Working out of Harris Bricken's Los Angeles office, Julie is a fearless advocate for businesses and organizations striving to master government processes, avoid litigation, and foster an environment that allows them to grow freely. Her experience working for federal and local governments and agencies has provided Julie with a unique perspective and an ability to foster cooperative relationships with public agencies on behalf of her clients.

Novato Cannabis LawThe City of Novato in northern Marin County, California, will be conducting a cannabis stakeholder meeting this Friday, July 20 at City Hall from 12:00 pm to 2:00 pm.

The meeting is designed to engage cannabis industry participants in determining what kinds of cannabis businesses might be viable in town and how many licenses should be issued for each type of cannabis activity.

The City’s consultants are seeking to identify key issues and concerns cannabis industry participants may have in implementing a cannabis program. If you’ve been looking for opportunities in the North Bay, this is your chance to engage with the City and its consultants in the early stages.

The City is also holding a separate community workshop on Saturday, July 21, to gather input from members of the Novato community.

Questions about the program and the stakeholder meeting should be directed to Bryan Lopez, Management Analyst (blopez@novato.org or 415-899-8923) or David McPherson (dmcpherson@hdlcompanies.com or 909-861-4335).

california cannabis lien assessmentCannabis regulation in California is heavily focused on local control. We write and speak about this constantly. (See here, herehere, and here). As predicted, new lawsuits are cropping up all over the state challenging the authority of local governments to take certain actions as they pertain to cannabis. Our firm has generally discouraged clients from taking a litigious approach toward government regulation of cannabis, because the often meritless lawsuits we saw in the pre-MAUCRSA era rarely resulted in victory for cannabis entities, were largely detrimental to property owners, and turned the majority of local legislative bodies in California against the cannabis industry.

However, there are constitutional and statutory limits to what governments can do, and it is a fundamental part of our duty as attorneys to ensure that the rights of voters, property owners and tax-paying citizens are protected. This post focuses on one troubling practice we are seeing in California involving cities recording excessive fines and penalties against property owners who lease (knowingly or unknowingly) to cannabis tenants.

Local Governments Are Charging Property Owners Excessive Fines And Penalties And Recording Them Against The Property As A Lien Or Special Assessment

Cities generally have two goals when it comes to code enforcement: (1) compliance and (2) cost recovery. State law provides the vehicle for local governments to achieve these goals via Government Code sections 53069.4, 38773.1 and 38773.5, which enable cities to declare activity in contravention of the municipal code a public nuisance, take action to abate that nuisance, and then recover the cost of abating the nuisance via a lien or special assessment against the property. However, this practice is frequently abused. A staggering number of cities misinterpret these laws to mean that they are entitled to impose fines (sometimes up to $10,000 or $20,000 per day!) for municipal code violations against both businesses and property owners. If these fines go unpaid, the cities record them as a lien or special assessment against the subject property. The result is a massive fee, sometimes upwards of $1 million, tacked on to an owner’s property tax bill. If that goes unpaid for three years, the local government can seize and sell the property.

This is a nightmare for property owners leasing to cannabis businesses. We have spoken to many owners in this scenario who were either unaware that cannabis activity violated the local code, or unaware that their tenants were cannabis businesses. Upon receiving a notice of violation, these owners instituted unlawful detainer proceedings, and diligently pursued eviction of cannabis tenants. Despite this, cities continued to assess fines against the property owners until the cannabis activity was completely eradicated from the property. In the end, despite immediately acting to remove their tenants, these property owners were hit with hundreds of thousands to millions of dollars in unpaid fines and penalties. Most owners in this scenario are unable to pay, and are forced to give up their properties.

This practice, in most cases, is unlawful under our analysis. The Government Code does not authorize cities to attach liens or impose special assessments to collect outstanding nuisance fines or penalties. We are actively fighting for our clients who have been wrongly assessed excessive fines and penalties and are in jeopardy of losing their properties, and we will provide updates as these cases progress. Stay tuned.

california marijuana cannabis

Welcome back to “California Cannabis: Scams and Schemes of the Week.” We are publishing this series to shed light on the unscrupulousness of certain attorneys, consultants, and operators in the California cannabis industry, with the goal of establishing a more ethical and regulated industry in the state. You can view Part 1 of this series here and Part 2 here.

Last week, I received many emails from readers regarding the scams and schemes they’ve experienced. It is frustrating, heartbreaking, and infuriating. I am hopeful that we will begin to see in California what we’ve seen in Oregon and Washington: Soon after robust regulations are implemented, many of the roaches and rodents scatter back to the dark corners from whence they came.

