california tax marijuana
Your standard CDTFA qualified cannabis tractor.

California cannabis businesses are now acquiring temporary permits to enter the new cannabis marketplace made possible under MAURSCA. As part of that process, all cannabis businesses have been introduced to the California Department of Fee and Tax Administration (“CDTFA”), the agency tasked with administering the new cannabis cultivation taxes and sales tax.

The CDTFA administers sales tax exemptions on purchases of certain farm equipment and agriculture products. These exemptions are available to cultivators, processors and manufacturers. California sales tax rates are high – ranging from 7.25% to 10.25% of the sales price. Sales tax savings go directly to the bottom-line and a business could save up to $1,025 on every $10,000 invested in eligible supplies and equipment.

This post provides a quick outline of California sales tax exemptions available to cultivators. A second post will cover licensed processors and manufactures.

Seeds and Plants

The sale of seeds and plants are exempt from sales tax so long as the purchaser uses those seeds and plants to create products sold in the regular course of business. Plants include “cuttings of every variety”. Consequently, a cultivator should be able to purchase clones and plants exempt from sales tax. To document the exemption, a cultivator must give a seller an exemption certificate.

Fertilizers

The sale of certain fertilizers is exempt from sales tax so long as the fertilizer is applied to land or in “foliar application” where the products of such plants (i.e., cannabis) are sold in the regular course of business. Only very specific types of fertilizers and nutrients qualify and the definitions are highly technical. For example, “commercial fertilizer”  and “agricultural minerals” qualify. These substances generally contain combinations of nitrogen, phosphoric acid and potash under 5%. On the other hand, “packaged soil amendments” (i.e., hay, straw, peat moss) do not qualify. To document the exemption, a cultivator must give a seller an exemption certificate.

Farm Equipment and Machinery

As a rule, the sale of farm equipment and machinery is taxable. However, the purchase of certain farm equipment and machinery is partially exempt from sales tax. The partial exemption is currently 5% of the sales price. For example, the sales tax rate on the purchase of eligible equipment in Arcata is 3.5% (8.5%-5.0%); resulting in a $500 savings on the purchase of $10,000 worth of equipment.

Three requirements must be met to take the credit. The first and most problematic requirement, is that the purchaser’s business must fall within specific federal SIC codes.  SIC codes are created by the federal government to track statistical information on U.S. businesses. Because cannabis is illegal under federal law, no specific SIC code is currently available for the sale of consumable cannabis. Nonetheless, a cultivator may argue that their business operation meets this requirement because it is included in the general farm category of SIC 0191.

The second requirement is that the equipment should be used at least 50% or more in harvesting agricultural product. The third, requirement is that the equipment should be farm equipment and machinery as defined under regulations. The regulations broadly define farm equipment and machinery. The CDTFA has identified the following equipment as qualifying for the exemption:

  • Planting equipment;
  • Trimming Tools;
  • Drying racks and trays;
  • Grow tents and lights;
  • Environmental controls;
  • Hydroponic equipment;
  • Irrigation equipment;
  • Hand tools;
  • Repair and replacement parts;
  • Wind machines.

Vehicles that are designed to be used exclusively on roads and highways, such as pick-up trucks, do not qualify. To document the exemption, a cultivator must give a seller an exemption certificate, Form CDTFA-230-D.

Buildings for Raising Plants

Certain buildings are considered farm equipment for purposes of the farm equipment and machinery exemption discussed above. Generally, they must be single purpose structures and do not include structures used for storage or administrative purposes.  The buildings must:

  • Be specifically designed for commercially raising plants;
  • Used exclusively for that purpose.

For example, a greenhouse would generally qualify. To document the exemption, a cultivator must give the seller an exemption certificate, Form CDTFA 230-D.

Solar Power Facilities

A business that otherwise qualifies for the farm equipment partial exemption, may purchase certain solar equipment at the reduced sales tax rate.

In general, solar power equipment used at least 50% in the production of cannabis would qualify for the farm equipment and machinery partial exemption. Solar power equipment may qualify even if the equipment is tied to the local power grid.

For example, a solar facility producing a total 1000 kw of electricity per year would qualify so long as at least 500 kw per year was used to power the cultivator’s farm equipment and machinery. Note that in this example, the cultivator could sell on the open market the excess 500kw of electricity. Potentially, the cultivator can deduct on its federal income tax return all expenses related to this separate power distribution business.

Diesel Fuel Used in Farming

The purchase of diesel fuel is generally subject to sales tax; however, a partial exemption from sales tax of 5.0% applies to the purchases of diesel fuel used in farming activity or in transporting product to a manufacturer or a distributor. The computation for this sales tax exemption is the same as for the exemption for farm machinery and equipment. To obtain the partial exemption, a cultivator must present to the seller an exemption certificate, Form CDTFA-230-G.

Furthermore, California imposes a $0.36 per gallon excise tax the sale of diesel fuel. However, a cultivator may purchase diesel fuel used to power farm equipment exempt from the diesel fuel excise tax. To obtain the exemption, a cultivator must present to the seller an exemption certificate, Form CDTFA-608 REV.

