Recreational Marijuana

oregon marijuana cannabis
Time to kick back and consider Oregon cannabis.

On January 31, the Oregon Secretary of State released an audit of Oregon marijuana regulation. The audit is a hefty 37 pages, but its core findings are listed right there on the cover sheet: “Oregon’s framework for regulating marijuana should be strengthened to better mitigate diversion risk and improve laboratory testing.” Now: we would all like to see less diversion and better testing, but those findings are not exactly surprising. And no one should expect big fixes anytime soon.

Below is some straight talk about the audit’s two primary conclusions, and a few thoughts about where things are headed.

  1. Much of the medical market is a black market and diversion is unstoppable at this time.

The Oregon Medical Marijuana Act (OMMA) was passed over 20 years ago, in 1998. As we explained a few years back, OMMA was (and is) little more than an affirmative defense for designated marijuana possessors and distributers from state criminal prosecution, and from federal hassles to the extent possible. Those are commendable goals, but the program never made sense from a commercial perspective. Thus, the Oregon Health Authority (OHA) has always found itself in the unenviable position of struggling to write rules around legislation that creates a marketplace while ignoring the market itself.

When the legislature did decide to build a primitive market, it did so in fits and starts. It took seven years to put a grow site registry together, and fifteen years for dispensary licensing. Heck, even the first grow site inspections (and there haven’t been many) didn’t occur until 2016. All of this was toothpicks and BAND-AIDS. And all the while, many people made money trading in the “medical” market. Did a lot of that weed and cash make its way across the country? You bet.

Even if Oregon were to follow the audit recommendations, however, and ramp up funding for inspections and enforcement in both the OHA and OLCC (adult use) programs, there are inherent and well documented limits to supply-side efforts when it comes to federally controlled substances. Oregon can invest heavily in keeping its cannabis under seal, but its energy would be better focused on federal lobbying to de- or reschedule marijuana under the federal Controlled Substances Act, or even on longshot solutions like promotion of interstate marijuana exchanges.

The state should also continue to push medical marijuana regulation, including enforcement, into the OLCC purview. The audit briefly suggests as much, and we’ve been talking about that forever on this blog. It’s not such a political quagmire anymore, especially as more overlap comes with each legislative session. The fundamental question is this: why have a revenue raising agency and a health authority both focus on intensive regulation of the same plant, especially when both are under-supported? It doesn’t make a lot of sense.

Finally, here’s the part that administrators, legislators and even executive branch actors aren’t saying out loud: leakage into interstate commerce really doesn’t matter at this point, especially if the state is running its studies and making token efforts to stop it. There may be some federal enforcement against black market actors (which is great), but no one is shutting these state programs down. In 2019, cannabis leakage exerts more pressure on the feds to find legislative solutions than enforcement ones.

  1. Testing is a tough issue, but more fixable.

Back in the day, when OHA first started licensing dispensaries, there were no real rules around testing. People would take weed to labs with inadequate equipment and inconsistent practices. They would leave with unreliable results. In 2016, when OHA began accrediting the first laboratories for the medical and adult use (OLCC) markets, not many of them signed up. In the OLCC market, this meant bottlenecks for an extended period.

Nowadays, all cannabis making its way to retail sale is tested more strictly than other agricultural crops, but medical marijuana outside that channel typically goes untested (unless the flower is processed by a medical marijuana processor, which is pretty niche). That’s a shame because medical marijuana patients are the ones who would benefit from testing the most: many of these individuals have conditions like cancer and HIV that directly compromise their immune systems. And roughly 10% of Oregon’s medical marijuana patient community includes children under 18 years of age and seniors over 70.

As far as testing issues that affect our industry clients (OLCC businesses and financiers) the audit recommends expanding testing requirements to screen for microbiological and heavy metal testing, and it promotes “shelf audits” at dispensaries. In theory, those steps could drive up costs along the supply chain, but we wouldn’t expect much variance. Altogether, the testing push is more about protecting vulnerable individuals in Oregon, including people in limited, patient-caregiver relationships. We can get behind that.

william barr federal law
Hopefully, anyway…

Back on January 4, 2018, the industry was in a slight tailspin due to then acting Attorney General Jeff Session’s (renowned marijuana hater) rescinding of all marijuana enforcement guidance from the Department of Justice (“DOJ”). Reactions in the media ranged from treating the Sessions announcement as nothing more than an attempt to frighten the cannabis industry to claiming that it was the first step in an organized crackdown of the marijuana industry that could affect cannabis businesses and users. Both possibilities are arguably realistic. And the drama that followed Sessions’ moves was pretty satisfying, including when Cory Gardner vowed to (and did) block DOJ appointments until the issue was resolved in favor of the states, culminating in a deal with President Trump to back off of state-legal marijuana. However, now that Sessions is out at the helm of the DOJ, industry folks can breathe a little easier where new Attorney General nominee William Barr has gone on record stating that state-law abiding cannabis businesses will not be prosecuted by the DOJ and essentially that the 2013 Cole Memo will be back from the dead.