Scam # 1: Criminal Attorneys Advising Clients to Engage in Criminal Activity

I am not talking about criminal law attorneys. I mean attorneys who are criminals. Over the past two weeks, I’ve had some mind-blowing conversations with self-proclaimed “cannabis expert” attorneys. These attorneys are advising their clients to engage in blatantly criminal behavior, often resulting in irreparable disaster for all involved. MAUCRSA provides a regulatory regime under which all operators are licensed and regulated businesses; this is dramatically different from the previous regime where collectives and individuals were provided limited criminal immunities under the Compassionate Use Act. If your attorney’s recommended strategy involves breaking the law and preparing to assert defenses under the Compassionate Use Act, rather than leading you into a legitimate, licensed, regulated space, you need to find a new attorney.

Scam #2: Ship Your Cannabis Cash to a Caribbean Bank

Two new banking scams came to my attention this week. One involves a company claiming to run a Bahamian bank that is safe from government seizure. All you have to do is ship your cash to an address in the Bahamas! The company’s mass emails and website use all the right banking buzzwords and acronyms (FinCEN! KYC! AML! Due Diligence!), but if you read the fine print terms and conditions, the true nature of this scam reveals itself. Common sense should tell you that shipping bags of cash offshore is not a good idea.

Scam #3: Buy this Turnkey Dispensary (which is actually worthless and illegal)

We’ve already discussed the inability to purchase a nonprofit, and how most cannabis licenses are non-transferable. But we’ve seen another common scam by dispensary peddlers. Some folks are selling “turnkey” dispensaries that are operating in violation of local zoning codes and have received multiple citations, without disclosing as much to the buyer. In fact, these scammers often try to exclude zoning compliance from the representations and warranties in the deal. The unwitting buyer pays hundreds of thousands to millions of dollars for a worthless “dispensary,” and by the time the buyer discovers that the dispensary is unauthorized and the subject of a code enforcement action, the seller has absconded with the money. The buyer is left with a closed dispensary, fines, outstanding debts to vendors, and tax liabilities. Unsurprisingly, we are seeing the same bad attorneys working both sides of these deals, taking commissions, and completely bailing on the buyers once the truth is revealed. In every deal, DUE DILIGENCE IS KEY. Always verify zoning and outstanding code enforcement actions with the City before you close. Each party needs to retain their own, non-conflicted attorney.

We will be back with more next week. If you’ve come across a California cannabis industry scam, we would like to hear from you! Leave a comment below, or email us at firm@harrisbricken.com.

california cannabis marijuana

Welcome back to “California Cannabis: Scams and Schemes of the Week.” We are publishing this series to shed light on the unscrupulousness of certain attorneys, consultants, and operators in the California cannabis industry, with the goal of establishing a more ethical and regulated industry in the state. You can find last week’s post here.

Scam #1: Attorneys Representing Buyer and Seller and Taking Commission

We continue to see attorneys representing cannabis entities on both sides of mergers and acquisitions, and in addition to taking an hourly rate, they’re taking a commission on the deal (from both parties)! We are seeing the same attorneys appoint themselves as counsel for the purchased corporation. We’ve seen some shocking deals that harm both parties and benefit only the attorney. Most often, troubling information about a business or property is concealed for the benefit of the seller and the attorney, to the detriment of the buyer. We often see good, trusting people get taken for a ride by attorneys with unethical motivations. The incentive to close a deal as quickly as possible to get a commission is at odds with the incentive to conduct careful due diligence. Make sure your agents and attorneys have your best interests at heart, and if a lawyer tells you he or she can represent “both sides” in a transaction, run!

Scam # 2: The $10 Million Plot of Empty Desert Land

We’ve seen some outrageous land deals in California. There are a number desert parcels without any improvements or utilities, in the middle of nowhere, being offered for millions of dollars. Due diligence is key in real estate transactions, especially in the speculative cannabis market. Just because cannabis activity is possible in a certain jurisdiction does not mean an empty plot of desert land there is worth $10 million. Supplying that land with water, electricity, and building out the structure is no small feat. Many remote desert areas lack the infrastructure to supply these parcels with necessary utilities, and the installation of such infrastructure takes many years and substantial cost. Beware.

Scam #3: Work for Equity in My Nonprofit! 

