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.

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.

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.

Los Angeles Cannabis Marijuana San FernandoOur Los Angeles cannabis business lawyers, including me, are constantly being asked about the local cannabis laws of the various 88 incorporated cities in Los Angeles County.

Because it is both important and difficult to decipher each individual city’s local laws, we thought it would be helpful to provide you with charts showing the same. We divided the county into four regions, and over the next few weeks we will publish charts for each of these regions to keep you updated on each of the cities and their current laws.

This week’s post highlights the cities located in and around the San Fernando and Antelope Vallesy. Here is a chart showing the laws regarding cannabis cultivation, dispensing, distribution, and manufacturing in those areas.

Before you can receive a California cannabis license (temporary or annual) you must provide the state with proof of local approval. Our charts in this series are intended to help you figure out whether such local approval is possible and, if so, what it takes to get it.  Please note that although we hope find this research useful, local cannabis zoning ordinances tend to change quickly, so you will want to confirm these findings and run related due diligence, prior to taking action.

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.

California cannabis marijuana
Lookin’ good!

One of the most common questions our California cannabis attorneys get asked is “where can I start or expand my cannabis business?” It can be a tough question: as we often say on this blog, every one of California’s 58 counties and 482 incorporated cities can decide whether or not they’ll authorize commercial cannabis activities in their jurisdictions. This means that California’s local jurisdictions are constantly discussing whether to regulate, amend, or prohibit commercial cannabis activities. Jurisdictions that had previously authorized medical cannabis businesses to operate are now considering how to regulate adult-use cannabis activities. This leads me to the recent (and positive) developments in Santa Rosa.

As part of our California Cannabis Countdown series we covered the city of Santa Rosa back in May. Shortly after our post, Santa Rosa residents overwhelmingly voted in favor of Measure D, which was a ballot measure setting tax rates for cannabis businesses. Santa Rosa takes its cannabis policy seriously, as the city has held over twenty (20!) meetings to discuss cannabis policy over the last two years. Many of the meetings were held by the city’s Medical Cannabis Policy Subcommittee (“Committee”).

Since inception, the Committee has solicited feedback from the community and interested stakeholders and provided guidance to the City Council. To its credit, the City Council and Planning Commission showed a willingness to incorporate the Committee’s findings into new cannabis ordinances. Specifically, the City Council passed ordinances that allowed medical cannabis cultivation (indoor only), non-volatile manufacturing, distribution, and laboratory testing in Santa Rosa. This was a welcome development after seeing what happened in Marin County, Santa Rosa’s southern neighbor.

While moving forward with regulating medical cannabis business activities, the next item on the Committee’s agenda was adult-use cannabis regulation. The Committee drafted a comprehensive cannabis ordinance that would regulate both medical and adult-use cannabis businesses. However, when the ordinance was first proposed at the end of June it did not include provisions for adult-use commercial cannabis activities. Though after the passage of Senate Bill 94 (a/k/a the Medicinal and Adult-Use Cannabis Regulation and Safety Act), the City Council added adult-use cannabis activities to the ordinance. The updated ordinance was first “noticed” in November, approved on December 19th, and will take effect on January 19, 2018.

Without further ado, then, here’s a breakdown of the types of medical and adult-use cannabis activities allowed in Santa Rosa:

  • Cultivation (only indoor for commercial cultivation although outdoor cultivation for personal use is allowed subject two a two plant limitation).
  • Manufacturing (non-volatile and volatile).
  • Distribution.
  • Retail.
  • Delivery.
  • Microbusiness.
  • Testing Laboratory.

