Recreational Marijuana

Last week we expanded our litigation series to focus more broadly on the different kinds of litigation in which your canna-business is likely to become embroiled. For ease of reference, here is the series so far:

Cannabis litigation
Cannabis Litigation: The waiting is the hardest part.

Today we will talk about one of the most vexing aspects of litigation: timing. According to Above the Law, the longest legal case in US history lasted 57 years! Fortunately, your typical state court case will usually be set for trial within one or two years of filing (with exceptions for expedited cases), though some federal cases can take much longer. For example, federal patent litigation cases can take about three years before trial.

Clients almost always have a justifiable sense of urgency when it comes to litigation. It feels like the other side is trampling on their rights, and each passing day brings more legal fees and more damage to the business. Litigation can often make clients feel helpless in the face of a legal system designed to slowly and methodically ferret out the truth.

This sense of urgency is particularly acute when the opposing party’s conduct is actively and irreparably harming your business interests. In these cases when patience is not a viable option, your lawyer will likely discuss the possibility of seeking provisional remedies, specifically temporary restraining orders (“TRO”) and preliminary injunctions.

A party seeking provisional remedies is asking the court to halt certain conduct prior to a full determination on the merits. Since it comes before you win your case, this is an extraordinary remedy, and the burden on the movant is high. Additionally, the purpose of provisional remedies is typically to preserve the status quo, for example, to prevent a landlord from wrongfully evicting a tenant.

The law varies by jurisdiction, and for purposes of this post, we will focus on Oregon state law. Under Oregon Rule of Civil Procedure 79 (ORCP 79), a party can obtain provisional remedies in a civil action when it appears the movant is entitled to relief demanded in a complaint and the requested relief involves halting the commission of an act that will cause injury to the movant during the course of the litigation. The movant can ask for a preliminary injunction, or, pursue a TRO if the danger is immediate.

Preliminary Injunctions

A preliminary injunction prohibits the non-movant from taking specific actions that will harm the movant, and the scope of the Court’s authority to craft an appropriate remedy is remarkably broad. A preliminary injunction can even bind non-parties, specifically a party’s “officers, agents, servants, employees, and attorneys and … those persons in active concert or participation with any of them that receive actual notice of the order by personal service or otherwise.”

When considering a preliminary injunction you should be aware of the cost. A hearing on a preliminary injunction is a mini-trial, with both sides presenting witnesses and evidence, and all of the attorney fees and costs that entails. Additionally, even if you prevail you will need to post a bond in an amount set by the Court, based on the Court’s estimate of the potential damages that the injunction will cause to the other party. If you ultimately lose at trial, then the other party will get the full amount of the bond.

Temporary Restraining Orders

In Oregon, you must give the other party at least five days notice of the preliminary injunction hearing, so that the parties can prepare their evidence. If you absolutely cannot wait five days, then you can file a motion for TRO and order to show cause why a preliminary injunction should not enter. Given the emergency nature of this type of pleading, it is typically submitted ex parte: the movant will personally appear at the court and hand deliver the pleading and supporting documents to the clerks and will likely speak directly to a judge on the same day. The Court will typically decide whether to issue the TRO based on the affidavits and evidence submitted by the movant on the same day. The non-movant may appear but likely won’t have much of an opportunity to submit contradictory evidence.

The TRO can only last about ten days, so if the TRO is granted, then the Court will quickly set an evidentiary hearing to determine if the TRO should be converted to a preliminary injunction, as described above. As with the preliminary injunction, you will need to enter a bond with the court before the TRO will go into effect.

Seeking provisional remedies is an extraordinary and expensive step, but may prove vital towards protecting your cannabis businesses. We have seen it be particularly effective in stopping wayward business managers from stealing company assets and other misconduct. The preliminary injunction procedure can prove to be dispositive, as the result will often drive the parties to settle in one or the other party’s favor.

Next week we will continue this series by discussing another method of quickly resolving litigation disputes: dispositive motions.

California cannabis lawyers
Big changes are coming to California cannabis collectives

Pretty much every state that’s dealt with an unregulated medical cannabis program has had to face the issue of what to do when heavily regulated adult use cannabis is introduced. In pretty much all of the West Coast states, you have had medical cannabis programs for qualified patients that revolve around an opaque “collective” model whereby patients are supposed to come together to pool resources to cultivate and distribute cannabis for medical use (via a physician or health care provider recommendation) among themselves and/or their caregivers. California was the first state to allow for medical cannabis for qualified patients back in 1996 under the Compassionate Use Act, which is part of the state’s health and safety code. Using “creative” legal advice to take advantage of this Act’s multiple loopholes and ambiguities, the “collective model” in California usually involves patients joining  a “closed loop” membership system (sometimes a formal corporate entity and sometimes not) to receive their medicine allegedly from other patients in the collective who grow or make it for them. What now happens to this collective model since California’s new cannabis laws (and forthcoming regulations) do not repeal the Compassionate Use Act?

