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.

california cannabis trademark
 

State trademarks for cannabis goods and services have been an ongoing saga in California that we have written about extensively. For a little background, until January 1, 2018, obtaining state trademark protection in California was not possible due to Sections 14270-14272 of the Model State Trademark Law of the California Business and Professions Code, which are simply titled “Miscellaneous.” Section 14272 states the following:

The intent of this chapter is to provide a system of state trademark registration and protection substantially consistent with the federal system of trademark registration and protection under the Trademark Act of 1946 (15 U.S.C. Sec. 1051 et seq.), as amended. To that end, the construction given the federal act should be examined as non-binding authority for interpreting and construing this chapter.”

However, in December of 2017, the California Secretary of State’s Office announced that customers would be able to register cannabis-related trademarks or service marks so long as the following requirements are met:

  1. The mark is lawfully in use in commerce within California; and
  2. The specification matches the classification of goods and services adopted by the United States Patent and Trademark Office.

The Secretary of State’s Office has reiterated that it will only accept applications insofar as the goods and/or services in question fit within an existing classification code from the USPTO’s Identification of Goods and Services Manual. Therefore, it is easy to register for things that fit squarely within the USPTO specifications, like retail services. Cannabis goods are a bit more problematic, although we have developed strategies to protect these as well.

All of this has been based on administrative policy declared by the Secretary of State’s Office, not on legislation or a change to the California Business and Professions Code, but Senate Bill 185, which was introduced on January 30, 2019 and just went to committee, would change that.

SB 185 notes that existing law in California provides for registration of trademarks where the classification of goods and services for those marks conforms to the classifications adopted by the USPTO, but proposes that for marks for which a certificate of registration is issued on or after January 1, 2020, applicants would be authorized to use “specified classifications for marks related to cannabis, including medicinal cannabis, goods and services that are lawfully in commerce under state law in the State of California.” Designated classifications of goods for cannabis products would streamline the process for trademark registration in California and provide cannabis companies with greater security regarding the enforceability of their registrations.

Additionally, SB 185 provides that the Department of Food and Agriculture, in conjunction with the State Department of Public Health and pursuant to MAUCRSA, must establish a certification program for cannabis and manufactured cannabis products comparable to the federal National Organic Program and the California Organic Food and Farming Act. As we’ve written before, it is not permissible to use an organic designation on cannabis products unless that designation is pursuant to state law or pursuant to a private certification, since the U.S. Department of Agriculture generally regulates that certification under the Organic Foods Production Act.

SB 185 lays the groundwork for some important improvements to the way cannabis companies protect their brands and the establishment of an organic certification program will benefit both companies and consumers. We’ll be following this bill closely and hope it doesn’t stall in committee. Stay tuned!

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:

hemp cbd farm act

In December 2018, Congress passed the Agricultural Improvement Act of 2018 (better known as the “Farm Bill”). Among other things, the passage of the bill removed industrial hemp from the federal Controlled Substances Act, allowing legal production of the crop. Despite this landmark legislation, pitfalls still lay on the path ahead. The legality of many industrial-hemp derived cannabidiol (“CBD”) products is in question now more than ever, with different states and federal agencies taking vastly different approaches on every facet of the hemp CBD industry.

Interest in hemp is at an all-time high, and with an industry that has a potential to be worth $20 billion by 2022, it is easy to see why. If you are a hemp CBD business, have interest in the industry or are interested in the state and future of hemp CBD legality, please join us on February 21, 2019 at noon (PST) for the latest installment in our lunchtime webinar series entitled “West Coast Hemp CBD After the Farm Bill.”

In this hour-long session, Harris Bricken lawyers Daniel Shortt (Seattle, Washington), Nathalie Bougenies (Portland, Oregon), and Griffen Thorne (Los Angeles, California) will provide an in-depth look at changes in federal law and policy post Farm bill, as well as its impact on each of the three west coast states (Washington, Oregon, and California). Throughout the presentation our team will also discuss the status of laws and regulations in each state. Some of the topics we will cover include:

  • the future of hemp permitting;
  • Farm Bill implications for Internal Revenue Code section 280E;
  • banking for hemp CBD businesses;
  • intellectual property for hemp CBD businesses;
  • CBD in food, beverages, vape cartridges, oils, topicals, and other products; and
  • the Food and Drug Administration’s role in hemp CBD.

