Recreational Marijuana

marijuana cannabis loan
This industry is different, you know.

Many cannabis businesses are funded with debt. Sometimes, the debt is owed to one of the business’s owners, who pursued a debt structure for tax reasons. Other times, the debt is owed to a third party. That party could be a friend or family member, an investor keen on the industry, or even a professional hard money lender. Our marijuana business lawyers have papered a large number of loans in the industry, on behalf of both businesses and lenders. This blog post identifies some considerations for lenders making plays in the industry.

Do Your Diligence.

Before making a loan of any type to a cannabis business, do your diligence. Like so many things related to cannabis businesses, this exercise is different than with standard businesses. There are several reasons for this: 1) cannabis businesses often have short or non-existent operating histories; 2) by extension, cannabis businesses often have limited financial information at hand (tax returns, P&Ls, etc.); 3) the financial projections for cannabis businesses are more speculative than for other businesses, due to market dynamism; and 4) regarding operations, cannabis businesses may be “license pending” and thus offer little to vet.

Altogether, these factors make it supremely important to vet the actual owners of the business, as well as whatever you can get on the enterprise. This means having a look at personal financials and assets, credit reports, asking for personal references and calling around, etc. And when it comes to diligence on the business, make sure you do more than simply run a UCC search and review financials. Ask for company agreements. After all, a business may have an oppressive lease or licensing agreement which makes it less likely to succeed, or it may have similar documents with contingent or springing security interests that diminish your repayment prospects.

Prepare to Be Vetted.

The cannabis business will look into you, of course. But the real vetting is likely to happen by the licensing authority. In Washington, for example, the two groups that must report to the Liquor Control Board are “true parties of interest” and “financiers.” In California, it’s “owners and financial interest holders.” And in Oregon, it’s anyone with a “financial interest.” Each of these terms is defined in each state’s ever-evolving administrative rules, but it’s very likely that as a lender, you will need to be disclosed and vetted by the licensing authority. This may entail submission of information on your business, if you have one, and/or its owners and spouses. It also usually means fingerprints, background checks, and having your name on file as a part of the public record.

Demand Security.

Arms-length loans are almost never unsecured, so this one is a no-brainer, and if a marijuana business pushes back, it should be a dealbreaker. The best type of collateral is something tangible, like real property (land) that is unencumbered by senior interests, or where foreclosure by a senior noteholder would not wipe out all available equity. But there are other types of collateral, too, like personal property (including intellectual property); and there is always the option for a convertible note. Finally, lenders often get creative with deposit control agreements and other collection levers.

In the personal property category, the noteworthy asset when lending to plant-touching businesses is the cannabis itself. Most states have procedures for secured creditors to take control of a cannabis business under provisional licensing authority, for liquidation purposes. But, before you sign up for this, ask yourself: Could I really see myself chopping down cannabis plants one day? Or paying a receiver to do that? If not, and if the business has no other valuable assets, this loan may not be right for you.

Demand Personal Guarantees.

This ties into the diligence and security categories. A personal guaranty is just an extension on whatever security you can otherwise acquire as a part of the loan. Make sure these guarantees are uniformly integrated into the loan documents, and that each guaranty is more than a cursory sentence appended to a promissory note. The personal guaranty should cover various contingencies, e.g.: What happens if the guarantor dies? Are there any allowances for its termination, aside from repayment of the loan? Etc. Also, consider whether your borrower resides in a community property state like Washington or California, where the guaranty may not attach to marital property.

Do Market (and Legal!) Research.

Lenders to the cannabis industry are getting better rates than almost anyone else. They are taking on more risk, and feeding an insatiable capital market. We have seen loans with interest rates up to 50%(!) for relatively quick turns, but we have also seen loans that do not conform with licensing rules, or with state lending and usury laws. The exercise here is to ascertain market norms, look at your prospective borrower’s situation, and consider these factors in the greater context of lending statutes and marijuana licensing program rules. Finally, balance what you think you can get against the decreasing odds of collection that inevitably come with higher interest rates and compact repayment schedules.

Hacking back isn’t the answer, unfortunately.

As I have discussed for the last two weeks, cannabis businesses have become increasingly vulnerable to cyberattacks. It is natural for a company victimized by data breaches to want to retaliate by hacking back. However, under current U.S. law, which is codified under the Computer Fraud and Abuse Act (“CFAA”), it is strictly prohibited to intentionally access another’s computer without authorization.

