california cannabis licensing

On July 1, Governor Newsom signed into law AB 97 and SB 97, which combined, extend the life and power of provisional cannabis licenses, giving much needed relief to licensees sitting on temporary licenses that were about to expire and/or that are awaiting their provisional licenses to issue in the face of massive red tape at the state licensing level. These two bills also support increased and more aggressive enforcement against illegal operators and against non-licensees that support or assist illegal activity that violates the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”).

Here are the major highlights (in my opinion) from these bills:

More enforcement options.  Remember when the Bureau of Cannabis Control (“BCC”) tried to go after Weedmaps for its alleged illegal advertising assistance to non-licensees? Well, the BCC will now have a blank check to pursue unlicensed companies that help people violate MAUCRSA. Specifically, the new bills state that:

“A licensing authority may issue a citation to a licensee or unlicensed person for any act or omission that violates or has violated any provision of [MAUCRSA or its regulations].” In addition,  regulators may “assess an administrative fine (per citation) not to exceed . . . thirty thousand dollars ($30,000) per violation by an unlicensed person . . . In assessing a fine, a licensing authority shall give due consideration to the appropriateness of the amount of the fine with respect to factors the licensing authority determines to be relevant, including the following:
(1) The gravity of the violation by the licensee or person.
(2) The good faith of the licensee or person.
(3) The history of previous violations.
(b) [These] sanctions . . . shall be separate from, and in addition to, all other administrative, civil, or criminal remedies.”
Whether this bill was a direct result of the BCC’s enforcement efforts against Weedmaps is anyone’s guess. In any event, unlicensed aiders and abettors beware.

Licensing simplification.  You no longer need to have or have held a temporary license to get a provisional license. You now only need to have filed a completed annual license application with the state and also demonstrate proof of California Environmental Quality Act (CEQA) compliance (which is painstaking and time-consuming for most cultivation licensees) and local authorization from your city or county (or demonstrate efforts to show that such approvals are underway) and you’ll be qualified to receive a provisional license.

Provisional license renewals.  Provisional licenses will still be good for up to a year, but they can now be renewed for additional year-long terms until January 1, 2022.

Organic cannabis certification.  We’re getting an organic cannabis certification program (similar to organic certification for products that already exists under California and federal law) by 2021 for cultivated and manufactured products, and you basically cannot label your products as “organic” until that program is up and running (since you can’t get certified organic status for your cannabis products from the Feds).

Social equity boost.  The state added more meat on the bones to its own social equity technical assistance program for participating local jurisdictions, which is much needed as cities have struggled significantly to get social equity sustainably off the ground.

Overall, the biggest boon from these bills is probably the fact that provisionals are the new temporary license, and that will be the case until 2022. This will likely lead to longer issuance times for annuals across all state agencies, but it will allow more people to enter the licensed system without having to wait months and months for any kind of licensure. And in order to get that provisional, you’ll still need to comply with CEQA, secure local authorization, and get your ducks in a row on some fairly involved annual license applications that include real property information and the submission of structured standard operating procedures. So, prepare now accordingly!

fda cbd
People are distrustful.

In May 2019, Gallup pollsters asked Americans about their trust in federal agencies. The Food and Drug Administration (FDA) ranked near the bottom, beating only the Veterans Administration (VA) and the Environmental Protection Agency (EPA). Only 44% of respondents rated the FDA as doing an excellent or good job. In turn, 33% viewed the FDA’s performance as “fair” and 22% ranking the FDA as “poor.” That paled in comparison to the US Postal Service (74% good/excellent) and fell below even the Internal Revenue Service (IRS) (50% good/excellent). That’s not great for the FDA, considering that its purpose is to protect the public, not collect taxes.

While we’re on the subject of Gallup Polls, in June Gallup found that 4 in 10 respondents believed that CBD should be sold over the counter.  Only 21% of respondents believed that CBD oil should be sold with a prescription and a mere 2% believed it should not be available at all. In addition, 36% of respondents were not familiar with CBD.

It’s no secret that CBD presents a unique challenge for the FDA because the compound itself is about as popular as the agency. To compare, 44% of Americans think the FDA is doing a good job and 39% of Americans believe that CBD should be available without a prescription. If the FDA and CBD oil were politicians, they’d be neck and neck. That begs the question, do Americans trust the FDA enough to evaluate CBD?