In rescinding all DOJ guidance on marijuana enforcement, Sessions torpedoed the famous 2013 Cole Memo, which outlined eight specific enforcement priorities of the DOJ in states with legal marijuana and which, between the lines, indicated that “robust” state regulations would keep the DOJ at bay regarding enforcement of the federal Controlled Substances Act. After that memo, entire states built their comprehensive cannabis licensing and taxation systems on those eight enforcement priorities, ensuring that compliance restrictions and barriers to entry were strong enough to support the same. Instead, Sessions put in place the “Sessions Memo,” which was short on specifics. It doesn’t contain an outright directive ordering U.S. Attorneys to go after marijuana businesses. It simply withdraws all of the earlier marijuana-specific guidance memoranda and directed U.S. attorneys to treat marijuana sales like any other federal crime. The withdrawn memos include, the 2013 Cole Memo, the February 2014 Cole Memo that extended low enforcement priority status to apply to banking activities (although the FinCEN guidelines are, importantly, still alive); and the 2014 Wilkinson Memo that was a sort of Cole Memo for tribal lands.

Right now, U.S. attorneys have full discretion to determine to what extent they can/should enforce federal law in the context of marijuana crimes in states with legalization and medicalization–which they always had anyway–but the 2013 Cole Memo helped them prioritize certain marijuana issues across the DOJ. In his memo, Sessions referred to the principles of enforcement in the U.S. Attorneys’ Manual, but that document reinforces the level of discretion and authority that each U.S. attorney has already. The Cole Memo was ultimately useful in providing a consistent nationwide federal policy. Under Sessions Memo, we are back to the days of having potentially 93 different enforcement policies — one for each U.S. Attorney. To date, there haven’t been any reported incidents of the Feds going after state-law compliant cannabis operators in states that have legalized and regulated.

A new sheriff is coming to town though, and that could be a very good thing for the momentum of state-by-state legalization in that states will better know what to expect from Big Brother as will marijuana businesses and their investors. William Barr may end up becoming a very unlikely helper when it comes to state-legal cannabis. He was Bush I’s attorney general from 1991-1993, and he’s a dyed in the wool conservative who, as Attorney General, was “tough on crime” and put many, many people in prison. As reported by Marijuana Moment, Barr in a mid-January hearing with Congress testified that:

My approach to this would be not to upset settled expectations and the reliant interests that have arisen as a result of the Cole memorandum . . . However, I think the current situation is untenable and really has to be addressed. It’s almost like a backdoor nullification of federal law . . .

While Barr also testified that he wouldn’t go “after companies that have relied on [2013] Cole memorandum . . . ,”  he also didn’t completely kowtow to state legal cannabis. He further testified that “we either should have a federal law that prohibits marijuana everywhere, which I would support myself because I think it’s a mistake to back off marijuana. However, if we want a federal approach—if we want states to have their own laws—then let’s get there and get there in the right way.”

In reading the tea leaves, it sounds like, personally, Barr would have no issue with continuing the War on Drugs as it relates to cannabis. As a department under his watch and command, however, the DOJ probably wouldn’t spend time and valuable resources on state-legal operators — even if Barr is concerned that the current dynamic is breeding “disrespect for the federal law.” Reasonable minds can differ, but I’d say that most cannabis operators and states are very mindful of federal law enforcement and it’s really Congress, the DOJ, and the President to blame for creating legal confusion because of varied enforcement over the years.

In the end, Barr’s testimony ultimately serves to show the country that Congress has been woefully impotent and ignorant when it comes to cannabis as a whole and especially as the topic relates to states’ rights. What’s good to know though is that if Barr is confirmed, we’re very likely returning to the 2013 Cole Memo principles, which will at least create a political atmosphere of certainty in that the DOJ has bigger fish to fry than state-legal marijuana. Right now, Barr is pretty much a lock for U.S. Attorney General, so hopefully he’ll make good on his cannabis compromises.

international law marijuana united nations

On February 1, it was reported that the World Health Organization (WHO) made some significant and long overdue recommendations with respect to cannabis. Those recommendations have not been formally released, but we expect that to happen soon. If adopted wholesale by the United Nations (UN), the recommendations will have a significant impact globally as to controls placed on cannabis and its constituent parts.

It is important to note that the WHO is not recommending the unfettered legalization of marijuana. Therefore, no one should expect the doors to swing wide on international cannabis trade overnight. Still, the WHO development is welcome news after nearly 60 years of unmerited and unexamined prohibition of marijuana under international law.

The WHO recommendations are reported as follows:

  • Remove whole plant marijuana and cannabis resin from Schedule IV of the Single Convention on Narcotic Drugs of 1961 (the “Single Convention”), but leave them on Schedule I of that treaty. (Under international law, Schedule I drugs are relatively safe, and Schedule IV drugs are the most heavily controlled.)
  • Place cannabis extracts and tinctures containing delta-9-tetrahydrocannabinol (THC) in Schedule III of the Single Convention.
  • Remove THC and its isomers completely from the 1972 Protocol to the Single Convention. (The 1972 Protocol is a follow-up treaty requiring states to actually enforce laws on their books against cannabis cultivation.)
  • Clarify that that cannabidiol and CBD-focused preparations containing no more than 0.2 percent THC are “not under international control” at all.

So what would all of this mean? First, cannabis containing more than trace amounts of THC would still be controlled. Whole plant marijuana would no longer be in the same class of drugs as heroin and fentanyl, but it would not be eligible for trade in the same way as coffee or even tobacco. Second, concentrated preparations of THC would be controlled more strictly than flower, but not at draconian levels. Third, penalties for possession and distribution of cannabis in any form would significantly decrease. And fourth, CBD would be treated like bonbons. In all, the WHO approach is measured and scientific, seeking to isolate various parts and preparations of the plant, and distinguish their effects.