Legislators have given some thought to this problem. Most recently, the re-introduction in October 2017 of the Active Cyber Defense Certainty (“ACDC”) Act, a bill sponsored by Congressman Tom Graves (R-Ga) and Congresswoman Krysten Sinema (D-Az), raised questions about the legality of counter attacking. Indeed, the ACDC Act proposes to amend the CFAA and enable victims of cyberattacks to adopt active defensive measures to identify the hackers, destroy information originally stolen from the victims’ networks, and attack the intruders’ servers to interrupt the ongoing attack. Although an eye-for-an-eye form of justice is appealing, unauthorized access to networks is not a good idea. Here is why.

First and foremost, the ACDC Act has not be enacted. This means that the CFAA remains the law of the land, and accessing others’ computer systems without their permission is a criminal offense. Every state law punishes hacking under the computer crime statutes. These crimes carry serious penalties ranging from a class B misdemeanor (punishable by up to six months in prison, a fine of up to $1,000, or both) to a class B felony (punishable by up to 20 years in prison, a fine of up to $15,000, or both).

Second, even if retaliation were legal, most companies would lack the expertise required to safely conduct an offensive cyber operation. It is incredibly difficult to identify individuals and entities behind cyberattacks. Most intruders cover their tracks very carefully by using encryption and by routing strikes through others’ computers. Given this, counter hacking would most certainly result in attacking computer systems and destroying data belonging to innocent third parties.

Then, there is the issue of whether victim companies have the technical proficiency required to effectively take counter measures against cyber intruders. Indeed, the internal tools needed to effectively hack back represent a major undertaking: a high level of expertise, constant vigilance, and huge financial resources. Moreover, it is highly unlikely that companies that could not prevent the intrusion of their networks would manage to take on their attackers on their own digital turf.

Lastly, retaliation by companies that fell victim of a data breach would most certainly impede law enforcement investigations and delete or temper with evidence that could be useful in a prosecution. Unlike law enforcement agencies, companies do not have the relevant technical expertise or diplomatic tools to pursue hackers. Most companies ignore how to preserve a chain of custody that would enable the introduction of untampered evidence at trial. In addition, counter hacking is an incredibly dangerous endeavor because it is very difficult, if not impossible, to see what a company would be up against. In retaliating, a company would run the risk of escalating the situation and of further injuring itself.

As I have discussed before (here and here), no one and no company is immune to cyberattacks. It is understandable that companies, including cannabis companies, are getting tired of being passive and of merely defending against these breaches. However, hacking back is not a feasible option given its illegality and the negative consequences it could have on the retaliating company. When faced with a data breach, don’t let your emotions dictate your actions; instead, stick with a comprehensive plan of action that will help you minimize your damages and let skilled, experienced law enforcement agents do the job of tracking and investigating your attackers.

vape marijuana cannabis
Is the vape industry in real trouble?

Like so many other U.S. industries, the U.S. vaping industry is now in the crosshairs of a 25% tariff on products imported from China. The first two waves of President Trump’s proposed tariffs against China covered about $50 billion worth of Chinese products but they did not include any vaping products. After China retaliated and proposed its own equivalent tariffs on an estimated $50 billion worth of U.S. products imported into China, President Trump proposed a much bigger third list of China products to cover an additional $200 billion in imports from China. This third list targets vaping devices, vaping parts, and batteries from China. Because our law firm’s marijuana business lawyers represent so many companies involved in various aspects of the vaping industry, we are hearing a earful about how these tariffs will “decimate” the nascent industry.

The U.S. vaping industry is indeed particularly exposed to these tariffs. Though much of the e-liquid used for vaping is made in the United States, almost all of the vaping hardware is imported from China. Just as Gillette makes the most money selling razor cartridges and not razors, many U.S. vaping companies chose to focus on the higher margin e-liquids, rather than lower margin vaping devices. Some have noted that there are no U.S. companies that produce any vaping hardware products. We are hearing of how many vape and cannabis retail shops will be unwilling or unable to pay the extra 25% tariffs because they do not believe they will be able to pass these extra costs on to their customers. If this does prove true, the vaping industry will indeed be decimated.