Liquid Propane Gas Used in Farming

Sales of liquid propane gas used to operate machinery used in farming or harvesting are fully exempt from sales tax. To obtain the full exemption, a cultivator must present to the seller an exemption certificate, Form CDTFA 230-N REV.

Conclusion

As cultivators make capital investments in their cannabis operations, they have an opportunity reduce the amount of sales tax they pay on their purchase of certain consumables and high-ticket items. These exemptions provide bottom-line savings; however, the CDTFA strictly enforces compliance in this area. Accordingly, cultivators should keep meticulous books and records and ensure that they issue completed exemption certificates on these purchases, and check in with a qualified CPA or tax lawyer with any questions.

culver city california cannabis marijuana
Adult use cannabis stores, coming soon.

On December 11, 2017, Culver City Council voted to approve an ordinance that allows for the establishment of medicinal and recreational commercial cannabis businesses. Culver City becomes the fourth city in Los Angeles (including West Hollywood, Los Angeles, and Maywood) to implement a framework for regulating both medical and adult-use cannabis.

Since January 1 and the legalization of adult-use cannabis in California, clients have been asking us constantly about licensing their businesses. As we have explained time and again, getting local approval is paramount before getting a state license.

Here is how the rest of Los Angeles County currently looks:

  • The City of Los Angeles is only accepting Prop M Priority Applications until at least March 4, 2018. The city has stated that applications for the general public probably will not be available until mid-2018.
  • West Hollywood has been processing applications, but the city is known for having high rents and minimal property space.
  • Maywood is one of the smallest incorporated cities in Los Angeles County. Although they allow commercial cannabis businesses, there is not a lot of space to establish one.

Culver City expects to have an application process open soon, sometime during the first quarter of 2018. The ordinance allows for the establishment of storefront retail, delivery only retail, manufacturing, distribution, laboratory testing, and indoor commercial cultivation. There will be limits placed on the number of permits issued for each type of business, so it will be important to be ready once the application process opens. The city expects that getting a storefront retail business permit will be competitive.

The ordinance additionally lays out strict standards for business permits. A commercial cannabis business permit is not transferable to other persons, projects, or locations. Businesses will not be able to relocate unless approved by the City Council. The ordinance also sets forth rules for changing ownership and changing the form of the entity. These types of things will be important to get organized before applying for a commercial cannabis business permit in Culver City.

Located in the heart of West LA and easily accessible by many major freeways, Culver City offers a great alternative to those seeking business licenses in the City of Los Angeles. Anyone interested should continue to monitor closely, and be ready to move quickly.

The U.S. cannabis industry employed roughly 165,000 workers as of last summer. By 2020 that number is expected to jump to 250,000 employees, which is more jobs than the expected jobs from manufacturing, utilities or governments sectors. It is no wonder that we have seen a significant uptick in cannabis industry employment claims over the past year or so in our Washington and Oregon offices. These claims can be very difficult to deal with for a business without basic employment safeguards, like a handbook and conscientious employment practices.

We have written two previous posts in this series on how to protect your marijuana business from the bad acts of your employees. You can find them here (negligent hiring and retention) and here (hostile work environment / harassment).  Today, we expand on the latter topic, providing some advice on how to investigate harassment claims.

employment cannabis marijuana
Investigating sexual harassment claims is critical. Pipe and magnifier, optional.

Ideally, sexual harassment would not occur in any business or professional seeing. Unfortunately, it does, and it is important your cannabis business is ready to properly investigate a sexual harassment claim when it arises. As previously discussed, a proper complaint procedure and investigation is important not only for legal protection against sexual harassment claims, but also to enhance your company’s credibility.

But how should an investigation be completed? While every investigation will be unique given the unique complaints and individuals involved, the procedures outlined below are good starting points to incorporate into your employee handbook and company practices, as appopriate.

Written Complaint

An employee may provide either a written or verbal complaint to the person designated in your sexual harassment policy. If the complaint was given verbally, the employer should request a detailed written complaint from the accuser. The complaint should include the name of the employee, the name of the accused, the unwanted actions by the accuser, the date, time and place of the actions, and any witnesses. If the original complaint was written, ensure it includes sufficient details to begin an investigation. A request for additional information should always come with an assurance of confidentiality and that the information will only be used for the purpose of investigating the complaint.

Assign an Investigator

After a complaint is received, an investigator should be assigned. A good investigator will objectively investigate the complaint without bias. Sometimes the investigator can be an existing employee of the company, such as a human resources manager or person previously designated as an investigator of sexual harassment complaints. Sometimes, in smaller cannabis companies, there simply is not an available existing employee that is able to objectively investigate the complaint. When that is the case, a neutral third-party investigator such as an attorney or a human resources specialist should be used. No matter what investigator you use, you must be able to trust their ability to keep the investigation and all employee information confidential.