Recently, the FDA issued a new statement on CBD: FDA is Committed to Sound, Science-Based Policy on CBD. The opening paragraph of the statement is reassuring:

Science forms the basis for decisions at the [FDA] and is paramount when it comes to making decisions that will impact the health and safety of the American public. We apply this rigorous, science-based approach to matters large and small that come before the Agency — including with respect to products containing cannabis or cannabis-derived compounds, including cannabidiol (CBD).

That sounds great! Who doesn’t want a “sound, science-based policy on CBD?” Though evidence shows that CBD certainly has some serious benefits, we really do not know enough about the compound at this point. I think the FDA’s statement sums this up nicely:

While we recognize the potential benefits of CBD, questions remain regarding its safety. During our review of the marketing application for Epidiolex, we identified certain safety risks, including the potential for liver injury. Furthermore, unsubstantiated therapeutic claims — such as claims that CBD products can treat serious diseases — can lead consumers to put off getting important medical care.

Again, it’s pretty hard to argue that these items shouldn’t be investigated. The problem is that people may not trust the FDA with something as popular as public access to CBD oil.

How did the FDA lose the public’s trust? In 2013, the Journal of Law, Medicine, and Ethics published an article titled Institutional Corruption of Pharmaceuticals and the Myth of Safe and Effective Drugs which provides some potential answers. The article finds that the “pharmaceutical industry has corrupted the practice of medicine through its influence over what drugs are developed, how they are tested, and how medical knowledge is created.” The FDA was created to protect the public from unsafe food and drugs. However, the high cost of investigating and approving drugs has turned “drug companies into the FDA’s prime clients, deepening the regulatory and cultural capture of the agency.” The article determines that the FDA has put the needs of the medical industry over the needs of individuals which has resulted in an increase in the overall number of drugs, some of which are not effective or needed. In the last few years, the opioid crisis has made the situation even more pressing. The Center for Disease Control reported that “drug overdoses killed 63,632 Americans in 2016,” and “nearly two-thirds of these deaths (66%) involved a prescription or illicit opioid.”

The lack of public trust in the FDA helps inform the current problem it faces with CBD oil. On one hand, the FDA must ensure that products are safe for the public. On the other hand, it also needs to keep politicians (including Senators Ron Wyden and Mitch McConnell) and the public happy by allowing broad access to CBD oil. We’ll continue to monitor how the FDA regulates this tough issue.

RICO california litigationIn what appears to be a first, a veteran commercial cannabis cultivator in Santa Barbara County has sued another cannabis cultivator for, among many other claims, violating the federal Racketeer Influenced and Corrupt Organizations Act (RICO). According to the complaint, the defendants defrauded the plaintiff as one of many business partners, investors, and otherwise unsophisticated persons and entities targeted in a fraudulent business scheme to wrongfully acquire financial and real estate assets. Two of the plaintiffs’ 25 causes of action cite RICO violations as grounds for relief.

As a refresher, RICO is a federal statute with both criminal and civil aspects, allowing private parties to sue for relief against enterprises engaged in federally illegal “racketeering” activity, which includes among its long list of enumerated crimes things like bribery, counterfeiting, extortion, numerous types of fraud, and, notably, “dealing in a controlled substance.” It is because of the latter inclusion that RICO has made a lot of recent news as a (mostly unsuccessful) means by which neighboring property owners have sued to try and shut down cannabis cultivation operations, even when they are legitimately operating pursuant to state and local law. The contradiction stems from the fact that cannabis remains illegal in any form under federal law.

The current case is unique because a California cannabis cultivator is suing another cannabis cultivator for violating RICO as a criminal enterprise. But what makes this case interesting is that it’s not because the defendants are cultivating cannabis; rather, it’s because, according to the complaint, the defendants are allegedly conducting a fraudulent criminal enterprise that happens to also be based on the business of cannabis cultivation. In other words, the legal question presented is not whether a person that’s engaged in “racketeering activity” (i.e. cannabis cultivation) can sue another for engaging in the same illegal behavior, but instead whether one person can sue under RICO for relief against separate racketeering activity despite the fact that both persons are already engaged in another kind of racketeering activity that is not at issue.

An even simpler distillation of the issue would be whether state-legal commercial cannabis businesses are excluded from the protections of federal law simply because they are themselves engaged in federally illegal activity—even though the federal Department of Justice has in recent years deprioritized enforcement against state-legal cannabis businesses. We know that the DOJ has taken the position that cannabis businesses are not entitled to bankruptcy protection, although that position has found its limits in actions involving businesses ancillary to cannabis such as landlords.

