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

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

Here are the key proposed changes from the BCC regulations:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

california cannabis marijuana
Get your comments in by Nov. 5 and help us fix this.

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

And to all parties currently engaging in intellectual property (IP) licensing or manufacturing deals as or with a non-licensee, you should most definitely submit your written comments if you want to be able to keep those deals alive. The modifications to the text of the proposed regulations include the following:

5032. Designated M and A Commercial Cannabis Activity

(a) All commercial cannabis activity shall be conducted between licensees. Retail licensees, licensed retailers and licensed microbusinesses authorized to engage in retail sales may conduct commercial cannabis activity with customers in accordance with Chapter 3 of this division.

(b) Licensees shall not conduct commercial cannabis activities on behalf of, at the request of, or pursuant to a contract with any person that is not licensed under the Act. Such prohibited commercial cannabis activities include, but are not limited to, the following:

(1) Procuring or purchasing cannabis goods from a licensed cultivator or licensed manufacturer.

(2) Manufacturing cannabis goods according to the specifications of a non-licensee.

(3) Packaging and labeling cannabis goods under a non-licensee’s brand or according to the specifications of a non-licensee.

(4) Distributing cannabis goods for a non-licensee.

These regulations would seemingly prohibit most, if not all, IP licensing agreements where the licensor is not licensed by the state, given that such licensing deals call for the licensee’s use of the licensed IP to manufacture particular goods, often utilizing the licensor’s proprietary techniques, recipes or trade secrets. Section (b)(3) above describes exactly what a licensee does under a trademark licensing agreement where the licensor does not possess its own manufacturing license from the state: “packaging and labeling cannabis goods under a non-licensee’s brand or according to the specifications of a non-licensee.”

Until Friday, there was nothing in the proposed regulations prohibiting a non-licensed third-party from engaging in these types of licensing deals, which we have written about extensively. Under those proposed regulations, a non-licensed entity entering into a licensing or manufacturing deal and taking a royalty from a licensed entity would need to be disclosed to the state as a party with a financial interest in a licensee but would not need to obtain a manufacturing license of their own. These kinds of deals are extremely prevalent throughout the industry, and are allowed to varying degrees in the other states in which my law firm’s cannabis business lawyers work (Washington and Oregon). For California to prohibit licensing deals involving non-licensed entities would be a major departure from what we’ve seen in other jurisdictions and would be incredibly disruptive to the cannabis industry as it currently operates.

This change would have far-reaching and unfortunate implications. Here are some examples of deals and structures that would not be allowed if this modification is ultimately adopted:

  • Licensed operators that have set up separate IP-holding companies to hold and license their intellectual property back to the operator;
  • Out-of-state cannabis companies that wish to license their existing cannabis brand to California manufacturers, but do not wish to directly engage in manufacturing in California;
  • Non-licensed third-parties that have developed technology to manufacture a cannabis product or a brand identity and wish to license that technology or brand identity to a licensed manufacturer.

The list goes on. If you have any type of licensing or manufacturing deal in place that involves both a licensed entity and a non-licensed entity, you should talk to your attorney as soon as possible to determine what the implications of this modification would be. And most importantly, you should provide written feedback immediately to the Bureau of Cannabis Control during the very short 15-day comment period expressing opposition to this modification.

california cannabis regulations
Here we go again!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

california cannabis marijuana privacy policy
No longer optional for your canna business website.

Unless you’ve been living under a rock for the past few months, you’ve probably read about the host of sweeping new laws in California, like its new Internet of Things law, cannabis privacy law, or net neutrality law, to name just a few. California has long been regarded a trailblazer when it comes to making people who are outside of California do things to comply with California law. So it probably comes as no surprise that website operators outside of California may need to comply with a privacy policy law in California: the California Online Privacy Protection Act.