When other states have faced the issue of what to do with their old and ambiguous medical marijuana laws after having enacted new and hardcore cannabis regulatory systems, they choose to have the new hardcore regulations cover all or nearly all cannabis issues in their state. This is due mostly to a desire to get into full compliance with the 2013 Cole Memo.

Our California cannabis lawyers are often asked whether it will be worth it to abandon the collective model in favor of receiving a state license under MAUCRSA, which will take time, money, and no small amount of effort. Our answer that it will be, especially because eventually you will no choice anyway. Even though the California legislature cannot disturb the Compassionate Use Act, it has already amended and repealed key provisions of the Medical Marijuana Program Act from 2003 that provided immunity to medical cannabis collectives and this will eventually eliminate the current collective model altogether.

Following 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. Immunities for medical cannabis collectives (i.e., non-profit mutual benefit corporations, non-profit corporations, non-profit cooperatives, etc.), on the other hand, expire one year after the state begins issuing licenses. See, H&S Code section 11362.775(d). 

Though 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. So, despite the one-year grace period provided to current collectives in H&S Code section 11362.775(d), a collective that is engaging in commercial cannabis activity that exceeds the very strict qualified patient and primary caregiver limits (see below) violates MAUCRSA and is operating illegally. We are hearing far too many stories (more in our Los Angeles office than in our San Fransisco office) of so-called cannabis lawyers and cannabis consultants charging small fortunes to help their collective clients avoid extinction. We urge you not to waste your money on these schemes.

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 under this article, 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)).

Additionally, collectives and caregivers still must comply with applicable local city and county laws, which are quickly changing with respect to how they deal with commercial cannabis activity so as to embrace MAUCRSA licensing standards (if there’s not a ban).

If you do not believe the above will be enough to bring the current collective model to a halt by January 1 (when California cannabis licenses begin to issue and when temporary licenses are supposed to become effective), there’s more. Commercial cannabis activity is only permitted among licensees and once a business entity or individual receives an active temporary license or a full-blown license from the state, they must immediately stop doing business with non-licensed entities (including unlicensed collectives), or they risk losing their license. See B&P section 26053(a).

Those who think they will be able to milk the current unregulated collective model for the next year or so as the state implements MAUCRSA are likely to be sorely mistaken. Like the other adult use states that came before it, California will very soon essentially wipe out the old collective model in favor of the transparency and regulation its citizens chose. Trying to hold on to the collective model after January 1, 2018, is going to be a dangerous legal mistake.

 

 

 

California’s Bureau of Cannabis Control (along with its Departments of Public Health and Food and Agriculture) dropped their much-anticipated emergency rules this afternoon (see here, here, and here) to fully implement the Medicinal and Adult-Use Cannabis Regulation and Safety Act in California. The agencies kept a lot of what we saw from the withdrawn rules under the Medical Cannabis Regulation and Safety Act (MCRSA). (see herehere, here, and here), but there are also some new, notable additions and some interesting gap-fillers that now give us the foundation for operational standards across cannabis license types.

Though we can’t cover every single change or topic from these rules in one post (and because we’ll be covering the license types and application details in other posts in the coming days and weeks and at our SoCal Cannabis Investment Forum), I will instead focus on the following highlights of the emergency rules:

  1. We now have a revised definition of “canopy,” which is “the designated area(s) at a licensed premise that will contain mature plants at any point in time.” In addition, canopy shall be calculated in square feet and measured using clearly identifiable boundaries of all area(s) that will contain mature plants at any point in time, including all of the space(s) within the boundaries. Canopy may be noncontiguous, but each unique area included in the total canopy calculation shall be separated by an identifiable boundary which includes interior walls, shelves, greenhouse walls, hoop house walls, garden benches, hedgerows, fencing, garden beds, or garden plots; and if mature plants are being cultivated using a shelving system, the surface area of each level shall be included in the total canopy calculation.
  2. “Nonvolatile solvent” has been further defined to mean “any solvent used in the extraction process that is not a volatile solvent,” which “includes carbon dioxide (CO2) used for extraction and ethanol used for extraction or post-extraction processing.”
  3. Temporary licensing has now been fully detailed to include online applications, the personal information for each owner that must be disclosed, contact information for the applicant’s designated point of contact, physical address of the premises, evidence that the applicant has the legal right to occupy the premises for the desired license type, proof of local approval, and the fact that the temporary license (which is good for 120 days) may be renewed and extended by the state for additional 90 day periods so long as a “complete application for an annual license” has been submitted to the state. No temporary license will become effective until January 1, 2018.
  4. For the full blown “annual license,” the application requirements are pretty much the same as under the MCRSA rules except that you must disclose whether you’re applying for an “M License” or an “A License” and you have to list out all of your financing and financiers which include: “A list of funds belonging to the applicant held  in savings, checking, or other accounts maintained by a financial institution, a list of loans (with all attendant loan information and documentation, including the list of security provided for the loan), all investment funds and names of the investors, a list of all gifts, and a list with certain identifying information of anyone with a “financial interest” in the business. “Financial interest” means “an investment into a commercial cannabis business, a loan provided to a commercial cannabis business, or any other equity interest in a commercial cannabis business.” The only exempt “financial interests” are bank or financial institution lenders, individuals whose only financial interest is through an interest in a diversified mutual fund, blind trust, or “similar instrument”, and those shareholders in a publicly traded company who hold less than 5% of the total shares.
  5. As part of your licensing application, you will still need to submit a premises diagram drawn to scale along with all of your security procedures and inventory procedures (and pretty much all corresponding operational SOPs) A $5,000 bond is still required for all licensees (as well as mandatory insurance) and all owners must submit their felony conviction criminal histories as specifically enumerated in the regulations, as well as rehabilitation statements.
  6. Several new licenses have been created (and/or brought back from the dead from MCRSA): the cannabis event organizer license (to enable people to take advantage of the temporary cannabis event license), the distribution transporter only license (which allows this licensee to only move product between licensees, but not to retailers unless what’s being transported are  immature plants or seeds from a Type 4 nursery), the processor license (a cultivation site that conducts only trimming, drying, curing, grading, packaging, or labeling of cannabis and non-manufactured cannabis products), the Type N and P manufacturing licenses are back, and there’s now a Type 9 delivery only Non-Storefront Retailer license.
  7. We also now have the non-refundable licensing fee schedules and though they vary depending on the license type they mostly are nominal, though some increase with increased gross receipts, and small and medium-sized growers will have to pay pretty robust fees.
  8. If you want to make changes after-the-fact to your premises or to your ownership structure, you first must secure state approval to do so.
  9. All growers are again limited to one Type 3 medium cultivation license each, whether it’s an M License or an A License.
  10. A retailer can sell non-cannabis goods on its premises so long as their city or county allows it (this excludes alcohol, tobacco, and tobacco products). Retailers can also sell non-flowering, immature plants (no more than six in a single day to a single customer). M-licensed retailers and micro-businesses can also give cannabis away free of charge to qualified patients or to their caregivers.
  11. Notably, until July 1, 2018, licensees may conduct commercial cannabis activities with any other licensee, regardless of the A or M designation of the license.
  12. The renewable energy requirements for cultivators have been revamped hopefully to the satisfaction of cannabis growers.
  13. Again, the licenses are NOT transferable, so we’re looking at folks only being able to purchase the businesses that hold them.
  14. Distributors will be able to re-package and re-label flower, but not infused cannabis products unless they hold a manufacturing license. Distributors also cannot store any non-cannabis goods at their premises. The state has laid out what must take place during a distributor’s quality assurance review and the chain of custody protocol with third party labs for testing.
  15. We have a detailed list of all permissible extraction types, including that any CO2 extractions must be done within a closed loop system.
  16. The prohibited products list is pretty much the same as it was under the  MCRSA rules (so, no nicotine or caffeine infused cannabis products).
  17. In regards to “premises,” the Bureau’s regulations mandate that a licensee may have up to two licenses at a given premises of the same license type so long as they’re owned by the same company and one is an A-License and  the other is an  M-License.
  18. In addition to other relatively onerous advertising requirements, licensees must “Prior to any advertising or marketing from the licensee involving direct, individualized communication or dialog, . . .  use age affirmation to verify that the recipient is 21 years of age or older.” Direct, individualized communication or dialog, may occur through any form of communication including in person, telephone, physical mail, or electronic. A method of age verification is not necessary for a communication if the licensee can verify that “the licensee has previously had the intended recipient undergo a method of age affirmation and the licensee is reasonably certain that the communication will only be received by the intended recipient.”
  19. Retailers and micro-businesses are now required to hire third party security to protect and watch their premises.
  20. To hold a micro-business license, a licensee must engage in at least three of the following commercial cannabis activities: cultivation, manufacturing, distribution, and retail sale. There are also now a slew of regulations surrounding each activity a micro-business can undertake.
  21. Live entertainment is now allowed at a licensed premises so long as it follows the bevy of regulations regarding content and presentation.

Overall, we have a close-ish copy of the withdrawn MCRSA rules that will lead us into 2018. Be sure to read the rules again and again before pursuing your California cannabis license. Applicants will have their work cut out for them on both the state and local levels.

 

Attorney General Jeff Sessions seems to have made it his personal M.O. to go after and take down state-legal marijuana programs and businesses, medical and recreational alike. He has made no bones about not being a fan of marijuana or its users, but the state-legal marijuana industry can breathe a (slight) sigh of relief on the heels of Sessions finally providing some guidance from the Department of Justice. According to Sessions, this administration will follow the 2013 Cole Memo in the enforcement of marijuana-related crimes in states with marijuana legalization and/or medicalization and corresponding regulatory systems.