With moderator Hilary Bricken, our panel of attorneys will address audience questions throughout the presentation. Please register for the event here! Should you have any further questions, please feel free to reach us at firm@harrisbricken.com.

california hemp cbd food ab 228
 Keep your fingers crossed for AB 228.

On January 17, 2019, California Assembly Member Cecilia M. Aguiar-Curry kept her promise and introduced a piece of hemp legislation, AB 228.  This bill is aimed at paving the way for adding industrial hemp derived cannabidiol (“Hemp CBD”) to foods, beverages, and cosmetics. The text of AB 228 is relatively short and would add the following two provisions to the California Health and Safety Code which contain provisions of the Sherman Food, Drug, and Cosmetic Laws (the “Sherman Laws”):

110611.  A food or beverage is not adulterated by the inclusion of industrial hemp products, including cannabidiol derived from industrial hemp. The sale of food or beverages that include industrial hemp products or cannabidiol derived from industrial hemp shall not be restricted or prohibited based solely on the inclusion of industrial hemp products or cannabidiol derived from industrial hemp.

111691.  A cosmetic is not adulterated because of the fact that it includes industrial hemp products, including cannabidiol derived from industrial hemp. The sale of cosmetics that include industrial hemp products or cannabidiol derived from industrial hemp shall not be restricted or prohibited based solely on the inclusion of industrial hemp products or cannabidiol derived from industrial hemp.

AB 228 thus narrowly targets California regulators’ ability to penalize companies for selling Hemp CBD beverages or foods on the grounds that they are “adulterated” under California law. This is an interesting piece of legislation, as the biggest major legal roadblock to selling Hemp CBD foods in California is the California Department of Public Health’s (“CDPH”) Hemp CBD FAQs, which don’t in fact claim that Hemp CBD makes foods or beverages “adulterated” (and says nothing about cosmetics). The only citation in the FAQs to the Sherman Laws is for the definition of foods (see footnote 1). That said, the Los Angeles Department of Public Health will soon begin taking the position that Hemp CBD foods and beverages are “adulterated” and issuing penalties based on that position.

If AB 228 becomes law, it will take the legs out from under one of the major arguments that could be used against Hemp CBD food products. The law wouldn’t change the federal Food and Drug Administration’s position that Hemp CBD is unlawful in foods, and so it will be interesting to see how California cannabis regulators treat Hemp CBD in the wake of AB 228 passing (if it does).

Ultimately, AB 228 isn’t perfect, but it’s a step in the right direction. Stay tuned to the Canna Law Blog for more updates on this and everything else Hemp CBD.

sonoma county cannabis RICOFor a while, criminal conspiracy lawsuits against cannabis operations looked like a potentially promising strategy for cannabis prohibitionists to try and use litigation to reverse the trend of legalization. The idea is to use the Racketeer Influenced and Corrupt Organizations Act (“RICO”), a federal statute intended to combat organized crime–and which allows private rights of action for lost property value resulting from criminal operations–to enjoin cannabis operations and recover damages to force the operators out of business. The typical set of facts is that a residential neighbor plaintiff claims that his or her property value is damaged by the existence of a nearby cannabis operation, usually outdoor cultivation, and names as a defendant every single person and business that had any conceivable connection to that operation.

There were a handful of relative successes with this strategy early on, culminating in a 10th Circuit Court of Appeals decision allowing a RICO claim against cannabis cultivators to move forward on a theory of diminished property value. However, that victory was soon followed by a resounding defeat in a jury verdict finding no such diminution of property value. Subsequent U.S. District Court decisions from Oregon continued the backward slide, finding that although the residential neighbor plaintiffs might have potential personal injury claims for nuisance, they were unable as a matter of law to demonstrate a plausible claim for injury to the value of their property.

That trend has now found a secure foothold in California, where a San Francisco federal court recently dismissed a lawsuit by residential plaintiffs in Sonoma County alleging RICO claims against a neighboring cannabis cultivator. While the court acknowledged that the plaintiffs could potentially move forward with their claims for “diminished sense of serenity” and various “cleaning, medical, legal, and other expenses,” it found those damages would have to be pursued though traditional state law nuisance claims, not federal RICO claims, noting that “RICO was intended to combat organized crime, not to provide a federal cause of action and treble damages to every tort plaintiff.” Ouch.

