industrial hemp cannabis farm bill

Just two weeks after Speaker of the House Paul Ryan expressed public support for the legalization of industrial hemp, Senate Majority Leader Mitch McConnell is now guaranteeing that the 2018 Farm Bill will include the industrial hemp legalization provision once the House and the Senate solve their difference regarding this issue.

If there’s a Farm Bill, it’ll be in there, I guarantee that,” McConnell told reporters last Friday.

(To watch McConnell’s hemp legalization guarantee, go to 13:15 into this video clip).

As we have discussed at length, the House and the Senate versions of the bill differ in that the House version is silent on the legalization of industrial hemp whereas the Senate version, which was introduced by the Senate Majority Leader himself, would remove the crop from the definition of “marijuana” under the Controlled Substance Act, and instead treat hemp like a standard agricultural crop. Indeed, although industrial hemp and marijuana are the same species, hemp contains a negligible amount of tetrahydrocannabinol (“THC”), the psychoactive compound that gives its users a high.

In justifying his support of the legalization of the crop, McConnell stressed the immense value and versatility of industrial hemp. In addition, McConnell declared that he became aware of the international implications of hemp legalization during his visits of hemp processors this past year and explained that major foreign investors have expressed interest in the hemp business, signaling the crop’s tremendous potential.

I don’t want to overstate this—I don’t know if it’s going to be the next tobacco or not—but I do think it has a lot of potential. And as all of you already know, in terms of food and medicine but also car parts…it’s an extraordinary plant.”

According to the Senate Majority Leader, once legalized, industrial hemp will be “lightly regulated” by the U.S. Department of Agriculture. In addition, there will be no more federal involvement except for the issuance of crop insurances to hemp farmers—which is one of the most significant provisions included in the Senate version of the bill. Instead, industrial hemp would be regulated by local law enforcement, pursuant to the state program under which hemp farmers would be registered.

Although McConnell acknowledged that a provision pertaining to work requirements for food stamp recipients had caused delays in the enactment of the 2018 Farm Bill, he declared that the enactment of the bill will be one of his top priorities when Congress reconvenes for a lame-duck session.

The continuing public support for the legalization of industrial hemp by conservative Congressional leaders strongly suggests that the enactment of the 2018 Farm Bill is imminent, which is fantastic news!

OLCC oregon violation license
Recommended compliance level for Oregon licensees.

A couple of months ago, the Oregon Liquor Control Commission (OLCC), for the first time, rejected a settlement offer from a licensee who had violated OLCC rules. At the time, we speculated the OLCC was done with settling and moving towards stricter compliance requirements. It seems, along with more stringent review of applications, the OLCC is doing exactly what we predicted and either rejecting settlement agreements or negotiating tougher settlements that result in licensees voluntarily giving up their licenses.

On September 21, the OLCC approved an administrative law judge’s (ALJ) order to temporarily suspend the marijuana license of the Corvallis Cannabis Club. Typically, a licensee is allowed to continue to operate as normal after receiving a charging document from the OLCC pending the outcome of a settlement or hearing. However, the Corvallis Cannabis Club was under investigation from the federal DEA and the OLCC agreed with the ALJ that a temporary suspension was necessary.

That same day, the OLCC also cancelled High Cascade Farms license after determining the licensee had violated 13 OLCC rules including transporting marijuana to an off-site location and intentionally misrepresenting to the OLCC what happened to the plants.

On October 26, 2018, the Oregon Bud Works agreed to surrender its license to the OLCC after committing 10 OLCC rule violations including changing the licensed premises without approval from the OLCC, failing to keep required surveillance video, and misrepresenting data in METRC.

I have spoken with several people at the OLCC recently about these developments. They all have the same message: now more than ever, it’s time to ensure compliance with the rules. The OLCC believes there has been sufficient time since legalization and the rules have rolled out for licensees to understand and abide by the rules. They are no longer willing to consider settlements that allow licensees to keep their licenses when there are multiple rule violations or especially egregious rule violations.

It unlikely that the OLCC will ever go back to reduced penalties for egregious violations or multiple violations. The agency seems less interested in teaching compliance at this point, than culling the herd. So what can you, an OLCC licensee do?

First and foremost, get familiar with the rules. Undoubtedly, the rules are expansive and overwhelming. They also change frequently. However, if you want to preserve your license, one of the most important assets you can have is a compliance person whose job it is to know the rules and ensure that your company complies at all times. On this point, make sure all of your employees are familiar with the rules, as well. The fact that an employee has a marijuana worker permit is not enough– your business is on the hook for any violation they may commit.