When it comes to implications for U.S. law, the WHO’s assessment of CBD could have the most immediate impact. Readers of this blog may recall that the U.S. Drug Enforcement Administration (DEA) has taken the position that the U.S. would “not be able to keep obligations under the [Single Convention] if CBD were decontrolled under the CSA”. The Food and Drug Administration (FDA) ultimately fell in line with the DEA’s interpretation, scheduled Epidiolex (an approved CBD drug), and recently issued a public statement warning that it is unlawful “to introduce food containing added CBD … into interstate commerce.”

If the WHO recommendation is adopted by the UN, though, the FDA may reverse course quickly. When the FDA agreed to schedule Epidiolex, it advised:

If treaty obligations do not require control of CBD, or the international controls on CBD … are removed at some future time, the recommendation for Schedule V under the CSA would need to be revisited promptly.

Presumably, state health authorities would fall in line with the FDA’s ruling, and we would stop seeing things like last week’s raids in New York and Maine.

At some point this year, it is likely that the UN will vote on the WHO’s cannabis rescheduling recommendations. A really, really interesting question is where the U.S. will cast its lot on that momentous day. The U.S. has always been an international hardliner when it comes to cannabis, even as a vast majority of its states have legalized marijuana for medical or recreational use. These days, though, things are changing fast – both domestically and worldwide.

For more on cannabis and international law, check out the following:

In late January, Portland hosted the Cannabis Collaborative Conference (“CCC” or “Conference”), an annual forum created by cannabis industry leaders, aimed at addressing the most pressing issues facing this emerging market. This year’s conference focused on the future of the cannabis industry.

Rick Garza, Director of the Washington State Liquor and Cannabis Board (“WLCB”), was one of the key speakers at this year’s Conference. Mr. Garza discussed the possibility of Washington state allowing small cannabis farmers to sell directly to consumers. This practice would be comparable to that allowed for wineries, breweries and distilleries. If approved by the Washington State Legislature, this move would afford small growers an opportunity to increase their sales and, consequently, boost the local economy. This initiative would mirror the practice adopted by several Canadian provinces, which allow licensed producers to sell marijuana to consumers at cultivation facilities, and states like Colorado and Oregon, which authorize licensed cannabis growers to concurrently hold retailer licenses.

washington oregon cannabis marijuanaThe Washington cannabis regulator was also joined by Steve Marks, Executive Director of the Oregon Liquor Control Commission (“OLCC”). Both discussed upcoming changes to the Washington and Oregon programs, which respond to the ongoing and growing issues of oversupply. As we previously discussed, Oregon’s supply has far exceeded local demands: the state is currently sitting on approximately 1.4 million pounds of marijuana that state and federal laws prohibit from selling outside state lines. This tremendous oversupply in Oregon has caused prices to crater, putting many licensed growers on precariously thin ice. In 2018, the wholesale price of Oregon flower dropped from $3.90 per gram at the beginning of the year to $1.86 as of the end of the summer. Washington growers find themselves in an equally challenging situation.

In addressing the overproduction issue and interstate leakage, the OLCC leader said he expected more discussion about legislation capping the number of cannabis business licenses in Oregon. However, as we explained before, controlling supply by capping Oregon licenses as a fearful response to interstate leakage could also incentivize black markets, especially for Oregon sales, because a cap would increase the prices of cannabis.

Mr. Marks also shared that he has seen an infusion of capital into Oregon cannabis companies from investors who believe marijuana will become federally legal. Similarly to those investors, we believe federal legalization is merely a matter of time and that it will help put an end to unapproved interstate leakage. Indeed, the federal prohibition of cannabis is encouraging unscrupulous and desperate cannabis businesses to cut their losses and sell their surplus in the black market.

Although solving the issue of oversupply and interstate leakage will inevitably require the federal legalization of cannabis, it is encouraging to know that Washington and Oregon cannabis regulators are actively exploring ways to improve the industry and insure its sustainability. We expect to see some very important developments in both states in 2019, in addition to any federal law updates.

cannabis marijuana immigrationOn January 16, 2019, each of the three California cannabis agencies dropped a final set of regulations. In many senses, the Bureau of Cannabis Control’s (“BCC”) regulations were the most comprehensive and expansive (we summarized some of the highlights here, and summarized the highlights of the California Department of Public Health’s final regulations here). In one area in particular, the BCC’s regulations may have some unintended and far-reaching effects: immigration.

For some reference, one of the biggest changes to the BCC’s regulations is in the “ownership” disclosure requirements, which now will require disclosure of persons as potential owners who may be far removed from the actual licensed entity. To recap, in the post linked above, we wrote:

[The BCC’s] entity ownership requirements kick in in any situation in which a company owns a licensee—not only where the ownership is based in equity (remember that ownership can also be based on direction, management, or control of a licensee or other grounds). If an entity is considered an owner, then anyone with a financial interest in that entity must be disclosed to the BCC and may be considered an owner.

This is a tremendously significant requirement and means that virtually everyone in the corporate chain must be disclosed (and probably must provide all of the many significant and burdensome disclosures). For example, if John Smith directly owns 1% of the BCC licensee ABC Retailer and does not exercise any control over ABC Retailer, he will be considered a financial interest holder as opposed to an owner.  But if he owns 1% of XYX Holdings, which has a 20% stake in ABC Retailer, he will need to be disclosed to the BCC and may be considered an owner.”

What this could mean in other words is that more people, and people higher up a corporate chain, may need to make “ownership” disclosures. One of those disclosures is the requirement per BCC Regulation 5002(c)(20)(D) to provide a Social Security Number (“SSN”) or individual taxpayer identification number (“ITIN”), and another is the requirement to obtain a live scan. These are significant requirements for foreign persons who “own” cannabis businesses and, as described below, could affect their immigration status.