Fortunately, there is still time for vaping companies to seek a tariff exemption for certain vaping products. The U.S. Trade Representative will accept comments until September 6 on whether entire categories of products listed on the third wave of proposed tariffs — the $200 billion in imports from China — should be exempted. There likely will be yet another chance to make more product-specific exclusion requests later in the fall.

For an exclusion request to have any realistic chance at being granted, marijuana and related vaping companies should address the following factors:

  • A description of the physical characteristics (dimensions, material composition, etc.) of the particular vaping products and the 10 digit subheading of the HTSUS tariff category applicable to those products.
  • Whether the particular vaping product is available only from China. In addressing this factor, requesters should address specifically whether the particular vaping product and/or a comparable product is available from sources in the United States and/or in third countries.
  • Whether imposition of additional duties on the particular vaping product would cause severe economic harm to the requester or other U.S. interests.
  • Whether the particular vaping product is strategically important or related to “Made in China 2025” or other Chinese industrial programs.
  • Requesters must provide the annual quantity and value of the Chinese-origin product the requester purchased in each of the last three years. If precise annual quantity and value information are not available, USTR will accept an estimate with justification.
  • Requesters may also provide any other information or data they consider relevant to evaluating their request.

The process for reviewing and deciding on these exclusion requests will not result in any immediate decision but the hope is that a favorable decision eventually will allow for refunding the tariffs paid.

The goal is to have the USTR review the comments and grant exclusions, particularly for products that are not made in the United States and can only be sourced from China. The last time similar tariffs were applied on steel products back in the early 2000s, many exclusions were granted that helped ease the impact of the tariffs on downstream users.

There have already been many opposing comments and exclusion requests submitted for the first two waves of proposed China tariffs. Many of the opposing comments have noted how the proposed tariffs on the Chinese products have nothing to do with  Chinese practices of stealing or extorting intellectual property from U.S companies, which are the reasons claimed for invoking the China tariffs in the first place. Many have also objected to how these tariffs are not likely to change how China respects intellectual property  rights, but will have a catastrophic effect on certain American companies.  What was a booming U.S. vaping industry now faces going bust with the proposed tariffs. If you are in the vaping industry, now is the time to do what you can to prevent this.

Editor’s Note: A version of this post previously appeared on our law firm’s China Law Blog. It focuses on the vaping industry but much of it holds true for a host of other U.S. industries caught up in the tariffs as well. The bottom line is that the situation for products and companies that will be hurt by these tariffs is not good and the chances of overturning the tariffs are in most cases less than 50 percent. But in many cases the situation is not yet hopeless and it behooves you to try.

cannabis marijuana term sheet

When I receive a summary of a cannabis business deal–the first emails, calls, LOIs, and term sheet in any form–with 90% accuracy I can say whether the transaction will be a difficult one or not. Note that “difficult” does not correlate with complex: Often the more complex deals, with multiple entities and asset transfers, end up being much easier, whereas a simple secured loan can be more difficult. And in the context of a transaction, “difficult” = “time consuming” = unnecessary expense. Everyone would like to avoid that.

The number one differentiating and determinative factor in assessing the difficulty of a marijuana business deal is the term sheet. If a deal is a building, think of the term sheet as both the architect’s blueprint and the physical foundation on which the deal is built. Deals that are smooth are built with a clear plan and on a solid base; these come in on time and under budget. Deals that are built based on a vague understanding of the final goal but with no firm, documented plan, will be typified by stops and starts, walls built, torn down and rebuilt, and a final product that stands but doesn’t resemble what either parties had in mind (“in mind” being a key phrase here, as often what was in the parties’ mind was never exchanged in an agreement). Oh, and the dreaded cost overruns.

Engage your attorney before you sign a term sheet. 

Having a final term sheet is necessary for a smooth transaction, but agreeing that a half-baked term sheet is “final” may prove worse than having no term sheet at all. Do not make the mistake of thinking you cannot engage your attorney until you have a term sheet signed: In fact, an hour with your attorney before you finalize the terms, could save you many hours down the line. Your experienced business attorney will know how the terms will fit in the documents, and in turn what terms you may not have addressed fully, or at all.

Do not have your attorney draft the transaction documents until after you sign a comprehensive and binding term sheet. 