Pursuant to this law, any business that owns or operates a website that advertises to, services, or in many cases is simply accessible by California residents will almost certainly need to conspicuously post (and—importantly—actually follow) a privacy policy containing statutorily defined disclosures. This requirement applies when a website collects “personally identifiable information” about California consumers, including first and last name, home or other address, email address, telephone number, Social Security number, or any other information that would permit a person to contact a website user (either physically or online). Moreover, a policy may be required even for businesses located in distant areas of the United States just by virtue of the fact that its website can collect this information.

If a company fails to create or adhere to a privacy policy and does so either intentionally or in a material and negligent way, that company may be in violation of the law. The law does state that website operators will not be in violation until 30 days after being notified that their website does not contain a privacy policy, but it does not specify where notification can come from (i.e., the state or any source), which means that reliance on this window may be risky. The law is enforced by the California Attorney General, with penalties of up $2,500 per violation. These penalties could be a severe for businesses that offer mobile apps, as the California Attorney General has taken the position that a new (potentially $2,500) violation occurs each time a non-compliant app is downloaded.

You may be wondering how this applies to your cannabis business. The fact is that there are numerous ways in which even seemingly passive websites collect protected information from and about users. Even if your website does not sell any products, it may include “Contact Us” or mailing list subscription portals which collect protected information. If your website sells or ships any sort of product, it may collect at least some protected information. Even if your business has not collected information about any California residents in the past but simply could do so, the mere possibility may mean it needs to comply.

Furthermore, there are other good business and legal reasons to post and adhere to a privacy policy. Customers appreciate when businesses are transparent about their privacy practices. For obvious reasons, ensuring that cannabis customers’ privacy is maintained is important. Additionally, in the event of a data breach which requires notification to state or federal authorities, the fact that a company took steps to maintain customer privacy may be important considerations in determining if any enforcement actions should be taken.

The good news is that, unlike some laws or regulations that cannabis companies face, California’s privacy policy law is relatively straightforward in that it specifies what a company needs to disclose in a privacy policy and how that policy needs to be displayed on a website. That said, ensuring that a privacy policy accurately describes a company’s current and future privacy practices can be a challenge, and inaccurate or gratuitous statements in a privacy policy could expose a company to additional liability. In other words, a policy needs to be tailored to a company’s specific practices, and so copying language from other privacy policies could cause even more trouble for a company.

Cannabis companies have enough to worry about. They shouldn’t add to the problem by failing to address privacy or data security laws. A good place to start is engaging counsel to draft a comprehensive privacy policy. After all, at least according to California, one is required.

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

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

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

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

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

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

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

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

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

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

california industrial hemp
For the most part, anyway.

We’ve been closely following the trajectory of SB 1409 and on September 30, 2018, Governor Brown signed the bill which will go into effect on January 1, 2019. This legislation is a huge step for California cannabis, in that it will add an industrial hemp pilot program to the California Department of Food and Agriculture’s registration system.

Currently, California law regulates the cultivation of industrial hemp, and specifies certain procedures and requirements on cultivators, not including an established agricultural research institution. Existing law defines “industrial hemp,” via the California Uniform Controlled Substances Act, as a fiber or oilseed crop, or both, that is limited to the non-psychoactive types of the plant Cannabis sativa L. and the seed produced from that plant.

Existing California law also requires that industrial hemp only be grown by those on the list of approved hemp seed cultivars. That list includes only hemp seed cultivars certified on or before January 1, 2013. Industrial hemp may only be grown as a densely planted fiber or oilseed crop, or both, in minimum acreages. Growers of industrial hemp and seed breeders must register with the county agricultural commissioner and pay a registration and/or renewal fee.

SB 1409 deletes the exclusionary requirement that industrial hemp seed cultivars be certified on or before January 1, 2013. Additionally, “industrial hemp” will no longer be defined restrictively in the California Uniform Controlled Substances Act as a fiber or oilseed crop, and the bill deletes the requirement that industrial hemp be grown as a fiber or oilseed crop, or both. We initially presumed this would allow cultivators to harvest hemp for CBD derivation, and related use, but given the recent FAQ issued by the California Department of Public Health effectively banning the sale of CBD food products, how hemp-derived CBD in California will be regulated in the future remains to be seen. We are certain this is an issue that will be taken up by the state during the rule-making process.