During the House Judiciary Committee oversight hearing yesterday, Sessions stated the following on the record:

Our policy is the same, really, fundamentally as the Holder-Lynch policy, which is that the federal law remains in effect and a state can legalize marijuana for its law enforcement purposes but it still remains illegal with regard to federal purposes.

Hopefully then, cannabis businesses in states with “robust regulation” that adhere to the eight enforcement priorities of the 2013 Cole Memo will be the lowest enforcement priorities for the DOJ. However, neither that Memo nor Sessions’ apparent acceptance changes the federal Controlled Substances Act and marijuana remains illegal under federal law. Still, Sessions agreed with Representative Steve Cohen (derived from a line of questioning from Cohen) that marijuana is not as dangerous as heroin (despite the Schedule I classification they share under the federal Controlled Substances Act). Despite all of Sessions’ anti-marijuana rhetoric (and his poking and prodding of states with recreational marijuana licensing systems), it seems he’s finally coming around to facts and science. Do not though expect this Attorney General to make an effort to reschedule marijuana anytime soon as he will no doubt continue taking the Republican Party line on continuing the failed war on drugs.

Another big boon from yesterday’s hearing is that, despite Sessions requesting Congress essentially undo state medical marijuana protections set forth in various Congressional budget riders (which have actually shown major teeth in the Ninth Circuit), he admitted the Department of Justice must respect those laws so long as they’re in place. In other words, he conceded the DOJ must abide by federal law.

So, for now, the 2013 Cole Memo remains the DOJ’s enforcement policy for state-legal marijuana, and we can expect states to continue their democratic experiments with marijuana regulatory systems at a regular clip. We’re glad to see that the DOJ will (hopefully) follow the 2013 Cole Memo, but we’re even happier that Sessions plans to respect the federal budget riders (as he should have done from the get go) and that he recognizes that marijuana is not the same as heroin.

California Cannabis HaywardCalifornia 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 waiting to see what to do with cannabis, and who is embracing California’s change to legalize marijuana — permits, regulations, taxes and all. For each city and county, we’ll discuss its location, history with cannabis, current law, and proposed law, all 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 Alameda County, and before that 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 City of Emeryville.

Today’s post is on the City of Hayward.

Welcome to the California Cannabis Countdown.

LocationHayward is a city in Alameda County that borders the East Bay cities of San Leandro, Fremont, and Pleasanton. Though Hayward doesn’t have the worldwide recognition of San Francisco or Oakland, it is an affordable city near the water with a strong manufacturing base.

History with Cannabis and Current Cannabis Laws. Right now you might be asking yourself: Hayward? Sure Hayward at first might not seem like a jurisdiction in which to locate your California cannabis business, but in the other states in which we have cannabis lawyers (Oregon and Washington), we long ago learned that the most glamorous cities are not necessarily the most profitable ones.

Historically, Hayward’s stance towards cannabis probably aligns closer with U.S. Attorney General Jeff Sessions than with most Californians. Hayward’s unfriendly approach to cannabis — absolute prohibition through an exclusionary zoning ordinance — was even starker when compared to the other progressive cities in the East Bay (Oakland, Berkeley, and Emeryville). Hayward’s slow march towards progress began in November of 2016 when approximately 60 percent of Hayward voters supported Measure EE and 56 percent voted for the Adult Use of Marijuana (a/k/a Prop 64). Measure EE set up a tax structure allowing the city of Hayward to tax cannabis businesses up to fifteen percent of their gross sales. The Measure specified that the tax could apply to medical and adult-use cannabis businesses and cover seed to sale license types (cultivation, manufacturing, distribution, and retail). Let’s give credit when it’s due as Hayward’s city council took notice of their residents’ wishes and just recently proposed and voted on a new cannabis ordinance.

New Cannabis Laws: On September 14, 2017, the Planning Commission held a hearing to discuss regulations for cannabis business and on October 17, Hayward’s City Council introduced an ordinance amending their municipal code. The proposed ordinance removed Hayward from the dark ages of complete prohibition. On October 30th, the City Council approved a final version of their cannabis ordinance. Here’s a list of the some of the highlights (and some lowlights) of Hayward’s cannabis ordinance:

  • Allows medicinal and adult-use commercial cannabis businesses.
  • Will permit seed to sale license types, including laboratories. Commercial cannabis cultivation operations under 5,000 square feet will only need an administrative use permit, bigger operators will need to obtain a conditional use permit.
  • Outdoor commercial cannabis cultivation is prohibited.
  • Volatile manufacturing is prohibited.
  • Caps the number of retail dispensaries to no more than three.
  • Onsite consumption is prohibited although an exception could be granted for qualified medical patients.
  • Temporary special events that involve onsite cannabis sales and consumption may be allowed if the applicant receives a special event permit.
  • Multiple cannabis businesses can be permitted per site so long as the businesses are located on separate and distinct premises.
  • Creates an ancillary option for retail sales. The retail sale of cannabis and cannabis products is allowed only as a component of a microbusiness operation. The operator must hold a microbusiness (Type 12) license issued by the state Bureau of Cannabis Control. The cumulative floor area of the retail activity shall not exceed 10 percent of the first-floor area of the industrial building and all cannabis and cannabis products for sale must have been cultivated, produced and manufactured on-site.
  • All individuals that participate in the production of edible cannabis products must be state certified food handlers.
  • Security cameras will have to allow for remote access to be provided to the Hayward Police Department.
  • All cannabis businesses shall be subject to a 600-foot minimum setback from schools, day care centers, youth centers, and open space areas or designated parks used towards children’s activities. The setback for public parks and open spaces may be reduced by the Planning Commission.
  • Applications for a cannabis business permit will be evaluated by the City Manager.