Second, when you have questions about whether a step or process is correct, specialized cannabis business attorneys are a great resource to assist. If you can have person dedicated to ensuring compliance and an attorney to help with interpretation when necessary, hopefully your licensed business will avoid a charging document from the OLCC. Those documents are looking more and more dangerous, and contesting them can be quite a process.

california cannabis temporary license
Hopefully, more cities are creative with this hard stop.

We recently wrote about an announcement by the California Department of Food and Agriculture (“CDFA”) that temporary license applications need to be submitted by December 1, 2018 in order to be reviewed on time for approval and issuance before December 31, 2018. To date, California Department of Public Health (“CDPH”) followed suit, but the California Bureau of Cannabis Control (“BCC”) has not. It’s safe to say that BCC applications submitted after December 1, 2018 have a low chance of being issued this year.

This is significant because after January 1, 2019, these agencies will have no legal authority to issue temporary licenses, and will not do so. After January 1, 2019, only provisional licenses will be issued, and only then to parties who hold or held temporary licenses. Parties that don’t have temporary licenses and thus cannot get provisional licenses will be stuck in the annual license logjam, which everyone knows moves at a snails’ pace. These deadlines cannot be solved with more regulations. They are from MAUCRSA and only the legislature can modify them. We wouldn’t count on that happening.

This time crunch places would-be licensees whose local applications are under review from California cities in a tough spot. As part of the state-level application process, the above-linked MAUCRSA section requires applicants to fork over “[a] copy of a valid license, permit, or other authorization, issued by a local jurisdiction”, and cities are not going to state that an applicant is approved while an application is under review.

Some cities have come up with creative solutions to this problem. The Los Angeles Department of Cannabis Regulation (“DCR”), for example, issued a release stating that it would issue to applicants from the second phase of applications (which closed a few months ago) who have paid their application fees a local letter of authorization that could be taken to the target state agency. The letter would not authorize commercial cannabis activity in Los Angeles. It would authorize an applicant to simply move into the temporary license phase, in order to eventually secure the provisional license that would eventually get them operational faster. At least one state agency, in turn, has expressed that letters from localities may be sufficient. Earlier this year, the CDPH wrote that local authorization may take the form of a “letter of acknowledgement”.

L.A. is a big city, and is swamped in applications. Our L.A. cannabis business and real estate lawyers have seen some other cities issue letters of authorization, but others that have refused. It’s not clear whether many other cities would write a letter of authorization, or what they would be willing to say. But it’s certainly worth reaching out to a city to see if they will.

cannabis marijuana scams
DON’T BE THE MOOCH.

This morning when I went to the gym before work, I put on an NPR podcast that delved into the story of the FTC’s bust of David Diamond. Diamond is an infamous Angeleno who defrauded hundreds of people via telemarketing scams. In the podcast, the interviewee does a great job of explaining the common scammer term, “mooch.” A mooch is, according to the podcast, “… someone who will essentially buy anything from anybody who calls [them] on the telephone.”

This got me thinking about the ideal marijuana mooch since so much fraud and bad behavior is rampant in the national marijuana marketplace. We’ve covered multiple marijuana scams here, here, and here (and have written about fraud and important red flags (and red herrings) in the industry multiple times in this past).

This time however, I want to dedicate this post to the top 5 red flags of which a marijuana mooch should be aware:

1.  Anyone who tells you to invest in cannabis at all costs because you might “miss the boat.”

News flash–big alcohol, big tobacco, and big pharma are not active in the U.S. cannabis space. Even though they may be thinking about it and may have future plans for it (and even if states may already creating “Big Marijuana” interests), there’s not one single U.S. cannabis company (that actually traffics in cannabis under state licensing laws) that’s tied officially or legitimately back to these big business interests. Normally, the mooch hustle is “You’re going to miss this once in a lifetime opportunity with cannabis since the bigger companies are flooding the space already, so you better invest all you have now, now, now.” Utilize your judgment to understand that this statement is not only overblown, but it’s untrue, and the source of the information is seriously suspect, even today. In any event, before you invest cannabis, which is an extremely volatile prospect, do your homework and determine whether there’s real value at the end of the elevator pitch.

