As we wrote on Tuesday, the midterm elections were monumental for cannabis: Michigan voters approved of a proposal legalizing recreational marijuana for adult use, Utah and Missouri will soon establish medical marijuana regimes, and Texas Representative and marijuana antagonist Pete Sessions lost to a Democrat.

All in all, Tuesday was a good day at the state and national level. But cannabis wasn’t just on the ballot at the state or national level—many cities had measures on that would regulate cannabis in one form or another. This post discusses some of the more impactful ballot measures that won and lost in California.

california elections cannabis marijuana

To start, dozens of cities and counties in California had cannabis taxation measures, which is a good sign for the expanding market. Oakland voters, for example, approved of Measure V, which amends the local code to allow cannabis manufacturers and cultivators to deduct the value of raw materials when calculating gross receipts for tax purposes. Fresno voters approved of Measure A, which adopts a cannabis business license tax. As noted above, numerous cities had tax measures on the ballot—and they are quite literally all over the map.

El Dorado County had a number of cannabis measures on its ballot. Measures P, Q, R, and S each passed, allowing the retail sale, delivery, distribution, and outdoor/indoor cultivation of commercial cannabis for recreational and medicinal purposes. Interestingly, El Dorado County’s Measure N (a tax measure), didn’t pass.

Los Angeles County’s well-publicized Measure B, which would have established a municipal bank, failed. This was a closely watched measure in the cannabis industry, as many had hoped for a local bank in which to bank their earnings. Because the California effort to charter a state bank has cooled, local businesses may have limited options until a federal fix occurs.

Elsewhere, the City of Malibu passed Measure G, which will now allow retail sales of commercial cannabis and deliveries. Before, Malibu only allowed medicinal sales. But wait before delivering into Malibu from other cities; you’ll need a regulatory permit from the City of Malibu to do so. No word yet on what that application process will look like.

As noted above, these are just a few of the measures that were adopted (or not) on Tuesday. California, like many other places nationally, is certainly moving toward a more open marijuana landscape.

california cannabis intellectual property licensing BCC
These proposed BCC regulations would be a mistake.

As we’ve been blogging about for the last couple of weeks, the Bureau of Cannabis Control (BCC) recently released modifications to the proposed regulations for cannabis licensees, one of which effectively prohibits all licensing, white labeling and manufacturing agreements between two parties where one of those parties is not a licensed cannabis business. In our post on this modification, we urged stakeholders to submit written comments to the BCC expressing their opposition to the rule change. We also noted that we would be submitting formal comments as a firm on behalf of our clients and are publishing those comments here. Our hope is that the BCC understands the damaging implications this rule change will have on the industry here in California, and we will be following the rule adoption process closely to see how this shakes out.

Below is the full text of our November 2 letter to BCC, minus the letterhead and signatures. We will continue to dialogue with affected parties and regulators on this crucial issue as opportunities permit. Please continue to join us in making your voices heard!


Lori Ajax, Chief
Bureau of Cannabis Control
P.O. Box 419106
Rancho Cordova, CA 95741

Re:       Comments Regarding Modifications to Text of Proposed Regulations for All Bureau Licensees §5032-Commercial Cannabis Activity

Dear Ms. Ajax,

On behalf of Harris Bricken McVay Sliwoski, LLP and our clients participating in California’s cannabis industry, we submit our comments to the Bureau of Cannabis Control’s Modifications to the Text of the Proposed Regulations for All Bureau Licensees.

Our comments are limited to Section 5032 pertaining to “commercial cannabis activity.” This section proposes to expand the definition of “commercial cannabis activity,” which may be conducted only between licensees, as follows:

  • 5032. 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.

In particular, we take issue with the expansion of the definition of “commercial cannabis activity” to include “Manufacturing cannabis goods according to the specifications of a non-licensee” and “Packaging and labeling cannabis goods under a non-licensee’s brand or according to the specifications of a non-licensee,” as this modification will effectively prohibit all intellectual property licensing agreements between licensees and non-licensees. We have not encountered such a prohibition in any other state in which cannabis is legalized and regulated, and we believe that this modification would stifle the industry and eliminate many, if not most, of the brands currently on dispensary shelves in California.