Interviews

An investigator should plan on interviewing the accuser, the accused, and any witnesses as soon as possible. Typically the employee should be interviewed first, followed by the accused and witnesses. Interview questions should be planned before the interviews begin and be based on the written complaint. The EEOC provides a list of suggested interview questions (Section V). Interview questions may need to be revised following the interviews and the investigator should be allowed to interview employees multiple times as more information is revealed. The interviewer should record the interviews and draft detailed notes of findings after each interview such as inconsistent statements and credibility.

Obtain Evidence

The investigator should be allowed access to the accuser and the accused’s personnel files. Further, the investigator should obtain any documentation of the harassment from the accuser, accused or witnesses. Examples of documentation may include voicemails, texts, emails, photos, or video surveillance.

Evaluate all the information

The investigator should refrain from making a decision based on any one piece of information. The investigator should evaluate all avilable information once the interviews are completed and all evidence is obtained. The investigator should prepare a written report of findings and whether the accused violated any company policies or committed harassment. The written findings should include support for the conclusions.

Make a Decision 

Sometimes the investigator has decision making power for the employer. Other times, for instance, if you hired a third-party investigator, the investigator does not have that power. Regardless, the investigators findings should be used to determine if corrective action is appropriate and if so, what that corrective action should be. Corrective action can include requiring the accused to take training classes, suspension, and even termination.

Follow-Up

The investigator’s findings should be shared with both the accuser and the accused. The employer should also follow up with the accuser regarding the investigation process to determine if the accuser felt the investigation was thorough and unbiased. Following up with the employee can provide a couple of benefits. First, if the accuser has remaining concerns, you can address them. Second, feed back from the employee can lead to more thorough investigations later.

Document, Document, Document

The most important part of any sexual harassment investigation is documentation. Every sexual harassment complaint could turn into legal action in court. It is important to document everything in a sexual harassment investigation and complaint procedure. Documentation will provide evidence of the steps taken to investigate and remedy the situation. It will also prove you took the situation seriously and provide a basis for any actions taken as a result of the investigation.

Properly managing marijuana supply is the single most challenging aspect of state-level marijuana regulation. In an op-ed published January 12th in the Oregonian, Billy Williams, U.S. Attorney for the federal district that encompasses Oregon wrote about what he calls Oregon’s “massive overproduction problem.” According to Williams, postal agents in Oregon seized 2,644 pounds of marijuana in outbound parcels in 2017 alone. Decreasing wholesale prices in Washington and Colorado indicate oversupply as well based on the inverse correlation between supply and price. We hear anecdotes in Washington all the time from marijuana producers that are finding it more and more challenging to survive with the current market prices.

If this were any other market, data points indicating falling prices and oversupply would be wholly unremarkable. Free markets tend to find an equilibrium point between supply and demand that support relatively stable wholesale and retail prices. Free markets also tend to self-correct, if given the opportunity to do so. If businesses in a market are all extremely profitable, new firms are induced to enter the market. The entry of those new firms tends to increase competition and decrease profits across the board, signaling to other would-be market participants not to enter. Similarly, if things are not going well and competitors exit the market, surviving businesses are given a little bit more room to maneuver and succeed.

cannabis marijuana supply
Managing cannabis supply is a tightrope for state regulators.

But standard markets differ from cannabis markets. They have a longer history from which to draw conclusions and base expectations. The legal cannabis markets in Washington and Colorado didn’t really start until 2014. It is challenging to determine what effects outside forces have on those markets when there isn’t historical data to draw on. How elastic are cannabis markets– meaning, how price-sensitive are they? We are learning a lot now, but the cannabis data we have pales in comparison to, for example, the alcohol market with data going back to prohibition.

The cannabis market’s short life span can also explain why market participants often act differently than one might expect. People investing in the cannabis market see it as a once-in-a-lifetime opportunity to get in on the ground floor of something. Whether it’s the original dotcom bubble, bitcoin, or marijuana, new markets create hope of potentially boundless returns. Because of that hope, firms tend to stick around longer than one might expect — you don’t want to be the person that exited the industry right before it took off and made everyone in it a billion dollars.

And that hope is part of the reason that oversupply issues exist in legal marijuana states. Oversupply by itself wouldn’t be a problem if not for cannabis’s federal illegality. Because even in the cannabis market, forces will eventually correct oversupply and get us to equilibrium. Companies aren’t going to stay in business losing money year after year into eternity. But whereas other markets get the benefit of time to find that equilibrium, cannabis oversupply issues bring threats of federal enforcement. If there is too much supply in the legal market, the incentives remain for certain unscrupulous and desperate cannabis businesses to cut their losses and sell their overage in the black market.

Which brings us back to state regulations. If we could have had Eric Holder as attorney general for ten more years, the Department of Justice may have understood that legal cannabis markets need time to adjust, and that the adjustment period would be occasionally rocky. But under Jeff Sessions and the U.S. Attorneys that share his views, these periods of market adjustment provide ample opportunity to criticize state cannabis programs and claim that federal law enforcement is necessary due to black market leakage.

Ending the cannabis black market is the one shared goal that prohibitionists and legalization proponents have in common. No one thinks that empowering an underground illegal cannabis market is a good idea. But if states move too far in controlling supply because they are worried about black market leakage inviting in federal law enforcement, legal cannabis prices will rise too high within those states. And those high prices will incentivize black markets to continue selling outside the eye of any state regulatory system.