2.  Marijuana penny stocks. 

Stay away from most marijuana penny stocks. As both we and the SEC keep pointing out, many (but not all) publicly traded cannabis companies are vehicles for investor fraud. As we have written before:

It almost seems that publicly traded stock companies are more focused on selling their stocks than on competing in the market. The herd mentality of investors seems to encourage this. Here’s how that basic logic works: Marijuana is booming. Therefore, marijuana businesses must be booming. In turn, all marijuana businesses must be booming. Therefore, I need to invest in a marijuana business. The only way I can easily invest in a marijuana business is to buy the stock in a publicly traded marijuana business. And so the stocks just keep booming.

All of which leads to pump and dump scams where “the group behind the scam increases the demand and trading volume in the stock and this new inflow of investors leads to a sharp rise in its price. Once the price rise has formulated, the group will sell its position to make a large short-term gain.” Pump and dump scams with publicly traded marijuana companies are still quite popular, especially as more and more states have legalized and “medicalized.”

3.  Marijuana franchises. 

Most marijuana franchise “offers” are just plain garbage because they fail to account for all of the reporting, registration, and disclosure requirements required by federal and state franchise laws and regulations. Franchising is governed by FTC and various state agency rules. Because of the state and federal law conflict with cannabis, franchising a cannabis business is a very risky proposition, and we are finding that most cannabis “franchisors” are not providing their potential “franchisees” with nearly enough risk disclosures to really inform franchisees and their investors what they’re getting themselves into at the end of the day.

4.  Marijuana reverse mergers (ESPECIALLY CANADIAN ONES).

Seems like everyone and their mother is trying to accomplish a Canadian reverse merger in the U.S. cannabis industry. Reverse mergers are a relatively fast, cheap and easy way for a private company to “go public” without having to go through all of the SEC reporting, disclosure, and registration requirements required by a standard initial public offering. Just like penny stock fraud though, reverse merger stock fraud is nothing new. In the typical reverse merger transaction, a privately operating company seeks to acquire controlling shares in an already publicly traded company with the goal of acquiring the public company’s listing. In the reverse merger scam, the underlying publicly traded company is usually just a shell company with little or no assets or positive business history. Because the underlying publicly traded shell has no assets, no real management base, and oftentimes no business at all, the whole point of these scams is to acquire investors and raise capital based on pumped-up stock statistics, prices, and claims before everything eventually goes bust. These scams tend to involve the same subset of marginal accounting and law firms that assist by securing IRS and SEC reporting delays. Like anything else, if you’re looking at acquiring stock in a reverse merger company, do your due diligence and know the red flags.

5.  Marijuana crowdfunding.

Back in May of 2015, the SEC released new crowdfunding rules designed to let the small fry swim with the sharks. As of May 16, 2016, companies were able to solicit $2,000 from anyone (and more in many cases) in exchange for an equity stake in their business. Companies can now raise up to $1 million annually through these offerings, which fall under Title III of the 2012 JOBS Act. As we have written before, the SEC does not care whether your business is a pot business, so long as you follow its offerings rules. Though the SEC’s rules for crowdfunding advertising are incredibly strict, we know there are a wind of crowdfunding cannabis companies seeking to skirt these new rules to the detriment of investors and mooches.

Don’t be the marijuana mooch! For more on cannabis scams, check out the following:

california real estate development agreement
You get what you negotiate in development agreements.

This is the third post in our three-part series on development agreements in California. In our first post we provide an overview of the use (and misuse) of development agreements in the cannabis industry. The second post breaks down the basics of development agreement laws. Here, we will discuss the key terms to include and what to watch out for when negotiating a development agreement with a public agency.

Term

As we’ve explained, California’s development agreement laws were enacted to provide assurances to developers faced with uncertainty in government approval processes for complex and long-term development projects. A development agreement should provide developers with assurances that the developer will see a return on investment by providing vested rights to engage in a particular use on a property. The rights are locked in so that if local laws change in the future (e.g., the voters or legislative body prohibit a particular use), the uses permitted in the agreement can continue for the remaining term of the agreement.

Accordingly, one of the fundamental terms of a development agreement is its duration. Commonly, development agreements in the non-cannabis context provide vested rights for a period of ten to twenty years. Properly building out a facility tailored for commercial cannabis uses may cost millions to tens of millions of dollars. If the term of a development agreement is only one to five years (as many California public agencies are proposing), a developer will not likely recoup the value of his or her investment. Imagine investing $15 million into a state-of-the-art cultivation and manufacturing facility, only to be prohibited from engaging in commercial cannabis activity one year down the road. Don’t go in for a short-term agreement!