Intellectual property licensing agreements are utilized widely throughout virtually every industry. We have assisted clients with many licensing deals throughout the state, none of which were intended to circumvent cannabis regulations or hide ownership or financial interests. In fact, our interpretation of the “financial interest holder” rule has been that the licensor in each of these licensing deals including a royalty component where the licensor receives a share of profits or revenue from the licensee must already be disclosed to the appropriate state regulatory agency as a “financial interest holder” in a licensee.

There are many reasons why intellectual property licensing agreements make sense for a licensed operator, and why access to intellectual property beyond that owned by licensed operators benefits consumers:

  • Many licensed operators do not have the resources to develop new technologies, products, or brand identities and intellectual property licensing can provide a mechanism for expanding and improving their product offerings.
  • Many companies and individuals that own intellectual property, such as recipes, techniques, processes, and brand identities do not have the resources to obtain local and state permits or are based in jurisdictions that do not allow commercial cannabis activity. Intellectual property licensing can provide a mechanism for these companies to provide their intellectual property to licensed operators and become fully disclosed financial interest holders in those licensed operators by taking a royalty based on product sales.
  • For entities that own multiple operations, it often also makes legal sense to utilize an IP holding company (that is not a licensed entity) to hold and manage the group’s IP portfolio for the avoidance of IP ownership disputes and liabilities, among other reasons.
  • Licensed intellectual property expands the ability of licensed operators to provide a greater variety of brands and products to consumers.

Eliminating the ability of licensees to enter into intellectual property licensing deals with non-licensees harms both licensees and consumers by restricting the number of brands and products available. It also seems that the Bureau’s goals may not be well-served by this proposed rule modification due to overbreadth of its scope. The intent of Sections 5032(b)(1) and (b)(2) appears to be preventing licensed entities from conducting cannabis business operations at the behest or at the direction of unlicensed entities. The main purpose of intellectual property licensing deals is not to direct an entity how to conduct its business, but to restrict the ways in which the intellectual property may be used, and to ensure compensation to the owner for those limited uses. The proposed modification to Section 5032 casts an unnecessarily wide net that would prohibit all manufacturing, packaging, and labeling operations by a licensed operator that happen to use intellectual property owned by a non-licensed entity—a result that does not serve consumers, licensed entities, or public safety. Just as a landlord should not have to be licensed in order to lease its property to a licensed cannabis operator in exchange for rent, an owner of a brand or a recipe should not have to be licensed in order to license its intellectual property to a licensed operator in exchange for compensation.

Rather than becoming the first state to prohibit IP licensing in its cannabis regulations, we recommend that the Bureau instead amend the following rule pertaining to financial interest holder disclosure requirements to explicitly include intellectual property and manufacturing agreements where the licensor receives a royalty as disclosable to the state (proposed language emphasized):

  • 5004. Financial Interest in a Commercial Cannabis Business

(a) A financial interest means an agreement to receive a portion of the profits of a commercial cannabis business, an investment into a commercial cannabis business, a loan provided to a commercial cannabis business, or any other equity interest in a commercial cannabis business except as provided in subsection (c) (d) of this section. For the purpose of this section, an interest in a diversified mutual fund, blind trust, or similar instrument is not a financial interest. For purposes of this division, an agreement to receive a portion of the profits includes, but is not limited to, the following individuals:

(1) An employee who has entered into a profit share plan with the commercial cannabis business.

(2) A landlord who has entered into a lease agreement with the commercial cannabis business for a share of the profits.

(3) A consultant who is providing services to the commercial cannabis business for a share of the profits.

(4) A person acting as an agent, such as an accountant or attorney, for the commercial cannabis business for a share of the profits.

(5) A broker who is engaging in activities for the commercial cannabis business for a share of the profits.

(6) A salesperson who earns a commission.

(7) A non-licensed entity that has entered into an intellectual property licensing agreement or manufacturing agreement with a commercial cannabis business for a share of the profits.