SSNs are available for residents and citizens of the United States. ITINs may be available in limited circumstances to foreign persons who have a need for tax identification purposes in the United States, but they are somewhat complex to obtain and require certain documentation (either a federal income tax return or some “exemption” documents). And live scans are federal background checks that land in federal databases, and as a result, in hot water.

The reason background checks for foreign nationals are problematic is that any direct or peripheral involvement in the cannabis industry is incompatible with the immigration laws of the United States. This applies to everyone who is not a United States citizen, including lawful permanent residents (i.e., green card holders), those living, studying, and/or working in the United States under an authorized nonimmigrant visa, those temporarily visiting the United States for business or pleasure, and of course, those who have no legal status in the United States.

As explained previously, even where a foreign person is traveling to a state where marijuana is legal, federal law applies at all U.S. ports-of-entry and preflight clearance locations (the “border”). The U.S. Customs and Border Protection (“CBP”) officer at the border has the legal authority to question the foreign person about the purpose of the visit and has advance access to the list of airline passengers on each flight and the license plate of each vehicle waiting at a border checkpoint.

By the time a foreign person is greeted by the CBP officer, seemingly unrelated dots between a web search and live scan and other databases have already been connected for the officer to use in questioning the foreign person about his connection to a cannabis business.

If the foreign person wants to lie about his involvement, he should absolutely not. The CBP has broad authority to search electronic devices, including cell phones and laptops. If the CBP officer finds any information to contradict the foreign person’s statements, it can potentially permanently ban him or her from entering the United States because of fraud or misrepresentation, and not just for violating the Controlled Substances Act.

Under the BCC’s new ownership regulations and its live scan requirement, a few things are clear. First, persons who earlier may not have qualified as owners now might. This may include a host of foreign citizens who now need to obtain ITINs and undergo live scans. Second, live scans are part of a federal database, so federal agents may be able to stop and ask clients questions about why they have undergone live scans. Moreover, and third, under the BCC’s live scan memo (linked above), live scan forms won’t be sent until an application is made, so foreign persons entering the United States to undergo a live scan will by definition already have applied for a cannabis application and thus may risk being turned away.

What’s clear is that ownership of a cannabis business is a risk when it comes to immigration. The BCC’s newest regulations may pass that risk on to a host of new persons. Stay tuned to the Canna Law Blog for more developments. In the meantime, for more on immigration and cannabis, check out the following:

international trade cannabis marijuana

Recently, we’ve been getting tons of questions from clients regarding the international import and export of cannabis around the globe. 2018 was a historic year for the cannabis industry not just in the United States, but also internationally. Canada legalized recreational marijuana for the entire country. Many countries (e.g., Thailand, New Zealand, Mexico, Lithuania, U.K.) took significant steps to decriminalize or legalize medical or recreational marijuana. In December, Israel became the fifth country to pass legislation legalizing the export of medical marijuana (after the Netherlands, Canada, Uruguay, and Australia).

Despite these advances, international trade in legal marijuana currently is limited. Under a 1961 international treaty (Single Convention on Narcotic Drugs), cannabis is classified as a controlled substance with no medicinal use or value (we explored this recently here). Most countries are signatories to this and other international treaties that set forth the ground rules for the international drug control regime for controlled substances. Individual countries, however, can and have begun to make their own determinations on whether cannabis should be treated as a narcotic substance. Countries that have legalized marijuana can agree to allow trade in marijuana between those countries. Dutch and Canadian companies have gotten a head start in the global marijuana trade with medical marijuana being exported to Germany, Italy, Croatia, Australia, New Zealand, Brazil, and Chile. Currently, Israel, Australia, Uruguay, and others are also pushing to get into the medical marijuana export game.

While other countries have begun to legalize cannabis, the United States federal government still classifies “marijuana” as a Schedule I controlled substance with no medical use and a high potential for abuse. Thus, federal law effectively prohibits importation of marijuana into the United States. In September 2018, however, the U.S. Drug Enforcement Administration (DEA) granted permission for a Canadian marijuana company (Tilray) to export medicinal cannabis to University of California San Diego for clinical trial. Although DEA’s approval of this importation may be just a one-off, this one approval could signal an eventual broader opening of the U.S. market to imported marijuana.

If (or when) the U.S. finally allows the importation of cannabis products from other countries, it seems likely that some type of trade dispute will likely occur. Legalization of marijuana has often resulted in supply and demand imbalances that result in prices rising or falling sharply. In Oregon, prices for licensed marijuana plummeted with overproduction, and nearly 70 percent of the legal recreational marijuana grown has gone unsold. In Canada, medical marijuana dispensaries faced shortages as licensed producers shifted to selling to the much larger legalized recreational marijuana market. Italy faced consistent shortages of medicinal marijuana and ultimately permitted imports from Canadian companies to ease the supply shortages.

Trade disputes often result when producers in one country complain that imports from another country are being sold at unfairly low or subsidized prices and harming the domestic industry. Domestic producers can petition their government to investigate imported products and often antidumping or countervailing duties are imposed. If imported cannabis products are allowed into the U.S., it would not be surprising if U.S. marijuana producers resort to U.S. trade laws in order to fend off import competition. Which countries might be likely targets of a cannabis trade dispute?