And here are some important things to keep in mind, under the new ordinance:

  • Cannabis businesses that have already received approval to conduct medical cannabis activities can incorporate adult-use activities into their permit with a zoning clearance.
  • Multiple cannabis business permits can be issued per site so long as there is a clear separation between license types.
  • The transfer of ownership or operational control of a cannabis business is allowed if the new owner/operator receives a zoning clearance from the city.
  • For cultivators square footage is determined by the size of the structure instead of by canopy.
  • Cannabis manufacturers that utilize a closed-loop system with will require approval from the city’s building and fire departments.
  • Only licensed cannabis retailers can conduct deliveries. The delivery-only dispensary model is currently not available.
  • Dispensaries may only operate between the hours of 9:00am and 9:00pm and are prohibited from having an on-site or on-staff physician to provide a cannabis recommendation.
  • On-site consumption and cannabis special events are allowed with the appropriate city approval.

Given Santa Rosa’s dedication to the conversation on cannabis, and the actual text of its new ordinance, we can safely way that the city is shaping up as a cannabis friendly jurisdiction (unlike these tough locales). Next, we will see how efficiently the city can administer its new marijuana ordinance come January 19th. We’ll be sure to keep you posted.

Jeff Sessions wants U.S. Attorneys to “Just Say No” to Marijuana Legal Reform.

Yesterday proved to be a wild day, featuring Jeff Sessions single-handedly demolishing the federal government’s former cannabis enforcement framework. Now that 24 hours have passed since the news came out, we have had a chance to refine our analysis of the Department of Justice’s move.

Reactions in the media have ranged from treating the Sessions announcement as nothing more than an attempt to frighten the cannabis industry to claiming that it was the first step in an organized crackdown of the marijuana industry that could affect cannabis businesses and users. For now, we must treat both of those possibilities as plausible futures. Trump and Sessions may be gearing up for a wave of arrests, prosecutions, and asset forfeitures related to marijuana businesses —or Sessions may just be trying to put a fright into marijuana business owners and investors. Only time will tell.

The “Sessions Memo” was short on specifics. It didn’t contain an outright directive ordering U.S. Attorneys to go after marijuana businesses. Instead, it simply withdrew the earlier marijuana-specific guidance memoranda and directed U.S. attorneys to treat marijuana sales like any other federal crime. The withdrawn memos include, among others, the August 2013 Cole Memo that has underpinned federal marijuana policy for the past four and a half years; the February 2014 Cole Memo that extended low enforcement priority status to apply to banking activities; and the 2014 Wilkinson Memo that was a sort of Cole Memo for tribal lands.

So now, U.S. attorneys have full discretion to determine to what extent they can/should enforce federal law in the context of marijuana crimes in states with legalization and medicalization. Sessions referred to the principles of enforcement in the U.S. Attorneys’ Manual, but that document reinforces the level of discretion and authority that each U.S. attorney has already. The Cole Memo was useful in providing a consistent nationwide federal policy. Under the new Sessions Memo, we are back to the days of having potentially 93 different enforcement policies — one for each U.S. Attorney. Here’s what we know already about a selection of the U.S. Attorneys that will be making these decisions:

Robert Troyer, District of Colorado: Bob Troyer issued a statement yesterday saying that his office “has already been guided by [the U.S. Attorneys’ Manual’s] principles in marijuana prosecutions.” This statement implies that Troyer doesn’t see any difference in Colorado between prior policy and today’s policy.

Annette Hayes, Western District of Washington: Annette Hayes, who has served as either the Acting U.S. Attorney or an interim U.S. Attorney since October 1, 2014, also put out at statement, but it was significantly denser than Troyer’s statement. It wasn’t overtly negative, but it also wasn’t as direct as Troyer’s regarding enforcement policies remaining the same.

Joseph Harrington, Eastern District of Washington: Joseph Harrington is another Acting U.S. Attorney that is a holdover from the Obama administration. Harrington did not issue any specific statement in response to the Sessions Memo. When media outlets asked Harrington about his position, he responded by referring media requests to the Department of Justice in Washington D.C. Harrington, for now, is something of a black box on this.