Furthermore, California law added another unique element to the court’s decision. Although California recognizes claims for diminution in the market value of their homes, including prospective future losses, and such losses could potentially be compensable under RICO, under California law, “a plaintiff in a continuing nuisance case may not recover diminution in value damages because the plaintiff would obtain a double recovery if she could recover for the depreciation in value and also have the cause of that depreciation removed.” And in this case, the court found that the alleged cannabis cultivation issues would be better classified as a continuing nuisance and that the defendants had already abated the nuisance while the lawsuit was pending. Therefore, the plaintiffs’ property loss claims were effectively moot.

In the end, although the defendants prevailed on the motion to dismiss, the case was more of a pyrrhic victory because the defendants had to shut down, as they were not properly permitted by the county or licensed by the state, and the court granted leave to amend the complaint to still allow the nuisance claims to proceed. But at least in terms of the viability of RICO lawsuits as a tool to reverse cannabis voter initiatives, this was another nail in the coffin.

For more on RICO cannabis litigation, check out the following posts in our series:

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.

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!

california cannabis final regulations

Yesterday afternoon, on January 16, 2019, the California Office of Administrative Law (“OAL) finally approved the sets of final regulations under it had been reviewing after submissions from the California Department of Public Health (“CDPH”) which regulates cannabis manufacturers, the California Department of Food and Agriculture (“CDFA”) which regulates cultivators, and the Bureau of Cannabis Control (“BCC”) which regulates distributors, retailers, event organizers, and testing laboratories. You can find the final regulations here.

The three sets of regulations follow on the heels of final proposed regulations that the CDPH, CDFA, and BCC submitted to the OAL for its review in December. We will be providing some overview of the key components of the final regulations shortly, but it looks upon initial review like these regulations adopted most or all of what was submitted for review in December.

These regulations are “final”, meaning cannabis operators and applicants no longer need to worry about discrepancies between emergency regulations (which as of now are no longer effective per the OAL’s statement) and whatever version of proposed regulations were then out in the ether. But though these regulations are “final”, we’re pretty positive that there will be changes and modifications—probably on a more incremental level—in the future.

Stay tuned to the Canna Law Blog for further insight and analysis into these final regulations and any final regulations that will come.

california hemp CBD
We’ve got you covered on California, hemp, FDA and CBD.

A few months ago, I wrote a blog post about the precarious state of industrial-hemp derived CBD in California. Since then, as everyone knows, President Trump signed the Agricultural Improvement Act of 2018 (or “Farm Bill”). A lot of people think that in the wake of the Farm Bill, hemp-derived CBD (“Hemp CBD”) is now completely legal. This is in many cases a wildly inaccurate misconception—especially in California. Now, the legal status of Hemp CBD is arguably even more confounding than it was then. And it was pretty bad.

What did the 2018 Farm Bill Actually Do?

Before getting into California Hemp CBD laws, it’s important to discuss what the new Farm Bill even changes. If you follow us here at the Canna Law Blog, you know we’ve written pretty comprehensively on this topic. For a brief overview, the 2018 Farm Bill modified the Controlled Substances Act (the “CSA”) to exempt hemp from the definition of marijuana. Not only is hemp now clearly excluded from this definition and thus not a scheduled drug, but states and tribes also cannot prohibit the distribution of hemp. However, as I explain below, that doesn’t necessarily mean hemp or Hemp CBD can be sold without state restrictions.

The current Farm Bill also gives the U.S. Department of Food and Agriculture (the “USDA”) authority to oversee state hemp regulatory programs. For example, states and tribes must submit plans to the USDA for implementing regulatory schemes, and these plans must be approved by the USDA. In the event that they aren’t, the USDA can implement its own plan.

One other interesting component of the Farm Bill is that crop insurance coverage could be extended to hemp, meaning hemp crops could actually gain federal insurance. In a state like California that is prone to natural disasters, this is critical.

These aren’t all the changes that the new Farm Bill brought along, but they are some of the key ones. Now, on to California.

Hemp CBD in Food/Beverages in California

Over the summer, the California Department of Public Health (“CDPH”) issued its now infamous FAQs (the text is here), which took the position that:

[A]lthough California currently allows the manufacturing and sales of cannabis products (including edibles), the use of industrial hemp as the source of CBD to be added to food products is prohibited. Until the FDA rules that industrial hemp-derived CBD oil and CBD products can be used as a food or California makes a determination that they are safe to use for human and animal consumption, CBD products are not an approved food, food ingredient, food additive, or dietary supplement.”