  • Canada –Given the head start that Canadian cannabis companies already have in developing international distribution networks in a number of countries, bigger and better funded Canadian companies could swoop in and aggressively price their product to overwhelm U.S. competitors and take over a dominant market share in the United States. U.S. cannabis companies could try to seek trade protection from Canadian imports by filing antidumping or countervailing duty petitions like those filed against Canadian softwood lumber in multiple rounds going back to the 1980s.
  • Mexico – Mexico’s new President Lopez Obrador has proposed legislation to legalize marijuana. If Mexico ever legalizes exports of licensed marijuana, Mexico’s relatively lower farm labor rates could provide significant cost advantages over U.S. or Canadian licensed suppliers.
  • China – Although marijuana is illegal in China, China is nevertheless the world’s leading producer of industrial hemp cultivation. China likely will have a significant advantage in producing more cost-effective hemp fabric and medicinal products than any other country. As of 2017, Chinese companies hold more than half of the 606 patents filed around the world that relate to cannabis. These patents could trigger plenty of litigation as companies try to attack or defend the intellectual property rights of their hemp products.

It’s hard to think of international trade disputes involving cannabis when it is still illegal for marijuana to cross U.S. state borders, let alone international borders.  But as the trend of marijuana legalization continues globally, it is likely a matter of time before licensed marijuana products become treated like any other commodity subject to competitive market forces and resulting litigation over fair and unfair competition. Once imported marijuana products are allowed, it is not difficult to foresee the day when import competition in the legal marijuana markets may trigger some type of international trade dispute either in the form of an antidumping or countervailing duty petition or a patent infringement action.

We have been critical of cities licensing cannabis businesses in the past. Cannabis businesses are taxed and regulated heavily enough at the state level–why involve cities as well? We have always thought that if a city is going to be involved in the licensing process, it might as well do some good along the way. Portland, Oregon has provided one example of what a city can do with those tax funds.

As many cities in Oregon have done, Portland imposes a 3% local tax on retail cannabis sales. The City allocated $500,000 of the taxes to support neighborhood small businesses, especially women-owned and minority owned businesses and to provide economic opportunity and education to communities disproportionately-impacted by cannabis prohibition. Of that $500,000, $150,000 was allocated to specifically reinvest in minority- owned cannabis businesses.

portland minority cannabis marijuanaTo receive a City Grant, a Cannabis Business must complete a Cannabis Tax Allocation Grant Application. The Grant Application requires the cannabis business to identify a project/program that meets the “Record Clearing” or “Workforce Development” goals of the grant. The Record Clearing goals focuses on awarding money to those that have been disproportionately impacted by cannabis prohibition by removing barriers to housing, employment and education through legal support including, expungement, fine reduction, and charge reduction. The Workforce Development goals focus on creating pathways for people disproportionately impacted by previous cannabis laws to obtain family-wage jobs, including training, mentorship, and other workforce reentry support.

The application is detailed and requires the applicant to explain the background and mission of their organization, specific examples of activities to be completed, major milestones, along with questions regarding budget. The Portland City Council then reviews the applications and allocates the grants.

The first recipients of grants intended to help communities historically harmed by cannabis prohibition were awarded on January 21, 2019. Green box, an African American owned cannabis delivery company, was awarded $30,000. Adrian Wayman has reported he intends to use the money to hire his first employee.

The second recipient of $30,000 is Green Hop. Green Hop is an African American owned dispensary in North Portland. Green Hop also runs the “Green Hop Academy”, an apprentice program that provides training to individuals who hope to one day own their own cannabis business.

The City plans to keep moving forward with the grants and has increased its allocations for the grants to $700,000 for the fiscal year 2018-2019. It is comforting to see money from cannabis taxes being reinvested into the community. While the grant application can seem daunting, it can certainly make a huge difference in the Portland community to assist those that historically have been disproportionately impacted by cannabis prohibition. Here’s to hoping other cities follow in Portland’s footsteps and reallocate taxes and other fees to good causes.

On Wednesday, January 16, 2019, the California Bureau of Cannabis Control (“BCC”)—the agency that licenses distributors, retailers, testing labs, and event organizers—dropped its final regulations. Until then, BCC licensed commercial cannabis operators or applicants for BCC licenses had been in no man’s land, complying with emergency regulations while trying to divine what the final regulations would look like, what they would need to change, and when they would need to change it. While the final regulations are by no means perfect, they are at least here (alongside the CDPH permanent regulations, which we covered on Monday). While these final regulations from BCC appear to mirror the proposed regulations submitted back in early December, they depart from the emergency regulations in some pretty significant ways. Below are a few of the more key areas.

BCC marijuana final regulationsOwner Changes. One of the more significant final regulatory expansions comes in the disclosures that must be made to the BCC when a licensed entity is owned by another entity. The BCC previously required that some of the people who own or run entity owners of licensees be disclosed in BCC applications, but the new regulation greatly expands those requirements. For example, in the readopted emergency regulations, entity owners needed to disclose their CEOs and/or board members if those entities were considered owners based on 20 percent or more equity in the licensee.

Now, entity ownership requirements kick in in any situation in which a company owns a licensee—not only where the ownership is based in equity (remember that ownership can also be based on direction, management, or control of a licensee or other grounds). If an entity is considered an owner, then anyone with a financial interest in that entity must be disclosed to the BCC and may be considered an owner.

This is a tremendously significant requirement and means that virtually everyone in the corporate chain must be disclosed (and probably must provide all of the many significant and burdensome disclosures). For example, if John Smith directly owns 1% of the BCC licensee ABC Retailer and does not exercise any control over ABC Retailer, he will be considered a financial interest holder as opposed to an owner.  But if he owns 1% of XYX Holdings, which has a 20% stake in ABC Retailer, he will need to be disclosed to the BCC and may be considered an owner.