As a whole, this is a pretty substantial first step by Hayward to regulate the cannabis industry. Sure, we’d prefer if there weren’t a cap on dispensaries but the city is showing some creativity by creating an ancillary sales option. This modified microbusiness model could be an attractive option for many California cannabis business owners. We’ll still have to wait to see how Hayward implements this ordinance, but it’s safe to say that you won’t find Hayward on this list anytime soon. Well done Hayward, well done.

The recent election bodes well for cannabis.

By now you have probably seen a dozen articles about the blue tidal wave that hit Virginia, New Jersey, and almost everywhere else that held elections on Tuesday, November 7. The consensus seems to be that Democrats, who are usually apathetic about off-year elections, showed up in large numbers to express their displeasure with the Trump administration. But this election was also heavily tinged with green and it bodes well for the prospects of an eventual end to federal cannabis prohibition. It also had some immediate benefits for recreational cannabis in the short term.

We have often written about prominent Democratic presidential hopefuls (i.e. democratic members of Congress) speaking rationally on cannabis (here, here, here, here, and here). These comments dovetail nicely with recent polling showing public support for cannabis legalization is at an all-time high, with 64% of the public in support (71% among Democrats, 62% among independents, and breaching 50% among Republicans for the first time). On November 7, the age-old political rule that the president’s party gets clobbered in mid-terms seems to have held true yet again. We expect that federal prohibition’s time is short, and if Democrats take the Senate and/or the house in 2018, we expect Attorney General Jeff Sessions’ options will be limited when it comes to federal interference with state-level recreational regimes.

But no doubt before the results of this last election impact federal cannabis, they will more likely impact cannabis on the state level. For instance, the election of Phil Murphy (D) as the next Governor of New Jersey all but guarantees the Garden State will legalize cannabis soon. Shortly after the election, we reached out to our Garden State legal colleague, Paul Strauchler, an attorney at Post, Polak Goodsell and Strauchler and one of the leaders of the firm’s Hospitality, Alcoholic Beverages, and Cannabis Group, to get an on the ground view on what the transition from cannabis-hating Chris Christie to Phil Murphy will mean for New Jersey. Paul is optimistic about the results: “Since Phil Murphy’s very entry into New Jersey public life, he has been an advocate for the legalization of cannabis: for its medicinal value and potential; for its commercial and economic opportunities; and for its remediation of a full spectrum of social justice issues. We look forward to working with Governor-Elect Murphy and the Lt. Governor-Elect and their team as New Jersey prepares for a new era.” In other words, just about everything cannabis just took a sharp upward turn for New Jersey.

Governor-Elect Murphy campaigned on legalization and he has vowed to legalize cannabis in his first 100 days. If he succeeds with this New Jersey will be the first state to legalize cannabis through legislation, rather than via a public ballot initiative.

Hollywood CannabisFive hours into a marathon council meeting, following robust discussion among City Council members and some fine-tuning by the City Attorney, West Hollywood introduced its new cannabis ordinance on first reading. The ordinance is scheduled for a second reading on November 20, and if adopted, will become effective just in time for the State’s implementation of MAUCRSA in January. The original ordinance is available here, but the revised version has not yet been published.

West Hollywood’s cannabis ordinance creates five types of cannabis business licenses, implements a merit-based system to select the top operators, and limits the number of licenses in each category to eight (except for delivery services).

The Ordinance Allows Adult Use Retail, Medical Use Retail, On-Site Consumption, Delivery, Testing, Manufacturing, and Cultivation

The ordinance provides for the following licenses:

  • up to 8 adult-use retail business licenses
  • up to 8 consumption area (smoking, vaping, ingestion) with on-site adult-use retail (sales of products to be consumed on-site) business licenses
  • up to 8 consumption area (edible ingestion only) with on-site adult-use retail (sales of products to be consumed on-site) business licenses
  • up to 8 medical-use dispensary business licenses
  • up to 8 business licenses for cannabis delivery services located in West Hollywood.
  • an unlimited number of business licenses for cannabis delivery services that are located outside the City limits and deliver cannabis to customers within the City of West Hollywood.