Billy Williams, District of Oregon: Billy Williams was also appointed during the Obama administration, but Trump did nominate him to stay on as U.S. Attorney in December. Williams prosecuted two Oregonians for federal cannabis crimes in 2016, but there were Cole Memo priorities implicated, including sales to minors. More recently, Williams invited Sessions to visit Oregon to discuss Oregon’s cannabis market in September 2017. In response to the Sessions Memo, Williams issued a press release saying: “We will continue working with our federal, state, local and tribal law enforcement partners to pursue shared public safety objectives, with an emphasis on stemming the overproduction of marijuana and the diversion of marijuana out of state, dismantling criminal organizations and thwarting violent crime in our communities.” Again, this statement doesn’t read too poorly, but it is sufficiently vague enough to still be worrisome.

California: California is a bit of a mess in all of this. Oregon and Colorado only have one U.S. Attorney each. Washington has two, but they are neatly separated into eastern Washington and western Washington, which often feel like two different states anyway. California, on the other hand, has four U.S. Districts.  And none of those four has or will have a U.S. Attorney with more than two months on the job.

  • Northern District: The U.S. Attorney for the Northern District of California, Brian Stretch, resigned yesterday to join a private firm. No replacement has been named.
  • Central District: The Central District is a populous jurisdiction that includes Los Angeles, Riverside, San Bernadino, Ventura, Santa Barbara, and San Luis Obispo. Two days ago, Sessions appointed a new U.S. Attorney for the Central District, Nicola Hanna. Hanna doesn’t seem to have much written history regarding his views on marijuana, but the fact that Sessions picked him and specifically called him out for “taking on drug traffickers” isn’t the most positive sign.
  • Eastern District: McGregor Scott, also a recently-named U.S. Attorney, has actually been a U.S. Attorney in the past, having prior experience in the Northern District of California. He did not earn positive marks from the cannabis community, as he did pursue aggressive marijuana prosecutions in the mid-2000s.
  • Southern District: Finally, Adam Braverman was named U.S. Attorney for the Southern District of California a couple of months ago in November. He is most well-known for international cartel work as well as other types of organized crime. Braverman made a statement in support of the Sessions Memo, saying: “The Attorney General’s memorandum today returns trust and local control to federal prosecutors in each district when it comes to enforcing the Controlled Substances Act.”

If we are reading the tea leaves to see what is going to happen next (and they are indeed tea leaves), Colorado appears to be in the safest position, but California could turn into a real mess with different enforcement standards in different counties depending on which judicial district a business is in. Banking will be a major unknown for some time as well. FinCEN’s 2014 Guidance heavily referenced the Cole Memo, which is now rescinded. If FinCEN withdraws that guidance, what kind of ripple effect will it have on other bank regulators?

It also remains unclear how all of this policy will work out. Cory Gardner, a republican senator from Colorado, appeared furious when he responded to the initial announcement of the Sessions Memo (video below). He went so far as to threaten to hold up DOJ nominations, which would include those newly appointed California U.S. Attorneys. Sessions’s actions, as well as those of the U.S. Attorneys, are not yet set in stone. Ultimately, political pressure from Congress may still have an effect on the final outcome.

Jeff Sessions Hates Cannabis
Jeff Sessions Hates Cannabis

It’s finally happening — Attorney General Jeff Sessions will, today, rescind the 2013 Cole Memo regarding federal enforcement in states that legalized cannabis. The Cole Memo, which came on the heels of marijuana legalization in Colorado and Washington back in 2012, set forth the Obama administration’s enforcement policies regarding state-legal marijuana. It set out eight main enforcement directives that essentially allowed states to move forward with legalization so long as they had “robust” regulations to control undesirable side effects. In turn, cannabis operators who consistently complied with hardcore state marijuana regulations basically saw themselves as off-limits to the Feds because of the Cole Memo. Nonetheless, the Cole Memo did not legalize or decriminalize marijuana and marijuana remains federally illegal today.

With this imminent shift in enforcement policies from the Department of Justice (DOJ), the question now becomes what will future DOJ enforcement look like?