Permitted Uses

Another key term of a development agreement is the description of permitted uses at the property. This clause should be given careful attention, and must be drafted to ensure that all of the contemplated uses of the property are explicitly spelled out. Stating “commercial cannabis activity” without referring to specific categories or license types will lead to confusion and potential problems. If the developer wants to engage in manufacturing, cultivation, and distribution, for example, then all of those uses should be described with as much specificity as possible to ensure that there is no question as to what the public agency authorized.

Many developers want to include uses that the local jurisdiction has not yet authorized. For example, a local jurisdiction may currently allow cultivation and manufacturing, but no retail use. A developer might want to engage in retail use at some point down the road, and therefore want to include retail in the permitted use clause. However, while a developer can commit to uses more restrictive than those set forth in the zoning ordinance, a development agreement may not allow uses or create exceptions to use restrictions beyond those allowed in the zoning code; to do so requires a rezoning or amendment to the zoning ordinance. Neighbors in Support of Appropriate Land Use v County of Tuolumne (2007) 157 Cal. App. 4th 997, 1015. Once the zoning code is amended, the developer can apply to amend the development agreement accordingly.

Vested Rights

Another fundamental aspect of a development agreement is the provision of vested rights to the developer. A “vested right” is a right to proceed with construction or other land use activity despite an intervening change in the law. See Avco Community Developers, Inc. v South Coast Reg’l Comm’n (1976) 17 C3d 785. Obtaining vested rights is essentially the entire point of a development agreement. However, we have seen some cities attempt to expressly prohibit developers from obtaining a vested right to engage in commercial cannabis activity. A development agreement should explicitly grant vested rights to the developer, and the vesting should not be conditioned on unreasonable or unattainable benchmarks.

Notice and Cure Period

Development agreements should provide developers with an adequate notice and cure period to enable the developer to remedy any problems and maintain its rights under the agreement before the public agency has the right to terminate. Vested rights under a development agreement are a valuable asset to the property, and developers (and their lenders, if applicable) need to have an opportunity to cure any potential defect and remain in good standing with the public agency to protect the value of the property.

Non-Mandatory

A development agreement should provide developers with the right, but not the obligation, to develop and use a property. Similarly, a development agreement should not require the developer to pay fees for a use it does not pursue. Many development agreements we have seen purport to require developers to pay fees to the public agency even when the cannabis uses are not actually pursued by the developer.

Construction Schedule

Some public agencies require developers to include a construction schedule in the development agreement. If the public agency insists on such a provision, make sure that the proposed schedule provides maximum discretion and control to the developer, is realistic and attainable, and does not penalize developer for failing to reach certain construction milestones. Construction is riddled with unforeseeable delays, which means there is a strong chance of running afoul of the development agreement terms or having to amend the development agreement if a strict construction schedule is spelled out in the agreement.


This post is not exhaustive, and you should consult with an experienced cannabis real estate attorney before negotiating a development agreement related to this highly dynamic industry in California.

oregon cannabis marijuana sisters sumpter klamath clatskanie ontario
Oregon is getting greener and greener each cycle.

Cannabis not only won big around the country on Election Day 2018, but also on a local level last week within states that had already legalized adult use marijuana, such as Oregon and California. As to Oregon in particular, a handful of cities voted to lift bans on recreational marijuana on November 6. Nearly all of them succeeded.

As we’ve previously explained, Oregon allowed cities and counties to opt out of the legal sale of recreational cannabis. Many cities and counties–particularly rural areas east of the Cascades–chose to go this route. One of the few ways cities and counties can lift the ban is through local initiatives that are presented to the voters. On November 6, some of those previously opted-out Oregon cities were able to life their bans through this process.

Ontario

Back in 2014, when Oregonians as a whole voted on the legalization of recreational cannabis use and sales, Ontario, Oregon was one of the cities that overwhelming voted against legalization. Ontario’s strong stance against the legalization of recreational marijuana allowed the city to ban the sale and production of marijuana. That all changed on November 6, 2018. According to preliminary results, the city lifted the ban with 1904 citizen voting in favor of the sale and taxation of marijuana within the city and 1450 voting against. The ban will officially lift on January 2, 2018. At that time, marijuana business owners can submit applications to the city for conditional use permits to open retail stores in the City. (Full disclosure: We worked on this initiative process.)

Klamath Falls

Similar to Ontario, Klamath Falls banned marijuana after the November 2014 statewide vote. On election night 2018, the Klamath Falls voters passed an initiative allowing recreational sale of marijuana in the city. Klamath Falls ban on recreational sales will be lifted in February 2019.

Klamath Falls faced strong opposition in an anti-pot PAC that raised more than $23,000 against the petition. Not a small measure for a local election. The surrounding county, unfortunately, is still dry.