SB 1409 also authorizes the state Department of Food and Agriculture to carry out, pursuant to the federal Agricultural Act of 2014, an agricultural pilot program for industrial hemp. Twinning a state-sanctioned pilot program with licensed, private cultivation is a model that has worked well in other states, like Colorado and Oregon. Given the recent expiration of the 2014 Farm Bill prior to passage of the Hemp Farming Act of 2018, however, it remains to be seen how new hemp pilot programs will be viewed and treated by the federal government. Our hope is that Congress will resolve its differences and enact the Hemp Farming Act of 2018 before the end of the year, or at least before California is able to build out and implement its own regulatory system.

Some other provisions included in SB 1409 include detailed requirements for sampling and laboratory testing of industrial hemp. The bill provides new time frames for sampling of industrial hemp and destruction of hemp that exceeds the 0.3% THC limit. Also of note, and perhaps unfortunately, the bill adds a provision to the Food and Agricultural Code giving local jurisdictions the ability to ban industrial hemp cultivation in limited circumstances:

A city of county may, upon a finding that pollen adrift from industrial hemp crops may pose a threat to licensed cannabis cultivators permitted by the city or county, prohibit growers from conducting, or otherwise limit growers’ conduct of, industrial hemp cultivation in the city or county by local ordinance, regardless of whether growers meet, or are exempt from, requirements for registration pursuant to this division or any other law.”

We’ve seen recent litigation on this issue in Oregon, so perhaps the state is trying to insulate its licensees from similar outcomes.

As stated above, we’ll be very interested to see how (and if) regulators tackle the issue of industrial hemp-derived CBD in California as they develop the new regulatory framework for hemp. In the meantime, if you are unfamiliar with the current legal status of hemp-derived CBD food products in California, we recommend reading the CDPH’s FAQ and checking out our post on the topic here. We’ll continue to monitor rule development now that the bill has passed and all hemp-related developments in California closely.

For more on industrial hemp generally (including CBD), check out our wealth of archived posts here.

cannabis marijuana IOT
Cannabis things included.

Two years ago, we published a series of posts about the cannabis industry’s embrace of the Internet of Things (“IoT”)—the network of physical objects connected through the Internet—for use in everything from garden sensors to dispensers. In that same series, we also discussed some of the potential legal risks and ramifications of using the IoT in the cannabis business—particularly some of the privacy and security risks inherent in the IoT.

Just last week, California Governor Jerry Brown approved of SB-327, the first information security law in the U.S. specifically targeting the IoT. SB-327 takes effect on January 1, 2020, and will require manufacturers of connected devices—essentially, devices in the IoT—to equip them with “reasonable” security measures. These security measures must be appropriate to the nature of the devices and information they collect and contain, and must be designed to protect the devices from unauthorized access, destruction, use, modification, or disclosure. SB-327 also requires devices that can be accessed outside of a local area network either to be equipped with a unique password or to allow a user to generate its own password.

It’s important to emphasize that SB-327 does not impose any requirements on users of IoT devices, but rather to manufacturers. So, for many businesses in the cannabis space that rely on the IoT, no real changes in operations may be necessary. Both plant-touching and ancillary marijuana companies that manufacture qualifying devices, on the other hand, may need to re-do or even re-invent their products.

It’s also important to note that the law applies to more than just California manufacturers. It applies so long as a business manufactures—either itself or through a contracting third party—qualifying devices that will be sold or offered for sale in California. Crucially, there is no threshold for product sales in California. Consequently, any manufacturer, anywhere, could be subject to SB-327.