This tightrope is why managing supply is such a tough nut to crack for state regulators. If U.S. Attorneys and the Department of Justice really want to see the end of cannabis sales in black markets, though, they will provide room for the legal markets to stabilize and find their natural supply, demand, and price points on their own.

washington marijuana cannabis
Will she or won’t she?

Jeff Sessions’ decision to rescind Obama-era guidance on the Department of Justice’s approach to marijuana enforcement was troubling for the cannabis industry. The “Sessions Memo”  withdrew earlier marijuana-specific guidance memoranda and directed US attorneys to decide which marijuana activities to prosecute “with the Department’s finite resources,” based on well-established principles that govern all federal prosecutions including, “the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.”

The Sessions Memo does not provide much additional insight as to what prosecutors should look for in determining what marijuana crimes to target. In lieu of such guidelines, it is important that stakeholders in the cannabis industry familiarize themselves with the US Attorney in their district. This post is focused on Annette Hayes, the US Attorney for the Western District of Washington.

On January 4, Hayes issued the following statement regarding the Sessions Memo:

Today the Attorney General reiterated his confidence in the basic principles that guide the discretion of all U.S. Attorneys around the country, and directed that those principles shepherd enforcement of federal law regarding marijuana.  He also emphasized his belief that U.S. Attorneys are in the best position to address public safety in their districts, and address the crime control problems that are pressing in their communities.  Those principles have always been at the core of what the United States Attorney’s Office for Western Washington has done – across all threats to public safety, including those relating to marijuana.  As a result, we have investigated and prosecuted over many years cases involving organized crime, violent and gun threats, and financial crimes related to marijuana.  We will continue to do so to ensure – consistent with the most recent guidance from the Department – that our enforcement efforts with our federal, state, local and tribal partners focus on those who pose the greatest safety risk to the people and communities we serve.

This short paragraph indicates that Hayes’ office will focus on threats to public safety, as it has for the past few years, and will act in a manner “consistent with the most recent guidance from the Department.” This statement is fairly vague and does not give a strong indication as to how Hayes will act in light of the Sessions Memo. To better understand Hayes’ opinions on cannabis, we can turn to her career as a prosecutor.

Hayes joined the U.S. Attorney’s Office in 1997 as an Assistant United States Attorney in the Criminal Division. Early in her career she was assigned drug cases including large-scale, international trafficking and cartel-related cases. In 2002, she became the Deputy Supervisor of the Complex Crimes Unit where she prosecuted cyber hacking and intellectual property cases.  In 2005, she became one of the supervisors of the General Crimes Unit, focusing on a range of federal crimes including child exploitation, drug, fraud, identity theft, immigration and violent crimes cases. Hayes took over for Jenny Durkan (Seattle’s current mayor) as the Acting US Attorney for the Western District of Washington in October 2014.

As she moved up the ranks, Hayes has not focused solely on drug crimes. Since taking over as US Attorney for the Western District of Washington, Hayes’ office has focused on marijuana cases involving acts of violence or the distribution of other drugs, like methamphetamine. I uncovered no examples of Hayes’ office prosecuting a licensed marijuana business. The following are some of the key marijuana-focused cases prosecuted in western Washington under Hayes:

  1. Illegal BHO Operation in Bellevue. In June 2015, Hayes announced that David Shultz had been sentenced to nine years in prison after causing a fire in a Bellevue apartment complex while manufacturing Butane Hash Oil (BHO). A man was killed as a result of the fire and several others were injured. The incident occurred in November 2013 and Hayes took over this case after replacing Durkan. Mr. Shultz was operating squarely outside of Washington’s regulatory framework.
  2. IRS Fraud. In May 2016, Hayes announced that former IRS agent Paul Hurley would serve 30 months in prison for soliciting and then accepting a bribe while auditing Have a Heart. Have a Heart worked with the FBI and local law enforcement to document the events leading to Mr. Hurley’s arrest and conviction. Have a Heart is a licensed retailer but did not face charges relating to this incident.
  3. Unlicensed Medical Marijuana. In June 2016, Hayes announced that Lance Gloor would serve a ten-year sentence for drug trafficking. Gloor owned several medical marijuana dispensaries. In 2010, police officers obtained a warrant to search Gloor’s home and found over 70 marijuana plants and a firearm. While awaiting charges in state court, Gloor allegedly opened four marijuana dispensaries in the Puget Sound area. During his trial,  the court ruled that Gloor violated court orders by contacting witnesses. In announcing the conviction and sentence, Hayes stated, “[d]espite repeated notice that his marijuana business was illegal under state and federal law, he continued to use lies, threats and intimidation to try to cover his tracks and make as much money as he could.” The court found that Gloor was not operating in compliance with state law and he did not have a license to produce, process, or sell marijuana from the Washington State Liquor and Cannabis Board.
  4. SPD Marijuana Diversion. In May 2017, Hayes announced the arrest of four Seattle Police Officers on conspiracy charges related to the delivery of hundreds of pounds of marijuana from Seattle to Baltimore. Alex Chapackdee, a 16-year veteran of SPD, was the alleged ringleader who also drove across the country to deliver marijuana on several occasions. This case is ongoing and the individuals involved have not yet been convicted.