In California, no one “owns” a nonprofit. One cannot buy or sell a nonprofit corporation, and no stock can be issued or authorized by a nonprofit. We’ve discussed this before on the blog.

Still, we have people asking us to review equity agreements where their nonprofit employer is offering stock instead of salary. In some cases, the company offering these fake stock deals may not know any better because they’re being advised by incompetent attorneys. In other cases, however, these companies are knowingly taking advantage of employees who are blinded by the excitement of being part of a bourgeoning industry. Walk away.

Scam #4: Buy My License!

Under MAUCRSA, state licenses are non-transferable. According to 16 CCR 5023(c), if one or more of the owners of a state license change, a new license application and fee must be submitted to the BCC within 10 business days of the ownership change.

Most local cannabis permits are similarly non-transferable. And if they are transferable, most jurisdictions require you to obtain written approval from the local government prior to transfer. Keep this in mind if you’re looking to buy or lease a “cannabis approved” property, There is simply no guarantee you will be able to get a license to operate there.

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If you’ve come across a California cannabis industry scam, we would like to hear from you! Leave a comment below, or email us at firm@harrisbricken.com.

california cannabis scam

I’ve had it with the scams and schemes in the cannabis industry. I’ve never seen so much dangerously ignorant and downright criminal behavior. Since beginning work in the cannabis industry, I have yet to go a day without encountering some sort of scam. The unscrupulousness of some attorneys, consultants, and operators in this industry needs to be called out and eliminated so we can establish an ethical, regulated industry in California. Towards that end, I’ll be posting a weekly list of scams and schemes to help unsuspecting victims avoid getting taken for a ride.

Scam #1: We Turn Your Cash into a Check Through Real Estate Investment!

There is a group pitching a scheme to turn dispensary cash into checks that can be deposited in the bank. The method: fork your cash over to this group. They toss your cash in with other “investors” and buy real estate with it. They flip the property, and send the proceeds to you in a check. Folks, this is textbook money laundering. The pitcher of this scam is exhibiting at industry conferences across the country and handing out “attorney-approved” contracts. Brazen, stupid, and dangerous for all involved.

Scam #2: Cannabis Cryptocurrency

If you want a lesson on what the government thinks about combining anonymous cryptocurrency with a federally prohibited substance, look no further than the life sentence handed down to Ross Ulbricht, creator of the Silk Road. Ulbricht was convicted of money laundering, computer hacking, and conspiracy to traffic narcotics. Those are the exact same charges that could be brought against any cannabis cryptocurrency company. Don’t get me started on the value of cannabis cryptocurrency on the secondary market. It’s complete b.s.

Scam #3: You Must Cultivate Before Obtaining a Permit

Most people laugh out loud when they hear this. Unfortunately, there are a few attorneys who provide their clients with downright criminal advice, trying to convince would-be business partners or landlords to engage in unlawful behavior. The days of collectives and “creative” lawyering to get around the laws are over. We now have a robust regulatory system under MAUCRSA that makes it clear that you cannot engage in any sort of commercial cannabis activity before obtaining all local approvals and a state license.

Scam #4: Your DUI Attorney Can Handle Your Tax Audit

Just say no. You are a legitimate business, and you need to retain a legitimate and experienced lawyer to handle your legal matters See Seven Keys to Choosing Your Cannabis Business Law Firm.

Did San Mateo’s new ordinance moot the CEQA issue?

Last month, we blogged about the writ petition brought against the County of San Mateo by petitioners who alleged non-compliance with the California Environmental Quality Act (“CEQA”).

CEQA requires environmental review of discretionary projects to inform the public and government decision makers of the environmental consequences of their decisions. The law must be interpreted in such manner to afford the fullest possible protection to the environment within the reasonable scope of the statutory language. Unless exempted, all discretionary projects must receive environmental review pursuant to CEQA.

Under CEQA, the “lead agency”—the public agency principally responsible for approving a proposed project—is responsible for preparing the environmental documents for a project, including any negative declaration or environmental impact report (EIR). If a project is not exempt from CEQA, the lead agency must prepare an initial study to determine whether the project will have a significant impact on the environment, or skip the initial study and conduct an EIR if it is obvious that an EIR is required.

The County of San Mateo’s challenged ordinance allowed cannabis cultivation subject to ministerial approval of license applications. This means there was no deliberation or discretion involved, and the County could issue licenses over the counter, if an applicant checked all applicable boxes.