Speed in transactions is defined by certainty. Term sheets that say “market standard” terms for X is likely a proxy for “we didn’t take the time to discuss X.” This can work if the parties have a common reference point or an external reference. For example, in the context of an equity financing, “standard NVCA language on Registration Rights” is OK. “Standard anti-dilution” is not OK: There are at least three flavors and they are wildly different, so the drafting attorney with that term sheet is guessing–or likely talking only to his side–on the issue. The stops, starts, and re-drafts is what eats up time.

Continuing with the building analogy: Every couple building their dream home wants the house built quickly and correctly, and on budget. But they had better get all the critical details decided and in the plans before the first brick is laid. In other words, if you don’t agree on the location and number of bathrooms, you wouldn’t tell a contractor to “start building now and we’ll decide on the bathrooms later.” The decisions won’t get easier if you put them off, and having a full plan in place from the beginning will make the process more enjoyable for all.

cannabis marijuana patent litigation

In previous posts, we’ve puzzled about why no one has filed a cannabis patent infringement case, despite the large number of patents granted for cannabis plants and compounds. See here, here, here, and here.

That all changed last week. United Cannabis Corporation (“UCANN”) has now filed what is believed to be the first cannabis patent infringement complaint. The case is United Cannabis Corporation v. Pure Hemp Collective, Inc., case no. 1:18-cv-01922-NYW, in the United States District Court for the District of Colorado.

The patent asserted is U.S.P. 9,730,911, “cannabis extracts and methods of preparing and using same.” The claims in the patent generally cover liquid cannabinol formulations using tetrahydrocannabinol (THC), cannabidiol (CBD), and various terpenes. See, for example, claim 10: “A liquid cannabinoid formulation, wherein at least 95% of the total cannabinoids is cannabidiol (CBD).”

Although the UCANN complaint does not specify which claims are being asserted, it appears that the plaintiff may focus on CBD-related claims, e.g., claims 10-15, rather than claims for THC. The complaint devotes several paragraphs to discussing FDA’s recent approval of Epidiolex, a CBD-based drug, as we discuss here and here. The complaint suggests that FDA will reclassify CBDs generally as Schedule II or Schedule III drugs. While it is clear that FDA will do a reclassification, it is not clear that it will reclassify all CBDs, rather than just the Epidiolex compound.

In any event, we expect to see more cannabis patent litigation soon, perhaps in Colorado, California, Oregon or elsewhere. Whether it will be a trickle or a flood remains to be seen, but we will be following the UCANN case closely and providing regular updates.

For more on cannabis patents, see our series here:

cannabis marijuana L.A. social equity
Looks good. Might get messy.

Phase II cannabis licensing in the City of Los Angeles (for only non-retail activity) kicked off on August 1 at 12 p.m. (and it will conclude on September 13th). To qualify for a City of Los Angeles cannabis license during this timeframe, an applicant must, among other things, be eligible for the City’s cannabis social equity program. This qualification factor has propelled a search for business partners who will make them eligible for Phase II cannabis licensing. Though this momentum is spurring business marriages all over the City many of these “partnerships” are little more than ruses for circumventing the social equity requirements.

It’s not unusual in the cannabis industry to see people rush into half-baked, hasty business marriages for fear that some grand opportunity will pass them by if they don’t. This is why the cannabis litigation lawyersat my firm spend so much time litigating cannabis business ownership disputes. LA’s social equity component has created a new breed of business “relationship” ripe forscamsand potential applicants on both sides of the social equity aisle need to be aware of the tricks being used to game this new system.

The below are some examples of what our Los Angeles cannabis lawyers have been seeing and are likely to see from social equity cannabis business unions in L.A.:

  1. The Tier 1 and Tier 2 Straw Men. To qualify for social equity in Los Angeles you need some combination of “low income” status, a “cannabis conviction,” or having lived in a “disproportionately impacted area” in the City for a certain amount of time. (For a detailed explanation of LA’s social equity qualification requirements go here.) Based on what you can prove as a social equity applicant, your cannabis business will be categorized as a Tier 1 or a Tier 2 business. To be Tier 1, the social equity applicant must have at least 51% of the equity in the cannabis business. To be Tier 2, the social equity applicant must have at least 33.3% of the equity in the cannabis business. Government rules that require sharing equity make even hardened business people nervous about losing voting control and search for ways around this rule. We expect to see Tier 1 and 2 cannabis businesses claim on paper (via operating agreements, bylaws, or subscription agreements) that they have the requisite equity spread while utilizing a “side letter” or a handshake to ensure that the actual social equity applicant has little to no real economic or control rights.
  2. The Incubator Terminator. L.A.’s social equity program has a Tier 3 cannabis business category that does not involve equity sharing. To qualify as a Tier 3, you must provide space, utilities, capital, business assistance, and licensing help to a Tier 1 or 2 business for no less than two years. Los Angeles is a very competitive cannabis market and I would not expect many will want to assist their competition and certainly not for free. This means we are bound to see Tier 3 businesses seek to sabotage their Tier 1 or 2 “roommates” so as to strengthen the competitive landscape for their own business. Oakland has shown what can happen when an incubator drags its feet during the entitlement process to the detriment of the social equity applicant, and unless Los Angeles mandates reporting requirements from Tier 1s and 2s to ensure Tier 3s are actually providing the help required by law, we can expect to see a Tier 3s working for the death of “their” Tier 1s and 2s during the mandatory assistance term.
  3. “Show Me the Money” Tier 1s and 2s. We have already seen Tier 1 and 2s essentially selling their status to multiple parties for a quick pay out without any actual plans to compete in the Los Angeles cannabis market. These sorts of deals go against the purpose of the social equity program, which wasto ensure those most negatively affected by The War on Drugs get a meaningful share of Los Angeles’s legal cannabis market.
  4. Is Your Partner Really a Tier 1 or 2?Many in Los Angeles wrongly believe one cannabis conviction is automatically enough to qualify for Tier 1 or 2 status. If you’re looking to partner with a Tier 1 or 2 be sure to do your due diligence to ensure they actually do meet the required criteria.
  5. Predatory Matchmakers. There aren’t many ways for legitimate Tier 1s and 2s to meet legitimate and willing Tier 3s, and our Los Angeles cannabis lawyers have been seeing more than a few questionable 11th hour brokered deals rushed to finish by the September 13th deadline. Many of  “brokerage” agreements we’ve seen have been inadequate and many deals are going through with little to no due diligence conducted by either party. These agreements are mostly boilerplate forms pulled down from the internet and badly re-purposed for social equity in L.A. Though satisfying L.A.’s requirements to qualify for Phase II is clearly important, you should not forget that these agreements will also serve as your legal foundation for a real business relationship with real obligations and liabilities and it is important thatt your agreement get the details right on things like company financing, leasing, voting, and managing day-to-day operations. Most of the “social equity brokers” putting these deals together care only about getting paid their percentage.
  6. Tier 3 Management Companies. There’s no such thing as a free lunch and many Tier 3s giving space, time, money, and assistance to Tier 1s and 2s will be expecting a lot back in return. We are already hearing of Tier 3s insisting they become management companies to the Tier 1s and 2s they plan to assist. L.A. is planning to address the issue of management companies generally in the City and that means we will likely see regulations aimed at preventing management companies from cannibalizing the opportunities intended for Tier 1s and 2s.

Los Angeles’s cannabis social equity program is a complicated undertaking and if just a handful of Tier 1 and Tier 2 cannabis businesses thrive in Los Angeles that will constitute a significant victory for the cannabis industry as a whole.

 

cannabis marijuana cyber attack security
Be prepared!

As I discussed last week, hacked devices, breached networks, and stolen proprietary information have become commonplace in the cannabis industry. Because cybercrime variants are continually emerging, no company can achieve totally assured cybersecurity. Consequently, we strongly encourage all our clients to adopt a cyber incident plan for responding to attacks before they occur. Developing a vetted, comprehensive plan of action is the best way to effectively respond to an attack and to reduce the amount of damage to your company.

This post highlights some of the best practices for preparing and responding to a cyberattack.

Before falling prey to a cyberattack, your company should:

  1. Identify Valuable Assets. Depending on your needs, it may be cost prohibitive to protect your entire business. Therefore, before creating a cyber incident plan, you should determine which data, assets, and device warrant the most protection.
  2. Develop a Plan of Action. Cyber incident plans will differ in size and structure, but at a minimum, your plan should:
    (i) Name those who have lead responsibility for different aspects of the response;
    (ii) determine ways to contact critical personnel at all times;
    (iii) identify how to preserve your most valuable assets, data, and device in a forensically sound manner; and
    (iv) develop notification plan for customers and data owners whose data would be compromised during an intrusion.
  3. Adopt Appropriate Technology and Services. Adopting off-site data back-up, intrusion detection capabilities, and data loss prevention technology will help you detect intrusions soon after they occur and help minimize the loss of valuable information.
  4. Implement Internal Preventative Policies. You must assist your employees with recognizing internal and external vulnerabilities to prevent security breaches but also to effectively react to attacks. Employee training should address issues such as safe password management, cryptographic communications, secure browsing practices and proper system configuration.