In addition to these licenses, the ordinance allows the following uses without a separate cannabis business license:

  • Testing laboratories
  • Manufacturing and indoor commercial cultivation as ancillary uses to licensed retail use

A business may hold a combination of licenses, but may not obtain two of the same type of cannabis license within the City. West Hollywood expects most operators will obtain multiple licenses.

A City Manager-Appointed Committee Will Rank Applicants Based on Weighted Criteria

Following an initial 30-day application period, the City Manager-appointed evaluation committee, comprised of at least three people with demonstrated experience in city government or the cannabis industry and with no business interests in West Hollywood, will review and score each application based on the general criteria listed below.

The City has not yet determined the specific criteria or weighting of points per criteria for each license type, but it will do so prior to the initial application period and it will publicly post this information.

At present, there is no tiebreaking mechanism in the ordinance, so it remains to be seen how the City will select the top 8 applicants in a particular category if, for example, 15 applications end up with the same high score.

The following general criteria will be used to rank applicants:

  • Previous adult-use retail, medical-use dispensing, or consumption area operation experience that was subject to state cannabis regulation, or experience in a similarly state- regulated activity (by way of example and not limitation, alcohol sales).
  • Ability to demonstrate the quality of cannabis strains and derivative product offerings.
  • Employee training, standard operating procedures, online ordering systems and procedures for providing cannabis to disadvantaged or disabled persons.
  • Social equity in terms of provision of providing a living wage and employee benefits and compliance with local, state, and federal employee non-discrimination policies.
  • Security program.
  • Pre-existing West Hollywood Cannabis Business that has no outstanding code violations with the City and is in compliance with local and state laws.
  • Ability to meet City of West Hollywood Urban Design Standards.
  • Additional information that demonstrates the ability to operate in a safe and responsible manner in the City, including without limitation a review of the quality and thoroughness of application materials, connection to West Hollywood, ability to serve the West Hollywood community, familiarity with West Hollywood, and innovative boutique business models consistent with the West Hollywood community.

Four Existing Cannabis Collectives Are Entitled to Relocation, Temporary Licenses, and Exemption from Ranking

The ordinance provides substantial priority to the four authorized cannabis collectives currently operating in West Hollywood. During the hearing, City Council amended the ordinance to automatically grant existing businesses the first four available medical dispensary licenses, so long as they satisfy certain criteria.

If any of the existing four want to take advantage of priority without having to go through the ranking process, they cannot make a permanent change to adult use. In other words, an existing business would have to remain medical only, and/or obtain only a temporary license to engage in any adult use. An existing business wanting to take advantage of this priority would not be able to obtain a consumption license, because those are only compatible with adult use retail. It appears an existing business could potentially add delivery services, so long as the delivery involved medical use products only.

However, even if one of the existing four decided to add adult use and forgo the priority license, the ranking criteria includes a category for existing collectives in good standing, meaning the existing businesses are entitled to additional points that a new business could not obtain. Accordingly, the existing businesses have a significant advantage in obtaining licenses.

The ordinance further provides that any of the existing four collectives that do not meet location requirements of local or state laws can move to a compliant location and be considered an “existing medical cannabis location.” An existing business may also obtain a temporary use permit in its original, non-compliant location if the State will issue a license for the location. This language appears directed at an existing collective located within 600 feet of a school.

Under the ordinance, existing businesses may immediately apply for a temporary and annual state license and local business license to operate medical and adult use retail. A temporary use permit may be issued to the existing four collectives to engage in the sale of adult use on a temporary basis provided that the operator receives and maintains a valid temporary license from the State.

Further Changes to the Original Ordinance Include Eliminating the Double Driver Requirement, Expanding Consumption Areas, and Limiting Operating Hours

In addition to the changes discussed above, the City eliminated the requirement that at least two employees be present in a delivery vehicle at all times, expanded the maximum consumption space from 25% to 50% of the total floor area of the retail space, and added language expressly reserving the authority of the Business License Commission to limit operating hours and to institute a closing time earlier than 2:00 a.m.

Orientation Meetings Next Week; Ordinance Scheduled to Take Effect Before January 1, 2018

The City invited interested parties to an orientation meeting next week to discuss the ordinance and answer questions about specific requirements and the application process. If the second reading and adoption proceed as expected on November 20, the ordinance will become effective before January 1, 2018.

California cannabis water requirements This past week the California Bureau of Cannabis Control (“BCC”), along with a number of other state regulatory agencies, held three cannabis business licensing workshops – the last one in Sacramento. These licensing workshops received a lot of attention but they weren’t as informative or as consequential to the California cannabis industry as the staff report and Cannabis Cultivation Policy (“Policy”) released by the State Water Resources Control Board (“Board”) on October 17, 2017 — the same day as the Sacramento workshop. For many, this might be the first you’re hearing of the Board’s report or perhaps of the Board’s involvement in cannabis regulation at all. If you need a little refresher, you’ve come to the right place.