Where the Cole Memo basically relinquished marijuana enforcement to the states under certain conditions, rescission of the Cole Memo likely will mean that federal prosecutors in cannabis legal states will now be free to decide how aggressively they wish to enforce federal marijuana laws. This means that a U.S. Attorney’s views on cannabis in a state where cannabis is legal will be critically important. It, therefore, behooves you — now more than ever — to familiarize yourself with the stances your particular U.S. Attorney has regarding cannabis. Though we do not foresee a return to high-level and consistent federal enforcement against cannabis — the DOJ lacks money and manpower to prosecute everyone — individual prosecutors will likely soon have sufficient means to target certain operators that get on their radar. Most U.S. Attorneys though (especially in the leading cannabis legal states) will see going after cannabis as political suicide and view themselves as having bigger fish to fry.

There will, however, likely be a ripple effect from this news. Namely, current access to banking, any tax reform progress, and investment are going to feel the chill of uncertainty and the threat of federal enforcement. Banks are only banking the cannabis industry because of a set of FinCEN guidelines from 2014 (and another DOJ memo on marijuana banking) that hinged on the Cole Memo. Banks are incredibly conservative and taking down the Cole Memo will almost certainly lead some banks to stop providing banking services to cannabis businesses. Institutional investors do not like this kind of uncertainty and we fear this will lead to a slowdown in cannabis investments, at least until we see how U.S. prosecutors handle the new enforcement protocol.

And what about the Rohrabacher-Blumenauer amendment (“Amendment”)? It’s still in play as valid federal law until January 19th, when it comes up for renewal. Be mindful though that the Amendment applies only to states with medical cannabis; it does not provide any protection to adult use marijuana operators. Plus, that Amendment has only served to protect medical cannabis operators in the 9th circuit based only on the McIntosh case.

Sessions’ move will increase confusion for both U.S. Attorneys and states, but I have been representing cannabis businesses in California and Washington for eight years now and I am confident that Western States like California, Colorado, Oregon, and Washington are not going to back down in the face of Jeff Sessions’ overzealous pursuit of his personal war on marijuana. Indeed, these (and other) states’ positions may ultimately speed up bonafide legal challenges that finally call into question in a real way the constitutionality of marijuana’s current scheduling and states’ rights to legalize and be left alone.

Stay tuned.

The California cannabis model is unique.

Even though the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA“) stripped distributors of massive amounts of power, they are still relevant and 100% necessary if cultivators and manufacturers want to get their products to retailers. Why? There are three primary reasons:

  1. Distributors are the only license type that can transport marijuana products and they’re also the only licensees that can coordinate the required third-party testing of licensees’ products.
  2. Prior to any retail sale, licensees must ensure that a distributor undertakes quality assurance packaging and labeling reviews of their products.
  3. Perhaps most importantly, distributors are almost exclusively in charge of collection and remittance of the cultivation and excise taxes to the California Department of Tax and Fee Administration (“CDTFA”).

Given the responsibilities placed on distributors by the MAUCRSA and the corresponding Bureau of Cannabis Control (“BCC”) emergency regulations, multiple distributors, as well as cultivators and manufacturers working with distributors, have asked us to draft their distribution service contracts. Gone are the days where cannabis goods and services are traded amongst wholesalers and retailers based on handshakes–at this point, it would be a huge mistake not to have your distribution contracts in writing to ensure enforceability and good behavior in the marketplace.