From an ownership and financial interest holder perspective, intellectual property and manufacturing agreements are no different than any of the arrangements already referenced in Section 5004 where a non-licensee receives a share of profits from a licensed entity. Intellectual property and manufacturing agreements that stipulate that all commercial cannabis activity shall be carried out solely by a licensed operator and that the non-licensee shall have no control over the licensed entity should not be treated any differently than leases, consulting agreements or any other agreement in which a non-licensee receives a royalty.

If the Bureau is instead concerned with the contents of these intellectual property licensing and manufacturing agreements, we recommend requiring disclosure of the agreements to the state, rather than prohibiting them altogether or requiring the licensor to secure onerous local approval and eventual state licensing for a commercial cannabis license they never intend to actually use. Washington State, for example, which has some of the strictest regulations pertaining to ownership and financial interests in cannabis businesses in the country, requires that licensors entitled to a royalty in a licensing agreement be disclosed to and vetted by the Washington State Liquor and Cannabis Board (WSLCB), and that the licensing agreement itself be disclosed to and reviewed by the WSLCB.[1]

We appreciate the opportunity to provide these comments to the Bureau’s proposed modifications to the text of the proposed regulations for all Bureau licensees and would be happy to engage in a dialogue to identify a means for regulating these types of business deals without causing significant harm to the industry and to consumers. If you have any questions, please contact Alison Malsbury at alison@harrisbricken.com or Hilary Bricken at hilary@harrisbricken.com.

[1]RCW 69.50.395.


Let’s hope that the Bureau considers these and other comments thoughtfully and seriously as California continues to build out its cannabis program architecture. We will keep you posted.

los ángeles california medical dispensary licensing
Certain L.A. dispensaries may soon be stuck in place.

Los Angeles’s existing medical marijuana dispensaries (“EMMDs”) under Measure M will soon be precluded from relocating from their current operations unless and until they receive their local annual licenses from the City of Los Angeles. Movement post-initial application to L.A. has been a common practice for  EMMDs for some time, and has apparently caused a rift with other potential commercial cannabis licensees who were effectively “zoned out” based on buffer requirements when an EMMD moved into their planned licensed territory (non-EMMD storefronts have to be no less than 700 feet from each other). The new requirement goes into effect soon—but just how soon remains to be seen.

On October 19, 2018, the Los Angeles Rules, Elections, and Intergovernmental Relations Committee (the “Committee”) held a meeting which dealt with various cannabis-related matters. Shortly before the October 19 meeting, the Los Angeles Department of Cannabis Regulation (“DCR”) submitted a letter requesting amendments to the City’s cannabis procedures, which are codified in the Los Angeles Municipal Code (“LAMC”). The letter requested that the City Council instruct the DCR to stop processing EMMD relocation requests or amend the LAMC accordingly. The DCR is concerned with EMMD relocation requests because:

In certain instances, an EMMD has re-located to a business premises within 700 feet of a location a Phase 3 applicant has secured as a potential retail business premises. Because the City does not permit a Phase 3 retailer to be within 700 feet of another retailer, in those instances, the Phase 3 applicant must abandon the location it has secured and find an alternate location. As this re-location issue may impact the Tier 1 and Tier 2 Social Equity Applicants applying for retail licenses, DCR recommends that the City Council either instruct DCR to stop processing EMMD re-location requests or amend Sec. 45.19.7.2 of Article 5.1 of Chapter IV of the LAMC to prohibit EMMD re-locations as of January 1,2019.

In other words, EMMD relocations could create a block on real estate for potential other dispensary licensees, and based on the social equity program in the City (for more on social equity, see here), the City wants to make sure that phase 3 social equity retailers get a fair shot at a more static real estate situation.

Also on October 19, the Committee issued a report that requests that the City Attorney, working with the DCR, “prepare and present an Ordinance to amend [the LAMC] to prohibit future Existing Medical Marijuana Dispensaries re-locations prior to the issuance of an annual license, and instruct the DCR to cease accepting and approving new re-location requests while this ordinance is under consideration by the City Council.”

EMMDs whose local annual licenses are still under review will thus no longer be able to change locations (unless and until they get that annual local approval)—but the big question is when that will kick in. From the text of the report, the DCR will be instructed to cease accepting and approving new relocation requests while the to-be-drafted ordinance is under consideration. It does not look like the ordinance is yet under consideration, so relocation requests may still be processed by the DCR if you get in the queue now.