But here, the plaintiffs have brought serious fraud allegations that do not appear to depend on the fact that anyone was engaged in cannabis activity; rather, the alleged RICO violations seem to depend specifically upon mail fraud and wire fraud—both of which are enumerated types of “racketeering activity” under the statute—as part of the means by which the enterprise allegedly furthered its purported ultimate goal of “dup[ing] and tak[ing] advantage of unsuspecting affiliates and investors, before ultimately cashing out to leave its victims to sift through the wreckage.” It just so happens that both sides of the lawsuit were also engaged in federally illegal cannabis activity. It is not clear whether a plaintiff’s own racketeering activity would preclude a claim for a different type of racketeering activity under a civil RICO suit where an unclean hands-type defense is raised, but courts have generally found such arguments unavailing except in limited circumstances where the same activity at issue in the lawsuit is alleged by both sides.

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

washington cannabis insurance In a prior post I discussed some general insurance issues for cannabis business owners to consider. Today we’ll take a deep dive into Washington State insurance for cannabis businesses. As is the case with most emerging industries, the pace of marijuana business continues to outstrip the development of ancillary but crucial services (see California Approves First Commercial Cannabis Landlord Insurance Coverage from only a year ago). Insurance is an important component for companies that have significant risks and either cannot afford to self-insure or are not permitted to self-insure.

For those who enjoy a bit of historical grounding, the first business insurance policies in the U.S. were written during the Industrial Revolution (which started in the early- to mid-1800s). Insurance was initially state-specific and remained so for the next hundred years. After the U.S. Supreme Court ruled in 1944 that insurance should be a federal affair, Congress quickly returned control to the individual states in 1945 though the McCarran-Ferguson Act, and states continue to regulate insurance within their boundaries today.

Washington has been on the forefront of marijuana legalization among the states, in 1999 becoming the 4th state to legalize medical marijuana, and in 2012 becoming the 2nd state to legalize recreational marijuana. Washington’s primary legislation mandating insurance for the cannabis industry was implemented in 2013. There have been several iterations and refinements to those requirements since 2013. The insurance required today looks like this (click here for the entire statute):

  • Marijuana licensees must obtain insurance coverage. “Licensees” refers to all cannabis retail stores, producers, and processors. This specific insurance legislation does not discuss ancillary businesses like landlords who rent to cannabis businesses or other companies who provide services to the cannabis industry, though those business owners should consider insurance specific to their particular business risks. Landlords with a mortgage will often be required to procure insurance for their real estate by their bank.
  • The type of required insurance is called commercial general liability coverage or umbrella coverage. This insurance covers both bodily injury and property damage “caused by any act, omission, or negligence of the licensee or its officers, agents, representatives, assigns, or servants.” In plain speak, this means that the business and its affiliated people are covered for any harm caused to any person or property. That is the broadest interpretation of the perfect insurance world (that does not exist). In reality those insurance policies are full of holes (insurance riders) where the insurance company can and will deny coverage to the company. Do not take what is on the front page of the policy at face value. Someone with an extreme attention to detail and fortitude for digesting and processing lengthy mind-numbing sentences written in justified, 8-point text for dozens of pages on end (basically every lawyer’s job description) will need to read the policy to understand what events and circumstances are covered by the policy.
  • Your coverage limits must be at least one million dollars ($1,000,000). Often insurance coverage is described as $X per occurrence and $Y in aggregate. X refers to the amount of coverage the insurance company will provide based on a single claim, and Y refers to the coverage for the policy in aggregate over the policy term, usually a 12-month period. Washington requires Y to be at least $1,000,000. The higher the coverage, the higher your premiums. If your policy contains a deductible, that is the amount you must pay toward making your business whole after a loss (a “covered event”) before the insurance company will start paying its portion of the loss.
  • Marijuana licensees must provide evidence (a certificate of insurance) to the WSLCB. The Washington State Liquor and Cannabis Board – sometimes just called the LCB – requires proof of insurance coverage. Cannabis businesses risk having their license revoked if they do not provide this proof of coverage.
  • The certificate of insurance must show WA, its employees, agents, and volunteers as additional insured. “Additional insured” is a term of art in the insurance industry, and if you tell your insurance agent that you need to add some additional insureds to your policy, that is a relatively straightforward and quick process. You should not need to give your insurer any additional information beyond the basic names and notice addresses for your additional insureds. The policy also needs to be primary over any other valid insurance policies. This is so that WA can be in charge of any future payouts and will not have to wrestle with more than one insurance company, potentially under a policy under which the state is not listed as an additional insured.
  • The insurance carrier has to be authorized to do business in WA and have a rating of A – Class VII (that’s a 7) or better in the most recently published edition of Best’s Reports (AM Best’s Insurance Reports). If you really want to use a specific insurance company that does not fit that criteria, there are additional criteria the insurance company can fit into (see 15RCW and 284-15 WAC), but it should be the insurance company’s job to tell you whether they fit the criteria. Do not try to conduct that analysis yourself.