Following a breach, you will need to focus on mitigating damages and working with law enforcement. Specifically, you will need to:

  1. Assess the Nature and the Scope of the Incident. You will first need to determine whether your company is faced with a malicious act or a technical glitch.
  2. Capture the Extent of the Damage. If you detect a cyberattack, you should immediately make a forensic image—an image or exact, sector by sector, copy of a hard disk—of the affected computer(s), which will be used for later analysis and may possibly serve as evidence at trial.
  3. Implement Measures to Minimize Damage. To contain the attack and prevent it from spreading, you will need to stop ongoing traffic caused by the attacker. Some measures include rerouting network traffic and isolating all or parts of the compromised network.
    Regardless of the option you select, be sure to keep detailed records of all steps taken. This information may be relevant for recovering damages from responsible parties.
  4. Notify. The notification list includes:
    (i) Relevant Personnel: You should inform the relevant personnel (i.e., managers, IT department, security department, and legal department) of the attack and keep them informed of the preliminary analysis.
    (ii) Law enforcement: Generally, you will need to contact law enforcement authorities to assist with investigating the intrusion. Law enforcement can also help coordinate statements to the news media concerning the incident, ensuring that information harmful to the company’s interest won’t unnecessarily be disclosed.
    (iii) Customers: All 50 states have now enacted breach notification laws that require companies faced with a cyberattack to inform customers whose data was compromised by the intrusion. Accordingly, soon after the attack, you should prepare a statement that explains to the customers the scope of the breach of security and which remedial efforts were adopted.

Cyberattacks can raise unique legal questions. Therefore, you should consult with attorneys who are accustomed to addressing these types of issues to assist you with decisions, such as how to interact with government agents, the types of preventative technologies you can lawfully use, your obligations to report the loss of customer information, and your potential liability for taking specific remedial measures when faced with a cyberattack.

california product recall marijuana cannabis

Now that the MAUCRSA transition period is over and full cannabis testing is in the works, we can fully expect California marijuana companies to start engaging in recalls of certain products for a variety of reasons. In fact, a voluntary recall has already been initiated by The Bloom Brand where an impermissible pesticide (Myclobutanil) was present in one of its product batches that made it to retailers. Recalls like this are going to continue to increase, and we have to applaud The Bloom Brand for being conservative when it comes to consumer protection. Hopefully, other companies will follow suit and not try to cut corners where the resulting consequence is undoubtedly litigation, reputational disaster, and even dissolution if not fixed and fixed immediately.

So, what do you do in California if you find yourself inching up towards a recall?

First, you start with the readopted emergency regulations, which lay the field for what has to go down in the event of a recall. The California Department of Public Health-Manufactured Cannabis Safety Branch oversees licensing and enforcement for all manufacturers, and recall protocol is found at section 40268 of the emergency regulations. CDPH is the only agency right now with recall protocol codified in the emergency rules. Specifically, as a condition of licensure, you have to have a recall plan in place. That plan has to include:

(a) Factors which necessitate a recall;
(b) Personnel responsible for implementing the recall procedures; and
(c) Notification protocols, including: (1) A mechanism to notify all customers that have, or could have, obtained the product, including communication and outreach via media, as necessary and appropriate; (2) A mechanism to notify any licensees that supplied or received the recalled product; (3) Instructions to the general public and/or other licensees for the return and/or destruction of recalled product.

Procedures for the collection and destruction of any recalled product also have to meet the following requirements:

(1) All recalled products that are intended to be destroyed must be quarantined for a minimum of 72 hours. The licensee must also affix to the recalled products any bills of lading, shipping manifests, or other similar documents with product information and weight; and

(2) Following the quarantine period, the licensee has to render all recalled cannabis product unusable and unrecognizable and dispose of it in accordance with the rules and law, and that destruction has to take place on video surveillance.

And there are additional waste, destruction, disposal, track and trace and reporting requirements for the recalled product.