So what should go into your cannabis distribution contract? Excluding all of the normal and necessary contract concerns like performance deadlines, term, termination standards, material breaches, waiver, assignment, disputes, etc., here’s a list of considerations that should be specific to the average California distribution agreement:

  1. Don’t think of it like alcohol.  This is not an alcohol distribution contract, so forget googling some boilerplate alcohol or beer distribution agreement. Unlike California alcohol distributors, marijuana distributors don’t have to push brands or make any representation or warranties that they have the authority or power to do that for the benefit of the manufacturer or cultivator in any kind of exclusive way or setting. Distributors don’t have to sweat product promotion, marketing, or even sales: in California, they don’t have to take title to the products they distribute (taking title is strictly optional).  Even if a distributor were going to take on such a role, the alcohol distribution contract model still likely wouldn’t fit given the BCC rules in play regarding “ownership” and “financial interests,” and because of the MAUCRSA’s anti-competitive behavior standards.
  2. The white label option. Consider white labeling for flower. Distributors may re-label, re-package, label, and/or package cannabis flower for retail sale under the BCC rules. Notably, distributors are not allowed to white label any manufactured products unless they also hold a manufacturing license and are re-labeling/re-packaging their own manufactured products. If you’re going to white-label flower as a distributor, you need to consider a whole host of issues ranging from the creation of intellectual property, to product specifications, product warranties, applications of branding, risk and retention of title over the product, quality control, and liabilities and/or product recalls due to faulty packaging and labeling.
  3. Core services.  Determine what lines of business you want to be in as a distributor, as you can charge licensees for performance of these services. Your options are: 1) storage only services, 2) transportation or transportation-only, 3) coordination of third party testing, and 4) quality assurance reviews of packaging and labeling. If you coordinate testing, you must also do the final quality assurance review.
    • Storage only. Note that distributors can’t store (or distribute) non-cannabis goods on their premises. There are also significant regulatory obligations that should be recorded in any distribution service contract to ensure that distributors meet these mandatory performance standards (like separate and distinct storing of various batches and that the informational content of batch labels lines up with BCC rules). If dealing with storage-only services, distributors and other licensees will want to analyze in their service contracts who bears the risk of loss of any product and what the consequences under the contract will be for any storage rule violations by the distributor.
    • Transportation or transportation-only. Movement of the product across the marketplace is going to be a critical revenue driver. There are all kinds of BCC rules governing transportation of product which, again, should be recorded in any service contract between a distributor and any other licensee including, but not limited to, performance standards for the generation of correct and accurate shipping manifests as well as ensuring that the distributor follows the rules for the state’s designated transportation routes. In addition, if you’re dealing with a transportation-only distributor, that distributor can’t transport any product to retailers except for transporting immature plants and seeds from a nursery licensee, and these kinds of distributors can’t take title to any product unless they hold some other type of commercial cannabis license. Again, who bears the risk of loss of product and performance regarding transportation schedules is going to be paramount when dealing with transportation services.
    • Coordinating third party testing. Essentially, the distributor is responsible for lining up third party lab testing of all products made or manufactured after January 1, 2018, and distributors must video record the lab’s retrieval of any given batch sample for testing as well as ensure that the lab takes a representative sample of the batch for testing (both the lab and the distributor are obligated to execute a chain of custody form to substantiate their interactions over the batch). The labs used by distributors for this service should be subject to negotiation between the cultivator/manufacturer and the distributor, and we anticipate that to be a large point of contention between the parties based on cost of the tests and reputation of the labs. The question has also arisen regarding with whom the lab should contract, with the distributor or with the licensee whose product is being tested (or both). Again, this is likely subject to negotiation between the parties.
    • Quality assurance review. Once the distributor receives a passing certificate of analysis from the lab for a test batch, the distributor cannot just transport the products to a retailer. Instead, the distributor has to do a quality assurance review of the product’s labeling and packaging to make sure that it meets the BCC rules. Basically, the distributor is the last stop to ensuring that all product packaging and labeling meet the rules in play. Such a role will of course play into the distributor’s liability for any bad, defective, or faulty packaging/labeling that hits the marketplace and those scenarios need to be handled through solid indemnification clauses in the distribution service agreements.
  4. Testing contingencies.  Make sure you sort out who is responsible for what and when in the event a batch doesn’t pass testing since the state has a mandatory protocol in place for this.  If the distributor is in possession of a failed batch that can be “remediated,” the distributor may “transport the batch to a cultivator or manufacturer for remediation.” Notably, the distributor doesn’t have to return the batch to the licensee who sourced it, which is another point of negotiation for the distribution services contract. Finally, a distributor can’t destroy a batch that failed laboratory testing and that can’t be remediated, so don’t include that in your agreements for products that fail testing: it won’t be an enforceable performance standard.
  5. Inventory Tracking. Account for any discrepancies in inventory in the contract. Distributors are obligated to audit their inventory every 14 days. If there’s any difference between actual inventory and the state’s track and trace system, the distributor must immediately undertake an audit. In turn, this inventory accounting should be a distributor performance standard in any service contract, especially if you’re looking at storage or transportation-only services, to ensure that there’s no confusion about which party is responsible for maintaining track and trace standards on the products while they’re in storage or while they await transportation or testing.
  6. State tax reporting.  Be sure to address the distributor’s collection and remittance of taxes to CDTFA. This is going to be a big issue between licensees as CDTFA continues to change its MAUCRSA tax policies and standards. For cultivators and manufacturers, distributors will likely want to collect the cultivation tax upon transfer of the product or upon the issuance by the lab of a passing certificate of analysis. In addition, the timing of remittance of the tax should also be addressed in the contract and abide by CDTFA regulations. Ultimately tough, CDTFA may ignore tax agreements between parties, and will first look to the distributor for any unpaid tax.  A distributor should therefore address in the contract the parties’ responsibility for bad math on the tax owed, falsified financial data and other failures to comply with CDTFA regulations or policy.
  7. Licensing issues.  Don’t forget to negotiate what happens to the agreement in the event a party loses their state license or local approval to operate. It’s highly unlikely that the parties will want to keep doing business together if one of them loses their ability to conduct commercial cannabis activity under state or local law, so be sure to include that worst case scenario in the distribution agreement.
  8. Regulatory changes.  The rules will continue to change indefinitely and they may (and likely will) affect your distribution agreement as a result. After enough time goes by and the market stabilizes, regulatory will often begin to make rules around licensees’ abilities to contract with each other to ensure that there’s no anti-competitive behavior or practices taking place. As a result, make sure that you reserve the right to amend the contract to comply with the rules in the event they affect material terms in the agreement.
Cannabis Litigation Webinar
Join us next Thursday! Should be fun.