One other important issue is whether relocation requests submitted before the ordinance is passed can still be approved after the ordinance is implemented–meaning, is the ordinance going to be retroactive? The text of the report suggests that the DCR’s ban will be only for new relocation requests made after the ordinance is under consideration. That said though, it really depends on what the ordinance ultimately says in the end and whether the City Attorney and DCR decide to prohibit any already-pending relocation requests.

For now, stay tuned. We will be sure to provide updates on the EMMD relocation prohibition as it evolves.

CBD alcohol california
Mint is still fine; CBD, not so much.

A few months ago, I spoke to a reporter from Quartz about cannabidiol (CBD). She told me that a local cafe was offering a CBD-infused latte and that it piqued her interest for a story. Her local baristas were not alone as numerous bars, restaurants, and cafes across the country have been experimenting with CBD-infused beverages. However, as with all things CBD, the regulatory framework is rapidly changing. If you’re a business owner looking to add a CBD beverage to the menu, it’s important to carefully consider state and local law.

That brings us to California. California is an excellent case study when it comes to CBD. The Golden State has a long history with cannabis, as it was the first state to create an affirmative defense for the medical use of marijuana in 1996. In 2016, California voters approved of recreational marijuana. California has also approved of an industrial hemp pilot program under the 2014 Farm Bill, but the program has been mostly dormant because the state’s laws and regulations make it nearly impossible to legally obtain hemp seeds. In addition, and perhaps most importantly when it comes to CBD, California has a propensity to regulate just about everything under the Sun.

Cue the California Department of Public Health’s (CDPH) infamous FAQs. As we wrote back in July, these FAQs stated that CDPH was banning the inclusion of hemp-derived CBD as a food, food ingredient, food additive, or dietary supplement. California’s Health and Safety Code defines food to include beverages meaning that CBD is not allowed in beverages of any kind. California’s Alcoholic Beverage Control (“ABC”) issued its own FAQs which stated that licensees could not serve alcoholic beverages mixed with cannabis, even if the licensee was using CBD. ABC cited to CDPH’s FAQs to prohibit the use of hemp-derived CBD.

The FAQs are examples of CDPH and ABC using policy statements to enact what feels like a new law or regulation. At the state level, laws are passed by both branches of a state legislature and signed into effect by the Governor. Laws establish requirements or prohibitions. In turn, regulations are issued by  agencies to clarify their interpretation of a law and how a law will be implemented. Like laws, regulations also impose requirements or prohibitions. When an agency issues a new regulation, there are procedural requirements such as a public comment period where stakeholders can voice concerns over proposed regulations. Similarly, when the legislature passes a new law, lawmakers hold public hearings. These procedural requirements provide for transparency.

Agencies also can issue guidance or other policy statements to clarify how an agency understands and implements existing laws and regulations. Generally speaking, guidance and other policy statements are not mandates but rather are an expression by the agency of a suggested or recommended action. Agencies are not generally required to provide the public with a notice and comment period before issuing a policy statement because those statements shouldn’t establish requirements or prohibitions.

When it comes to CBD-infused products, the outright prohibition in California is stated in the CDPH’s policy statement. There is no law or regulation that specifically prohibits using industrial hemp derived CBD as a food additive but CDPH interprets its governing rules and regulations to prohibit CBD in food or drinks.

Alternatively, ABC’s guidance prohibiting the use of CBD in alcoholic beverages has been enacted into California law. Recently, Governor Jerry Brown signed Assembly Bill 2914 (the “Bill”) prohibiting alcoholic beverage licensees, like bars and liquor stores, from providing hemp-derived CBD cocktails. The Bill’s purpose is summed up as follows:

This bill would prohibit an alcoholic beverage licensee from, at its licensed premises, selling, offering, or providing cannabis or cannabis products, including an alcoholic beverage that contains cannabis or cannabis products, and would provide that no alcoholic beverage shall be manufactured, sold, or offered for sale if it contains tetrahydrocannabinol or cannabinoids, regardless of source.”

That last phrase, “regardless of source,” encompasses cannabinoids like CBD even if it was derived from industrial hemp.