Complying with SB-327 may be as simple as assigning randomly generated passwords to each device or re-tooling software or firmware to provide more robust security protection. But for some manufacturers—especially of devices that gather or contain sensitive information—compliance may be more involved and may require a ground-up reinvention. Consultation with counsel is always the best step towards compliance.

foreign investment california cannabis
Coming soon to California cannabis?

In addition to our California cannabis business attorneys’ work on corporate, finance, and transactional issues with marijuana-related businesses, we also work with our firm’s foreign direct investment group. As California has implemented MAUCRSA since January 1 of this year, we have been getting tons of interest and questions in and about foreign investment into California’s booming cannabis industry. As would be expected, much of this interest is from Israel, Canada, Spain, Turkey, South America, the Netherlands, the UK and Germany. These investors are interested in California because of the size of the market, but also because California has no residency or citizenship requirement to invest in cannabis businesses.

In general, foreign direct investment (FDI) refers to any type of cross-border transaction where a company or investor from Country A invests money in a company located in Country B. It generally doesn’t refer to dumping money broadly into stocks and bonds — it is specifically about a concentrated, single-enterprise investment.

FDI exists in several forms. Foreign investors can start a new company and can finance and build it from the ground up. They can participate in a joint venture with U.S. partners. They can wholly or partially acquire a U.S. business. They can also take a lighter touch, where they provide primarily branding and process support while having U.S. parties take on the bulk of the financial risk — the basic franchise model.

In the marijuana industry, we have already seen large FDI projects in cannabis ancillary services (i.e., the companies that provide the goods and services that support the actual marijuana traffickers). Foreign investors have opened up domestic companies for the manufacture and import of cultivation equipment like grow lights and hydroponic equipment, processing equipment like automated trimmers and extraction machines, and associated inputs including soil, fertilizer, vapor pen batteries and cartridges, and more. We have also seen large amounts of foreign money come in for cannabis real estate projects, especially in the Coachella Valley and certain desert cities. In addition to buying the real estate, the foreign investors put money into greenhouses, grow lights, storage facilities, and more to offer turnkey cultivation and processing facilities for lease to local businesses. These companies are largely unregulated at the state level, and their foreign investment issues are similar to non-cannabis businesses, dealing with things like registering as U.S. taxpayers for partnership taxed businesses, complying with FIRPTA, and dealing with immigration issues.

For firms directly involved in the buying and selling of cannabis, state-specific restrictions become more of a concern. States like Washington do not allow anyone who is not a state resident (much less not a U.S. resident) from having any profit interest in a marijuana business. California, similar to Oregon, is extremely liberal with its cannabis regulations regarding owners and “financial interest holders.” As mentioned above, there is no residency or even citizenship requirement to participate. Still, on the whole, state regulations and state laws are typically written with U.S. residents in mind. In turn, things like criminal and financial background checks on foreigners remain a bit of a gray area (though California’s Department of Public Health, which oversees manufacturers, has accommodated the situation somewhat with an “out of state owner” background check). Ultimately though, neither state officials nor the FBI are likely to have any real information on foreign nationals who haven’t had prior contact with the United States. How the Feds will react to foreign ownership in terms of the Department of Justice (rather than via immigration through the Department of Homeland Security) still remains to be seen, though nothing’s been publicly reported that’s a red flag against foreign marijuana business ownership in California.  

As far as federal laws go, the Controlled Substances Act doesn’t differentiate between activities that are international, interstate, or fully intrastate in nature. Possessing, manufacturing, and distributing marijuana are illegal federally regardless of where the company’s owners live. Still, there are a couple of criminal statutes that add fuel to the fire when interstate and international commerce are involved. 18 U.S.C. § 1952, for example, criminalizes traveling or using the mail in interstate or foreign commerce with intent to distribute the proceeds of marijuana sales.