As we explained in our last post, the County issued a negative declaration with the challenged ordinance following an initial study, determining that there was not substantial evidence that the ordinance would have a significant effect on the environment. Petitioners disagreed, claiming the record contained substantial evidence supporting myriad arguments that the ordinance would adversely impact hydrology and water quality, sensitive species and habitat, air and light pollution, climate change, and other effects.

Further, as ministerial licenses, each cannabis cultivation project under the challenged ordinance would have been exempt from CEQA and none would require their own environmental analysis. That fact alone seems like an end-run around the law.

At the end of February, petitioners and the County held a settlement conference. Shortly thereafter, the County repealed and replaced their cultivation ordinance with one that subjects each cultivation project to discretionary approval. Now, each cultivation project will be subject to CEQA unless otherwise exempt.

MAUCRSA provides a temporary exemption to CEQA to cities and counties adopting a cannabis ordinance subject to specific conditions.  So long as a city or county ordinance requires discretionary review and approval of permits, licenses, or other authorizations to engage in commercial cannabis activity, and includes any applicable environmental review pursuant to Division 13 of the Public Resources Code, the adoption of the ordinance itself is exempt from CEQA. Bus. & Prof. Code, § 26055(h). This exemption expires July 1, 2019.

Arguably, the County of San Mateo’s new ordinance is exempt from CEQA pursuant to Business and Professions Code section 26055(h), and the petition is moot. There are no future hearings on calendar, but the writ petition is still pending. We will keep you posted on any developments: The viability of San Mateo’s approach could have a significant impact on the approach taken by other local jurisdictions with respect to California marijuana licenses.

Courts often invalidate unfair spot zoning ordinances.

We recently discussed the California Environmental Quality Act as a limitation on local zoning authority through environmental regulation. Another important limitation on local authority when it comes to cannabis ordinances is spot zoning, which is the act of singling out specific parcels of land to benefit specific owners at the expense of others in the surrounding areas. Spot zoning can exist in the form of restricting activities from occurring on specific parcels, or by providing exclusive use benefits to specific parcels—such as allowing licensed marijuana operations in select places. It is essentially the practice of creating zoning “islands” that are decidedly dissimilar to their surrounding areas, and is often the subject of legal challenges.

Recently, a San Bernardino County Superior Court judge invalidated Measure O, a voter-approved ballot initiative that eliminated a city-wide ban on medicinal cannabis and required the City of San Bernardino to allow commercial cannabis operations in certain parts of the city. The court found that although Measure O provided a variety of areas in which cannabis cultivation, manufacturing, testing, transportation, and distribution could occur, it limited the possible dispensary sites to just two addresses, one of which was the Flesh Showgirls strip club.

The court noted that not all spot zoning is invalid per se, but spot zoning is impermissible if there is no rational basis for it—i.e. if it is arbitrary or capricious. An example of potentially permissible spot zoning would be restricting a portion of land within a commercial development to residential use, because doing so might benefit the public interest by maintaining dedicated housing. Similarly, a city might allow an island of land within a residential neighborhood to obtain commercial licenses for retail and light manufacturing, in order to preserve a neighborhood commercial district for the benefit of the local community.

In the San Bernardino case, however, the court found no such rational basis. The court opined that no justification was provided for why two particular parcels were singled out as the only locations in the city that could have dispensary use. According to the court’s ruling, “these two addresses are separated from each other by several miles and are surrounded on all sides by similarly situated yet non-qualifying properties,” and that there was no rational basis for doing so, nor was there any discernible public interest served. The court determined that Measure O effectively created a zoning duopoly in the two dispensary addresses “with the owners of these two locations the sole beneficiaries.” Accordingly, the court concluded that unlawful spot zoning had occurred, and held that because it was not feasible to sever the dispensary zoning from the overall initiative, Measure O was invalid in its entirety.

We have heard rumblings of special interest groups organizing to pass initiatives in California jurisdictions that currently prohibit commercial cannabis activity. Any groups pursuing such a path should be mindful of the Measure O case and the invalidity of spot zoning without rational basis. While the idea of eliminating competition by drafting a ballot measure favoring select parcels of land may seem like an attractive business proposition, even if an initiative passes with support of the voters, it can still be overturned by a court of law if it is legally defective.

While San Bernardino County may have to go back to the drawing board on its cannabis zoning, the lesson is clear: if you’re going to limit the places where cannabis businesses can operate, there has to be a rational basis for doing so that serves a legitimate public interest, and it cannot create an unfair monopoly over the market for select participants. Otherwise, you risk a court invalidating the ordinance altogether.

california cannabis
Pro environment? Or just anti-cannabis?