Under California law, “food” is defined as “[a]ny article used or intended for use for food, drink, confection, condiment, or chewing gum by man or other animal” and “[a]ny article used or intended for use as a component of any article designated” in the foregoing definition. What this means is that the CDPH views anything that counts as food or drink that’s intended for human or animal consumption as unlawful.

On an important side note, the Medicinal and Adult-Use Cannabis Regulation and Safety Act (or “MAUCRSA”) defines “cannabis” to exclude industrial hemp (and therefore doesn’t regulate industrial hemp), and instead incorporates provisions of the California Health and Safety Code which leave the regulation of hemp cultivation to the California Department of Food and Agriculture (“CDFA”). The CDPH expressly cited this issue in MAUCRSA back in response to the 45-day comment period for its proposed regulations to note that the CDPH doesn’t have jurisdiction over regulating industrial hemp. This doesn’t mean that the CDPH can ban hemp in other things (like manufactured cannabis, see below), but it just means that under MAUCRSA, the CDPH can’t start issuing hemp regulations.

Back to the main story, it was pretty clear after the FAQs were issued that the CDPH wouldn’t continue to tolerate sales of foods or beverages with Hemp CBD for long. But we weren’t aware of any sort of enforcement efforts or actual regulations by the CDPH regarding Hemp CBD in foods or beverages. However, after the Farm Bill wound its way through Congress but before Trump signed it, there was some question on whether the Farm Bill would negate the CDPH FAQs.

A few days before the Farm Bill was signed, I wrote a post predicting that the 2018 Farm Bill would not do away with the FAQs. This was because the FAQs are based on the CSA’s prohibitions on hemp as well as the federal Food and Drug Administration’s (“FDA”) stance that Hemp CBD foods are not permissible. The Farm Bill changed the CSA, but not the position of the FDA.

In fact, while the ink from Trump’s signature on the Farm Bill was still drying, the FDA issued a statement (see here) telling companies to pump the brakes and that it still regulates hemp and CBD in at least medicines and foods. In an accompanying Q&A document, the FDA takes the fairly unequivocal position (see response to Q.13) that it is illegal to introduce into interstate commerce food that has CBD in it.

So what is going to happen now? As noted above, we aren’t yet aware of any enforcement actions in California. We’re also unlikely to see any sort of new guidance from the feds during the shutdown or in the immediate future thereafter. But localities may be taking a very different approach.

For example, the L.A. County Department of Public Health’s Environmental Health Division (“LADPH”) published an undated PDF concerning industrial hemp in food and saying that the LADPH will begin actually enforcing them: “Effective July 1, 2019, prohibited use of industrial hemp derived products in food will be considered adulterated and cited by [LADPH] as a violation resulting in a deduction of two (2) points on the official inspection report.”

This is one of the first instances we’ve seen of a county taking an official enforcement position on CBD food products, and interestingly comes on the heels of the L.A. Department of Cannabis Regulation (“DCR”) creating an attestation (which I wrote about here) for businesses who sell hemp products to advise that those products don’t fit within the legal definition of cannabis.

Now it seems like we have our first glimpse of what is going to happen when companies sell CBD foods or beverages. While this is only in L.A., we can assume that other counties will follow suit and may be even more aggressive in their pursuit of these hemp CBD food companies.

What is much less clear though is what this means for simply manufacturing or distributing food products that contain hemp CBD. The CDFA’s website Q&As still say that “California law does not currently provide any requirements for the manufacturing, processing, or selling of non-food industrial hemp or hemp products.” It seems like we will need to wait and see what the final answer is.

Licensed Cannabis Products

Cannabis products will generally contain at least some level of CBD naturally. But what about adding CBD from an industrial hemp source to a manufactured product under the Medicinal and Adult-Use Cannabis Regulation and Safety Act? Well, the CDPH (which governs the manufacture of all cannabis products in California) says no.  In the proposed final regulations (no. 40175(c)), the CDPH states pretty clearly that, “A manufacturer licensee shall only use cannabinoid concentrates and extracts that are manufactured or processed from cannabis obtained from a licensed cannabis cultivator.” With this regulation, the CDPH has effectively cut Hemp CBD out of the manufacturing process altogether.

Alcohol Products

In 2018, the California legislature passed a piece of legislation that prohibits cannabis or alcohol licensees from introducing Hemp CBD (or THC) to alcoholic beverages. You can read more about that here.