Overall, Hayes does not appear to have the same zealous opposition to cannabis as Jeff Sessions. However, she has pursued marijuana cases that involved individuals who operated outside of Washington’s regulatory framework.  Hayes, like all of us, has relied on the Cole Memo for the last four years and is likely re-evaluating how her office will deal with marijuana in Washington. Under the Sessions Memo, we could see Hayes take a tougher approach to cannabis but her history of prosecuting marijuana crimes appears to indicate that she is not inclined to target licensed businesses.

california cannabis marijuana
Roll up that California collective and get a license.

This week, the Bureau of Cannabis Control (the “BCC”) announced that as of January 9, 2019, Section 11362.775 of the Health and Safety Code (the “Code”) will no longer be in effect. The BCC notice ends the popular collective and cooperative models of cannabis cultivation, manufacturing and distribution in California. These models were promulgated through the use of “creative” legal advice in order to take advantage of the Compassionate Use Act’s multiple loopholes and ambiguities, and usually involved patients joining a “closed loop” membership system (sometimes a formal corporate entity and sometimes not) to receive medical cannabis from other patients in the collective who grow or process it for them.

California’s transition into a regulated commercial cannabis system left many operators, particularly those with non-profit mutual benefit corporations structured as collectives or cooperatives, uncertain as to just how much time they have left to operate. We’ve encountered some operators who, for a variety of reasons including the time and expense of the process, or their inability to comply with local zoning requirements at their current location, are reluctant to abandon the collective model in favor of receiving a state license under MAUCRSA.

Unfortunately, these operators will have no choice but to join the regulated system, and there are a laundry list of reasons why it makes sense to do that sooner rather than later. Given the recent dismantling of the federal government’s former cannabis enforcement framework, operators will be opening themselves up to much greater risk if they are choosing to operate outside of the state’s licensing framework. U.S. Attorneys now have full discretion to determine to what extent they can and should enforce federal law in the context of marijuana crimes, and we would be willing to bet that California’s U.S. Attorneys won’t be turning a blind eye to cannabis businesses that continue to operate in contravention of local law, or without a state license.

Following the implementation of MAUCRSA, qualified patients and their caregivers may continue to operate with limited criminal immunity without a state license, so long as: (1) the patients and caregivers operate in full compliance with state law, and (2) the local government does not prohibit the activity. See, H&S Code sections 11362.5, 11362.765, 11362.77, and 11362.7. But as we stated above, immunities for medical cannabis collectives (i.e., non-profit mutual benefit corporations, non-profit corporations, non-profit cooperatives, etc.) will expire on January 9th of next year.

And although MAUCRSA expressly exempts qualified patients and caregivers from licensure requirements, it does not allow qualified patients, their caregivers, or cannabis businesses to conduct commercial cannabis activity without a license. Any collective currently engaging in commercial cannabis activity that exceeds the strict qualified patient and primary caregiver limits is in violation of MAUCRSA and is operating illegally.

As a reminder, to be immune from prosecution under the Compassionate Use Act and MAUCRSA, a primary caregiver (or a collective) must operate within the following confines when acting without a state license:

  1. Cultivation, possession, storage, manufacture, transportation, donation, or provision of cannabis must be exclusively for the personal medical purposes of no more than five specified qualified patients for whom the caregiver is the primary caregiver. (B&P section 26033(b));
  2. The caregiver cannot receive remuneration for these activities other than for actual expenses, including reasonable compensation incurred for services provided to an eligible qualified patient or person with an identification card to enable that person to use cannabis, or for payment for out-of-pocket expenses incurred in providing those services. (B&P section 26033(b), H&S Code section 11362.765(c));
  3. The caregiver cannot possess more than eight ounces of dried cannabis per qualified patient unless a physician’s recommendation or local guidelines allow amounts in excess of this limit. (H&S Code section 11362.77(a)-(c)); and
  4. The caregiver cannot maintain more than six mature or twelve immature cannabis plants per qualified patient unless a physician’s recommendation or local guidelines allow amounts in excess of this limit. (H&S Code section 11362.77(a)-(c)).

In addition, everyone, including collectives and caregivers, must still comply with applicable local law. And collectives and cooperatives that opt not to apply for a state license right away will be limited in their ability to distribute their product. The bottom line is that commercial cannabis activity is only permitted among licensees, and once a business entity or individual receives and active temporary license or a full license from the state, they must immediately cease doing business with non-licensed entities, or they risk losing their license. See B&P section 26053(a). And for those licensees looking to “have their cake and eat it too” by obtaining a state license while maintaining a collective or cooperative, keeping that non-licensed entity will put the state license at risk.

With local license caps quickly being reached, stringent legal limitations on collectives and cooperatives, and an uncertain federal enforcement landscape, we cannot emphasize enough the importance of integrating into the regulated state system as soon as possible. Holding on to the collective model through the next year will make that transition much more difficult, and perhaps even impossible.

cannabis marijuana intellectual property
It can be tough to decipher who owns your cannabis business IP, if you don’t write it down.