Clatskanie

Unlike Ontario and Klamath Falls, Clatskanie citizens voted on what is known as a “referendum.” A referendum is an ordinance passed by the City Council that is put to public vote. Here, the city council of Clatskanie proposed a vote on banning marijuana businesses in the City limits. The voters made their intentions clear and struck down the ordinance—meaning the City must allow marijuana businesses within City limits. Another win.

Sumpter

Sumpter may have squeaked out a victory for recreational marijuana businesses on election night. According to the Baker City Herald, 73 persons voted no to banning marijuana businesses whereas 72 voted yes to the ban. Sumpter may be joining Klamath Falls and Ontario in the new year licensing recreational marijuana businesses. This one is incredibly close.

Sisters

Unfortunately, Sisters was unable to generate enough votes to lift the ban. Nearly 57 percent of voters in Sisters voted to keep its current ban on recreational marijuana businesses banned in the city limits. Perhaps city residents were biased after two Sisters residents were arrested on October 11 related to an illegal operation.


All in all, it was a good night for local cities. Many Oregon cities have tried and failed to lift bans in past elections, however, there seems to be a clear movement towards lifting bans in cities to allow the recreational sale of marijuana (and getting access to that growing stream of state-wide tax revenue). We here at Harris Bricken are hopeful the trend will continue, and are excited to be a part of it along the way.

BCC california cannabis marijuana
We’ve got a lot of questions for the BCC right now.

Last month, California’s regulatory agencies charged with writing commercial cannabis rules released new modifications to the final rules proposed in July. The Bureau of Cannabis Control’s (BCC) proposed modifications contained some of the most dramatic changes, including what would effectively be an outright ban on intellectual property licensing for cannabis products—something we are still trying to wrap our heads around due to the seismic effect it would have throughout the industry. The comment period is now closed on the proposed modifications, so now we must wait and see what the BCC decides to do with its final rules in the next few weeks. (To see at our law firm’s comments to BCC on this, go here.)

The proposed rule banning IP licensing agreements is the result of the BCC’s attempt to redefine what constitutes “commercial cannabis activity.” Existing California statutes—which allow the BCC to create and modify cannabis rules—already require that “all commercial cannabis activity shall be conducted between licensees.” So, if you are conducting “commercial cannabis activity” you must have a license to do so. But what truly is “commercial cannabis activity,” and where should the state draw the line?

Current state law defines “commercial cannabis activity” as “includ[ing] the cultivation, possession, manufacture, distribution, processing, storing, laboratory testing, packaging, labeling, transportation, delivery or sale of cannabis and cannabis products.” That much makes sense—activities that touch the plant or its products fall squarely within a common sense understanding of what activities should require a license from the state. But under the BCC’s new proposed rules, the following would now also constitute commercial cannabis activity:

  • Procuring or purchasing cannabis goods from a licensed cultivator or licensed manufacturer on behalf of, at the request of, or pursuant to a contract with a non-licensed person;
  • Manufacturing cannabis goods according to the specifications of a non-licensee;
  • Packaging and labeling cannabis goods under a non-licensee’s brand or according to the specifications of a non-licensee; and
  • Distributing cannabis goods for a non-licensee.

Distributing cannabis goods for an unlicensed operator seems straightforward. But for the other additions, such a broad reading of the statute would undoubtedly sweep many activities within this prohibition that in fact have little or nothing to do with actual cannabis activity. For example:

  • Some types of cannabis licensees are not prohibited from conducting certain types of non-cannabis activity (e.g. manufacturing, distributing, and selling cannabis accessories). To prohibit any of those non-cannabis contracts from having any interaction with cannabis contracts would add an unnecessary restraint on trade. Perhaps a non-licensee makes vape batteries and as part of its distribution agreement wants to require its licensed retailer partner to only purchase cannabis oil from a certain licensed manufacturer to preserve its brand integrity. Under the new rules, that would be prohibited.
  • Imagine that same battery manufacturer wanted to require that same manufacturer by contract to produce vape oil to certain specifications, to ensure the device functions as designed. Under the new rules, that would be prohibited.
  • The third point is perhaps the most concerning, as we have already discussed previously and written directly to the BCC. It means that anyone with a brand, whether they already associate it with cannabis products or not, would now be prohibited from selling licensees the right to use that brand on packaging or labels for cannabis goods. This would mean that if you want to have a brand you also have to have a license, which means you also have to be a cannabis operator of some kind. And the entity that holds the license to operate must also own the rights to the brand – holding the intellectual property in a separate entity for liability purposes would not be allowed. Such an arbitrary barrier to the use of intellectual property is an unnecessary restraint on trade.

