Photo of Will Patterson

Will works out of our Portland office, advising clients on business law, intellectual property, civil litigation, and cannabis law matters.

Oregon marijuana cannabis
OLCC audit results were nothing to write home about.

Earlier this month, the Oregon Secretary of State’s office released a formal audit report (“Report”) of the Oregon Liquor Control Commission’s (OLCC) information technology systems as they relate to Oregon’s recreational cannabis regulatory enforcement. The Report, titled “Oregon Liquor Control Commission: Cannabis Information Systems Properly Functioning but Monitoring and Security Enhancements are Needed“, focused on two separate but related issues: 1) the OLCC’s Marijuana Licensing System (MLS) and Cannabis Tracking System (CTS), and 2) general IT security concerns and disaster recovery procedures. The Report and the OLCC’s formal written response (“Response”) paint a picture of an underfunded agency doing its best to establish appropriate procedures and processes in the face of a unique emerging marketplace, unexpected demand for licenses, strict statutory deadlines, an an ever-changing regulatory framework. It is also apparent that the Secretary of State and the OLCC worked well together during the audit process, as each party complements the other on transparency, professionalism, and common courtesy.

The audit was initiated to determine whether:

  • the OLCC has sufficient technical controls in place to ensure that the MLS and CTS are supporting effective regulation of the recreational cannabis industry; and
  • the OLCC has implemented sufficient security procedures to protect against known technical and physical threats.

Today we will focus only on issues raised relating to the MLS and CTS.

Marijuana Licensing System (MLS) and Cannabis Tracking System (CTS)

The Report and the Response provide an interesting look at how these two independent but related systems came to exist. When Oregon passed Measure 91 and then HB 3400 (2015), the OLCC was charged with creating and enforcing a regulatory framework for an entirely new industry with tight deadlines and insufficient resources. The OLCC reasonably decided that the only practical solution was to hire third-party contractors to provide Software as a Service (SaaS) solutions. The OLCC hired the company that created Colorado’s seed-to-sale tracking system to customize Colorado’s system to serve Oregon’s needs, resulting in the CTS, an online portal that allows OLCC licensees to input data about harvests, sales, etc. The OLCC hired a separate company to create its license application and renewal software, the MLS.

After hiring these vendors, OLCC was forced to repeatedly overhaul these systems in response to extensive legislative rewrites to the recreational program in 2015, 2016, and 2017. In recognition of these difficulties, the OLCC requested funding for a full time Chief Information Officer in the 2017 legislative session, but was denied. The Report and the Response both highlight the importance of filling this position, and the OLCC will be asking for additional funding from the legislature again this session.

In a nutshell, the CTS is Oregon’s licensee portal where licensees are required to self-report information about inventory, transfers and sales. The MLS is the OLCC’s online system for tracking license applications and licensee status.

We identified several weaknesses associated with OLCC’s new IT systems used for marijuana licensing and tracking. They include data integrity and maturity issues, and insufficient processes for managing marijuana computer programs and vendors. Until these issues are resolved, the agency may not be able to detect noncompliance or illegal activity occurring in the recreational marijuana program. – The Report

The Report identifies five general weaknesses in the CTS and related enforcement:

  1. the CTS relies on self-reported data that is inherently susceptible to inaccuracies;
  2. the CTS allows users to enter measurements in either metric or imperial resulting in additional errors;
  3. existing licensees are potentially abusing a policy that allows new licensees to introduce cannabis into the recreational regime from any source;
  4. inadequate data quality hampers the OLCC’s ability to monitor the Oregon market as a whole;
  5. the OLCC lacks sufficient trained staff for regular on-site inspections.

Even with the additional staff, OLCC may not be able to ensure an appropriate amount of scrutiny for marijuana businesses. Both Alaska and Nevada have approximately one inspector for every 18 recreational marijuana licenses. Currently, Oregon only has one inspector position for every 83 recreational marijuana licenses. – The Report

The Report also notes that the OLCC doesn’t take sufficient steps to monitor their third-party SaaS providers, has inadvertently stored test data in the active MLS database, and has insufficient controls over user accounts. Finally, the Report notes that the MLS and CTS are not set up to automatically update each other. For example, a licensee with revoked status in MLS could still have active status in CTS.