MAUCRSA itself empowers CDPH to mandate a recall when:

“the [CDPH] has evidence that a cannabis product is adulterated or misbranded, the department shall notify the manufacturer. [CDPH] may order a manufacturer to immediately cease distribution of a cannabis product and recall the product if [CDPH] determines both of the following: (1) The manufacture, distribution, or sale of the cannabis product creates or poses an immediate and serious threat to human life or health.(2) Other procedures available to [CDPH] to remedy or prevent the occurrence of the situation would result in an unreasonable delay.”

“A peace officer,” including any peace officers from the Bureau of Cannabis Control or CDPH, can also seize product under recall “by any licensing authority” pursuant to MAUCRSA. However, at this point, California’s actual cannabis recall standards are paltry and they’re mostly on a voluntarily basis, which is downright scary given some of the operators in the field.

Every single licensee should, for its own sake and liability mitigation, have concrete standards for recall procedures where products liability means strict liability for everyone in the chain who passed on the dangerous or defective product. Here are some tips of what should go into any reliable recall plan:

1. Create an overall recall strategy that’s going to actually work for the company dependent upon resources and manpower.

2. As part of your recall plan, create definitions and standards for classes of recall and the depth and scope of any given recall. If your state or local laws do not provide basic recall standards for marijuana businesses, check out the FDA’s website under Guidance for Industry: Product Recalls, Including Removals and Corrections.

3. Appoint a recall committee within your company, to be led by experienced personnel capable of evaluating and investigating product complaints to determine if a recall is warranted. This also entails your developing a product complaint form that will be utilized by customers. It is better to learn about product problems early.

4. Develop a complaint receipt and evaluation method to ensure that your product complaint processing and investigations are logical, efficient, and comprehensive. There are few things worse than receiving product safety complaints and then ignoring them until the situation is out of control.

5. Truly ponder what your product complaint investigation will entail. What facts should the recall committee be seeking to determine if a complaint is valid or if a recall is warranted. What should your recall look like, as based on the facts and circumstances and the threat the product poses to consumers and vendors.

6. Create a distribution list so that your recall committee can quickly and easily identify all affected products and product lots for disposition and potentially destruction. The distribution list should also include the names of all affected consumers and vendors, their contact information, and the dates on which the products were sold to them or consumed by them, and it should also include any side effects, injuries, or illnesses resulting from product use. Time is of the essence here.

EXAMPLE: My law firm had a regional food client that inadvertently failed to issue a recall notice to one of many supermarket chains to which it sold its food. This supermarket chain was so angry about having been kept out of the loop that it refused ever to purchase our client’s product again. Then other supermarket chains learned of our client’s mistake and they too ceased all of their purchasing. Needless to say, our client company no longer exists. Don’t let this sort of thing happen to you.

7. Institute a method of stock recovery so all tainted product in inventory is effectively quarantined from sale and distribution.

8. Generate your recall notice and be very careful with your wording in how you alert vendors and consumers to the recall. You want to effectively communicate that a product has been affected and how to deal with that, but you also want to minimize whatever liability your product problems may create for the company. On a case by case basis, consideration should also be given to drafting a press release to help the company’s PR. Regular readers know that we seldom state that attorney help is required, but for this, attorney assistance is absolutely required!

9. Make sure to as quickly as possible (preferably in advance) to alert your outside advisors (your lawyers, your insurance broker, etc.) regarding your recall.

10. Set out in your recall plan your options for product disposition. Will you destroy a product? Cleanse and then repurpose it? Lay out your options in your plan now so that you are not scrambling to try to figure out your possible options later, when you have no time to do so.

11. Record everything you do. Document every effort you make and record all your communications with consumers and vendors. If there is a legal action later, you will want to be able to show the court that you took all reasonable steps to ensure consumer safety.

In addition to formulating a solid and reliable recall plan, you also might want to consider conducting a mock recall to ensure your recall systems will work when the real deal occurs. Compliance audits can also be a big help in shoring up loose ends on a recall.

In the world of cannabis product recall, especially in California, licensees need to be very proactive in order to protect themselves. Relying on the state’s thin recall standards isn’t likely enough to protect licensees against an overwhelming liability exposure.

wine cannabis marijuana california

Our own Hilary Bricken will have the great pleasure of speaking at the 2nd annual North Coast Wine & Weed Symposium (presented by the Wine Industry Network) on Thursday, August 2, in Santa Rosa. While the Symposium will focus on a variety of topics covering the cross section of the wine and cannabis industries, Hilary’s panel will specifically cover “Rules, Regulations, and Policy Updates” in regards to the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”) and its corresponding readopted emergency rules and the current proposed permanent rules.

