Recreational Marijuana

california bcc cannabis rules
Huge changes ahead. Get your comments in by Nov. 5!

Last Friday, we wrote about the amended proposed permanent cannabis regulations that are now in a 15-day notice-and-comment period for each California agency—the Bureau of Cannabis Control (“BCC”), Department of Public Health (“DPH”), and Department of Food and Agriculture (“DFA”). Each of the proposed rules can be found here, here, and here. The next round of written public comments is due to each agency by November 5, 2018. It’s important then for California cannabis businesses to get a handle on the proposed regulations as quickly as possible to determine whether to provide written comments since some impactful changes are coming.

Here are the key proposed changes from the BCC regulations:

Intellectual Property Licenses: Yesterday, we explained the threat that the BCC’s regulations pose to cannabis intellectual property licensing in California. Our California cannabis lawyers are regularly involved in intellectual property licensing deals and we think it’s critical for cannabis businesses to speak up in opposition to this proposed rule. California would be the only state in the cannabis union to bar third-party IP-licensing deals for cannabis licensees, which will certainly undercut the business growth of a good amount of operators if this rule passes.

“Owners”: The BCC modified the definition of “owner” (as well as “financial interest holder”; see below), which now includes “[a]n individual entitled to a share of at least 20 percent of the profits of the commercial cannabis business.” This is much broader than the existing 20 percent aggregate ownership threshold (which also still stands). To illustrate, the current ownership threshold definition expressly states that it does not apply where that interest holder holds “solely a security, lien, or encumbrance.” This new addition to the rules seems to capture a mere security holder—so long as that security holder is entitled to 20 percent of the profits.

The BCC also expanded upon the form of “ownership” that requires disclosure based on assumption of responsibility for the license, by specifying certain kinds of persons or entities who qualify (note that this list is not exhaustive or complete, so it likely will be read even more broadly), as:

  • Persons who manage or direct the licensed business in exchange for a portion of the profits. Note, there is no minimum threshold for profit entitlements here, so this could include persons who expect less than 20 percent of the profits.
  • Persons who assume responsibility for the licensed business’ debts. Here too, there is no threshold for debt assumption.
  • Persons who determine how “a portion” of the licensed business is run. This includes things such as “non-plant-touching portions of the commercial cannabis business such as branding or marketing”, but it too could include much more broad categories of business operations.
  • Persons who determine what cannabis goods will be cultivated, manufactured, distributed, purchased, or sold.

Notably too, these modifications now take the position that if an “owner” is an entity, all entities and individuals with a financial interest in that entity must be disclosed to the BCC and may be considered owners of the commercial cannabis business. The BCC emphasized that each entity and person in the corporate chain must be disclosed until the applicant can identify actual persons.

The takeaway from these changes is that the BCC now wants full identification of any person who has anything to do with an applicant entity—even if that person simply owns a company multiple steps away in a corporate chain. That is not dissimilar to what our cannabis business lawyers have seen in Oregon and Washington.

“Financial Interest Holder”: Like before, the BCC considers a financial interest to include an agreement to receive a portion of the profits of a licensed entity. Now, however, the BCC gives a number of examples of what qualifies as such an agreement:

  • An employee who enters into a profit-share plan with a licensee.
  • A landlord who enters into a lease agreement with a licensee for a share of the profits.
  • A consultant who provides services to a licensee for a share of the profits.
  • A person who acts as an agent, such as an accountant or attorney, for the licensee for a share of the profits.
  • A broker who engages in activities for the licensee for a share of the profits.
  • A salesperson who earns a commission.

The BCC will now also require the identification of all persons in the corporate hierarchy for interest holders, similar to the rules regarding owners. Meaning, if a financial interest holder is an entity, everyone in that entity is getting disclosed .

Annual License Fees: The BCC scrapped its previous test for determining the amount of appropriate fees for the annual licenses—estimating the maximum dollar value of planned operations—and now has created a new formula: “To determine the appropriate license fee due, the applicant or licensee shall first estimate the gross revenue for the 12-month license period of the license.”

Changes in Ownership: The BCC is also expanding its prohibition on changes of ownership over a licensed entity. If any new person is added as an “owner” by virtue of a change in ownership of a licensed entity, that person will need to provide the vast categories of information required by section 5002(c)(20) within 14 calendar days of the transfer. This will obviously have an impact on California cannabis M&A. The business can still operate pending the change so long as one previous owner remains on; otherwise, operations will need to cease pending the BCC’s review of the new owner. The BCC is also now requiring 14 calendar days’ notification of changes in any of the following:

  • Any changes to the contact information that was provided to the BCC in the original application;
  • Any change in legal name, business name, trade name, or fictitious business name of the licensee;
  • Any change to financial information, including funds, loans, investments, and gifts required in the original application;
  • Any change in the required bond; or
  • Any change or lapse in a distributor’s insurance coverage.

Annual License Applications and Requirements: As to annual licenses, the BCC made tweaks to the information that it will require for submission, which signals its desire to place more scrutiny on applicants and ensure compliance with California law. We won’t explain every change here, but here are the essential ones:

  • First, the BCC changed the requirement to provide it with “The business-formation documents” for the licenses business to “All business-formation documents”.
  • Second, the BCC is requiring that applicants provide it with state employeridentification numbers (“SEIN”), which the BCC explains in its notice of modification as being “necessary to ensure that all applicants that are required to obtain such a number have obtained it and are thus, in compliance with California law.”
  • Finally, licensees with more than one employee must attest that within one year of receiving their license, the licensee will have employees who have undergone certain Cal-OSHA safety training.

The BCC is also beefing up its requirements for renewal of licenses to require documentation of any change to any item listed in the original application. So, chances are that if a cannabis business obtains an annual license before these proposed changes become effective (and assuming they do), that business will need to provide these additional disclosures later.

Premises: There are a number of modifications to the proposed rules concerning licensed premises, but here are the highlights:

  • While it’s been routine for multiple licensees to operate on the same premises, the proposed modifications now expressly state that they do not “prohibit two or more licensed premises from occupying separate portions of the same parcel of land or sharing common use areas, such as a bathroom, breakroom, hallway, or building entrance.”
  • The premises must consist of permanent structures—shipping containers, modular buildings, or anything on wheels are a no-go—that are affixed to the ground and not capable of movement.
  • There is now a form (BCC-LIC-027) to submit to the BCC to request to make a physical change or alteration to the premises.

Marketing and Promotions: Licensees will be prohibited from selling or transporting goods that are identified as any kind of alcoholic product (and they cannot refer to anything as containing or being an alcoholic product). There are also now definitions for promotional goods and branded goods. If licensees want to sell branded goods that are not listed in the definition, they will need to seek BCC approval first. The proposed modifications also clarify that licensees can provide customers with promotional non-cannabis goods—and it looks like these goods could be provided at the premises or via delivery, too.

Packaging: The proposed modifications set up a time tier for cannabis packaging, whereby until January 1, 2020, cannabis packaging needs to be tamper-evident, in some cases re-sealable, and must not look like packaging that is marketed to children. Until January 1, 2020, retailers and microbusinesses can satisfy this rule by providing opaque exit packaging that meets the foregoing standards.

Testing and Quality Assurance: The proposed regulations include prohibitions on re-sampling previously tested batches, new requirements for remediation plans for failed batches, and new requirements for quality assurance testing for the level of THC, CBD, and terpenoids, among other things. If goods have undergone testing and haven’t been sold in 12 months, they now  have to be destroyed.

Retailer Packaging: Similar to the revised distribution rules, the proposed modifications set up a time table that require tamper-evident packaging until January 1, 2020, and re-sealable, tamper evident, and child-resistant packaging thereafter. There are opposite requirements for retailer exit packaging—it must be child-resistant, re-sealable and opaque until 2020, and then just opaque thereafter.

Deliveries: The rules now more heavily regulate a retailer’s use of tech platforms for delivery (i.e., the platform can’t share profits and can’t be the one doing the delivery, presumably unless it too is licensed). Delivery vehicles cannot contain any exterior markings that indicate that they are delivering cannabis goods. Delivery vehicles may now carry only $5,000 in cannabis goods at once. And the biggest change of all, per the modified section 5416(d), deliveries can be made into any jurisdiction in the state, so long as they comply with the BCC’s delivery rules. Currently, localities can and do prohibit deliveries from other jurisdictions. The BCC’s proposed regulations, however, now open the floodgates to previously “dark” delivery jurisdictions.

For the next few days, we’ll be writing on the proposed rules issued by DPH and DFA. We cannot emphasize enough how licensee stakeholders need to speak up and provide public comment for the rules they like and don’t like so that industry can better shape the regulatory playing field. So, get those comments in by November 5!

california cannabis regulations
Here we go again!

This morning, the California Bureau of Cannabis Control, California Department of Public Health, and California Department of Food and Agriculture issued 15-day notices of modification to the texts of their respective proposed regulations. The California Cannabis Portal has published links to each notice and the modified texts of the proposed regulations. For each set, the respective Department will accept written comments by November 5, 2018.

Stay tuned to the Canna Law Blog for future posts analyzing modified proposed regulations, which are extensive.

california cannabis indemnity
Don’t skim over that indemnification clause!

Coming from Seattle to Los Angeles, I’ve already seen one state flip from being a “gray medical cannabis state” to a fully regulated licensing system and I understand how painful a process this can be. So much of what I saw in Washington State is now happening in California.

In California today, folks are jockeying for operational licenses on the state and local levels under MAUCRSA and “the cream” is rising to the top, just as it did in Washington. One-to-two-person shops and mom and pop operators are feeling the financial pinch of licensing costs and compliance woes. The secondary market for buying cannabis businesses is also beginning to open up as cities and counties solidify and stick with their local cannabis entitlement programs. Transactions between cannabis licensees are becoming increasingly sophisticated, from IP licensing agreements, to distribution agreements, to white labeling agreements, to purchase and sale agreements for inventory.

And just as happened in Washington State at the onset of legalization there, we are seeing many cultivators and manufacturers overpromising on what they can deliver, more often due to overconfidence as to dishonesty. In legal terms, this means we are also seeing cultivation and manufacturing licensees, and distributors agreeing to indemnify retailers and other licensees for everything under the sun, quite often to their own detriment. Even though the cannabis industry is maturing rapidly in California, many are still using boilerplate or Google-discovered or Legal Zoom and Rocket Lawyer contracts for these very serious transactions. This use of bad template documents (most of which are modified little if at all for the realities of the cannabis industry) has got to stop, or cannabis licensees will soon find themselves embroiled in costly and counter-productive disputes/litigation.

And that brings me to the crux of this post, which is one of the most important “boilerplate” contract provisions that absolutely must be tailored for a California cannabis contract: indemnification. What, exactly, is indemnification? It’s when one party (the “indemnitor”) agrees to hold harmless and compensate the other party (the “indemnitee”) for losses suffered by the indemnitee.

Many cannabis sellers in California are far too willing to indemnify third parties for things completely out of their control, like lab results, changes in regulations that may affect the other party’s operations, and unforeseen conduct by users of the cannabis product. These blanket indemnification provisions are creating liability and exposure.

In the past month or so, many cannabis companies have come to us (both in Los Angeles and in San Francisco) with poorly drafted, irrelevant or nonsensical indemnification provisions and agreements from cannabis sellers. So, what makes for a good indemnification provision in a cannabis contract?

A preliminary question should be the breadth of the indemnification. If you are the seller and you want to protect yourself, you should tailor your indemnification to what makes sense and to what you can afford. You do not want something like the following (which is being used fairly often in California these days by inexperienced lawyers and lawyerless companies):

“The Indemnitor agrees to indemnify, defend, and hold harmless the Indemnitee, its officers, directors, employees, owners, agents, assigns, and affiliates (collectively, the “Indemnified Parties”) from and against any and all claims, liability, loss, expenses, suits, damages, judgments, demands, and costs(including reasonable attorneys’ fees and expenses) (each a “Claim”) arising out of any accident, injury, or death to persons, or loss of or damage to property, or fines and penalties which may result, in whole or in part, by reason of the use or sale of any Product, or its packaging, except to the extent that such damage is due solely and directly to the gross negligence or willful misconduct of the Indemnified Parties and that the Indemnified Parties, or any of them, were acting in bad faith.”

This sort of provision is a bad idea for any cannabis seller. It means that seller will be liable to the buyer for just about anything that could go wrong–anywhere, for anyone–from the product. No one wants to be on the hook for things they cannot control.

Here are a few important things to consider when crafting a cannabis indemnification term:

  • Both the cannabis seller and buyer need to focus on what kinds of losses will or will not be covered by indemnification. If I’m the seller, I’m going to want to exclude incidental, punitive, and indirect damages even if foreseeable. If I’m the cannabis buyer, I’m going to want to include at least incidental damages and foreseeable indirect damages.
  • It is both unusual and risky for a seller to agree to indemnify a party indefinitely, and yet this too has become common in California. If you are the seller, make sure your indemnity agreement or provision has an end date.
  • Your indemnification agreement or provision should include a protocol for making indemnification claims to the indemnifying party. The boilerplate indemnification provisions and agreements we are seeing typically never even mention any claim deadline or claim notice requirements. As the cannabis seller you should, at minimum, address these two issues in your indemnification provision or agreement.
  • If the indemnification is mutual, and captures reciprocal indemnification obligations in the same paragraph or contract section, ask yourself “why?” Putting the same parameters around indemnification for both parties often makes no sense, because each party has a different role in the business relationship. Consider separating the indemnity obligations and applying tailored language for each party, as appropriate for that party’s role in the transaction.
  • Finally, can you just cross it out? If you have deal leverage, and someone presents you with an indemnification provision (particularly an onerous one), you may be able to get rid of it altogether. Sometimes, you can convince the other party to give you everything they need to feel comfortable through appropriate representations and warranties.

There are certainly very good and reliable stock indemnification provisions in most contracts, and there’s a reason for that boilerplate in that it’s time-tested and mostly appropriate for more standard business agreements. However, be sure that whatever you’re putting into your cannabis contracts on indemnification is tailored to your specific situation. If not, you could find yourself holding the bag on way more than what is fair — let alone what you expected or can afford.

canada cannabis marijuana

 

Congratulations to all of our Canadian readers! Today is the big day!

Whether you are a cannabis business owner, consumer, lawyer, doctor, advocate, or even an opponent, you can surely appreciate this historic day. Canada has bucked international trends and become the first North American country to legalize recreational, adult-use marijuana.

Canada has instantly become an international leader in marijuana policy. If states like Washington, Oregon, and California are any indication, there will surely be bumps along the way, but Canadians should be excited about what comes next.

For those celebrating today, be safe and enjoy responsibly!

For more on Canadian cannabis, check out these posts:

u.s. border customs marijuana cannabisCanada’s cannabis legalization creates yet another wrinkle in the relations between the U.S. and its northern neighbor.

U.S. Attorney General Jeffrey Sessions harbors a well known hatred towards anything cannabis and he clearly has no love for Canada’s Cannabis Act either. What will this mean though for Canadians who are 100% legally involved in Canada’s cannabis industry when coming to the United States?

The answer came last week, when U.S. Customs and Border Protection (“CBP”) issued its Statement on Canada’s Legalization of Marijuana and Crossing the Border:

[a] Canadian citizen working in or facilitating the proliferation of the legal marijuana industry in Canada, coming to the U.S. for reasons unrelated to the marijuana industry will generally be admissible to the U.S. [H]owever, if a traveler is found to be coming to the U.S. for reason related to the marijuana industry, they may be deemed inadmissible. (Emphasis supplied).

Though this statement is a welcome surprise, it still provokes skepticism from U.S. immigration lawyers who have seen countless foreign nationals banned for life from entering the U.S. because they once used marijuana or were once associated with the cannabis industry.

Under the U.S. Controlled Substances Act (“CSA”), passed by U.S. Congress in May 1971, cannabis is classified as a Schedule I drug, which is reserved for substances like heroin and LSD, among others, that: (i) have a high potential for abuse; (ii) have no currently accepted medical use in treatment in the U.S.; and (iii) lack accepted safety for use under medical supervision.

U.S. federal law – more specifically the Immigration and Nationality Act (“INA”) — governs entry into the United States and under the INA, a “conviction” for controlled substances renders a foreign national inadmissible into the U.S. INA’s definition of “conviction” expands beyond a formal finding of guilt by a court of law to include instances where a foreign national admits to the essential elements of the crime under oath to a U.S. consular or CBP officer. For example, by answering “yes” to the question, “Have you ever smoked pot?”

Even a foreign national who has never consumed marijuana could be declared inadmissible under the INA based on his or her involvement in a legal cannabis business, either as “a knowing aider, abettor, assister, conspirator, or colluder with others” or “an illicit trafficker” of a controlled substance. Earlier in the year, we saw two examples of this when Canadian businesspersons Sam Znaimer and Jay Evans were banned for life from entering the U.S. because of their intended affiliations with U.S. cannabis industry.

Of course, lying about the use of or affiliation with marijuana would also render a foreign national inadmissible and you should avoid this at all costs. CBP has the legal authority to search electronic devices, and if it finds conflicting and/or incriminatory evidence about a foreign national’s actual or intended activities, that foreign national may be refused entry into the U.S. or even given a lifetime ban.

Once declared inadmissible, a foreign national needs a waiver of inadmissibility from the CBP to enter the U.S. These waivers are discretionary, costly, time-consuming, and limited in validity to between one and five years. Even with a waiver, a foreign national will typically face secondary questioning and delays each time he or she attempts to enter the U.S., even when the purpose of the visit is purely personal.

Foreign nationals have also been historically denied entry for profiting from the drug trade. Because of this, cannabis lawyers were concerned that virtually all foreign nationals lawfully engaged in Canada’s cannabis industry would be deemed inadmissible even if coming to the U.S. for purely personal reasons.

The recent statement from the CBP appears to exempt individuals who seek to enter the U.S. for reasons unrelated to cannabis. However, the process of admitting foreign nationals into the U.S. remains discretionary and subjective and only time will tell just how exactly the new policy will be applied at U.S. ports of entry.

lcb washington cannabis marijuana
Unfortunately, a lot of this stuff is not written anywhere.

To successfully work in Washington’s regulatory cannabis industry, you need to understand the overlapping levels of laws and rules that are in the state’s regulatory arsenal. State statutes in RCW 69.50 set forth the boundaries of the regulatory system. State regulations in WAC 314-55 fill in the details of that regulatory system. Then there are official Liquor and Cannabis Board guidance documents, administrative cases, and court cases that formally interpret those statutes and rules. But there is yet another tier of rulemaking that is harder to see. This tier houses all the unwritten, often changing policies and interpretations of the LCB. If you aren’t aware of these unwritten rules, you can get yourself into a lot of trouble, including potentially losing your license — even if you think you’ve done everything by the book.

For example, did you know that the LCB has two different enforcement policies with regard to its “minor frequenting” violation? If a marijuana retailer does not check ID at its door, here’s the order of events. The minor enters the retail store and attempts to make a purchase. The store employee checks ID and sees that the minor is underage and asks the minor to leave without completing a sale. There is no violation. However, take this same set of circumstances and add an additional security ID check at the front door, in addition to the ID check at point of sale. In that circumstance, if the ID check at the front door misses spotting the date on the ID card but the minor is still turned away at the secondary ID check at point of sale, the retailer has committed a violation. If a retail business is going to have an outside security check, it has a different, stricter standard for what constitutes a rules violation than if it doesn’t have that security check. Regardless of whether that policy is bad (it is), you can’t find it anywhere in the LCB’s rules or in case law interpreting those rules.

In another example, the LCB has generally held that a financial contribution to a licensed business creates a financier relationship the entails a full criminal background check on the financier and a disclosure by the financier to the LCB of all that financier’s assets, debts, etc., all under penalty of perjury. On the other hand, if that same financier wanted instead to invest just in real estate and equipment and lease that equipment to a licensed marijuana business, no LCB disclosure or background check is required. All of that is reasonably reflected in the rules as written. However, the LCB also has a twist on that policy. If a marijuana business owner also wants to co-own the real property that is leased to the marijuana business, any other financiers or owners of that real property are considered as financiers or owners of the underlying marijuana business. Even if a property were purchased a year before the marijuana license was issued, a lender that holds a deed of trust on property that is owned by an individual that leases it to that individual’s marijuana business is considered a financier. Again, this policy is not reflected at all in any statute or regulation.

We deal all the time with people who are unwittingly violating written regulations. As a layperson in a regulated industry, it is your responsibility to know those rules, but that doesn’t mean it’s easy. When companies get into trouble because of violations of the unwritten rules, however, they don’t have real notice that what they are doing is contrary to LCB policy. And it allows the LCB to implement policies without being subject to the state’s mandatory notice and comment period for new rules. I don’t think that the LCB does this on purpose — the notice and comment period creates delays and can be taxing to work through. But there are enough tools in the LCB’s belt (emergency rules, interim policies, formal guidance documents, etc.), that any time we see the unwritten rules in practice, we need to push back. Lately, we’ve been doing that a lot around here.

california cannabis marijuanaIt’s not a normal day in California if there aren’t around 50 cannabis bills floating around Assembly halls. And this legislative session did not disappoint in getting certain much-needed cannabis legislation passed (though some important legislation also bit the dust). All in all, there is a lot of legislation and it can be difficult to keep track of. It can also be difficult to identify what’s going to have the greatest impact on California’s cannabis industry. We are still in an emergency rule period under MAUCRSA (with permanent regulations probably taking full shape and adoption in early 2019), so it’s comforting to see the legislature fill some of the gaps left over from the emergency rules.

Here’s my list of the most important/recent cannabis bills of 2018 for California:

Provisional licenses. Without a doubt, the industry would have gone into a tailspin and then come to a screeching halt after December 31 of this year without the advent of provisional licenses. We wrote about the provisional license bill, SB 1459, before its passage, and the bill is now law. The basic gist is that if your business holds or has held a temporary license and you’ve file for your annual license, you’re going to get a provisional license (which is good for only one year) in order to keep operating while you pursue your annual license. Temporary licenses will not be issued after December 31 of this year, so this is the new vehicle for continued operation in California while you wait on your annal license. Here’s a fact sheet from CDFA that details what you need exactly for a provisional cultivation license (the other agencies haven’t released anything yet as of the writing of this post).

Events. Finally, the legislature got on board with expanding the venues at which cannabis events can be held. AB 2020 now allows cannabis events to take place at “a county fair event, district agricultural association event, or at another venue expressly approved by a local jurisdiction for the purpose of holding temporary events of this nature. . .” Of course, local jurisdictions still have to approve of these events and only licensees can throw them, but this is a big move for the increased normalization of cannabis in California where we’re now beyond allowing licensees to have temporary events at only county fairs and district agricultural association events as was previously the case.

Cannabis convictions. AB 1793 represents the continued implementation of Prop 64. Namely, when it comes to cannabis-related convictions, Prop. 64 “authorizes a person to petition for the recall or dismissal of a sentence, dismissal and sealing of a conviction, or redesignation of a conviction of an offense for which a lesser offense or no offense would be imposed under [Prop. 64].” In turn, AB 1793 mandates that the State Department of Justice/Office of the Attorney General, before July 1, 2019, review all existing criminal records in the state’s database to identify past convictions that are eligible for recall, dismissal and sealing, resentencing and/or redesignation. The State DOJ then must notify all local prosecutors about the foregoing eligibility. The prosecutors must then, on or before July 1, 2020, review all of their eligible criminal cases to decide whether to challenge the recall, resentencing, dismissal and sealing, or redesignation. If no such challenge is made by that date, the subject court must automatically reduce or dismiss the conviction. Without a doubt, many people in California will have their lives and futures changed for the better due to the passage of this bill.

Social equity. I have long maintained that any meaningful social equity programs on the local level (like those in Los Angeles, San Francisco, and Oakland) likely wouldn’t survive unless supported by the state. Thankfully, California is on board with the success of local social equity regimes via SB 1294, also now known as the California Cannabis Equity Act of 2018 (the “CCEA“). The CCEA basically sets up the state to provide “technical assistance” not to social equity applicants directly, but to the local programs that govern them. The Bureau of Cannabis Control (“BCC”) “may, upon request by a local jurisdiction, provide technical assistance to a local equity program that helps local equity applicants or local equity licensees.” “Technical assistance” includes “providing training and educational sessions regarding state cannabis licensing processes and requirements to equity applicants or equity licensees that are coordinated with the local equity program.” Cities and counties will have to petition the BCC for a grant of assistance to get things going under the CCEA, and whether the BCC assists or not depends on various merit-based criteria set forth in the CCEA regarding the nature of the local social equity program.

Pets and pot. AB 2215 addresses veterinarians and their relationship to licensees under MAUCRSA. Under this new law, the Veterinary Medical Board can revoke or suspend a veterinarian license, or can assess a fine, for “accepting, soliciting, or offering any form of remuneration from or to a [MAUCRSA] licensee if the veterinarian or his or her immediate family has a financial interest [in the licensee].” Further, if a vet physician even discusses cannabis with a client (i.e., the pet’s owner) while the vet physician has any kind of an agreement with or is employed by a MAUCRSA licensee, or if the vet physician makes any kind of advertisement for cannabis, the Veterinary Medical Board can revoke or suspend a veterinarian license, or can assess a fine against the vet physician. This is the biggest kicker of all though–AB 2215 “prohibits a licensed veterinarian from dispensing or administering cannabis or cannabis products to an animal patient.” Still, the vet will not get into trouble for just discussing, on their own with the pet owner, the benefits or effects of cannabis on the pet.

Privacy. What companies can and cannot share about their customers seems to be ever changing and certainly constitutes an emerging area of law. And cannabis companies are no exception, and definitely not now in California. As we wrote in a previous post, “AB 2402 is significant in that it prevents licensed cannabis businesses from sharing expansive categories of customers’ personal information with third parties—except in limited circumstances in connection with payments, or where a customer has consented to sharing his or her data with a third party. Notably, AB-2402 prohibits licensed cannabis businesses from discriminating against or refusing service to consumers who do not consent to disclosure of their personal information to third parties.”

No CBD in your booze. For anyone who had dreams of making a cannabis-infused wine, cocktail, or beer, AB 2914. “prohibit[s] a licensee from selling, offering, or providing a cannabis product that is an alcoholic beverage, including, but not limited to, an infusion of cannabis or cannabinoids derived from industrial hemp into an alcoholic beverage.”  Yes, the nail is now officially in the coffin for hemp-derived CBD alcoholic beverages. And this doesn’t just apply to cannabis licensees–it also now applies to alcoholic beverage licensees licensed under the Alcoholic Beverage Control Act. Given that CDPH-FDB recently prohibited hemp-derived CBD in all food and regular drinks (via an FAQ), it was really only a matter of time until state government extended that prohibition to alcohol, too.

OSHA. AB 2799 is going to force licensees to get serious about employment laws in California; specifically, it will make cannabis businesses become Cal-OSHA compliant, which really isn’t a bad thing where it’s good public policy to promote and implement safe workplaces for employees. Now, when you apply for your annual license or you to go to renew that annual license, you’ll have to “[p]rovide a statement . . . that [you] will employ within one year of receiving or renewing a license, one supervisor and one employee who have successfully completed a Cal-OSHA 30-hour general industry outreach course offered by a training provider that is authorized by an OSHA Training Institute Education Center to provide the course.”

City cannabis licensing in action.

Recently, the City of Portland announced that it would lower cannabis business licensing fees. Most notably, retail license fees have been reduced from $4,975 to $3,500, in line with other license types. That is still too steep (especially considering the state licensing fees), and although the City has cleaned up its process over the past few years, it’s still redundant, unnecessary and something of a cluster. Like all cities, Portland should stop licensing cannabis businesses.

It’s been over three years since Portland adopted its poorly written Code Chapter 14B.130, which sets forth license procedures and requirements for marijuana businesses. The oppressive fee schedule adopted at that time placed an outsized burden on retailers to cover the cost of administering the Portland Marijuana Policy Program. In the early days, the program was staffed by functionaries at the Office of Neighborhood Involvement (ONI) who shall go unnamed and mostly seemed to follow each other in circles, sometimes passing applicants back and forth with the Bureau of Development Services (BDS). Most of those folks have moved on.

ONI has since been rebranded as the Office of Community & Civic Life (people still call it ONI) and slotted under a different Commissioner. All of this followed from campaign promises made by Portland’s new mayor, who acknowledged that the City’s relationship with marijuana was a mess. For further reading on how bad it got — from credible estimates that local red tape was costing the industry $22 million per month, to disapproving letters penned by Congressional reps — go here, here, here, here, here, here and here. The City’s actions also caused one of my all-time favorite Oregon cannabis rumors: A class action suit would be filed “any day now” by private industry against the City. It’s been a trip.

Three years later, the Marijuana Policy Program is better run, and the lawyers and paralegals in my office get along with everyone there and push licenses through on the regular. But the question remains: What exactly is the point of having a local regulatory program for cannabis businesses? Everything is redundant to what the state is doing, and when it’s not, it’s usually worse. So why do cities think this is a good idea?

Those are complex and provocative discussions, but the motivation by cities may be some combination of the following: 1) licensing cannabis generates revenues; 2) licensing cannabis generates jobs; 3) licensing cannabis is novel; 4) licensing cannabis may appease people who dislike pot businesses; 5) cities may already be licensing alcohol (although to a lesser extent, invariably); 6) other cities are licensing cannabis; and 7) it’s hard for regulators not to regulate things. All in all, it’s a dismal mix.

Unfortunately, there is not much that industry can do when a city decides it wants to license cannabis. In states where legal marijuana markets exist, cities (and counties) have significant leeway in dealing with cannabis businesses. Some cities opt out entirely; others choose to license. Still others take a middle path, charging a variety of fees and taxes to hapless pot businesses but stopping short of licensure. Although fees and taxes are burdensome, those cities tend to avoid the logjams that prevent many businesses from even getting off the ground.

In all, the Portland experience is not unique. Hilary Bricken has been writing on this blog for some time about City of Los Angeles’ convoluted three-phase licensing protocol, for example, and the unintended consequences that come with it. Others have taken a broader survey, chronicling “extortionate” application, permit and license fees from municipalities nationwide. In comparison to some locales, cities like Portland and Los Angeles don’t seem so bad.

It’s also important to remember that cities can do a lot of good for cannabis, if they skip the licensing step and focus on other things. In August, Portland directed $350,000 in funds toward record-clearing and workforce efforts for communities that prohibition has impacted disproportionately. It also dropped another $150,000 to support equitable cannabis initiatives. Both announcements were met with general approval.

Most recently, Portland rolled out a “Social Equity Program”, which modestly reduces licensing fees to qualifying businesses. Before you get too impressed, though, consider: The better move would be dropping the licensing structure altogether.

oregon marijuana cannabis data securityLast week we discussed the data breach notification laws with which cannabis companies doing business in Oregon must comply following a cyber intrusion. Today, we discuss the safeguards these companies must adopt to protect the security, confidentiality and integrity of customers and employee (collectively, “Consumer”)’s personal information, who reside in Oregon.

Pursuant to Oregon Revised Statutes (“ORS”) § 646A.622 any business that “owns, maintains or otherwise possesses, and has control over or access to,” written and electronic data that includes personal information used for business purposes, must develop, implement, and maintain reasonable safeguards to protect the personal information.

Generally, “personal information” means a Consumer’s first name or first initial and last name in combination with, for example, a Consumer’s social security number, driver license number or financial account information, if (1) encryption, redaction or other methods have not rendered the data element or combination of data elements unusable; and (2) the data element or combination of data elements would enable a person to commit identity theft against a consumer.

The company must act in accordance with this law by:

(1) Complying with:

  • State or federal laws with greater protections for personal information than ORS § 646A.622;
  • Gramm-Leach-Billey Act as of January 1, 2016 as of June 2018, if the company is subject to this act; or
  • Requirements of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) as of June 2018, if HIPAA applies to the company;

and

(2) Implementing a security program that includes:

Administrative Safeguards, such as:

  • Frequently identifying reasonably foreseeable internal and external risks;
  • Frequently training and managing employees in security program practices and procedures; and
  • Selecting service providers that are capable of maintaining appropriate safeguards and adhering to procedures and protocols to which you and the service provider agree, but also requiring the service providers by contract to maintain the safeguards, procedures and protocols.

 Technical Safeguards, like:

  • Assessing risks and vulnerabilities in network and software design;
  • Taking reasonably timely action to address the risks and vulnerabilities; and
  • Applying security updates and a reasonable security patch management program to software that might reasonably be at risk of or vulnerable to a breach of security;

and

 Physical Safeguards, including but not limited to:

  • Monitoring, detecting, preventing, isolation and responding to intrusions timely and frequently; and
  • Disposing of personal information after you no longer use it for business purposes, pursuant to local, state and federal law.

So what does all of this mean? Simply put, business owners with 100 or fewer employees (which includes almost all Oregon cannabis businesses), will comply with these statutory requirements if their information security and disposal program contains administrative, technical and physical safeguards and disposal measures that are appropriate to: (1) the size and complexity of their business; (2) the nature and scope of their activities; and (3) the sensitivity of the personal information collected from or about a Consumer.

Cannabis business should take these safeguard standards seriously. Each violation if subject to a penalty of up to $1,000. Note that each day of a continuing violation is a separate violation, but the maximum penalty for any occurrence is $500,000. Civil penalties under ORS § 183.745 may also apply.

Complying with ORS § 646A.222 is not only required by law, it is also a very good idea for all cannabis business. Indeed, 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. Be safe out there!

OLCC marijuana license employment
Your license transition plan should consider employees.

You’re new to the Oregon cannabis scene and quickly realize you won’t be able to open a newly licensed cannabis retail store due to the Oregon Liquor Control Commissions (OLCC) pause on issuing new licenses that went into effect on June 15. But what about purchasing an existing retail store from a licensee?

It is possible to purchase a retail marijuana business and receive a license from OLCC. However, no money or control of the store can take place until the OLCC vets the new ownership to ensure compliance with the marijuana rules and statute. Typically, the seller and buyer enter into binding agreements to sell the store (technically, an asset or stock purchase) pending approval from the OLCC of the change in ownership. As we recently wrote, the OLCC recently increased scrutiny on these applications and can take up to 3-6 months to approve. During that time, your dreams of owning a retail cannabis store are paused. However, based on our recent discussions with the OLCC, there is a legal way to start the transition to the new owner without violating the rules: through employees.

Employees are a key part of any business. Employees keep the day to day operations of business running smoothly. In a retail store, they are the face of the company. It’s important to select people you trust and will work hard for your company. One way to begin control of the new company is to enter into an agreement with the seller to hire certain employees. There are a lot of things to consider when doing this—so it’s important to do it right.

First, it’s probably best to mention this when you first begin sale negotiations. Let the seller know you’d like to immediately “place” employees of your choice, who will be hired by the seller, prior to OLCC approval of the change in ownership. It’s best to be up front with these things rather than watch your deal fall apart later because you failed to mention your intentions.

If the seller agrees, the seller will need to hire the employees. Remember: You the purchaser cannot have a financial interest or control in the company until the OLCC approves. The employees will either need to be hired on a short term employment agreement to terminate when the sale is finalized, or enter into an employment agreement that will be assignable to the new entity once the sale is finalized. This would be a great time to talk with an Oregon cannabis employment attorney  to ensure everything is done correctly.

You’ll also want to be super clear with the employees about the arrangement. Again, you don’t want your employment relationship with the individuals to fall apart because you weren’t clear that the employee’s boss or employment status will change once the OLCC application is approved.

Assuming all of that goes smoothly, what kind of employees should you hire? For the transition period, its best to hire those that will exhibit decision making powers such as managers and supervisors. Qualified people in higher up positions tend to be more difficult to find. Get them in early and the transition will be even easier.

You might not be able to run the business the way you want during the period the OLCC is reviewing the change in ownership application, but you may be able to instill employees that can start the transition for you.