In its Response, the OLCC generally agrees with all of the Report’s findings and states that, subject to obtaining additional funding from the legislature, it will work diligently to implement the Report’s recommendations. The OLCC refers to the MLS and CTS as “state-of-the-art imperfection” and notes that while issues exist, the CTS system has already identified thousands of discrepancies that have led to investigative and enforcement actions, and that even bad data is meaningful.

Citizens and policy makers need to know that as important as the issues identified in this audit are, the OLCC is not dependent on the CTS system alone to identify licensees that are attempting to use the state system as a cover for diversion. The CTS system is one fundamental tool for successful enforcement and compliance . . . the audit recommendations focus on improving the overall effectiveness of the system which the audit acknowledges is properly functioning. – The Response

The take away here is that the CTS system is not broken. It is currently helping to limit diversion and promote public safety, but like any system, it can and should be improved. On the whole, the public and licensees should expect that the OLCC will be implementing regular, random on-site inspections to support the CTS, and refining the CTS system to eliminate opportunities for confusion or deliberate deception. Hopefully the legislature will recognize the importance of a robust and technically effective OLCC to the industry as a whole, and will provide the OLCC with sufficient funding to retrofit its systems and hire a Chief Information Officer.

oregon cannabis processor
Licensees and employees only: them’s the rules!

Our Oregon marijuana processor clients often approach us with requests to draft agreements that will allow third-parties to process cannabis in the client’s licensed premises. Typically, the processor is not operating at capacity and would like to supplement income by charging fees to keep the premises open around the clock. Previously, we have explained that this arrangement only really works if the third-party is also a licensed OLCC processor, pursuant to Oregon’s new alternating proprietor rules (OAR 845-025-3255). However, we are most often approached with proposals to have non-licensee third-parties enter the kitchen and physically create cannabis products that will be owned and sold by the licensee.

Here is a more concrete example: Kelly’s Kitchen is an Oregon Liquor Control Commission (OLCC) licensed processor. Kelly meets Cindy, who has developed a recipe, labels, and packaging. Cindy doesn’t want to go through the OLCC application process, she just wants to make her Bud Brownies. Kelly invites Cindy to personally make her brownies on Kelly’s property, and Kelly agrees pay Cindy for each unit sold. The prevalence of these arrangements suggests that the industry has been treating this as a grey area. However, we recently reached out to the OLCC and received confirmation that this is black and white: The OLCC will view Cindy as illegally processing cannabis without a license, even if Kelly always retains ownership of the cannabis and resulting product. This arrangement can also put Kelly’s license at risk. No arrangement that allows non-licensees to personally process cannabis within a licensed premises is allowed under the rules.

The OLCC’s view should not come as a surprise when you consider the significant restrictions in the new alternating proprietor rule that allows multiple OLCC licensed processors to share kitchen space:

  • The kitchen must have a pre-approved schedule posted on its front door showing when each processor will be using the kitchen.
  • The kitchen must have a separate secure area for each processor to store its cannabis products.
  • Any concentrates produced under an alternating proprietor arrangement can only be used within that processor’s edibles or topicals.

In effect, Cindy and Kelly are trying to bypass these restrictions, and the processor licensing regime as a whole.

The only viable alternative to alternating licensed proprietors appears to be a standard intellectual property licensing agreement, whereby Cindy would license her recipe, branding, and packaging to Kelly as co-packer. Kelly or her employees then process the brownies and sell them retailers or wholesalers without Cindy’s involvement. Cindy will likely expect to be paid based on the number of brownies that Kelly manages to sell. However, anyone considering this arrangement needs to carefully look at the OLCC’s financial interest disclosure requirements.

The definition of financial interest is fairly broad and includes anyone “having an interest in the [licensed] business such that the performance of the business causes, or is capable of causing, [an individual or entity] to benefit or suffer financially.” The OLCC will view Cindy as a financial interest holder because her compensation depends on Kelly’s success in moving the product. This isn’t the end of the world, but it does mean that Kelly must submit a Change in Financial Interest form and receive approval from the OLCC before Kelly begins making Cindy’s brownies. All this means is that Cindy will likely need to be fingerprinted and pass a background check.

We expect that we will continue to be approached by clients that want to invite non-licensees into their licensed premises to make products, but now we can confidently say that this common industry practice violates OLCC rules. Be warned!

Oregon RICO marijuana
This is not the racketeer you’re looking for.