California has codified the prohibition of CBD-infused alcoholic beverages. The similar prohibition on CBD in non-alcoholic beverages and other consumable products is not codified in a law or regulation. In that sense, the latter prohibition would be easier to reverse. That said, CDPH’s guidance is powerful as agencies are given broad deference when interpreting their own regulations, so if CDPH changes that guidance, it will likely be because it wants to or because the legislature writes a law to expressly allow CBD in non-alcoholic beverages and other consumables. It will not be the result of a private party lawsuit.

The idea of offering a CBD-infused cocktail in California is a non-starter. If you are hoping to enjoy a CBD cocktail, you’ll have to forgo California and book a flight east. CNBC reports a New York bar is experimenting with CBD cocktails. Perhaps New York regulators will take a different approach from their California counterparts. Time will tell.

california cannabis licensing
A California cannabis licensing backlog is imminent.

A backlog of cannabis license applications has no doubt happened in almost all of the other states that have medical and adult use licensing. You wouldn’t normally think this is such a big or concerning development, but in cannabis licensing delays can mean angry investors, a complete 180 for your business plans and even insolvency.

In California, a licensing logjam was bound to catch up with regulators, especially as cities and counties start to embrace the democratic experiment of legalization. And now we know that at least one state agency, California Department of Food and Agriculture (“CDFA”), which oversees cultivators, is feeling the pinch of hundreds and hundreds of license applicants.

On Friday, October 26, CDFA sent the following email to its stakeholder list serve:

ATTENTION, PLEASE!

FOR NEW TEMPORARY LICENSES ISSUED PRIOR TO DECEMBER 31, 2018

Due to the large number of applications being submitted for temporary cannabis cultivation licenses, the California Department of Food and Agriculture (CDFA) hereby notifies prospective applicants that any application for a temporary license received after December 1, 2018, may NOT be processed in time for us to issue a temporary license before January 1, 2019. After December 31, 2018, the authority for CDFA to issue temporary licenses expires. To provide sufficient processing time, please submit your temporary application to CDFA’s CalCannabis Cultivation Licensing Division by December 1, 2018.

Even though MAUCRSA makes clear that temporary licenses will no longer be around (or renewed) after December 31 of this year, CDFA is moving that timeline forward based on the sheer volume of applications for just temporary licenses its received. The kicker here is that you will NOT receive a provisional license (to continue to operate while you wait for your annual license) unless you’ve already had or have a temporary license for the same license type at your same location. And, in case you were living under a rock, provisional licenses are the new form of temporary licenses that the legislature okay’ed at the end of last month. Oddly enough, CDFA is the only agency so far that’s given its roadmap for how to get a provisional, but we imagine (based on statute) it will be pretty much the same protocol for the Bureau of Cannabis Control (“BCC”) and the California Department of Public Health (“CDPH”).

Why is all of this important? To date, temporary licenses (which are good for 120 days) represent the only means by which an operator can open and run its businesses before receiving its annual cannabis license. To get a temporary license, the licensee first has to secure local approval from its local government, which can be easy, somewhat challenging or extremely difficult, depending on the local jurisdiction. Importantly, temporary licenses can be renewed for 90-day increments so long as the license applicant is in pursuit of its annual license with the state. As a start-up business, it’s usually lucrative to be able to get operational very quickly because, in cannabis: 1) you likely already have an operational lease that you’re paying on; 2) you’ve completed a costly build out; and 3) you have to answer to your financiers or at least break even on your own contributions to keep going. If you can’t operate while you wait on your license, your fate is likely to just try to hang on while you bleed cash, and licensing can take months to get depending on the state.

The biggest wrinkle here in California is that many cities and counties are not really paying attention to, or cannot adequately address, this future gap in licensing–namely, if you can’t get your temporary license by the end of the year (which requires prior local approval from your city or county), you’re not operating at all in 2019 unless and until you receive your annual license, which is taking months to secure. (I have clients who applied for their annual license in April of this year and they still have no annual license.) A great example is West Hollywood, which for new license applicants for retail–by the City’s own admission–won’t even be done with its retailer selection process until the end of November. This affords successful applicants very little time, if any, to try and get temporary licenses from the BCC to be able to lock down their provisional licenses thereafter. And if you’re looking at Phase 3 general public licensing in the City of Los Angeles, you may not even get the chance to apply for local approval until 2019. This means you will miss the state temporary licensing deadline, and therefore the ability to get a provisional license altogether.