The breakdown of Hilary’s panel is as follows:

The rules & regulations around cannabis continue to evolve at a rapid pace and can be drastically different from one county, or town, to the next. This session, with Hezekiah Allen, Executive Director of Cal Growers Association, Hilary Bricken, Partner, Harris Bricken, and Erin Carlstrom, Senior Counsel of Dickenson, Peatman and Fogarty, will provide an update and overview of the latest changes in regulations at the state level and local level, along with any expected changes to take place in the upcoming year.

We expect a lively and interesting discussion at this symposium: Although the wine and cannabis industries don’t always get along, these two industries have a lot more in common than you might think, and knowing the current status of California’s cannabis rules and laws as well as ongoing policy debates surrounding MAUCRSA, will no doubt have an impact on both industries.

For all your questions about wine and cannabis, as well as specifics regarding the regulatory challenges under MAUCRSA, we sincerely hope you can make it to the Wine & Weed Symposium!

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Local policy may be influenced by nearby metropolitan choices.

Do you live in a jurisdiction where commercial cannabis activities are prohibited? Under the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”), local jurisdictions in California are free to decide whether they will regulate or prohibit commercial cannabis activities. As we have covered before, the City of Novato, located in the northern part of Marin County, currently falls in the prohibition camp.

Novato passed a moratorium banning all commercial cannabis activities except for two pre-existing laboratories. There is also a carve-out in the moratorium for medical cannabis deliveries from operators licensed outside of Novato. The City’s moratorium is scheduled to expire in November, leaving the City with two options: Either continue the prohibition, or decide to regulate and license the industry.

Last week I attended two meetings sponsored by the City and HdL Companies (a company that partners with local agencies to develop cannabis policies) that discussed the future of cannabis licensing in Novato. With reports that only one in three California cities authorize any type of cannabis businesses, it’s important for cannabis supporters to actively engage with local regulators when cannabis policies are on the legislative agenda. The cannabis meetings in Novato presented an inside look in how a small a city, in close proximity to metropolises with cannabis friendly policies (Novato is less than thirty minutes from San Francisco and Oakland if the traffic Gods are shining upon you), approaches the future of cannabis activities in their town. Here is some insight from the meetings:

  • There were a number of dispensary operators from nearby jurisdictions, all with different viewpoints on what Novato’s cannabis ordinance should look like, but there was unanimous consent on one particular point: A medical-only storefront retailer will not thrive with adult-use jurisdictions nearby (San Francisco, Oakland, Santa Rosa, Sebastopol, and Vallejo just to name a few). Medical-only dispensaries will lose tourists and curious customers willing to try cannabis for the first time to their adult-use competitors.
  • The double-edged sword of commercial property values. If your town has a large number of decrepit and vacant buildings, then commercial cannabis businesses can be instrumental in revitalizing those neighborhoods. On the other hand, since landlords can extract a significant amount more in rent from cannabis businesses, long-time local businesses may see their rents increase or their leases not renewed. This problem is exacerbated if a city enacts restrictive zoning regulations, thereby further limiting where a cannabis business can operate.
  • There was a lot of support for an ordinance that includes a social equity component. Should a cannabis ordinance give priority to owners from disadvantaged groups? Should there be a requirement that a certain percentage of employees be local residents? For further context on social equity programs, we covered what Los Angeles is doing here, and what San Francisco and Oakland are doing, here.
  • Educating and informing the public is paramount to turning a prohibitionist jurisdiction green. Misinformation and scare tactics run rampant at many public hearings (see our coverage on Sonoma County, here), so cannabis supporters must be prepared to correct the record.

Right now, it’s too early in the process to tell which way Novato will go with its cannabis policy. The City is holding two more public meetings in August: One on August 8th and the other on August 16th (both will be from 6pm-8pm at City Hall). If Novato residents want to see the City lift its cannabis prohibition, they will need to study up and prepare their talking points: The first two meetings were cannabis friendly but trust me, there will be opposition. But most importantly, cannabis supporters must continue to show up and vocalize their support! Mark your August calendar, Novato.