What is less clear is how the BCC will evaluate whether persons like John Smith in the above example are owners. The rule isn’t very clear on this point, but does give examples such as “all entities in a multilayer business structure, as well as the chief executive officer, members of the board of directors, partners, trustees and all persons who have control of a trust, and managing members or nonmember managers of the entity.” Persons like John Smith, who really have no say over the company and have just a small monetary interest, probably won’t be considered owners even under these new rules. But again, they probably will need to make full ownership disclosures before the BCC makes that determination.

One other significant point in the final regulations is that the BCC now expressly considers persons who expect 20% or more of the profits of a licensee to be owners. This means that various kinds of contracts (subject to the discussion below) between a licensee and third party could turn the third party into an owner depending on the compensation—even if that third party otherwise would not be an owner.

Interest Holder Changes: Similar to the owner regulations, the financial interest holder rules (regulation 5004) were also enlarged. Unlike in the readopted emergency regulations, the interest holder regulations provide a non-exhaustive list of persons or entities who must be disclosed as interest holders:

  • An employee who has entered into a profit share plan with the commercial cannabis business.
  • A landlord who has entered into a lease agreement with the commercial cannabis business for a share of the profits.
  • A consultant who is providing services to the commercial cannabis business for a share of the profits.
  • A person acting as an agent, such as an accountant or attorney, for the commercial cannabis business for a share of the profits.
  • A broker who is engaging in activities for the commercial cannabis business for a share of the profits.
  • A salesperson who earns a commission.

The ownership changes discussed above may seem at first glance to be one of the more onerous changes in the regulations. And to some extent—especially for licensees in corporate families or which are owned by other companies—this is true. But these interest holder disclosure requirements are equally, if not more complex because they require disclosure of virtually anyone with any sort of stake in a cannabis company—small or large. This will require companies to take stock of all third-party agreements to which they are a party and spend serious effort analyzing whether the disclosure obligations apply.

Not only are there likely to be larger disclosures of financial interest holders than of owners, but licensees are also now obligated to make similar disclosures where their financial interest holders are entities. Now, anyone who is an “owner” of a financial interest holder will need to be disclosed to the BCC. This rule is admittedly narrower than the ownership disclosure requirement in that it is limited to just owners of the financial interest holder and that the categories of information that must be submitted are much narrower, but it is significant nonetheless and will require a lot of work and evaluation.

IP Licenses and Other Third-Party Agreements: Back in October, we wrote about how changes to BCC regulation 5032(b) could prohibit IP licenses and other transactions with non-licensed entities. This is obviously significant as there are many such transactions in this industry (and any). The October version of rule 5032(b) was subsequently scaled back to remove examples of unlawful third-party agreements, but now we are left with a regulation which is ambiguous as to its scope: “Licensees shall not conduct commercial cannabis activities on behalf of, at the request of, or pursuant to a contract with any person who is not licensed under the Act.” In the final statement of rules that accompanied the December 2018 proposed final regulations (which have been removed from the BCC’s website), the BCC suggested in response to comments that third-party license agreements could be permissible if an unlicensed entity were disclosed as an owner or interest holder. But whether the BCC maintains this position remains to be seen.

Packaging and Labeling: A few weeks ago, I wrote about the packaging and labeling mess that was likely to ensue if the December proposed regulations became the final regulations. It looks like that’s happened, so I won’t repeat that article verbatim. But what bears repeating is that, except for child-resistant packaging, there doesn’t appear to be any sort of grace period for compliance with the new labeling regulations. To compound matters, while distributors can re-label cannabis and pre-rolls, they apparently can no longer re-label manufactured goods—and retailers can’t do any sort of labeling. We therefore expect that there will be a good deal of chaos over packaging that was compliant but now suddenly is not, and confusion over what to do about it.

Delivery Expansion (or Not?): As I highlighted back in the October when the BCC’s modified proposed regulations were issued, one of the bigger changes to the regulations was to section 5416(d), which allows deliveries into any jurisdiction in the state so long as they comply with the BCC regulations. This change stuck in the final regulations. While it would seem that licensed cannabis retailers can deliver anywhere in the state, there are a number of jurisdictions that still forbid it. This thus creates a conflict between local laws and statewide regulations that is not so clear as one may think.

For example, Malibu recently passed a measure that permits adult use cannabis sales and deliveries, but forbids deliveries into Malibu for entities that don’t have Malibu permits. Pasadena, which is currently undergoing a massive licensing competition, prohibits its permittees from delivering into cities or counties that prohibit deliveries. And of course there are numerous other California cities which are even more restrictive and prohibit all commercial cannabis sales or deliveries.

While not very clear, the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”) provides: “A local jurisdiction shall not prevent delivery of cannabis or cannabis products on public roads by a licensee acting in compliance with [MAUCRSA] . . . .” Arguments could therefore be made on either side of the spectrum about whether MAUCRSA permits cities to preclude deliveries: cities could argue that MAUCRSA permits them to ban deliveries off of public roads (i.e., on private property); others could argue that deliveries made using public roads and to residences or other private properties adjacent to public roads cannot be prohibited. We expect that there may be future litigation here.

These are just some of the significant changes in the regulations. Compliance with the regulations is critical, and it’s always recommended to consult with experienced regulatory cannabis counsel in doing so. Stay tuned to the Canna Law Blog to see how the BCC regulations shake out and for other California cannabis developments.

cannabis marijuana cobrandI’m currently advising multiple cannabis clients that are seeking to enter into co-branding deals, some with other cannabis companies, some with non-cannabis companies, and some of these clients were initially unaware of the potential risks to their intellectual property (“IP”) that could result from a poorly-drafted agreement (or from failure to adequately protect their IP from the outset).

Most of the industry, at least here in California, is aware of the collaboration between Lagunitas Brewing Company and CannaCraft (under its AbsoluteXtracts brand) that produced Hi-Fi Hops, an IPA-inspired cannabis sparkling water. In Oregon, East Fork Cultivars partnered with Coalition Brewing to create a CBD-infused beer called Certified Hazy IPA. And there are no shortage of other brand collaborations within the industry, from gourmet chocolate to vape cartridges.

Co-branding is a common marketing strategy wherein two or more brands collaborate to create a product that is representative of both or each of the brands. Co-branding can be a great opportunity for publicity and can also serve as an opportunity to introduce one of the co-brander’s customers to the other co-brander’s product. It can be an effective tool for expanding the reach of your brand into other markets if executed properly. Co-branding can also serve to enhance the value of the goods if both of the brands are well-known and respected by their consumers.

But if these types of deals aren’t well thought out and well executed, co-branders run the risk of diluting their brand, or if they are a small company, finding their brand overshadowed by the larger, better established brand. If an agreement is poorly drafted, you may find yourself in a situation without much control over the product or its quality, and a sub-par product could ultimately lead to negative publicity and reputation damage.

Below are some of the things you should think about before entering into a cannabis co-branding deal.

     1.   Choose your co-branding partner wisely.

We’ve talked about this in the context of IP licensing generally, but the same rules apply here. Make sure you feel comfortable with the company you intend to partner with. In a co-branding deal, it’s important that the products or services offered by each co-brander are complementary and that each party stands to gain through affiliation with the other. Ask yourself whether partnering with this other company would expand your consumer base and introduce potential new customers to your product, and whether your brand would provide the same benefit to your partner. The goal with these types of deals is to create a win-win situation for both parties.

In the cannabis industry in particular, it’s also important to make sure that your potential co-branding partner is on solid legal footing. Do your due diligence, and make sure they’re operating in compliance with all applicable state and local laws. If they aren’t, you run the risk not only of reputational harm, but of legal liability.

     2.   Don’t relinquish too much power.

While it’s fine and may make sense for one partner to take the lead in pushing the co-branding deal forward, it’s important for both partners to have input into how the deal is executed. Don’t ever turn over all decision-making authority to your partner, as it’s important to exercise control over how your brand is used at all times. Failure to police your trademarks could lead to big issues down the road, including loss of any trademark rights.

     3.   Make sure your agreement is solid and your IP is protected.

Finally, as always, make sure you aren’t relying on a template or generic agreement. Co-branding agreements are all unique and can be more complex than your typical trademark licensing agreement, not to mention the added complexity of one or more parties being in the marijuana industry.

These agreements will have some similarities to trademark licensing agreements, since each party will, in a sense, be licensing their brand to the other. It is therefore important that each party maintain independent control over their own marks and how they are used throughout the deal. Neither party wants its mark(s) to be diluted or tarnished through the co-branding venture. And each party needs to come out of the deal with all of its IP ownership rights intact.

Control, as I mentioned above, is one of the key considerations in any co-branding deal: Quality control provisions should be fleshed out, and each party should clearly specify how its trademarks are to be used and displayed, where they will be permitted to be used, and how the product will be marketed.

Each party should feel comfortable with the termination provisions of the agreement, and should be able to exit the deal if, for example: sales targets are not met; laws or regulations change in a way that renders the deal legally problematic; legal enforcement actions are taken against either of the parties; if there is infringement or misuse of the trademarks; or if one party does anything that could negatively impact the other’s brand or reputation. To that end, make sure the agreement contains comprehensive representations and warranties from each party, as well as mutual confidentiality and indemnification provisions. Some of these provisions should survive termination of the agreement.

These are only the most basic considerations for constructing a cannabis co-branding deal. These types of ventures can be exciting and drum up a lot of publicity, which has the potential to greatly benefit both parties. But it is essential to carefully consider how your co-branding agreement is drafted, and to make sure that you and your intellectual property are adequately protected.

california cannabis licensing rulesThe State of California finally adopted permanent cannabis regulations earlier this month. In a series of posts, we’re going to cover the highlights of each agency’s permanent rules so that you know what big changes to expect during 2019. This post will cover the main changes (in our opinion) regarding the California Department of Public Health Manufactured Cannabis Safety Branch’s (“CDPH-MCSB”) permanent regs. Without further ado:

No more Farm Bill hemp-CBD ingredients or additives. It’s no secret that the California Department of Health Food and Drug Branch (“FDB”) has an issue with hemp-CBD. Specifically, an FAQ that issued from FDB last year made clear that FDB prohibits hemp-CBD in “Food” for humans and pets. Now, CDPH-MCSB is following suit (indirectly). Pursuant to new regulation 40175(c), “a manufacturer licensee shall only use cannabinoid concentrates and extracts that are manufactured or processed from cannabis obtained from a licensed cannabis cultivator.” What this means is that using Farm Bill hemp-CBD as an ingredient or addictive to cannabis manufactured products is not allowed unless it comes from a licensed cannabis cultivator. The protections of the Farm Bill won’t apply.