Dietary Supplements and Medicinal Products

The FDA’s statement makes clear that it will retain jurisdiction over CBD products making medicinal claims, and the accompanying Q&A (see response to Q.12) says that the FDA views dietary supplements containing CBD as unlawful. That said, the FDA notes that there is at least a path towards FDA approval. For what it’s worth, the FDA’s not all talk—see the case of Epidiolex (and see subsequent statement by California’s Attorney General, Xavier Becerra, on Epidiolex). Also, the same day that it issued the statement discussed above, the FDA issued a companion statement listing as generally recognized as safe (“GRAS”) hulled hemp seed, hemp seed protein powder, and hemp seed oil. The FDA is making clear that it’s willing to work with the CBD industry, but it will probably not be cheap.

Vaporizers and Other Products

We recently wrote a comprehensive post about Hemp CBD in vape cartridges. What we said then still holds—it’s a grey and undefined area. This is probably another area that the FDA may eventually regulate given its similar work with nicotine-based vape products. But given the shutdown and just the general speed of regulators, we’re unlikely to know anytime soon.

For what it’s worth, the FAQs are only tailored to food, but it’s possible that regulators could view all products containing Hemp CBD intended for human consumption as unlawful. This seems a bit less likely to happen right away because the CDPH and other agencies have had ample chance to do this but haven’t. But it’s certainly possible, and we’ll make sure to keep you informed of any developments.

Cultivation

We know that at least for cultivation, California’s recent bill SB-1409 (which we’ve written about here and here) was intended to create an application and registration scheme for cultivators. Now that the Farm Bill will require states to submit plans to the USDA for hemp production, it’ll be interesting to see what happens with SB-1409.

Packaging and Labeling

Anyone in the California cannabis game knows that the packaging and labeling regulations are tough, ever-changing, and hard to comply with. The point of these laws seems straightforward—regulators want people to know what they are consuming, and to ensure that cannabis products are properly labeled so that people don’t unwittingly ingest cannabis. They also want to avoid false and misleading claims in labeling.

Because CBD products in California are either in grey or quasi-illegal areas, things aren’t so clear. There aren’t specific packaging and labeling laws for it here, so people who still are selling these products are operating in a labeling wild west. This is different from states like Oregon or Indiana, which have actually begun to figure out how some CBD products should be labeled. We published a post recently on the complexities of and in many cases lack of instruction for hemp labeling laws at the FDA level—and the fact that there may not be guidance for another year or two.

The FDA’s Q&As (see response to Q.15) note that in deciding whether to institute enforcement actions, the FDA will now consider factors, such as “agency resources and the threat to public health.” This may be the FDA’s way of saying that in light of its limited resources, it’s going to spend its enforcement power on those companies selling dangerous products or making false or misleading health claims. One thing we do already know is that the FDA has already sent warning letters to companies that have marketed CBD as new drugs, in the FDA’s view. So in post-shutdown mode, we may see the FDA step in more aggressively on enforcement, especially for products and claims that it views as unlawful.

With the passage of the Farm Bill comes the possibility of a completely new playing field for industrial hemp producers. It appears that the question of whether IRS Code 280E (which prohibits deductions for any amount paid or incurred in carrying on any trade or business that consists of trafficking in a Schedule I or II controlled substance under the CSA) will apply to hemp producers is now settled.

But what about issues like banking or federal intellectual property protections? While it seems like these may be a reality soon, the answer is not as clear cut. If the FDA starts using its enforcement powers against companies that make Hemp CBD foods, for example, it’s certainly possible that banks will still stay away from those companies or that the USPTO won’t register their trademarks. It’s all too soon to say how this will play out, so stay tuned to the Canna Law Blog.

It may seem difficult to understand why cannabis, which is still prohibited federally, is at the state level treated more liberally than Hemp CBD. But the reason is clear—there are strict regulatory testing and quality assurance requirements for cannabis, there will be a track-and-trace system in place to ensure that only white market sources are used, and there are tight packaging and labeling rules that create uniformity in how cannabis products are identified to consumers.

That level of regulatory security doesn’t really exist yet for Hemp CBD and so regulators and lawmakers are naturally more concerned about products that they cannot trace, that may not be labeled at all, and that have undergone zero testing. When Hemp CBD is regulated more like cannabis, regulators may very well relax some of their positions.

Stay tuned to the Canna Law Blog as we will be sure to follow and interpret each and every development in this complex and fast moving space.