Our Oregon marijuana processor clients often approach us with requests to draft agreements that will allow third-parties to process cannabis in the client’s licensed premises. Typically, the processor is not operating at capacity and would like to supplement income by charging fees to keep the premises open around the clock. Previously, we have explained that this arrangement only really works if the third-party is also a licensed OLCC processor, pursuant to Oregon’s new alternating proprietor rules (OAR 845-025-3255). However, we are most often approached with proposals to have non-licensee third-parties enter the kitchen and physically create cannabis products that will be owned and sold by the licensee.
Here is a more concrete example: Kelly’s Kitchen is an Oregon Liquor Control Commission (OLCC) licensed processor. Kelly meets Cindy, who has developed a recipe, labels, and packaging. Cindy doesn’t want to go through the OLCC application process, she just wants to make her Bud Brownies. Kelly invites Cindy to personally make her brownies on Kelly’s property, and Kelly agrees pay Cindy for each unit sold. The prevalence of these arrangements suggests that the industry has been treating this as a grey area. However, we recently reached out to the OLCC and received confirmation that this is black and white: The OLCC will view Cindy as illegally processing cannabis without a license, even if Kelly always retains ownership of the cannabis and resulting product. This arrangement can also put Kelly’s license at risk. No arrangement that allows non-licensees to personally process cannabis within a licensed premises is allowed under the rules.
The OLCC’s view should not come as a surprise when you consider the significant restrictions in the new alternating proprietor rule that allows multiple OLCC licensed processors to share kitchen space:
- The kitchen must have a pre-approved schedule posted on its front door showing when each processor will be using the kitchen.
- The kitchen must have a separate secure area for each processor to store its cannabis products.
- Any concentrates produced under an alternating proprietor arrangement can only be used within that processor’s edibles or topicals.
In effect, Cindy and Kelly are trying to bypass these restrictions, and the processor licensing regime as a whole.
The only viable alternative to alternating licensed proprietors appears to be a standard intellectual property licensing agreement, whereby Cindy would license her recipe, branding, and packaging to Kelly as co-packer. Kelly or her employees then process the brownies and sell them retailers or wholesalers without Cindy’s involvement. Cindy will likely expect to be paid based on the number of brownies that Kelly manages to sell. However, anyone considering this arrangement needs to carefully look at the OLCC’s financial interest disclosure requirements.
The definition of financial interest is fairly broad and includes anyone “having an interest in the [licensed] business such that the performance of the business causes, or is capable of causing, [an individual or entity] to benefit or suffer financially.” The OLCC will view Cindy as a financial interest holder because her compensation depends on Kelly’s success in moving the product. This isn’t the end of the world, but it does mean that Kelly must submit a Change in Financial Interest form and receive approval from the OLCC before Kelly begins making Cindy’s brownies. All this means is that Cindy will likely need to be fingerprinted and pass a background check.
We expect that we will continue to be approached by clients that want to invite non-licensees into their licensed premises to make products, but now we can confidently say that this common industry practice violates OLCC rules. Be warned!