As we’ve discussed time and time again, California’s voter-passed cannabis legalization initiative, as well as all subsequent statutory and regulatory additions to that law, maintains local governments as the ultimate arbiters of whether and how commercial cannabis operations can take place within any given county or municipality in the state. The most prominent exercise of that authority exists through local permits and licenses (which are now a prerequisite for any state license), and land use laws, such as zoning ordinances. The starting point for any property owner considering a cannabis use on the property is the applicable zoning law and the local ordinance on cannabis, if any. Recently, property values in appropriately zoned places have appreciated accordingly.

But as the new laws are implemented, we are seeing the limits of local authority when it comes to zoning for cannabis operations. In one recent example, a group advocating for a moratorium on marijuana in San Mateo sued the County of San Mateo for opting to issue a “negative declaration” stating that its new cannabis ordinance would not have any significant impact on the environment, rather than engaging in the more rigorous option of preparing a full environmental impact report to study the effects of the proposed activity. The ordinance generally prohibits all cannabis activity except cultivation in greenhouses and transportation.

The petitioners in San Mateo brought the writ petition pursuant to the California Environmental Quality Act (“CEQA”), alleging that “the county prejudicially thwarted CEQA’s statutory goals, including environmental protection, informed decision-making and informed public participation.” According to NORML, the petitioners are an anti-cannabis group.

CEQA requires environmental review of discretionary projects to inform the public and government decision makers of the environmental consequences of their decisions and must be interpreted in such manner to afford the fullest possible protection to the environment within the reasonable scope of the statutory language. Unless exempted, all discretionary projects must receive environmental review pursuant to CEQA.

Under CEQA, the “lead agency”—the public agency principally responsible for approving a proposed project, in this case the County of San Mateo—is responsible for preparing the environmental documents for a project, including any negative declaration or environmental impact report (EIR). If a project is not exempt from CEQA, the lead agency must prepare an initial study to determine whether the project will have a significant impact on the environment, or skip the initial study and conduct an EIR if it is obvious that an EIR is required.

A negative declaration, as opposed to an EIR, is appropriate in two situations: (1) when there is no substantial evidence that shows that the project may have a significant impact on the environment, or (2) the initial study identifies potentially significant impacts, but revisions made to the project before public review of the negative declaration reduce impacts to a level of insignificance. Before approval of a negative declaration, the lead agency must find that there is no substantial evidence that the project may have a significant effect on the environment.

An EIR must be prepared if a project is not exempt from CEQA and does not qualify for a negative declaration. Generally, an EIR is required whenever it can be fairly argued that substantial evidence indicates that the project may have a significant impact on the environment. CEQA allows plaintiffs to sue public agencies for failure to comply. Plaintiffs can challenge a public agency’s decision to prepare a negative declaration instead of an EIR (like the San Mateo case), or a public agency’s determination that a project is exempt from CEQA, among other things.

CEQA litigation is rampant, and public agencies and developers alike are critical of its abuse by NIMBY groups and others who may bring an action for an improper purpose. For example, a competitor may file a CEQA lawsuit to delay or derail a competing project, or a labor union might file a CEQA lawsuit to secure an agreement that gives that union control over which project jobs will be allocated among which unions.

While public agencies, rather than private businesses, are ultimately responsible for determining how to proceed under CEQA, operators and developers should be mindful of the potential delays to their projects that could result from challenges brought by CEQA plaintiffs, and to pay close attention to any objections raised against the draft environmental document during the government approval process, which is a requirement for standing to bring a lawsuit under CEQA and could signal future legal challenges to the project. By the same token, cities and counties should be mindful of the high bar they will have to meet for any decisions involving potential environmental impact, and to plan accordingly by doing a thorough environmental review as part of the approval process for any cannabis-related proposals.

In some ways, CEQA challenges can be seen as part of the California cannabis regulatory regime’s rite of passage into public life, just as any other California industry has to contend with. But this is also an opportunity for California’s state regulators and local agencies to get it right and set an example for other states, and to show how the environmental damage caused by prohibition-era operations can be successfully mitigated with robust regulation and implementation of environmental standards. Until then, we expect to see more lawsuits brought by anti-cannabis and NIMBY groups using CEQA as a tool to challenge cannabis projects throughout California.