It’s not clear exactly why the BCC believes these rule modifications are necessary or justified; it only states in its notice of modifications that it had been made aware “that licensees may be engaging in such conduct” as would now be prohibited by the new rules. It’s also unclear whether the BCC will stick with these changes or discard them based on feedback received during the comment period—only time will tell.

Earlier this year, the Washington Legislature passed House Bill 2334 (the “Bill”) into law. The Bill allows licensed marijuana producers and processors to use cannabidiol (CBD) from a source not licensed by the Washington State Liquor and Cannabis Board (LCB). The Bill defines a “CBD product” as “any product containing or consisting of cannabidiol” and would permit the use of CBD products from unlicensed sources so long as the CBD product has a THC level of 0.3 percent or less on a dry weight basis and has been lab tested. The Bill essentially allows Washington processors to add CBD from industrial hemp derived in other states into Washington marijuana products.

Washington’s regulated cannabis market is a closed loop that works on the principle that no marijuana comes in and none goes out. Everything sold in a licensed retail store is grown by licensed producer and processed into products like oils and edible by a licensed processor.

cannabis washington lcb marijuana
Start ramping up ahead of December 1.

On October 31, the LCB enacted new regulations in light of the Bill. These new rules impose some additional requirements and restrictions with regards to CBD derived from sources outside of Washington’s framework. The LCB will not allow the addition of CBD to useable marijuana flower. That means CBD additives will be limited to edibles, oils, tinctures, and other products that are derived from marijuana. Licensees will have to enter CBD products into the LCB’s traceability system, keep the records up-to-date, and the additives labeled. And licensees must also keep CBD additives quarantined from other marijuana until the CBD additives have gone through lab testing.

The LCB already requires that all marijuana and marijuana products undergo lab testing. WAC 314-55-102. CBD additives will go through additional testing under these new regulations. CBD additives that do not pass testing cannot be added to marijuana products.

In addition to the THC threshold, outside CBD must be tested for contaminants and toxins by the same accredited labs that test other marijuana and marijuana products in Washington. Licensees must submit samples of CBD additives to accredited labs. The samples must be representative of the entire product and must be one percent of the product as packaged by the manufacturer but no less that two grams. The samples must be collected in a sanitary manner, meaning the person collecting the samples must wash her hands, wear gloves, and use sanitary utensils and storage devices. Samples must be labeled with an unique identifier number, the trade name of the lab receiving the sample, the license number and tradename of the licensee, the date the sample was collected and the weight of the sample.

The CBD additives must be tested for THC to ensure that the product contains less than 0.3 percent. The additives are also tested to determine/verify the levels of THC and CBD. CBD additives must be tested for pesticides, heavy metals, residual solvents, microbiological matter, and mycotoxin.

For any questions on these new rules, give us a call. The new rules take effect December 1, 2018.

As we wrote on Tuesday, the midterm elections were monumental for cannabis: Michigan voters approved of a proposal legalizing recreational marijuana for adult use, Utah and Missouri will soon establish medical marijuana regimes, and Texas Representative and marijuana antagonist Pete Sessions lost to a Democrat.

All in all, Tuesday was a good day at the state and national level. But cannabis wasn’t just on the ballot at the state or national level—many cities had measures on that would regulate cannabis in one form or another. This post discusses some of the more impactful ballot measures that won and lost in California.

california elections cannabis marijuana

To start, dozens of cities and counties in California had cannabis taxation measures, which is a good sign for the expanding market. Oakland voters, for example, approved of Measure V, which amends the local code to allow cannabis manufacturers and cultivators to deduct the value of raw materials when calculating gross receipts for tax purposes. Fresno voters approved of Measure A, which adopts a cannabis business license tax. As noted above, numerous cities had tax measures on the ballot—and they are quite literally all over the map.

El Dorado County had a number of cannabis measures on its ballot. Measures P, Q, R, and S each passed, allowing the retail sale, delivery, distribution, and outdoor/indoor cultivation of commercial cannabis for recreational and medicinal purposes. Interestingly, El Dorado County’s Measure N (a tax measure), didn’t pass.

Los Angeles County’s well-publicized Measure B, which would have established a municipal bank, failed. This was a closely watched measure in the cannabis industry, as many had hoped for a local bank in which to bank their earnings. Because the California effort to charter a state bank has cooled, local businesses may have limited options until a federal fix occurs.