In this series (Part 1, Part 2, and Part 3) we have been looking at two RICO cases filed in District Court in Oregon against cannabis producers. The first, McCart v. Beddow, appears to have settled pursuant to a confidential settlement agreement. The second, Ainsworth et. al. v. Owenby et. al., is just getting started. The common thread here is that the pro se (self-represented) plaintiff in McCart v. Beddow, is an attorney who is now representing the plaintiffs in Ainsworth.

Due to this common thread, we think we can draw some likely conclusions about the contents of the confidential McCart settlement from the issues raised in the Ainsworth complaintNote that the Ainsworth complaint was filed just about two months after the McCart defendants filed their motions to dismiss. As discussed below, it is clear that the Ainsworth complaint learned some valuable lessons from the motions to dismiss. Let’s engage in a bit of idle speculation:

Dispensaries can breathe a sigh of relief.

The McCart lawsuit named each and every OLCC licensed retailer that purchased the defendant farm’s product. In sharp contrast, the Ainsworth complaint doesn’t name any such “dispensary defendants.” Given that one of the goals of these RICO cases is to get a windfall under RICO’s treble damages clause, it is probably safe to assume that the McCart dispensary defendants didn’t end up being a pot of gold at the end of the RICO rainbow. Perhaps the attorney now agrees with our initial assessment: “It seems unlikely the Dispensary Defendants in this case had anything to do with operating or managing the enterprise. They appear to have merely been customers, in which case they shouldn’t have liability here.” This suggests that dispensaries are unlikely to be targets of future RICO suits based on the conduct of their suppliers.

The protections of ORS 30.936 (Right to Farm Act) played an important role in the McCart settlement negotiations.

As we explained in a previous entry in this series:

“ORS 30.936(1) . . . provides farmers in farming areas with immunity from suit for any trespass or nuisance claims, defined elsewhere as claims ‘based on noise, vibration, odors, smoke, dust, mist from irrigation, use of pesticides and use of crop production substances.’ Since RICO case law suggests that harms to property interests should be determined by state law, plaintiffs’ diminution of value claims are likely dead on arrival.”

The Ainsworth complaint takes pains to avoid the protections of 30.936. For example, paragraph 91 reads:

“Defendants are not entitled to ‘right to farm’ immunity pursuant to ORS 30.936 because Defendants’ use of the [Defendant] Property does not comply with applicable laws. For example, the [Defendant] Property is zoned ‘rural residential’ and therefore Defendants’ use of the [Defendant] property to produce and process marijuana commercially violates Linn County Ordinance 940.400(A) and 940.500(A).”

Plaintiffs are correct that Ordinances 940.400 and 940.500 appear to bar marijuana production on the Defendants’ property, but that only suggests that Defendants must have been grandfathered in when Chapter 940 (Marijuana Code) was adopted. Otherwise, they presumably would not have been able to receive state authorization to cultivate cannabis. If the Defendants’ use was grandfathered in, then the Ainsworth trespass and nuisance claims should still be barred by ORS 30.937, which extends the farming immunity to any “preexisting nonconforming use” as a farm.

Lessons Learned

Like with the McCart complaint, we can also analyze the Ainsworth complaint to draw some broader lessons for cannabis businesses that want to avoid similar lawsuits.

As quick reminder, we identified two initial lessons from the allegations in the McCart case:

  • Don’t be a jerk.
  • Control the odors.

Taking the allegations at face value, the Ainsworth defendants violated both of these rules. Like in McCart, there are (as yet unsubstantiated) allegations of harassment (although much less severe than in McCart). Also as in McCart, a major sticking point for the Ainsworth plaintiffs is the “unmistakeable skunk-like stench” that “pervades” the neighborhood, “stagnates” in the Plaintiffs’ yards, and “completely overpowers the gentle and pleasant scents of [one of] the [Plaintiffs’] flower gardens.” These lessons still clearly apply: Be a good neighbor, and control the odors.

We can pull a few new lessons from the Ainsworth complaint:

  • Avoid smoke. The Ainsworth complaint alleges that the Defendants regularly burned cannabis debris in their yard, causing smoke to trespass onto their neighbors’ property. Producers seeking to avoid similar lawsuits should think twice before lighting bonfires.
  • Limit noise. The Ainsworth plaintiffs complain of the noise caused by the industrial fans in the defendants’ greenhouses. Producers would be wise to take any reasonable steps to limit noise pollution.
  • Try to limit traffic. Both McCart and Ainsworth complained about the increased traffic caused by the cannabis farm at all hours of the night. It seems the ideal farm will have direct access to a major road instead of access through residential roads. Barring that, producers should at least try to limit after-hours traffic.
  • Don’t live next to a county commissioner. One of the plaintiffs is Linn County Commissioner John Lindsey. One would expect that Mr. Lindsey will recuse himself from any future attempts to rewrite Linn County’s cannabis ordinances.