California marijuana cannabis
ICYMI: We have answers to your marijuana retailer, distributor, and microbusiness questions from our MAUCRSA webinar

Last month, we hosted a webinar analyzing the emergency cannabis regulations released by the California state agencies in charge of administering the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA). We had over 1,000 people sign up to find out what the California cannabis regulatory landscape will look like in 2018 for cultivators, manufacturers, distributors, retailers, and microbusinesses.

During the webinar, we took questions from attendees, but we couldn’t get to all of them due to the sheer number of questions asked. Alison Malsbury covered the webinar questions related to cannabis manufacturers, Habib Bentaleb handled the questions regarding cultivation, and I’ll cover the retail/distribution/microbusiness questions here.

Q: Please explain the logistics of distributors collecting excise tax from retailers. Is it collected at the time of invoice/delivery or can the retailer wait and not pay the distributor until up to 90 days later? If so, how the heck will distributors track all of this and what recourse do distributors have if a retailer doesn’t pay the excise tax?

A: The Distributor is the focal point in the California Cannabis and Excise Tax system. Cultivators and Retailers are prohibited from remitting Cannabis Taxes to the California Department of Tax and Fee Administration (CDTFA).  The law intentionally places a serious burden on the Distributor to pay up. Although only a Distributor may remit taxes to CDTFA, all licensees in the supply chain are subject to a 50% late payment penalty if the tax is not paid when due. Accordingly, Distributors should receive payment of the Cannabis Excise Tax from the Retailer at the date of sale. This will likely be a serious point of contention as the Retailer will want to defer payment until product is sold to a consumer, so be sure to cover it in your distribution agreements.

Q: Do retailer Exit Bags need to be labeled?

A: 16 C.C.R. § 5413 requires an “opaque exit package” for all product leaving a retail storefront going into a consumer’s hands, but the regs say nothing about having to have a specific label on that exit packaging.

Q: What are the child resistant packaging requirements for retail sales in the first few months?

A: During the transition period (January 1 through July 1, 2018), cannabis goods in a retailer’s inventory at the time of licensure that are not in child resistant packaging may be sold if the retailer puts them into child-resistant packaging at the time of sale. “Child resistant” means designed or constructed to be significantly difficult for children under five years of age to open, and not difficult for normal adults to use properly.

Q: Can licensed dispensaries purchase manufactured material from nonlicensed manufacturers during the transition period?

A: No. Licensees may only conduct business with other licensees, even during the transition period.

Q: What is a microbusiness?

A: A commercial cannabis business engaged in at least three of the following activities: cultivation (less than 10,000 square feet), manufacturing (non-volatile or no solvnets), distribution, and retail sale.

Q: Do microbusinesses activities need separate addresses?

A: No. In fact, microbusinesses must conduct all cultivation, manufacturing, distribution and retail activities on the same premises.

Q: Can you clarify what adult use licensees and medicinal licensees are allowed to do during the transition period? Can an adult use licensee purchase products from a medicinal licensee? Can a medicinal retailer sell to non-patients?

A: During the transition period, from January 1 through July 1, 2018, licensees can transact business with each other regardless of the “M” or “A” designation. However, a medicinal retailer cannot sell products to “adult use” customers and vice versa. In other words, medicinal retailers can only sell products to qualified patients and caregivers. A medicinal retailer cannot act as an adult use retailer during the transition period, or ever, without an adult use license.

Q: Can you talk more about the distribution license and if you will have to package, test, etc.?

A: It depends. You could be a “storage only” or a “transport only” distributor that does not handle packaging and testing. Otherwise, a distributor may package, re-package, label and re-label cannabis flower for retail sale. A distributor cannot, however, package, re-package, label or re-label manufactured cannabis products unless the distributor also holds a manufacturing license and is packaging, re-packaging, labeling or re-labeling its own manufactured cannabis products. Testing and quality assurance services are also on the table for distributors. Regarding testing, after taking physical possession of a cannabis goods batch, the distributor must contact a testing laboratory and arrange for a lab employee to come to the distributor’s premises to select a sample for testing. The distributor also has duties and obligations for which it is responsible during the testing sample retrieval process.

Q: Is self-distribution considered a “transport only” distribution license or can businesses wishing to self-distribute do all distribution activities package/label/testing/quality assurance review?

A: To be clear, a testing licensee is totally separate from all other licensees. A distributor is responsible for the coordination and verification of testing, but cannot do the testing itself. An entity with a distribution license, so long as it is not “transport only” or “storage only,” can engage in any of the activities that a licensed distributor is authorized to do.