An important question for any cannabis business is: who owns the company’s intellectual property (IP)? The easy way to answer this question is to work it out before any dispute. The much, much harder way is to litigate. As noted in a famous oil filter commercial, “You can pay me a little now. Or you can pay him a lot later!”

The two most common situations where IP ownership disputes arise in a marijuana business are between the owners of a company, and between the company and its employees. Here are some tips on how to handle each situation.

IP ownership in an entity: IP is a capital asset of a cannabis company, and like all other capital assets, e.g., grow equipment, real property, office furniture, software, etc., should be owned by the cannabis company itself, as provided in the entity operating agreement. Issues can occur, however, when the entity wants to use IP that is already owned by a member/owner of the entity.

In particular, many operating agreements provide that a member contributes her IP as initial capital. There is nothing wrong with this, in theory. Intellectual property, like real property or other assets, can be contributed as capital provided that the operating agreement properly values and accounts for the asset. But problems can occur when the operating agreement does not legally transfer title in the IP to the entity. In such a situation, the “contribution” may be more like a license, which can be revoked. If the contributed IP is the primary brand name of the company, this could give the contributing shareholder undue leverage if she wants to withdraw from the entity after the company has built equity in the brand name. A significant number of operating agreements do not properly transfer title to the trademarks, copyrights, or patents that are being contributed. Without the appropriate transfer, this is a time bomb waiting to explode, in a courtroom near you.

IP ownership of employee creations: The conventional wisdom is that everything that is created by a company’s workers automatically belongs to the company as “work for hire.” While there is a federal copyright statute that refers to works for hire, the rules are much narrower than conventional wisdom suggests. This often causes conflicts between employers and employees about patents and copyrights, which in turn lead to litigation.

There is an easy way to avoid the work-for-hire minefield, called an employee IP agreement (“EIA”). An EIA is a written agreement that defines which creations are the employee’s, and which are the employer’s. For example, where a new employee has already created IP before her employment, the EIA could provide that the employee retains title to all disclosed preexisting IP, but is required to assign any future IP created in the scope of her work to the employer. EIAs also often address creations done outside of the workplace or outside of the scope of employment, and may provide for invention bonuses or other incentives. The key is that the EIA allows the parties to define their ownership of worker creations, without having to rely on the limited default rules that exist in federal and some state law.

***

IP ownership agreements: don’t leave the dispensary without one! For parts 1 – 3 of this series, check out the following:

Marijuana Cultivation Los Angeles
It’s no easy calculation in Los Angeles when it comes to cannabis cultivation.

When the City of Los Angeles passed its ordinances allowing commercial cannabis businesses, the City placed limits on the total amount of licenses available in each community for each license category, based on “undue concentration.” The City made it easy to understand the “soft caps” for most of the licensing categories. For each neighborhood’s retailers (Type 10), microbusinesses (Type 12), and manufactures (Type 7) –the ratio is one license per 10,000, 7,500, and 7,500 residents, respectively. The City has even provided the exact number of licenses available on its Commercial Cannabis License Capacity Chart (“License Capacity Chart”), here.

However, the cultivation license limits are more difficult to understand. Here is how the city defines cultivation limits for Undue Concentration:

a ratio of 1 square foot of cultivated area for every 350 square feet of land zoned M1, M2, M3, MR1, and MR2 with a maximum aggregate of 100,000 square feet of cultivated area and a maximum aggregate number of 15 Licenses at a ratio of one License for every 2,500 square feet of allowable cultivated area for Cultivation (Types 1A, 1C, 2A, 3A, 4 and 5A).

After careful examination of this definition, here’s what we think the City means to do with undue concentration and available plant canopy:

On the License Capacity Chart, if you take the Total Square Feet of a given neighborhood and divide that number by 350 square feet, the result is the listed as “Cultivation + Microbusiness (with cultivation)”. For example, Harbor Gateway has 43,982,470 total square feet, which means that Harbor Gateway has about 125,664 total square feet of eligible canopy (43,982,470/350=125,664).

There can also only be 1 license for every 2,500 square feet of allowable cultivated area. Sticking with the Harbor Gateway example, 125,664 eligible square feet divided by 2,500 equals 50 potential licenses, max. However, that number assumes that all licensees will have grows no larger than 2,500 square feet, which probably isn’t the case. To that end, the City informs us that cultivation licenses will be processed on a first come, first serve basis.

The rules also stipulate a maximum of 100,000 square feet and a maximum of 15 licenses, but it is unclear whether these maximums apply to the neighborhood as a whole or to the individual licensee (who could stack up small cultivation licenses to secure 100,000 feet of canopy in aggregate). However, the initial total calculation of the eligible canopy area would be irrelevant for multiple communities if there was a maximum of 100,000 square feet total for that community. Therefore, we can assume that the 100,000 square feet should be applied per individual license, with no one person or entity holding more than 15 cultivation licenses within a given community.

All of that said, the key question remains: How many square feet can I apply for in my application? The ultimate answer is that “it depends.” No matter how much available canopy space there is in a community, the situation depends on factors like how many people apply for cultivation space, how much space each person applies for, how much space the City will grant, etc. We do know that as the City of Los Angeles grants licenses, the Undue Concentration license soft caps will become clearer.

For now, here’s a chart (with approximate numbers) to summarize how many licenses per community we will most likely see:

Community Plan Area

Square Feet of Canopy

Maximum Amount of Licenses (Actual*)

Average Canopy Space**

(sq. ft.)

Arleta – Pacoima

63,309

15 (25)

4,220

Bel Air – Beverly Crest

N/A

0

0

Boyle Heights

97,034

15 (38)

6,468

Brentwood – Pacific Palisades

N/A

0

0

Canoga Park – Winnetka – Woodland Hills – West Hills

22,392

8

2,799

Central City

72,563

15 (29)

4,837

Central City North

98,647

15 (39)

6,576

Chatsworth – Porter Ranch

169,165

15 (67)

11,277

Encino – Tarzana

2,422

1

2,422

Granada Hills – Knollwood

48,254

15 (19)

3,216

Harbor Gateway

125,664

15 (50)

8,377

Hollywood

20,825

8

2,603

LAX

N/A

0

0

Mission Hills – Panorama City – North Hills

38,553

15

2,570

North Hollywood – Valley Village

47,735

15 (19)

3,182

Northeast Los Angeles

100,725

15 (40)

6,715

Northridge

18,331

7

2,618

Palms – Mar Vista – Del Rey

33,528

13

2,579

Port of Los Angeles

N/A

0

0

Reseda – West Van Nuys

127,800

15 (51)

8,520

San Pedro

29,633

11

2,693

Sherman Oaks – Studio City – Toluca Lake – Cahuenga Pass

4,807

1

4,807

Silver Lake – Echo Park – Elysian Valley

3,028

1

3,028

South Los Angeles

16,453

6

2,742

Southeast Los Angeles

168,657

15 (67)

11,243

Sun Valley – La Tuna Canyon

222,321

15 (88)

14,821

Sunland – Tujunga – Lake View Terrace – Shadow Hills – East LA Tuna Canyon

2,291

1

2,291

Sylmar

66,600

15 (26)

4,440

Van Nuys – North Sherman Oaks

62,941

15 (25)

4,196

Venice

4,955

1

4,955

West Adams – Baldwin Hills – Lelmert

13,477

5

2,695

West Los Angeles

26,300

10

2,630

Westchester – Playa del Rey

34,770

13

2,674

Westlake

1,560

1

1,560

Westwood

N/A

0

0

Wilmington – Harbor City

248,428

15 (99)

16,561

Wilshire

4,284

1

4,284

*Actual maximum amount of licenses available if the City does not cap at 15 licenses.

**Average canopy space assumes that City will allow the maximum amount of licenses, and that each applicant will apply for an equal amount of canopy space.

The OLCC has made some changes to canopy sizes that seem to target outdoor growers.

In the two previous entries in this series (here and here), we discussed the packet of rules amendments recently adopted by the Oregon Liquor Control Commission (“OLCC”) to implement the many cannabis bills passed by Oregon last year. Specifically, we discussed a new rule allowing Marijuana Promotional Events, and a small amendment to the definition of “financial interest” that will have a big impact. Today we want to talk about some important changes to canopy sizes.

Before discussing the specific changes, it is important to note that these rules amendments were adopted in an uncertain time in Oregon’s recreational market. As we have noted before, prices for outdoor flower appear to be falling quickly and many producers have contacted our office about the possibility of pushing the OLCC to limit producer licenses, or enact a moratorium on new licenses. (Note: As of January 8, there were 896 active producer licensees in Oregon, with about 1,000 more in the queue). The reality is that the OLCC does not have statutory authority to either limit licenses or enact a moratorium. Only the legislature can make this kind of change, and we think that it is unlikely that it will be considered in the upcoming short session. Unlimited licenses will be the law of the land for the foreseeable future.

While the OLCC may not be able to limit licenses, it does have the authority to set canopy sizes, i.e. the size of the allowed cultivation area for each producer tier. Obviously, while existing producers may favor a moratorium on new licenses, they certainly don’t want a reduction in canopy sizes. From this point of view, the new rules are a bit of a mixed bag.

Previously, the OLCC’s rules allowed for an unlimited number of immature plants on each grow site. The canopy areas designated for each producer were for mature plants only. For example, a micro-tier I producer could have up to 625 square feet of mature plants and an unlimited number of immature plants. Many outdoor grow operations maximize yield by ensuring that they have a constant supply of near-mature plants ready to replant in their canopy area after each harvest. The new rules will put a damper on this strategy.

Specifically, the recent amendments create a new distinction between mature and immature canopies. Mature canopy sizes are identical to the previous rule, but can now contain both mature and immature plants. The new immature canopies are significantly smaller than the correlated mature canopy for outdoor producers. Here is the new breakdown:

Mature Canopies – Indoor (same as previous rule)

  • Micro tier I: Up to 625 square feet.
  • Micro tier II: 626 to 1,250 square feet.
  • Tier I: 1,251 to 5,000 square feet.
  • Tier II: 5,001 to 10,000 square feet.

Mature Canopies – Outdoor (same as previous rule)

  • Micro tier I: Up to 2,500 square feet.
  • Micro tier II: 2,501 to 5000 square feet.
  • Tier 1: 5,001 to 20,000 square feet.
  • Tier II: 20,001 to 40,000 square feet.

Immature Canopies – Indoor or Outdoor

  • 625 square feet for Micro tier I producers.
  • 1,250 square feet for Micro tier II producers.
  • 5,000 square feet for Tier I producers.
  • 10,000 square feet for Tier II producers.

Remember that outdoor producers could previously have as many immature plants on a site as they could fit. This change drastically reduces that number. However, producers should keep in mind that “if immature plants are grown on racks or shelving within the immature canopy, only the footprint of the area containing the immature plants will be used to calculate the immature canopy.” OAR 845-025-2040. So grow vertically!

It is also worth noting that the rules amendments implement a further restriction on all production canopies. All producers that renew after April 1, 2018 will be limited to 20 total canopy areas, and each canopy area must be separated by a physical boundary (a wall), or at least eight feet of open space.

While it remains to be seen whether this amendment will have any effect on Oregon’s supply glut, it seems certain that the legislature won’t be considering the issue anytime soon.

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

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

san rafael california marijuana cannabis
San Rafael’s next mission: medical cannabis

Today’s post is on the City of San Rafael.

Welcome to the California Cannabis Countdown.

LocationSan Rafael is a city in Marin County and dubs itself as “The City with a Mission” which is a play off its famous chapel. San Rafael is also the county seat and economic hub of Marin. No one likes spending time in a courtroom or in government administrative offices but if you’ve got to, having a civic center designed by Frank Lloyd Wright isn’t too shabby.

History with Cannabis: Ever since the passage of the Compassionate Use Act of 1996 (a/k/a Prop 215), San Rafael has prohibited medical cannabis dispensaries and other cannabis businesses from operating within its city limits. Although Marin County and its municipalities have the reputation of being liberal and progressive, that has not translated into forward-thinking cannabis policies. As we’ve covered in the past, Marin has proven to be quite a difficult jurisdiction for cannabis businesses to enter: the well-to-do enclaves of Sausalito and Mill Valley are maintaining their commercial cannabis prohibitions. Surrounded by cannabis friendly jurisdictions (San Francisco, Richmond, Oakland, Santa Rosa, and Sonoma County), Marin’s cannabis stance is probably closer aligned to Alabama’s than the Bay Area. It’s amid this prohibitionist backdrop that San Rafael is attempting to buck the Marin malaise.

New and Proposed Cannabis Laws: On December 4, 2017, the San Rafael City Council adopted a Cannabis Urgency Ordinance (“Ordinance”). The Ordinance was San Rafael’s first attempt to regulate commercial cannabis activities although there were a couple of caveats. The Ordinance would only allow for medical commercial cannabis activities and retail dispensaries were still prohibited. The Ordinance only established the bare contours of a regulatory structure as the City Council was in a rush to pass legislation prior to statewide licensing taking effect in 2018. Upon passage of the Ordinance, San Rafael’s Medical Cannabis Subcommittee prepared a Medical Cannabis Business Resolution (“Resolution”) that built on the framework established by the Ordinance. The Resolution will be up before the City Council today, January 16th. Here are some of its highlights:

  • Up to eight medical infused products manufacturing licenses will be available otherwise known as a “Type N” license from the California Department of Public Health’s Manufactured Cannabis Safety Branch.
  • Up to four medical delivery-only licenses will be available.
  • Up to four testing laboratory licenses will be available.
  • Commercial cultivation, manufacturing (other than Type N), distribution, and storefront retail are prohibited.
  • Adult-use commercial cannabis activities are still prohibited.
  • Applications will be ranked based off of business executive summary (20 points), safety and security plan (20 points), patient benefits and education (20 points), local enterprise preference (10 points), qualification of principals (20 points), and community benefits (10 points). An Applicant must receive a total score of at least 85 points to move forward with their application. A secured location is not necessary at this stage.
  • If the number of applicants with a score of 85 or higher exceeds the maximum number of licenses available then a lottery will be conducted to determine which applications will proceed.
  • Hours of operation for medical delivery businesses will be 9am to 9pm. Labs and manufacturers can operate between 7am to 6pm.
  • Six months after the adoption of the Resolution, San Rafael’s economic development director will prepare a progress report of City Council review.

Although by no means a bold entry into regulating cannabis businesses, San Rafael is still taking the initiative – which is more than we can say about the rest of Marin’s cities (only Marin County is proceeding with a medical cannabis delivery-only ordinance). Let’s hope that by the time the City Council reviews the progress of its medical cannabis program that it will be willing to expand its cannabis license types and authorize adult-use commercial cannabis businesses.