The Ainsworth defendants have only recently lawyered up, so it may be a few weeks before we can see their answer to these charges. We’ll keep you updated.

hemp oregonIn the three previous entires to this series (here, here, and here), we have discussed the major changes in the packet of rules amendments that the OLCC adopted at the end of 2017. Those changes cover promotional events, lender disclosures, and canopy size changes for marijuana grows. Today, we want to talk about the new rules for industrial hemp.

Industrial hemp regulation has been going through a series of rapid shifts since 2016, when the Oregon legislature adopted a two-tier system that allowed for the registration of industrial hemp growers (producers) and handlers (processors). At the time, only hemp handlers could sell industrial hemp products. This changed last year, when Governor Kate Brown signed into law SB 1015, which allows industrial hemp to enter into the recreational cannabis supply line.

Just before the new year, the OLCC adopted amendments to its administrative rules on cannabis that implemented SB 1015, providing much needed guidance on the new hemp regime. First and foremost, the term “industrial hemp” refers to any cannabis plants with a THC concentration below 0.3 percent, mirroring the definition under federal law. Hemp growers and handlers can apply to the OLCC for an industrial hemp certificate ($500 per year, plus a $250 application fee) to transfer hemp to recreational processors, and handlers can also receive a certificate to transfer their hemp concentrates and hemp extracts to recreational processors.

In turn, recreational processors can apply for a special “endorsement” that will allow them to accept hemp and hemp products from the handlers and growers, create hemp concentrates or extracts with a THC concentration below 5 percent, incorporate hemp concentrates or extracts into “marijuana items,” and sell those products to other OLCC processors, wholesalers, and retailers. OLCC retailers can then turn around and sell these hemp-based products to Oregon consumers.

None of this answers the question that we receive most often from industrial hemp producers: “Can I sell my industrial hemp products outside of Oregon?” It goes without saying that OLCC retailers must sell locally, so any hemp products transferred into the recreational supply chain can only be sold in Oregon. Hemp outside of the recreational chain is regulated by the Oregon Department of Agriculture (ODA). The ODA’s rules are surprisingly wide open when it comes to the sale of industrial hemp products. Under OAR 603-048-0100, a hemp handler can sell hemp products “to any person.” The ODA’s rules make no reference to whether that sale must occur in Oregon.

While interstate sales of hemp products may be legal in Oregon in certain circumstances, federal law on the issue is anything but clear. The DEA has taken the position that any concentrate or extract derived from the flower, leaves, or resin of any plant of the cannabis family, regardless of relative THC concentration, is a prohibited Schedule I drug. In contrast, the mature stalks of such a plant and fiber from such stalks, as well as oils or cake derived from hemp seeds or stalks are not included in the federal definition of marijuana, and are not subject to federal prohibition. There is currently a lawsuit pending before the Ninth Circuit Court of Appeals that challenges the DEA’s position, and we can hope that the court will provide a bit of guidance in this area. For now, we still advise our clients to keep their products in Oregon.

Note: Portions of this post were originally published in the Portland Mercury and are republished here with permission.

Oregon marijuana cannabis
Better than booze is not good enough.

On January 10, Oregon’s cannabis regulatory body, the Oregon Liquor Control Commission (“OLCC”), sent out a notice to its listserv titled “Licensees Across Oregon Fail to Stop Sales to Minors.” The notice details the results of a series of minor decoy tests that the OLCC conducted between December 20, 2017 and December 29, 2017. Admittedly, the results are not great:

  • Dec. 20 – Eugene/Springfield – 16/19 passed – 84% compliance
  • Dec. 21 – Keizer-Salem – 18/23 passed – 78% compliance
  • Dec. 21 – Portland – 3/7 passed – 43% compliance
  • Dec. 28 – Central Oregon – 5/5 passed – 100% compliance
  • Dec. 29 – Southern Oregon – 8/12 passed – 67% compliance
  • Total – 50/66 passed – 76% compliance

The email notice was accompanied by a quote from Steve Marks, the Executive Director of the OLCC: “These overall results are unacceptable. One of the basic tenets of Measure 91 is the protection of children by discouraging their use of marijuana. Oregonians who voted for legalizing recreational marijuana implicitly told the cannabis industry to abide by public safety laws. Clearly they’re not, and we need to continue this type of enforcement activity.”