Currently, the licensing fee schedule divides the distributor license into three categories: Distributor, Distributor Transport Only Self-Distribution, and Distributor Transport Only. Obviously, if you apply for the Transport Only Self-Distribution license, you will be limited to transport only (and even that has certain limitations regarding what you can transport and to whom).

Q: Would a cannabis yoga and meditation business be OK?

A: It depends on the local government. If onsite consumption is authorized, and the location is zoned for yoga and meditation (as well as onsite consumption of cannabis), then such activity would presumably be allowed pursuant to a retail or microbusiness license so long as the following are met: (1) Access to the area where cannabis consumption is allowed is restricted to persons 21 years of age and older, (2) Cannabis consumption is not visible from any public place or nonage-restricted area, and (3) Sale or consumption of alcohol or tobacco is not allowed on the premises. Appropriate permits/licenses from your local government would need to be obtained for yoga or meditation as well.

Q: Are you able to start a cannabis lounge, like a Hookah lounge?

A: The foregoing rules apply for cannabis lounges, too. Be sure to check on whether your local government authorizes onsite consumption.

Q: Can you have entertainment and onsite consumption?

A: See above regarding onsite consumption. Entertainment is often restricted by local zoning codes, but as long as it is locally authorized, live entertainment is expressly permitted by the regs so long as there is no nakedness, no live sex and no nipples (male or female)! Basically no strip club/consumption lounges are allowed in this context. See 16 C.C.R. § 5807 for more on that.

Q: Can you cover which of these licenses can be held concurrently? Or, if it’s a shorter list, which licenses have restricted concurrent licensing?

A: All licenses can be combined, with the exception of testing (and Type 5 cultivation licenses, which are not yet available). A testing licensee cannot hold any other cannabis licenses.

Q: Can distributors use professional employment organizations (such as ADP) and have these count as employees for the purposes of transport?

A: No. 16 C.C.R. § 5311 specifically states that transportation shall only be conducted by licensed persons or their employees. Further, Business & Professions Code § 26070(c) says “[t]he driver of a vehicle transporting or transferring cannabis or cannabis products shall be directly employed by a licensee authorized to transport or transfer cannabis or cannabis products.” Employees are expensive, but distributors need to budget accordingly if they want to comply with MAUCRSA.

Q: Can autonomous vehicles distribute cannabis or manufactured goods?

A: No. Unmanned vehicles are prohibited per 16 C.C.R. § 5311(c).

Q: If a product has been tested by a lab and deemed clean or cleared to go to market, why is the liability on the distributor and not the lab, cultivator or manufacturer if something ends up being wrong with that product?

A: Distributors are statutorily obligated to oversee the quality assurance process. A distributor is responsible for ensuring that the certificate of analysis from the lab correctly corresponds with the batch, that the label is consistent with the certificate of analysis, the packaging complies with MAUCRSA and is tamper-evident, the weight or count of the batch comports with that in the track and trace system, and that all events prior to receipt have been entered into the track and trace system. That does not mean that the distributor will be solely liable if something is wrong with the product, but we believe we will see a lot of distributors named in lawsuits involving product liability issues because of their statutory duty to do everything mentioned in the previous sentence. This does not mean cultivators, manufacturers, and testing labs are not also liable. As a result, insurance and indemnity agreements are key here.

Q: Does an indemnification contract remove the liability for the distributor? Or only possibly?

A: An indemnity agreement is a good tool to use to shift liability, but as I mentioned during the webinar, an indemnity agreement only works if the other party is well-capitalized and/or well-insured. If you have an indemnity agreement with a party that goes bankrupt and never carried insurance, you will not recover your losses. Nothing, not even a great indemnity clause, can guarantee full insulation from liability.

Q: What type of permitting or licensing do I need for a compassion program that is currently running is not a storefront. We do not sell cannabis at all, host our donation day at a brick and mortar and deliver to homes at no cost to patients that are low income, disabled or suffering from an acute illness.

A: For an answer to this question, please see California Cannabis Licensing and The Collective Model: How Long Will That be Going On? 

Q: Do I need to secure a location prior to applying for the license?

A: Yes. With your state application, you must submit the physical address of the premises, evidence of the legal right to occupy the premises, and a diagram of the premises, among other things.

Q: Is delivery considered a retail activity under the microbusiness license?

A: Yes. 16 C.C.R § 5500(e)(4) expressly contemplates non-storefront delivery as a retail element of a microbusiness.

