of hemp for research purposes conducted under an agricultural pilot program or by a research institution, in states where hemp cultivation was legal. California still hasn’t developed an agricultural pilot program, but according to FAQs issued by the California Department of Food and Agriculture (“CDFA”), the pilot program is in the works.

After the 2014 Farm Bill was passed, on June 6, 2014, then-California Attorney General (and current 2020 U.S. presidential runner) Kamala Harris issued opinion 13-1102, which stated “Federal law authorized, and rendered operative, the relevant portions of the California Industrial Hemp Farming Act on February 7, 2014.” Harris’ opinion, however, noted that provisions of the CIHFA were “inoperative to the extent that they apply or pertain to any form of industrial hemp cultivation not authorized by federal law.” In plain English, commercial cultivation was still not allowed.

In 2016, the Control Regulate and Tax Adult Use Of Marijuana Act (or “Prop. 64”) was passed. Prop. 64 formally amended the above California Food & Agriculture Code sections to make the hemp provisions become effective on January 1, 2017. But even that didn’t really happen.

In 2018, commercial cultivation began to become a reality with Senate Bill 1409. SB-1409 (which we have written about herehere, and here) allowed for the commercial cultivation of hemp upon registration with the CDFA and county commissioners, effective January 1, 2019. It was only on April 30, 2019, years after the CIHFA was passed, that the CDFA published information concerning registration with county agricultural commissioners to cultivate hemp.

To date, CDFA has created (1) regulations that deal with cultivation for commercial purposes; (2) regulations that list of approved seed cultivars; (3) emergency testing and sampling regulations; (4) guidelines for county agricultural commissioners to collect certain information from EARI cultivators; and (5) guidelines requiring certain hemp cultivators to obtain nursery stock licenses. More are likely to come, and soon.

What this all means is:

  • Pilot Program: We don’t have one here officially yet, but might soon.
  • EARIs: CIHFA basically allows EARIs to cultivate hemp with very few restrictions. There are still a lot of unanswered questions, like whether this hemp can be sold for commercial purposes.
  • Commercial Cultivation: Commercial hemp cultivators can pay a modest fee to cultivate hemp (provided their local jurisdiction allows it), and are subject to some testing and sampling, as well as other requirements. All in all, commercial cultivators are subject to DRASTICALLY fewer restrictions and regulations than commercial cannabis cultivators in CA (for the record, CA defines “Cannabis” here to exclude hemp, sorry for any confusion). However, because the 2018 Farm Bill hasn’t been fully implemented and the federal government is still relying on the 2014 Farm Bill, commercial cultivation is still in a gray area.

Being California, this is of course about to possibly change. The state is considering passing new legislation (SB-153) that would amend the hemp provisions of the Food and Agriculture Code to be more consistent with the 2014 and 2018 Farm Bills. I plan on writing more on SB-153 in the coming weeks, but for now, here are some highlights:

  • SB-153 would contain a new definition of “industrial hemp” that’s sort of different from CA’s current definition in the Health and Safety Code, meaning there will be two definitions of the term;
  • The definition of EARI would be restricted much, much further to apply to a much smaller subset of research institutions;
  • Permits would be required for all hemp cultivation—including non-commercial cultivation—meaning that some research institutions that currently qualify as EARIs will need to register and comply with CDFA regulations;
  • The CDFA will be forced to create and submit a hemp production program to submit to the U.S. Department of Agriculture per section 297B of the 2018 Farm Bill; and
  • People who provide false information on their commercial hemp registrations will be barred from participating in CA’s future hemp program.

This is just a brief overview and, again, I plan on writing in detail on SB-153 in the coming weeks. Needless to say, however, SB-153 would clarify a lot for hemp cultivators here given that the 2018 Farm Bill has yet to be implemented and, to date, there hasn’t been much action to get a California hemp production plan going.

Hemp Processing/Manufacture/Testing

The CDFA FAQs say all that needs to be said: “California law does not currently provide any requirements for the manufacturing, processing, or selling of non-food industrial hemp or hemp products.” That said, the California Department of Public Health’s (“CDPH”)  Hemp CBD FAQs take the position that Hemp CBD is illegal in basically all foods, beverages, and some other products. Based on this position, the CDPH has apparently been going after manufacturers of Hemp CBD products on the grounds that Hemp CBD “adulterates” foods, under the California Sherman Food, Drug, & Cosmetic Law.

I recently wrote about a new law (AB-228) that if passed, would find conclusively that Hemp-CBD added to foods and other products does not in and of itself adulterate them. The law looks poised to pass, and if it does would do the following:

  • Licensed cannabis companies wouldn’t be precluded from being in the hemp business;
  • Hemp products that are foods, beverages, or cosmetics would have some minimal labeling requirements;
  • Food manufacturers that make hemp products would be required to obtain certain registrations and would need to demonstrate that their hemp comes from a jurisdiction that has an “established and approved industrial hemp program” that meets all federal requirements for the sale and cultivation of hemp;
  • The CDPH wouldn’t be able to conclude that foods, beverages, or cosmetics are adulterated just because they contain CBD; and
  • Raw hemp products would need to undergo certain lab testing and get certificates of analysis prior to sale.

Hemp-CBD Product Sales

The CDPH’s Hemp CBD FAQs prohibit the sale of Hemp CBD in foods and many other products as noted above. It’s less clear about certain products like flower, oil, and vape cartridges. But we do know what if AB-228 passes, Hemp CBD may be allowed in many kinds of products that the state has, for some reason, tried to ban.

In the near future, we may be dealing with a “legal” and regulated Hemp CBD market in California.