Those are the bare insurance requirements for your Washington marijuana business. However, I need to provide a caveat to help you understand that the bare legal requirements are probably not enough to cover your business interests. The stated purpose of your required insurance (from the Washington Insurance Commissioner’s and the legislature’s point of view) is not to protect your business per se but to protect consumers from your business and to ensure you remain solvent enough to pay your liabilities if you fail to do something (omissions) you should have done or you do something you should not have done (commissions). There are many other types of insurance available (e.g. D&O insurance, employment practices insurance, worker’s compensation insurance, products completed liability insurance) that you should consider, but they are topics for another day.

Procuring and maintaining insurance is something that most business owners want to delegate to someone else, and they can, as long as that other person understands the importance of securing and keeping the policy in place without letting it lapse. If you already have insurance, you may want your attorney or trusted right-hand person to prepare a summary matrix of your coverage so you can see at a glance where you are covered and where you may have gaps you need to fill. This should be done at least yearly and well in advance of your annual insurance renewal.

cannabis trademark scandalous immoralIn alignment with its 2017 decision in the Matal v. Tam case which ruled that the disparagement clause of the Lanham Act violated the First Amendment’s free speech clause, the Supreme Court ruled last week that free speech protections also extend to “immoral or scandalous” trademarks. In Iancu v. Brunetti, SCOTUS ruled that the United States Patent and Trademark Office violated a trademark applicant’s free speech rights when it denied his application to protect the mark FUCT for apparel.

Section 2(a) of the Trademark Act, 15 U.S.C. §1052(a), states that no trademark by which the goods of the applicant may be distinguished from the goods of others shall be refused registration on the principal register on account of its nature unless it:

“Consists of or comprises immoral, deceptive, or scandalous matter; or matter which may disparage or falsely suggest a connection with persons, living or dead, institutions, beliefs, or national symbols, or bring them into contempt, or disrepute; or a geographical indication which, when used on or in connection with wines or spirits, identifies a place other than the origin of the goods and is first used on or in connection with wines or spirits by the applicant on or after one year after the date on which the WTO Agreement (as defined in section 3501(9) of title 19) enters into force with respect to the United States.”

Interpretation of these prohibitions is both subjective and fluid, and could vary depending on the examining attorney assigned to any given file. This left applicants (and attorneys) with a good deal of uncertainty as to what constituted “immoral” or “scandalous” matter. In the Brunetti decision, the Court asserted that the “immoral or scandalous” bar, similar to the “disparagement” bar addressed in the Tam case, discriminates on the basis of viewpoint and “collides with this Court’s First Amendment doctrine.” The Court goes on to explain:

Expressive material is “immoral” when it is “inconsistent with rectitude, purity, or good morals”; “wicked”; or “vicious.” So the Lanham Act permits registration of marks that champion society’s sense of rectitude and morality, but not marks that denigrate those concepts. And material is “scandalous” when it “giv[es] offense to the conscience or moral feelings”; “excite[s] reprobation”; or “call[s] out condemnation.” So the Lanham Act allows registration of marks when their messages accord with, but not when their messages defy, society’s sense of decency or propriety.”

The statute therefor distinguishes between two opposed sets of ideas: “those aligned with conventional moral standards and those hostile to them.” The USPTO has refused to register marks that indicate “immoral” or “scandalous” views about things such as drug use, but has “approved registrations of marks expressing more accepted views on the same topics.”

Setting aside the known hurdles to obtaining U.S. federal trademark protection for marks used on goods or services that violate federal law, it is possible, under the Lanham Act, that a mark intended for use on perfectly legal goods or services that espouses a viewpoint on cannabis that strikes the examining attorney as “immoral” or “scandalous” could be refused registration on that basis. SCOTUS’s decision in the Brunetti case will now prevent that from happening, and we see this decision as win for the First Amendment.

arizona hempThe Agriculture Improvement Act of 2018 (“2018 Farm Bill”) legalized hemp by removing the crop and its derivatives from the definition of marijuana under the Controlled Substances Act (“CSA”) and by providing a detailed framework for the cultivation of hemp. The 2018 Farm Bill gives the US Department of Agriculture (“USDA”) regulatory authority over hemp cultivation at the federal level. In turn, states have the option to maintain primary regulatory authority over the crop cultivated within their borders by submitting a plan to the USDA. This federal and state interplay has resulted in many legislative and regulatory changes at the state level. Indeed, most states have introduced (and adopted) bills that would authorize the commercial production of hemp within their borders. A smaller but growing number of states also regulate the sale of products derived from hemp.