Elsewhere, the City of Malibu passed Measure G, which will now allow retail sales of commercial cannabis and deliveries. Before, Malibu only allowed medicinal sales. But wait before delivering into Malibu from other cities; you’ll need a regulatory permit from the City of Malibu to do so. No word yet on what that application process will look like.

As noted above, these are just a few of the measures that were adopted (or not) on Tuesday. California, like many other places nationally, is certainly moving toward a more open marijuana landscape.

california cannabis intellectual property licensing BCC
These proposed BCC regulations would be a mistake.

As we’ve been blogging about for the last couple of weeks, the Bureau of Cannabis Control (BCC) recently released modifications to the proposed regulations for cannabis licensees, one of which effectively prohibits all licensing, white labeling and manufacturing agreements between two parties where one of those parties is not a licensed cannabis business. In our post on this modification, we urged stakeholders to submit written comments to the BCC expressing their opposition to the rule change. We also noted that we would be submitting formal comments as a firm on behalf of our clients and are publishing those comments here. Our hope is that the BCC understands the damaging implications this rule change will have on the industry here in California, and we will be following the rule adoption process closely to see how this shakes out.

Below is the full text of our November 2 letter to BCC, minus the letterhead and signatures. We will continue to dialogue with affected parties and regulators on this crucial issue as opportunities permit. Please continue to join us in making your voices heard!


Lori Ajax, Chief
Bureau of Cannabis Control
P.O. Box 419106
Rancho Cordova, CA 95741

Re:       Comments Regarding Modifications to Text of Proposed Regulations for All Bureau Licensees §5032-Commercial Cannabis Activity

Dear Ms. Ajax,

On behalf of Harris Bricken McVay Sliwoski, LLP and our clients participating in California’s cannabis industry, we submit our comments to the Bureau of Cannabis Control’s Modifications to the Text of the Proposed Regulations for All Bureau Licensees.

Our comments are limited to Section 5032 pertaining to “commercial cannabis activity.” This section proposes to expand the definition of “commercial cannabis activity,” which may be conducted only between licensees, as follows:

  • 5032. Commercial Cannabis Activity

(a) All commercial cannabis activity shall be conducted between licensees. Retail licensees, licensed retailers and licensed microbusinesses authorized to engage in retail sales may conduct commercial cannabis activity with customers in accordance with Chapter 3 of this division.

(b) Licensees shall not conduct commercial cannabis activities on behalf of, at the request of, or pursuant to a contract with any person that is not licensed under the Act. Such prohibited commercial cannabis activities include, but are not limited to, the following:

(1) Procuring or purchasing cannabis goods from a licensed cultivator or licensed manufacturer.

(2) Manufacturing cannabis goods according to the specifications of a non-licensee.

(3) Packaging and labeling cannabis goods under a non-licensee’s brand or according to the specifications of a non-licensee.

(4) Distributing cannabis goods for a non-licensee.

In particular, we take issue with the expansion of the definition of “commercial cannabis activity” to include “Manufacturing cannabis goods according to the specifications of a non-licensee” and “Packaging and labeling cannabis goods under a non-licensee’s brand or according to the specifications of a non-licensee,” as this modification will effectively prohibit all intellectual property licensing agreements between licensees and non-licensees. We have not encountered such a prohibition in any other state in which cannabis is legalized and regulated, and we believe that this modification would stifle the industry and eliminate many, if not most, of the brands currently on dispensary shelves in California.

Intellectual property licensing agreements are utilized widely throughout virtually every industry. We have assisted clients with many licensing deals throughout the state, none of which were intended to circumvent cannabis regulations or hide ownership or financial interests. In fact, our interpretation of the “financial interest holder” rule has been that the licensor in each of these licensing deals including a royalty component where the licensor receives a share of profits or revenue from the licensee must already be disclosed to the appropriate state regulatory agency as a “financial interest holder” in a licensee.

There are many reasons why intellectual property licensing agreements make sense for a licensed operator, and why access to intellectual property beyond that owned by licensed operators benefits consumers:

  • Many licensed operators do not have the resources to develop new technologies, products, or brand identities and intellectual property licensing can provide a mechanism for expanding and improving their product offerings.
  • Many companies and individuals that own intellectual property, such as recipes, techniques, processes, and brand identities do not have the resources to obtain local and state permits or are based in jurisdictions that do not allow commercial cannabis activity. Intellectual property licensing can provide a mechanism for these companies to provide their intellectual property to licensed operators and become fully disclosed financial interest holders in those licensed operators by taking a royalty based on product sales.
  • For entities that own multiple operations, it often also makes legal sense to utilize an IP holding company (that is not a licensed entity) to hold and manage the group’s IP portfolio for the avoidance of IP ownership disputes and liabilities, among other reasons.
  • Licensed intellectual property expands the ability of licensed operators to provide a greater variety of brands and products to consumers.