Next Thursday, January 11, Harris Bricken will present a FREE lunch hour webinar on marijuana litigation. Please click here to sign up.

Harris Bricken’s marijuana litigators in Washington, Oregon, and California have been handling cannabis disputes for years. These cases involve individuals, partnerships, corporations, and LLCs. Subject matter may cover business disputes, investment and financing, intellectual property, employment, landlord-tenant issues, and administrative actions. As the cannabis industry expands, litigation in these areas, as well as in new areas such as product liability and patents, will increase.

Cannabis cases are different than any other type of business litigation, and nearly every case has a federal law component. State legalization has also led to an enormous statutory and regulatory apparatus that cannabis businesses — and their lawyers — must navigate every day. To meet the needs of the cannabis industry, Harris Bricken has experienced and dedicated civil litigators in its Seattle, Portland, San Francisco, and Los Angeles offices, including Vince Sliwoski, Hilary Bricken, John Mansfield, and Will Patterson. These lawyers will speak on various topics, including:

  1. The state of cannabis litigation and emerging trends
  2. How cannabis disputes are different than disputes in other industries
  3. Disputes involving partnerships and other business entities
  4. Intellectual property disputes
  5. Product liability disputes
  6. Federal law issues
  7. Employment disputes
  8. Remedies in cannabis lawsuits
  9. Ways to avoid cannabis litigation

If you are in or around the marijuana industry, understanding business disputes and how to avoid them is critical. And if you are unfortunate enough to find yourself in a dispute, you need advisors experienced in handling these issues. We hope you will join us next week for a lively panel discussion on this important topic. Go here to sign up, and bring your questions.

Until then, here is a healthy list of articles regarding cannabis litigation: