Recreational Marijuana

cannabis marijuana oscars
Now featuring cannabis!

MarketWatch ran an article last week on how this year’s Academy Award swag bags “are packed” with “legal” cannabis. I’m always happy to see an article like this because it means California legalization is working. And yet, these glam-o, cannabis friendly goodie bags are a good reminder to cannabis businesses (and the ancillary businesses that support them) that even if an A-list celebrity is consuming your cannabis or CBD products on or after the red carpet, California’s Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA“) (and federal law) still apply.

According to MarketWatch, this year’s “treasure trove of over-the-top gifts for the acting and directing nominees is packed with cannabis chocolates, CBD beauty products and a year-long VIP membership to L.A.’s first cannabis-friendly social club. Marketing company Distinctive Assets has been gifting the Oscar’s swag for the past 17 years and company founder, Lash Fary, told MarketWatch their 2019 gifts are “directly tied to the broad legalization of cannabis in California last year.”

As much as I hate being a party-pooper – especially for a party as big as the Oscars — as a Los Angeles based cannabis business lawyer, I cannot resist mentioning my own legal concerns about these swag bags. Under MACURSA and Prop. 64, individual adults 21 and up can gift up to an ounce of cannabis (or its infused equivalent) without fear of state or local prosecution so long as there’s no financial compensation. But this gifting rule is far more complicated for cannabis business licensees. MAUCRSA is clear that cannabis licensees “shall not give away any amount of cannabis or cannabis products, or any cannabis accessories, as part of a business promotion or other commercial activity” and cannabis retailers “cannot provide free cannabis goods to any person” other than a medical cannabis patient as defined by Section 11362.71 of the Health & Safety Code.

This means that if the cannabis in the swag bags is given by cannabis businesses as part of “a business promotion or other commercial activity,” those businesses probably will violate MAUCRSA. I say this because this cannabis swag is probably being given to the Academy Award attendees and Hollywood A-listers as a “business promotion,” especially since a marketing company is involved in the gifting, and I assume the entire point is to elevate the profile of the companies involved amongst powerful circles of potential future consumers.

A lot of cannabis “brand” power is also contained in these Oscar bags, which is pretty interesting given the legal challenges posed by Section 5032 of the Bureau of Cannabis Control (“BCC”) regulations. If any of the cannabis products in the bags utilize a third party’s intellectual property (“IP”)–and luxury branding (or really any branding) in cannabis remains huge– there may end up being issues under Section 5032. Still, the BCC will not say whether this rule requires cannabis IP licensors to have their own commercial cannabis license in California. The BCC’s own comments to this rule indicate that it does not apply to manufacturers, but the rule itself clearly encompasses manufacturing activity and manufactured products (as well as flower). Since many (most?) California cannabis companies hold their IP in separate companies and/or license their IP from well-known operators in other states, section 5032 may or may not cause serious legal headaches here.

These swag bas also contain CBD products, which could get people in trouble with the California Department of Public Health Food and Drug Branch. MarketWatch mentions that some of the CBD products are topicals and beauty products, which the infamous California FDB FAQs (see also here) do not address and which the Federal Food and Drug Administration may also deem unlawful because it generally considers hemp derived CBD to be unlawful under the Food, Drug & Cosmetic Act. And if there are foods or beverages in those bags that contain CBD, they also violate both state and federal laws according to the FDB and the FDA.

Finally, seeing as how the City of Los Angeles does not yet allow onsite consumption at MAUCRSA-licensed retail or microbusiness facilities within the City, I also wonder to what the MarketWatch article was referring when it mentioned “L.A.’s first cannabis-friendly social club” offering VIP memberships in the goodie bags.

Though I have my doubts about the legality of this cannabis swag under California state law, and even though the gifting and receipt of the bags is undoubtedly federally illegal drug trafficking, I cannot help but applaud everyone behind these cannabis gifts: it’s brave and it’s bold. When a nationally significant and hugely watched event like the Oscars is willing to take the risk of openly gifting cannabis and CBD on one of the world’s biggest stages, you know there has been a major, positive societal shift regarding cannabis.

Oregon is truly churning out the cannabis.

Last week, I covered the Oregon Secretary of State’s audit report of Oregon marijuana regulation. On January 31, the same day the audit was released, the Oregon Liquor Control Commission (OLCC) submitted its 2019 Recreational Marijuana Supply and Demand Legislative Report (“Report”). The Report’s key finding is nothing new: supply exceeds demand within Oregon’s recreational market. The impressive part, however, is by how much. The Report specifies that “the recreational market has 6.5 years’ worth of theoretical supply in licensees’ inventory accounted for and contained within Oregon’s Cannabis Tracking System.” That’s a lot of weed.

The Report explores the whys and wherefores of this situation, presenting some interesting data and analysis. One fact glossed over in the Report, however, is that no one expected so many applicants for the OLCC system, and no one expected that Oregonians would consume more marijuana per capita than any other state. Looking back at the Estimate of Financial Impact for Measure 91, for example, tax revenues were forecast at “$17 to $40 million annually.” Tax revenues for FY 2018 more than doubled that estimate’s high end, surpassing $82 million. Data like these make the current level of oversupply even more astonishing.

Ultimately, the Report gives four potential policy choices for legislative consideration:

  1. Maintain the free market status quo and let the market self-correct towards equilibrium. (Fingers crossed!)
  2. Limit maximum producer capacity (something OLCC currently does not have the statutory authority to attempt).
  3. Increase license fees (something OLCC could do today).
  4. Place a cap or moratorium on the number of recreational licenses (something OLCC technically cannot do today, although it has paused intake of new applications).

Each of these options, or any combination of them, would have a significant impact on the Oregon industry. That impact will not be felt only by consumers and potential market entrants, but by current licensees and ancillary businesses. The Report acknowledges as much, noting that:

Due to the nature of the market in which supply already exceeds demand, any policies enacted with the purpose of creating equilibrium in the near term will inherently have an effect on incumbents within the market.

This means that everyone has some skin in the game, and everyone ought to be paying attention.

On the executive side, Governor Brown already has expressed her view on the issue, requesting a pre-session filing of Senate Bill 218. That bill would allow the OLCC to refuse to issue marijuana production licenses “based on market demand and other relevant factors.” Senate Bill 218 still has not had a public hearing, but it’s very possible that this bill gains traction and OLCC is given a wide berth on production licenses and other market-limiting issues. In our opinion, legislative deference to OLCC would make sense there.

I’ll cover SB 218 in a bit more detail next week, along with the myriad of other draft Oregon legislative bills on cannabis (both marijuana and hemp). We will also continue to track both legislative and administrative actions that deal with oversupply. In the meantime, check out the following blog posts for more on the issue:

Something has gotta give in Phase 3.

The City of Los Angeles has long endured questions surrounding its elusive Phase 3 licensing process for cannabis businesses. The City completed Phase 1 and 2 licensing without too much crazy change, but Phase 3 is very likely going to be a different story, and will affect a lot of stakeholders for better or worse.

On February 8, 2019, the Department of Cannabis Regulation (“DCR“) wrote to the Rules, Elections, and Intergovernmental Relations Committee (“Committee”), proposing total reform for Phase 3 licensing in the face of multiple regulatory issues caused by undue concentration, the promotion of social equity businesses, and the overall economic interests of various stakeholders who are waiting for Phase 3 to open. DCR wrote to the Committee that it wants to make certain strategic amendments to the licensing process in Phase 3 that “would make our licensing process more efficient, transparent, and, most important, equitable.”

DCR’s obvious concern in its letter to Committee is that Phase 3 successfully hoist up social equity applicants and be as efficient as possible at the same time. In particular, the letter states that:

DCR recognizes that the existing licensing process provided in the Cannabis Procedures ordinance and regulations will take significant time to implement and that many Phase 3 storefront retail applicants will have to make significant investments in the application process before knowing for certain whether they might be denied because another applicant within 700 feet of them gets licensed first or the Community Plan in which they are located reaches undue concentration before they obtain a license.

Based on its letter, DCR looks to be seeking to award those stakeholders that are patiently sitting on eligible commercial cannabis properties (bleeding rent and other costs while waiting for Phase 3 to commence) through swift and efficient licensing. The bottom line is that the current proposed licensing process potentially harms everyone, including social equity applicants who have either already made the investment in the unsettled program or that don’t have the resources to invest ahead of time to their detriment (since the City hasn’t yet established the assistance programs necessary to aid social equity applicants, but is finalizing a draft RFP “to identify vendors who can provide a suite of business and licensing support to Tier 1 and Tier 2 social equity applicants”).

Combine the foregoing with the fact the City “expects approximately 200 storefront retail licenses will be available through Phase 3 before undue concentration is reached in most or all of the City’s Community Plans,” and DCR has taken the position that Phase 3 licensing procedures must change, and fast. DCR therefore proposes in its letter that Phase 3 licensing for the remaining estimated 200 retail licenses (probably all of which will go only to social equity applicants per existing laws) take place as follows:

First come, first serve for verified Tier 1 and Tier 2 applicants (that also have locations ready to go) for the first 100 licenses OR a lottery system to issue the first 100 licenses (with various barriers to entry, including having a location on lock). And for the second 100 licenses, the DCR wants a merit-based system with various qualification criteria.

There were other pretty important recommendations made in the letter to Committee regarding other amendments to current LA cannabis licensing laws, but the change-up on the Phase 3 licensing process is, by far, the most impactful.

Even though the DCR has studied the foregoing issues for months, the City Council was not yet ready to act on the DCR’s recommendations. On Friday, February 15, after a hearing with Committee and then a hearing with Council regarding the DCR’s recommendations, Council instructed DCR “to report back at the next Rules, Elections, and Intergovernmental Relations Committee meeting with a further analysis of the recommendations for Phase 3 Storefront Retail processing and Non-storefront Retail processing, including consideration of a social equity applicant registry platform similar to the City of San Francisco” and to “suspend any Phase 3 processing until the enhanced Social Equity analysis for the San Fernando Valley, Boyle Heights, and Downtown Los Angeles is completed.”

What does all of this mean? Basically, we’re back to square 1 in L.A., and original Phase 3 processing remains in place despite the DCR’s attempt at an overhaul. Without question though, Phase 3 licensing should change. The current timing alone on issuance of Phase 3 licenses will bankrupt or scare off the vast majority of people. First come, first serve likely appeals to most people, but it’s just as imperfect and arbitrary as a lottery system. So long as the right barriers to entry and restrictions are implemented, either system can work to effectuate quick and efficient licensing (just ask Washington State whose biggest problem with a lotto system was actually movement of winners after-the-fact).

Lotto likely edges out first come, first serve if we’re talking maximum efficiency, because it eliminates the timing pressure and order of applicants at the outset when they file with DCR. With either proposal though, ambiguities would hinge around what a “complete” application really means and/or the ability of people to game the system by paying off family members (or whomever) to act as straw applicants to increase their chances of success. Merit-based also poses its own challenges regarding what qualities should net you the most points, especially when dealing with social equity applicants who remain the most popular form of licensing capital in L.A. and therefore the most vulnerable when it comes to scams and hawkish investor behavior.

Interestingly enough at Friday’s hearing, Council did instruct the City Attorney to draft an ordinance (with input from DCR) to, among other things:

  • grant temporary approval to phase 3 retailers (which would allow them to instantly open their doors upon securing state licensure),
  • exempt non-storefront retailers from hearing before the Cannabis Regulation Commission prior to full licensure,
  • force Tier 1s or 2s to give a right of first refusal on ownership transfers to their existing partners to purchase their ownership interests at market rate (after expiration of the applicable Social Equity Agreement term),
  • bar from Phase 3 retail or delivery licensure applicants or landowners with “evidence” against them for illegal cannabis activity at any time since January 1, 2018.

So, we know change is coming to Phase 3 licensing albeit at a glacial pace. For now though, it appears that the DCR will really have to persuade Council on adopting its Phase 3 recommendations for the licensing process, or all Phase 3 stakeholders will invariably suffer licensing by a thousand cuts.

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 shepherd the 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.