Consolidation, Connection and Automation Differentiate Blockchain from Current Technologies

Following my last post about blockchain technology and the cannabis industry, a Canna Law Blog reader commented, “[m]aybe I’m missing something. How is this better than just scanning a barcode when the item changes hands like they do with FedEx?”

Great question. I asked similar questions early on in my work with blockchain technology. What differentiates blockchain from applications like DocuSign, DropBox and Google Drive which already provide a shared, instantaneous and relatively secure system.

Among other things, blockchain connects these isolated applications and consolidates them into one place — enabling faster, more secure, automated transactions. A barcode scan by FedEx is a single event trapped in the FedEx system. When shipping an item, FedEx, the shipper and the recipient can track the package by entering the tracking number on FedEx’s website. Blockchain, on the other hand, reveals all of the steps to all of the parties with permission to view the chain, such as the manufacturer, its suppliers, the seller, the various warehouses and intermediate sales channels (e.g., Amazon’s distributed sales network), the carrier (FedEx), the recipient, any inspectors at stages along the way, the paying bank, the receiving bank, the government taxing and other authorities. All are all linked. In a non-blockchain system, all of the various participants work on their own independent systems, which are arguably insecure and not linked into one, single, immutable ledger.

The FedEx scanning is, as you can see, only one small step in a larger chain of events and participants.

FedEx Scanning and Tracking Does Not Create Self-Executing Smart Contracts

In addition to the linking of participant networks as described above, blockchain technology can also be used to create self-executing “smart contracts,” where automatic and instantaneous responses are triggered by certain pre-defined events. Participants in a smart contract, for example, should get paid at the right time without the need for anyone to issue an invoice, receive an invoice, write a check, make a wire transfer, or execute a credit card transaction. Payment triggers would be written as code into the blockchain. According to Accenture, investment banks alone could save up to $12 billion per year by adopting blockchain and smart contracts. Gartner has estimated that by 2022, defined impact smart contracts will be in use by more than 25% of global organizations.

DocuSign is similarly just one small piece in a larger chain of events and participants. In a blockchain setting, a law firm would not be required to issue an invoice or to continually bug a client about paying a retainer as it would happen automatically. Submitting the engagement document to the blockchain with a digital signature would trigger a series of events. One event would be payment to the firm. The digital signature would be an authorization to the client’s bank to pay the bill automatically, with no additional approval needed from the client. If the payment is subject to conditions, then the “smart contract” would set out those conditions and the method for proving fulfillment. When fulfilled, the payment would be made. Consider the amount of time and friction that would save for a small entity. Then consider the amount of time and friction it would save for a large company and the economy as a whole.

Same with a DropBox type program. Once a document is accepted into a blockchain ledger, it does not just sit there inert as it does in DropBox. The entry into the ledger would trigger other actions: payment of a bill, issuance of a deed or registration of a deed of trust. Isolated transactions would be linked into the chain. If there is no need for this chain, e.g. if no network of participants exists, then blockchain is not required and the dead letter box of DropBox would be adequate.

 

The Downsides – Implementation Costs, Loss of Privacy and Intrusive Government Surveillance

Blockchain reduces time and friction, but what about the time and friction required to create a blockchain program, adapt old records into the system, program smart contracts with highly specific code language, and maintain the program over time? When blockchain’s benefits outweigh these downsides, we will see mass adoption of the technology.

As discussed in my previous article, blockchain technology has obvious benefits in the cannabis industry as a supply chain tracking mechanism. Regulators and technology companies have already shown interest in implementing a blockchain-based track and trace system. What has not been discussed, however, is how intrusive government participation could be if regulators are included as an authorized party in a blockchain system. Most would feel uncomfortable knowing the government could comb through all of their cannabis transaction histories with just one click. In fact, the Fourth Amendment protects United States citizens against such unreasonable searches. Further, the European Union’s incoming General Data Protection Regulation regarding consumer data privacy and ownership rights and the US Fair Credit Reporting Act, the Gramm-Leach-Bliley Act and the SEC’s “Regulation SP” all require personal financial data be redactable—something not possible on an immutable platform.

It remains to be seen how blockchain systems will strike a balance between privacy rights and the needs of government regulators. We will likely see mechanisms to allow government review of transaction history only upon demonstration of probable cause or upon consent of the participants. We should also expect to see opposition from the cannabis business community to the ability of government to participate in the blockchain ledger at all. I will monitor developments in this space as the technology and regulations evolve and continue to post about them here.