Indeed, many stakeholders will find that if they cannot get their city or county to give them some form of local approval by or before December 31 (or by December 1 if you’re applying to CDFA) so they can go get their temporary and eventually provisional license(s), they will be sitting on unusable businesses, likely paying rent, until they get their annual license from regulators. To us, this is nothing new as regulators constantly pump the brakes on licensing logistics across the board in order to make the situation more manageable for them. To that end, we’ll also likely see in the future prohibitions on being able to relocate your business while in the annual licensing process, prohibitions on changes of ownership while you’re in the annual licensing process, and prohibitions on changing your business plan or operational lay out in any way until you receive your annual license.

The foregoing all goes to show that regulators can and do shuffle the deck on licensing timelines all the time. Stakeholders have to have their heads on a swivel to survive, and failing to take into account how these licensing deadlines and expectations shift is a massive mistake that will inevitably foreclose the ability to participate for lots of would-be licensees. So, prepare accordingly!

Hemp and Hemp-CBD in California is wild right now.

As readers of this blog know, California is on its way to developing robust laws governing the sale (and all other aspects) of cannabis and cannabis products. So, it’s somewhat surprising that California’s laws concerning the sale of industrial hemp and hemp-derived cannabidiol (“hemp-CBD”), to the extent they even exist, are all over the map. And in some cases, selling industrial hemp or hemp-CBD is apparently unlawful, in spite of the fact that it may contain just trace amounts of THC found in California-legal cannabis products and despite the fact that that hemp-CBD is coming from Farm Bill-sanctioned sources.

Our California cannabis lawyers often get asked what the requirements are for selling industrial hemp or hemp-CBD in California. This post tries to explain California’s convoluted regulation of industrial hemp and hemp-CBD.

As a baseline, “Industrial Hemp” is legally defined as parts of the Cannabis sativa L. plant, or derivatives of that plant, containing less than .3% THC. The Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”) specifically defines “Cannabis” to exclude Industrial Hemp. The Health and Safety Code echoes this sentiment, and also states that the California Department of Food and Agriculture (“DFA”) exclusively regulates industrial hemp.

The Food and Agriculture Code, which the DFA enforces and interprets, includes some provisions regarding industrial hemp—but notably that Code contains nothing concerning its sale. We have been monitoring (here and here) California’s SB-1409, which modifies these parts of the Food and Agriculture Code, but again there are no requirements concerning actual sales (for what it’s worth, you can also read more about the expiration of the federal 2014 Farm Bill here). Even the DFA has recognized that “California law does not currently provide any requirements for the manufacturing, processing, or selling of non-food industrial hemp or hemp products.”

The message here then is that there are no regulations governing the sale of industrial hemp or hemp-derived CBD. There are, however, some other pretty important requirements at the legislative, policy, and even local levels that could affect hemp and hemp-CBD businesses across the state:

  • Legislation: California recently passed legislation banning licensed cannabis or alcoholic beverage companies from selling alcoholic beverages that contain cannabis, or cannabinoids derived from industrial hemp. Stay tuned for in-depth coverage of that in another post.
  • Policy: Over the summer, the California Department of Public Health’s Food and Drug Branch (“FDB”) drafted a FAQ taking the position that “the use of industrial hemp as the source of CBD to be added to food products is prohibited.” We don’t yet know what FDB’s enforcement measures will look like, if anything, but it’s pretty clear what its position is on hemp-CBD in food and drinks.
  • Local Level: This is where things get dicey. As anyone familiar with cannabis law knows, every one of the hundreds of cities and counties in California has different laws on cannabis licensing. One common requirement for any business in most municipalities is to have a form of business license—and this may be an area in which local jurisdictions create specific industrial hemp and hemp-CBD requirements. For example, the Department of Cannabis Regulation (“DCR”) within the City of Los Angeles recently published an “attestation” form that hemp business owners must sign under penalty of perjury, certifying that their hemp-CBD or industrial hemp products meet the definitions of the Health and Safety Code, and that those products are not “cannabis”. This is now apparently a requirement for Los Angeles hemp businesses that wish to obtain local business licenses, and it looks like that’s the only hemp/hemp-CBD “regulation” that the City of Los Angeles currently has on the books.