After enactment of the Medical Cannabis Regulation and Safety Act (“MCRSA”), Governor Jerry Brown signed Senate Bill 837 (“SB 837”) into law. SB 837 added a number of environmental protection provisions to the MCRSA and tasked the Board with coming up with guidelines to protect the environment. When the Medicinal and Adult Use Cannabis Regulation and Safety Act (“MAUCRSA”) was enacted this past June, the Board’s role in regulating the cannabis industry was solidified. MAUCRSA specifically states that the California Department of Food and Agriculture shall include in any license for cultivation all of the following:

“Conditions requested by the Department of Fish and Wildlife and the State Water Resources Control Board to (A) ensure that individual and cumulative effects of water diversion and discharge associated with cultivation do not affect the instream flows needed for fish spawning, migration, and rearing, and the flows needed to maintain natural flow variability; (B) ensure that cultivation does not negatively impact springs, riparian habitat, wetlands, or aquatic habitat; and (C) otherwise protect fish, wildlife, fish and wildlife habitat, and water quality. The conditions shall include, but not be limited to, the principles, guidelines, and requirements established pursuant to Section 13149 of the Water Code (emphasis added).”

In its report, the Board divided California’s 163,696 square miles into fourteen regions — nine of which are identified as priority regions because they support salmon. The nine priority regions are: Klamath, Upper Sacramento, North Coast, Middle Sacramento, Southern Sacramento, North Central Coast, South Central Coast, San Joaquin, and South Coast. The Board is particularly concerned with the discharge of pesticides, fertilizers, fuels, and trash into California’s waters. The unfortunate truth is that not all cannabis cultivators are good stewards of our precious environment. Furthermore, when combined with years of drought, the practice of water diversion threatens water quality and aquatic habitat. The Board then listed the following twelve items of concern when addressing waste discharges:

  1. Site development and maintenance, erosion control, and drainage features;
  2. Stream crossing installation and maintenance;
  3. Riparian and wetland protection and management;
  4. Soil disposal;
  5. Water storage and use;
  6. Irrigation runoff;
  7. Fertilizers and soil;
  8. Pesticides and herbicides;
  9. Petroleum products and other chemicals;
  10. Cannabis cultivation waste;
  11. Refuse and human waste; and
  12. Cleanup, restoration, and mitigation

The Board’s Policy provides for a statewide-tiered approach for permitting waste discharges from cannabis cultivation, depending on whether the cultivation is for personal use, indoor commercial cultivation, or outdoor commercial cultivation. The criteria for outdoor commercial cannabis cultivators will vary depending on the size of the disturbed area, but they’ll mainly focus on the slope of the disturbed area and the proximity to a surface water body. The Policy also details the different ways for cultivators to register and establish their water rights.

The Policy comes in at a hefty eighty-nine pages and contains too many regulations for one blog post to cover it all. What’s clear is that the Board takes its role as an environmental steward very seriously. We’ll have to wait and see whether cannabis cultivators in California will be able to satisfy the Board’s proposed regulations. A cultivator’s state license will depend on it.

Oregon cannabis taxes
Oregon cannabis taxes

The Oregon Department of Revenue (“DOR”) imposes a point-of-sale tax called the Recreational Marijuana Tax on all Oregon recreational cannabis retailers. The DOR collects 17% of the value of all cannabis sold at each retailer location.

In theory, this tax burden is shared across the entire cannabis production line (producer, processor, distributor, and retailer) by depressing prices. Oregon law also allows cities and counties to impose up to an additional 3% point-of-sale tax, but this additional tax can only be implemented after a vote of approval from local residents. Local jurisdictions can opt to enter into an agreement with the DOR that allows the DOR to collect the tax their behalf, and most jurisdictions that have passed a 3% tax have elected to do so. In these jurisdictions, the DOR will collect a full 20%, and distribute the 3% to the local governments.

The DOR maintains a record of local jurisdictions that have implemented the 3% tax, as well the list of jurisdictions that have entered into a collection agreement with the DOR. In most cases, any local tax issues will be handled on your state tax filings (discussed below), but if you are located in one of the following jurisdictions you will need to contact the local government directly to arrange for payment:

  • Brookings
  • Columbia County
  • Coos County
  • Cornelius
  • Dundee
  • Dunes City
  • Gilliam County
  • Gold Hill
  • Gresham
  • Hines
  • Jackson County
  • Josephine County
  • La Pine
  • Lafayette
  • Rainer
  • Rockaway Beach
  • Sheridan
  • Tillamook (the city)
  • Tualatin
  • Veneta
  • Westfir
  • Wheeler
  • Yachats

At the state level, each month every retail location must submit an Oregon Marijuana Tax Monthly Payment Voucher along with payment for the prior month’s tax. The tax can be paid online through the DOR’s Revenue Online website or can be paid by check, money order, or by cash in Salem — with all of the various problems that arise from transporting large quantities of cash. Remember that you will need to submit a separate voucher and payment for each location, so if you have multiple retail cannabis locations you need to track sales separately for each location. In addition to the monthly vouchers, you also need to submit a quarterly return.