Owners and financial interest holders. I recently wrote about how it’s unclear as to how far the state will now go in finding and vetting entity owners and entity financial interest holders, especially since the Bureau of Cannabis Control (“BCC”) articulates in its rules that it intends to locate and vet every human possible in pretty much any ownership structure. But what about MCSB? MCSB entity owner regulations now state that “if the owner . . . is an entity, then the chief executive officer and members of the board of directors of the entity shall be considered owners,” and for financial interest holders, MCSB rules mandate only that “financial interest holders shall be disclosed on the application for licensure.” On balance, the BCC’s owner and financial interest holder rules are much more aggressive than MCSB, and the BCC’s comments to its owner and financial interest holder rules was that all agencies would apply the same standards for vetting. However, this clearly isn’t going to be the case if stakeholders go off of a plain reading of the law. Though it will be strange, the MCSB will very likely stick to its minimal vetting requirements while the BCC goes full bore on retailer, distributor, and lab owners and financial interest holders.

Changes in ownership. Again in contrast with the BCC, the MSCB is going to be much easier on changes in ownership of licensees. Under BCC regulations, if there’s a full buy-out of all existing owners, the entity can no longer operate while the change of ownership is being reviewed and processed by the BCC. The MCSB however has no such standard, at least not one that’s codified under the new regs. Specifically, for any changes of ownership or changes to financial interest holders, the MCSB expects the following protocol:

“The licensee shall notify the [MCSB] of the addition or removal of an owner through [the agency’s online system] within 10 calendar days of the change; Any new owner shall submit the information required [by law]; The [MCSB] shall review the qualifications of the new owner in accordance with [state law] and these regulations to determine whether the change would constitute grounds for denial of the license. The [MCSB] may approve the addition of the owner, deny the addition of the owner, or condition the license as appropriate, to be determined on a case-by-case basis; An owner shall notify the [MCSB] through [the state agency’s online system] of any change in their owner information . . . within 10 calendar days of the change; and a licensee shall notify the [MCSB] through [the state’s online system] of any change in the list of financial interest holders . . . within 10 calendar days of the change.”

Labeling. Labeling is still just as intense and comprehensive as it was under the emergency regulations. Now though, manufacturers need to ensure that, if a product container is separable from the outer-most packaging (e.g., a container placed inside of a box), the product container includes the following: (1) For edible cannabis products, topical cannabis products, suppositories, or orally-consumed concentrates, all information required for the primary panel except for cannabinoid content, and (2) for inhaled products (e.g., dab, shatter, and wax), the universal symbol (which is the black triangle with a cannabis leaf and an “!” with “CA” underneath). We also now (finally) have specific labeling requirements for pre-roll and packaged flower that didn’t exist before outside of the statute, itself. Overall, there are additional technical change requirements for labeling, including the weight of the product now needing to be in metric and U.S. customary units, specific labeling for flavoring in line with federal law, and more specific labeling restrictions for cannabinoid content.

Packaging. Until 2020, manufacturers are off the hook for providing child resistant packaging (“CRP”). Until then, retailers will bear the burden of CRP through the continued use of CRP exit packaging. Once CRP for manufacturers kicks in though, they’ll need to adhere to a litany of requirements, including compliance with the Poison Prevention Packaging Act of 1970 Regulations.

New product definitions. Via the permanent regulations, MCSB has introduced a number of newly defined terms, which is ultimately better for licensees so that confusion doesn’t abound as product development continues. For example, we now have as recognized definitions like:

  • “Infused pre-roll,” which means “a pre-roll into which cannabis concentrate (other than kief) or other ingredients have been incorporated”;
  • “Kief,” which means “the resinous trichomes of cannabis that have been separated from the cannabis plant”; and
  • “Orally-consumed concentrate,” which means “a cannabis concentrate that is intended to be consumed by mouth and is not otherwise an edible cannabis product. ‘Orally-consumed concentrate’ includes tinctures, capsules, and tablets . . .”

OSHA training. Given that cannabis remains federally illegal, people often think that violating one federal law somehow gives you a license to violate every federal law, which is entirely untrue. Under the permanent MCSB regulations:

“for an applicant entity with more than one employee, the applicant employs, or will employ within one year of receiving 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.”

Clearly, safety and federal compliance in the workplace still applies, even to cannabis operators, which is now demoralized under the permanent MCSB rules.

Changes to operations that now require state approval. As the state moves along with licensing and enforcement, it was inevitable that certain licensee actions would first require state approval. What this usually means is that major changes to your business or SOPs can’t go down without the state’s blessing, which can take weeks or months to secure. Specifically, for the MCSB, licensees will now have to report to and clear with the state the following action items before the licensee pulls the trigger on them (all to the tune of a $700 change application fee, which is non-refundable):

  • the addition of any closed-loop extraction method;
  • the addition of any other extraction method that necessitates a substantial or material alteration of the premises;
  • the addition of infusion operations if no infusion activity is listed in the current license application on file with the [MCSB] (you’ll also have to tell the state about “any changes to the product list on file with the [MCSB] and provide a new product list within 10 business days of making any change” to the products you’re making”); or
  • a substantial or material alteration of the licensed premises from the current premises diagram on file with the [MCSB].

Importantly, a “substantial or material alteration” includes: “the removal, creation, or relocation of an entryway, doorway, wall, or interior partition; a change in the type of activity conducted in, or the use of, an area identified in the premises diagram; or remodeling of the premises or portion of the premises in which manufacturing activities are conducted.” Be advised!