Eliminating the ability of licensees to enter into intellectual property licensing deals with non-licensees harms both licensees and consumers by restricting the number of brands and products available. It also seems that the Bureau’s goals may not be well-served by this proposed rule modification due to overbreadth of its scope. The intent of Sections 5032(b)(1) and (b)(2) appears to be preventing licensed entities from conducting cannabis business operations at the behest or at the direction of unlicensed entities. The main purpose of intellectual property licensing deals is not to direct an entity how to conduct its business, but to restrict the ways in which the intellectual property may be used, and to ensure compensation to the owner for those limited uses. The proposed modification to Section 5032 casts an unnecessarily wide net that would prohibit all manufacturing, packaging, and labeling operations by a licensed operator that happen to use intellectual property owned by a non-licensed entity—a result that does not serve consumers, licensed entities, or public safety. Just as a landlord should not have to be licensed in order to lease its property to a licensed cannabis operator in exchange for rent, an owner of a brand or a recipe should not have to be licensed in order to license its intellectual property to a licensed operator in exchange for compensation.

Rather than becoming the first state to prohibit IP licensing in its cannabis regulations, we recommend that the Bureau instead amend the following rule pertaining to financial interest holder disclosure requirements to explicitly include intellectual property and manufacturing agreements where the licensor receives a royalty as disclosable to the state (proposed language emphasized):

  • 5004. Financial Interest in a Commercial Cannabis Business

(a) A financial interest means an agreement to receive a portion of the profits of a commercial cannabis business, an investment into a commercial cannabis business, a loan provided to a commercial cannabis business, or any other equity interest in a commercial cannabis business except as provided in subsection (c) (d) of this section. For the purpose of this section, an interest in a diversified mutual fund, blind trust, or similar instrument is not a financial interest. For purposes of this division, an agreement to receive a portion of the profits includes, but is not limited to, the following individuals:

(1) An employee who has entered into a profit share plan with the commercial cannabis business.

(2) A landlord who has entered into a lease agreement with the commercial cannabis business for a share of the profits.

(3) A consultant who is providing services to the commercial cannabis business for a share of the profits.

(4) A person acting as an agent, such as an accountant or attorney, for the commercial cannabis business for a share of the profits.

(5) A broker who is engaging in activities for the commercial cannabis business for a share of the profits.

(6) A salesperson who earns a commission.

(7) A non-licensed entity that has entered into an intellectual property licensing agreement or manufacturing agreement with a commercial cannabis business for a share of the profits.

From an ownership and financial interest holder perspective, intellectual property and manufacturing agreements are no different than any of the arrangements already referenced in Section 5004 where a non-licensee receives a share of profits from a licensed entity. Intellectual property and manufacturing agreements that stipulate that all commercial cannabis activity shall be carried out solely by a licensed operator and that the non-licensee shall have no control over the licensed entity should not be treated any differently than leases, consulting agreements or any other agreement in which a non-licensee receives a royalty.

If the Bureau is instead concerned with the contents of these intellectual property licensing and manufacturing agreements, we recommend requiring disclosure of the agreements to the state, rather than prohibiting them altogether or requiring the licensor to secure onerous local approval and eventual state licensing for a commercial cannabis license they never intend to actually use. Washington State, for example, which has some of the strictest regulations pertaining to ownership and financial interests in cannabis businesses in the country, requires that licensors entitled to a royalty in a licensing agreement be disclosed to and vetted by the Washington State Liquor and Cannabis Board (WSLCB), and that the licensing agreement itself be disclosed to and reviewed by the WSLCB.[1]

We appreciate the opportunity to provide these comments to the Bureau’s proposed modifications to the text of the proposed regulations for all Bureau licensees and would be happy to engage in a dialogue to identify a means for regulating these types of business deals without causing significant harm to the industry and to consumers. If you have any questions, please contact Alison Malsbury at alison@harrisbricken.com or Hilary Bricken at hilary@harrisbricken.com.

[1]RCW 69.50.395.


Let’s hope that the Bureau considers these and other comments thoughtfully and seriously as California continues to build out its cannabis program architecture. We will keep you posted.