These results generated quite a bit of bad press for the Oregon industry, but we should take a moment to take a closer look at the numbers before declaring that Oregon’s cannabis industry is “clearly … not” abiding by public safety laws.

First, it should be noted that the January 10 email excludes the results of an OLCC decoy operation in Bend that occurred on December 19, 2017. All twenty locations passed. A more accurate picture of the OLCC cannabis decoy operation looks like:

  • Dec. 19 – Bend – 20/20 passed – 100% compliance
  • Dec. 20 – Eugene/Springfield – 16/19 passed – 84% compliance
  • Dec. 21 – Keizer-Salem – 18/23 passed – 78% compliance
  • Dec. 21 – Portland – 3/7 passed – 43% compliance
  • Dec. 28 – Central Oregon – 5/5 passed – 100% compliance
  • Dec. 29 – Southern Oregon – 8/12 passed – 67% compliance
  • Total – 70/86 passed – 82% compliance

Let’s compare this to the last six days of OLCC alcohol decoy testing:

  • Nov. 18 – Redmond/Sisters – 26/31 passed – 84% compliance
  • Nov. 20 – West Linn – 6/8 passed – 75% compliance
  • Nov. 30 – Bend – 10/15 passed – 67% compliance
  • Dec. 6 – Hermiston/Stanfield/Umatilla City – 16/24 passed – 67% compliance
  • Dec. 27 – Tigard – 11/12 passed – 92% compliance
  • Dec. 28 – Madras/Terrebonne – 8/9 passed – 89% compliance
  • Total – 77/99 passed – 78% compliance

On the whole, the cannabis industry outperformed the alcohol industry. Of course, the alcohol industry is not operating under a microscope due to federal prohibition and a hostile administration. The cannabis industry needs to be flawless, but still, the Oregon alcohol industry has had decades to get it together.

The second thing to keep in mind is that the OLCC’s sample size was quite small. There are currently 516 active recreational retailers in Oregon. The OLCC only tested about 17% of active retailers. Perhaps the most eye-popping statistic is that only 43% of Portland retailers passed, but remember that only 4% of active Portland retailers were tested (7/160).

The take-away here is that recreational dispensaries in Oregon must do better, but we are not facing an epidemic of sales to minors. We can and will do better. Owners need to focus their efforts on employee training, as it is now even more clear that the actions of a single poorly trained employee can have disastrous consequences for your business and potentially for the entire industry.

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.

marijuana cannabis loan
Nearly all lenders must now be disclosed to the OLCC

Just prior to the new year, we discussed the packet of rules amendments recently adopted by the Oregon Liquor Control Commission implementing the many cannabis bills signed by Oregon governor Kate Brown last year, and promised to dive in depth on a few of the more important changes. In the prior post we discussed new rules for “Marijuana Promotional Events.” This week we dig into a small but important change to the definition of “financial interest” that could have widespread effects on the Oregon cannabis industry: under the new rules, all lenders are pulled into the “financial interest” definition, and must be disclosed.

Historically, the definition of financial interest has not included lenders at commercially reasonable rates. But the new amendments add the following to the definition of “financial interest”: “lending money, real property or personal property to an applicant or licensee for use in the business that constitutes a substantial portion of the business cost.” OAR 845-1015(23)(a)(B). The new rules make no attempt to define “substantial portion of the business cost,” which means that some day, someone may test that definition in administrative litigation.

As a bit of background, the OLCC has always been interested in knowing the identity of each individual or entity that has a financial interest in a cannabis license. In the initial application process, applicants must disclose anyone with a financial interest in the company (in many cases, this includes spouses). The application can be denied if the interest holder has an issue that would justify denial if that person was an applicant, such as a (serious) criminal history. A licensee also has several notice requirements relating to anyone with a financial interest in the company:

  1. A licensee must notify the OLCC within 10 days if a financial interest holder has a change in contact information.
  2. A licensee must notify the OLCC within 24 hours if a financial interest holder is arrested or convicted of a misdemeanor or felony. Failing to do this can result in a license revocation.
  3. A licensee must submit a form to the OLCC and receive prior approval before making any change in who has a financial interest in the company. The OLCC has the right to reject the proposed change.