Overall, the bottom line is that we still lack the critical legal infrastructure for industrial hemp and hemp-CBD in California. We don’t know how the state or localities will enforce the FDB FAQ. We don’t know how the state will regulate hemp-CBD sales. We don’t know how the locals will regulate hemp-CBD businesses, if at all.

So, stay tuned, as we’ll be sure to write about new California hemp and hemp-CBD laws as they come.

On Friday, the three California agencies charged with issuing and enforcing rules for cannabis business licensees issued a stack of proposed changes to the final rules it had previously proposed in July. Many of the most dramatic changes came from the BCC and will likely motivate more than a few comments during the rulemaking process (deadline for comments on these proposed changes is Nov. 5, FYI).

The Department of Food and Agriculture, which administers the cannabis cultivation licensing program, issued its own set of proposed rule changes that, while not as jaw-dropping as some of the BCC’s proposed changes, are still noteworthy.

Most importantly, the rules for cultivation plans just got a lot more onerous for licensees that plan to “stack” small licenses for use on one premises. Recall California’s controversial decision last year not to cap the total cultivation acreage per licensee to one acre, and the resulting benefit to mega farms that were then free to “stack” multiple smaller licenses to get a larger total cultivation area that they would otherwise be prohibited from getting due to the one-per-licensee limit of 1-acre outdoor licenses and the prohibition on Type-5 “large” cultivation licenses until 2023. A key element to that loophole’s benefit to large growers was AB 133, which clarified that a licensee could maintain one big “premises” upon which to operate all of its licenses, and was not required to make each license have its own “separate and distinct” premises. This would allow for economies of scale, as it would be arbitrary and inefficient to require every single chunk of canopy on a parcel to have its own fencing, security, etc.

Cue the DFA, which through its new proposed rule modifications, now says there are certain categories of a licensed premises that categorically cannot be shared among licenses owned by a single licensee.  Permissible shared areas must be contiguous, and they are limited to areas designated for pesticide storage, composting, cannabis waste storage, and harvested cannabis storage, in addition to traditional common areas such as hallways, bathroom, and break rooms. However, areas that cannot be shared among multiple licenses held by one licensee include: (i) areas outside of the canopy where only immature plants are grown (i.e. nursery-type areas); (ii) processing or packaging areas (i.e. “drying, curing, grading, trimming, rolling, storing, packaging, and labeling”); and (iii) areas designated for physically segregating cannabis during an administrative hold pending resolution of a notice of violation from the state. While it is not clear exactly how the DFA would interpret this proposed new rule language in practice, a likely result could be that cultivation licensees holding multiple licenses (either of the same type or a variety) for use on a single premises would no longer be able to take advantage of the same economies of scale for processing and packaging or for cultivation of immature plants, and that each separate license would require its own dedicated room for each such activity. We also know that the BCC requires separate walls and sealed doors when it calls for premises to be separate. Time will tell how this rule will look in a few months, but as it stands now it could harm companies with limited access to space and resources for building additional rooms, and would certainly add to costs of compliance.

Other notable small changes that could add to licensing costs include requirements that each license applicant must now agree to put one supervisor and one employee through a standard 30-hour Cal-OSHA course for workplace safety; and beginning in 2020, all cannabis and nonmanufactured cannabis products packaged or labeled by a licensed cultivator must come in child-resistant packaging, which conforms to the requirements of BCC and DPH for packing of other cannabis products.

Finally, one proposed change in the BCC rules that may end up having more of an effect on cultivators is that all structures included as part of the licensed premises must now be permanently affixed to the land for an indefinite period of time. Off-the-grid type operations are notorious for using RVs, mobile homes, lightweight moveable greenhouses, etc., so this rule change might also serve to prevent what would otherwise be a quick fix to the first issue identified above.

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.