More questions arise when considering foreign ownership in the context of the Department of Justice marijuana enforcement memoranda that cannabis-legal states are working under. The main takeaway from the August 2013 Cole Memorandum (which has been rescinded by U.S. Attorney General Jeff Sessions) was that if the states want to keep federal law enforcement away, they need to make sure their regulations prevent state licensees from violating the various federal enforcement priorities. One of those priorities was that state regulations need to prevent “revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels.” If the state and federal criminal background check databases don’t have extensive coverage on foreign crimes, how can a state, including California, have faith that the foreign investors don’t fall into one of those categories?

For now, with no broad pronouncements apparent, it appears that the federal government is taking a wait-and-see approach to foreign ownership of state cannabis businesses. That means it is up to state cannabis business participants and the states themselves to ensure that foreign owners do not violate federal enforcement priorities — starting with California.

AB 2164 cannabis fines marijuana
AB 2164 may create surprises for cannabis landlords.

Prior to the enactment of AB 2164, California law required cities and counties to grant a person responsible for a continuing municipal code violation a reasonable time to remedy the violation before the city or county could impose fines or penalties when that violation pertained to building, plumbing, electrical, or other similar structural and zoning issues that did not create an immediate danger to health or safety. Cal. Gov. Code section 53069.4.

In June, California’s Fifth District Court of Appeal interpreted Government Code section 53069.4 to require the County of Fresno to provide a cannabis cultivator a reasonable time to abate cultivation activity before imposing a fine. See Thao v. County of Fresno, Court of Appeal of the State of California, Fifth Appellate District, Case Nos. F072276, F073035, Filed June 28, 2018 (unpublished).

Apparently, the state legislature didn’t like that, because earlier this month, Governor Brown signed AB 2164 into law, which amends Government Code section 53069.4 and allows local governments to eliminate the “reasonable time period” to correct a code violation in cases of cannabis cultivation. According to the bill’s author, this removes at least one monetary incentive for illicit grows to continually move while giving local governments the ability to bring meaningful penalties on willfully illegal growers.

While it may sound reasonable, in practice this new law will have drastic impacts on unwitting landlords who may or may not know that cannabis cultivation is occurring at their property. Even the most sophisticated property owners are befuddled by California’s new regulatory scheme, unsure of whether cannabis activity is authorized as a matter of right in all jurisdictions (it is not), or whether they are even allowed to prohibit cannabis use or activity in their leases (they can).

We have been assisting a number of property owners facing excessive fines and penalties imposed by cities due to unlawful cannabis activity by their tenants (see here for more on that). Some cities impose strict liability against property owners for their tenants’ code violations, rack up fines of $10,000 per day, and then record the fines as an assessment on the property owner’s tax bill. This can result in a tax bill for hundreds of thousands to millions of dollars, non-payment of which results in sale of the property by the county.

Providing a reasonable period of time to correct a violation like cannabis cultivation ensured that property owners, who generally cannot proactively inspect property that is leased to a tenant (and therefore may be unaware of illegal activity) could take action to eliminate unlawful activity before it became an insurmountable financial burden. Now, property owners face serious and immediate risks and must take steps to ensure they are not held liable for unlawful cultivation activity by their tenants.

Fortunately, AB 2164 includes a “safe harbor” that requires cities and counties to provide a reasonable period of time to correct a violation prior to the imposition of administrative fines or penalties if all of the following are true:

  1. A tenant is in possession of the property that is the subject of the administrative action;
  2. The rental property owner or agent can provide evidence that the rental or lease agreement prohibits the cultivation of cannabis; and
  3. The rental property owner or agent did not know the tenant was illegally cultivating cannabis and no complaint, property inspection, or other information caused the rental property owner or agent to have actual notice of the illegal cannabis cultivation.

So, if you are a commercial landlord and want to protect yourself from municipal fines and penalties without warning, make sure that either (1) your tenant is lawfully cultivating pursuant to all local and state laws, or (2) you are complying with items 1-3 above. Otherwise, the consequences of city or county action can be painful.