Prior to the recent change, the definition of “financial interest” was already fairly broad: “an interest in [licensee] such that the performance of the [licensee] causes, or is capable of causing, an individual, or a legal entity with which the individual is affiliated, to benefit or suffer financially.” This would of course include royalty agreements, commissions, or lease agreements where a landlord is entitled to a percentage of revenue. The rules also clarify that this definition includes “out-of-the-ordinary” employee compensation, borrowing money at a “commercially unreasonable rate”, giving something of value to a licensee for use in the business, and being the spouse of an owner of the licensee. Anyone in these categories must be disclosed to the OLCC.

This small change is going to have big effects. Due to a lack of institutional lending, most financing in this industry comes from hard money lenders or venture capitalist groups. Previously, the OLCC didn’t care about private financing so long as the loans were commercially reasonable. Now, virtually every lender must be disclosed to the OLCC for pre-approval, which will require background checks and possible fingerprinting. This will slow down investment in an already cash-poor industry and may have a chilling effect on potential wealthy investors who may opt to invest in an industry without such invasive requirements.

Change is the only constant in cannabis regulation.

On December 22, the Oregon Liquor Control Commission (OLCC)  adopted a large packet of rules amendments that incorporate the many cannabis bills signed by Oregon Governor Kate Brown this year, as well as “technical amendments [made] in response to market realities.” These changes, effective December 28, 2017, include:

  • implementation of mandatory seed-to-sale tracking for medical cannabis;
  • a new regulatory regime for hemp and hemp products that allows hemp products into Oregon’s recreational cannabis supply chain;
  • new rules governing Marijuana Promotional Events;
  • new canopy limits for growing immature plants outside of the standard canopy areas;
  • an exception to the retailers-must-be-1,000-ft-from-a-school rule if there is a physical or geographical barrier between the retail site and the school that prevents children from traveling to the retailer, such as a river;
  • new certifications for recreational wholesalers that can now trim cannabis, and can offer mobile for-hire trimming services;
  • some minor changes to transportation rules;
  • a small change to the definition of “financial interest” that will have a big impact on what investors must be pre-approved by the OLCC;
  • a new prohibition on sales through walk-up windows to complement the existing prohibition on drive-thru sales (Makes you wonder who came up with the work-around that led to this rule change); and
  • micro-tier producers can now do some processing of cannabis concentrates.

Because the changes cover quite a bit of ground, we’ll dig into several of these in more detail in future installments in this series. For now, we will focus on the new Marijuana Promotional Events, governed by OAR 845-025-1335. This new administrative rule allows recreational licensees to display their products at trade shows, which is something many of our clients have been eager to do for a while.

Under the new rules, trade shows or similar events will be organized by a single licensee or “Event Organizer”, that will be the primary contact with the OLCC. The Event Organizer must submit an application to the OLCC at least 28 days before the event that will include the names and signatures of any participating licensees, the amount and type of cannabis items that will be on display, and a control plan that explains how the participating licensees will prevent violations.

Assuming the OLCC approves an application, the participating licensees may bring and display marijuana and marijuana products from their inventory (sorry, no hemp). All of the marijuana must be returned to the licensee’s premises at the end of the event. Thus, these trade shows are not an opportunity to sell or otherwise distribute any cannabis products. Even samples are prohibited.

The ban on samples will probably dissuade some members of the public from attending, but that rule is no different than the ban on samples from licensed dispensaries generally. On the licensee side, trade shows may prove invaluable for smaller industry players hoping to distinguish themselves in a very competitive market. The other possibility, of course, is that licensees may find the regulations too strict, and decline to participate.

Check back soon for another dive into the new rules governing Oregon’s cannabis market. And Happy New Year!

At 3:30pm PST today, Sen. Ron Wyden became the first US Senate Co-Sponsor of Sen. Cory Booker’s Marijuana Justice Act (“MJA”). We’ve discussed the content of the MJA before here and as we stated in the Portland Mercury:

“Booker’s Marijuana Justice Act is remarkable in its scope. Not only would it remove marijuana and tetrahydrocannabinols (THC) from Schedule I classification, it would remove the federal criminal prohibition on the import and export of cannabis. It would also withhold federal money for the construction of prisons or jails from any state that has discriminatory (race or income) arrest and incarceration rates for cannabis offenses. Such states would also see up to a 10 percent reduction in federal funding for a broad array of crime fighting efforts. These funds would instead be directed into a community reinvestment fund that would go towards communities devastated by the drug war. Finally, and perhaps most ambitiously, it would expunge all old cannabis convictions, and anyone currently imprisoned on federal cannabis charges would have the right to a new sentencing hearing. The hearing judge would have authority to impose a modified sentence as if the Marijuana Justice Act was in effect on the date of the crime.”