What does the State of Oregon do with your hard earned taxes? By law, the DOR distributes the state marijuana tax as follows (taken from the DOR’s Marijuana Fact Sheet):

  • 40 percent for education.
  • 20 percent for purposes for which money in the Mental Health Alcoholism and Drug Services Account may be used.
  • 15 percent for state law enforcement.
  • 10 percent to cities, based on population and number of licensees.
  • 10 percent to counties, based on total available grow canopy size and number of licensees.
  • 5 percent for alcohol and drug abuse prevention, early intervention, and treatment services.

Remember that cannabis businesses are still subject to any other general business taxes imposed by the state or local jurisdiction, and of course federal taxes as well (which you can read more about here, here, here, and here). Oregon’s Recreational Marijuana Tax should, therefore, be only one small part of your tax planning.

Get Legit.

In the old days, people rarely wrote things down when they sold cannabis. Selling the flower was risky, and leaving a paper trail riskier still. With the advent of medical marijuana programs, though, cannabis supply contracts became routine. Such agreements may be styled as “patient-caregiver agreements” or “patient-grower agreements,” and state agencies may even require their use. These limited scale agreements are often between two individuals for small sums of marijuana and cash. In the world of pot contracts, those deals are beta.

Today, four states have scaled adult-use (“recreational”) cannabis programs (Washington, Oregon, Colorado and Alaska), with four others close behind (California, Nevada, Massachusetts, Maine). In these states, trading in cannabis is no longer limited to patient-caregiver transactions. Instead, it involves licensed agribusinesses bringing statutorily designated “crops” to increasingly differentiated markets. For this reason, cannabis distribution agreements have become a key contract for many of our clients.

Below are ten critical terms in any cannabis distribution agreement. This list is by no means exhaustive, but is curated to show how unique these agreements are and should be:

  1. Distribution Grant. This term covers the territory in which the cannabis can be distributed by the purchaser, as well as other items, like whether sub-distributors are allowed and what their roles may be. The key consideration here is ensuring that cannabis is kept within state borders, pursuant to whatever tracking system may be required.
  2. Term and Termination. Terms tend to be short in cannabis distribution agreements and with multiple renewal options, to account for price fluctuation and general market dynamism. Termination may be allowed for a variety of specific reasons, or for no reason at all. Specific reasons may include cessation of business operations, contract breach, business impracticability, regulatory violations, etc.
  3. Testing Obligations. States with robust regulatory systems require cannabis be tested for pesticides and other contaminants. Therefore, the distribution agreement should designate which party is responsible for testing and its associated costs, and what happens in the event of a failed test.
  4. Inspection.  Marijuana is a perishable and essentially fungible commodity, and the purchaser will want a right to inspect upon delivery, and sometimes for a window of time thereafter. Sellers will want to limit this right as much as possible because once the marijuana is out of sight, the seller has no control over the care and treatment of the product.
  5. Purchase Orders and Payment. Your standard cannabis distribution agreement will detail the method a purchaser must use to communicate its product needs to the seller, how invoices are presented, and at what point payment must be made. Sometimes, the agreement will contain a requirement for one party to notify the other of market changes; i.e. of the wholesale market rate per pound of marijuana.
  6. Sales and Marketing. Sellers will want purchasers to comply with all advertising and sale regulations and make good faith efforts to market the sellers’ marijuana among shelves of competing products. In many cases, trademarks will be in play, and sellers will have specific parameters around how a name and logo may be used in association with these efforts.
  7. Representations and Warranties. Distribution agreements in all industries are chock full of representations and warranties, but cannabis agreements take this concept to the next level. In a cannabis distribution deal, warranties will cover everything from program compliance concepts to product safety.
  8. Confidential information. Because cannabis companies have fewer options to protect intellectual property through formal registrations than companies in other industries, the industry relies heavily on non-disclosure and trade secrets.  When one party is selling cannabis to another, the parties are bound to learn a bit about each other, especially where site visits are involved. In many cases, the distribution agreement itself may even be designated as confidential.
  9. Limitation of Liability. This section is often heavily negotiated, as the parties attempt to carve out who would be responsible for what unfortunate event, and to what degree. It takes little imagination to dream up things that could go wrong in a cannabis distribution deal, from product recalls to intellectual property infringement. Here, each party will seek indemnification for anything beyond its control.
  10. Federal Law Concepts. Federal illegality will flow through nearly every section of the pot distribution agreement, from licensing to termination to dispute resolution protocols. When reading through each contract term, both lawyer and client should ask “how might federal illegality affect this provision?”

At the end of the day, like all cannabis industry contracts, agreements for the distribution and sale of pot are unique. Generic distribution agreements may do more harm than good when trading in cannabis, and although courts may recognize the existence of oral contracts, no legitimate business will move its goods without a tailored, written agreement.

In that sense, the old days are gone. It’s time for a new approach.