It remains to be seen whether the Wyden sponsorship will catalyze other members of the Senate to step forward on this progressive bill. In the meantime, the near term focus for most industry watchers is the soon-to-expire protection for state medical marijuana programs and actors. We are cautiously optimistic that those protections will be extended later this week, provided the entire government doesn’t shut down. But in the long term, we would love to see the MJA build on today’s momentum, and eventually become law.

Sen. Wyden and Sen. Booker’s joint statement on the MJA was screened live on Sen. Booker’s Facebook page and is available here.

Josephine County Cannabis
The scales have tipped sharply against legal growers in Josephine County, Oregon.

At the end of September, we discussed the successful efforts of local growers in Josephine County, Oregon, to stop an ordinance that would have effectively banned commercial and medical marijuana on rural residential land in the county. After passionate argument by the growers, the Josephine County Board of Commissioners (“Board”) went back to the drawing board.

And they came back with something arguably worse. For comparison purposes, here is a short summary of the ordinance that almost passed back in September:

  1. Any OLCC licensed site would need a 300-foot setback on all sides. Currently, the code requires a setback of 30 feet in the front, 10 feet on the sides, and 25 feet in the rear.
  2. The property would need to be owned directly by the OLCC licensee. This would be problematic because many licensees lease land, or hold the land in a separate holding company for liability purposes.
  3. No OLCC site could be serviced by private road, easement, or owner maintained public right-of-way unless the OLCC producer owns all of the land adjacent to the right of way.

Any farm that could not meet these requirements would have had thirty days from the date the ordinance went into effect to request a Determination of Non-conforming Use. To qualify for a non-conforming use determination, a recreational site needed to:

  1. Be in full compliance with the county codes as they existed prior to the amendments; and
  2. Either have obtained a Land Use Compatibility Statement (“LUCS”) from the county planning department prior to the adoption of the new ordinance amendment, or have applied for a LUCS prior to the adoption of the amendment that is being “actively processed by [the] OLCC with the intent to issue a license.” 

And here is a short summary of the ordinance that was officially adopted on December 6, 2017. Any property zoned rural residential with more than 12 mature plants (the ordinance doesn’t seem to distinguish between medical and recreational) must comply with the following requirements:

  1. Cannabis production will be banned outright on all lots or parcels of five acres or less. This provision was included even though Commissioner Dan DeYoung has previously been quoted as saying “The rules should be the same for all rural residential whether it’s one acre, two and a half acres, five, ten, twenty-nine.”
  2. Lots larger than five acres may have up to a 1,250 square foot indoor grow area or a 5,000 square foot outdoor grow area (compared with the 10,000 square foot indoor or 40,000 square foot outdoor maximum per license allowed by OLCC regulations).
  3. The property must have a 100 foot setback on all sides for all structures and grow canopies.
  4. “The person regulated by the State of Oregon must have an interest in the lot or parcel where the marijuana production site is located.” At a minimum, this provision will ban the common practice of landowners leasing a property to third-party cannabis farms. Whether this will affect the practice of a farm owning the land in a separate holding company is a bit less clear. OLCC licensees are almost always companies, so is the company the “person regulated by the State of Oregon”? If so, it seems the licensee company will have to have some direct ownership interest in the separate holding company
  5. All security personnel on the property must obtain and maintain Marijuana Worker Permits from the OLCC. Normally, only workers that physically interact with cannabis must have a permit.
  6. Indoor production must use odor control systems. We believe this just requires what farms should be doing anyway, as we have previously recommended cannabis farms use odor control systems to avoid costly neighbor disputes.
  7. The county will notify all neighbors of any cannabis farm and owners must post notices of cannabis production where their properties meet public streets. Both of these requirements raise safety and security concerns.

Any farm licensed by the OLCC before March 6, 2018, will be considered a “special or unusual circumstance” and may apply for a variance from these regulations.

The group of growers and concerned citizens we discussed in the previous post have formed F.A.R.M.S. (Farming and Agricultural Rights Management Society) and are vowing to challenge this ordinance in court. We will keep you posted.