In light of these legislative changes, we are presenting a 50-state series analyzing how each jurisdiction treats hemp-derived cannabidiol (“Hemp-CBD”). Each Sunday we will summarize a new state in alphabetical order. So far, we have covered Alabama and Alaska. This week we turn to Arizona.

The Arizona Department of Agriculture (“AZDA”) oversees the state’s hemp program.  The hemp program began in May 2018 when Senate Bill 108 was signed into law, which opened up hemp processing in the summer of 2019. It took the state a year so that it could develop the regulations and licensing program. As of now, the state’s opening up for license applications. Arizona’s hemp laws and regulations can be found here and here respectively.

Under Arizona law, growers (and nurseries), processors, harvesters, and transporters are required to obtain AZDA licenses, which AZDA publishes applications for here. The regulations also require researchers to obtain licensure. Notably, the AZDA doesn’t regulate retailers, which I’ll discuss some more below.  Like in any other state with regulated hemp, there are fees, compliance rules, and penalties for non-compliance. But the level of regulation is not even close to what we see for cannabis/marijuana in many other states.

It’s important to consider that the 2018 Farm Bill hasn’t yet been fully implemented, meaning for the time being, the 2014 Farm Bill is still in play. Even though the 2014 Farm Bill doesn’t expressly allow for commercial activity, a number of states have broadly interpreted it to permit commercial activity. Arizona is allowing commercial activity for licensees of the AZDA—in addition to allowing research as noted above—but it doesn’t appear to have taken the position that commercial sales are authorized under the 2014 Farm Bill like other states. What this means is that under federal law, and until the 2018 Farm Bill is fully implemented, the state of the laws is murky.

One of the areas in which the law is murky is the sale of hemp products. There is currently no retail license type, and the hemp regulations state that it’s prohibited to “Offer for sale, trade, transfer possession of, gift, or otherwise relinquish possession of industrial hemp plants, plant parts, or hemp seed that is capable of germination to an unauthorized person”. However, a different section of the regulations states that processors can “sell, distribute, transfer, or gift any products processed from harvested hemp that are not” unauthorized. Read together, these sections only seem to bar the resale of plant parts and not all “Hemp products”, which are defined as “all products made from industrial hemp, including cloth, cordage, fiber, fuel, grain, paint, paper, construction materials, plastics and by-products derived from sterile hemp seed or hemp seed oil.  Hemp products excludes any product made to be ingested except food made from sterile hemp seed or hemp seed oil.” While there aren’t specific retail license types, the state may be okay with limited sales of hemp products.

In terms of what those hemp products are, the AZDA itself doesn’t regulate the production of products made from hemp according to the following statement from these FAQs on its website:

Q: Will I be able to manufacture “CBD” products from industrial hemp?
A: Yes, however the Program oversight only extends from the growth and cultivation of industrial hemp, up to the point of processing. For licensed processors, the Program will focus on ensuring they receive raw material that is below 0.3% THC. If there are food handling laws, laws and regulations under the oversight of the Food and Drug Administration, or other laws related to industrial hemp of another agency, then those issues are out of the Department’s scope of regulatory oversight.

In other words, the AZDA doesn’t have oversight over certain products, but that’s not to say that other authorities don’t.

Another important nuance of the regulations is that they state that “No unauthorized person shall . . . transport, import or process industrial hemp”. It’s not yet clear what the effect of this provision will be on interstate shipments of hemp or hemp products. The 2018 Farm Bill states that individual states can’t block shipments through their borders, but (a) that law hasn’t taken effect yet, and (b) Arizona is free to stop shipments of out-of-state hemp into Arizona. So in the end, the state may just be closing off its borders to out-of-state products.

There are not a great deal of restrictions on personal use. The AZDA notes in the FAQ that people aren’t allowed to grow hemp for personal use. When it comes to marijuana, the state has a medical marijuana program which is subject to much different regulations.

Arizona’s hemp laws are still in their infancy. That’s all likely to change as the federal government implements the 2018 Farm Bill and the FDA (hopefully) comes out with CBD regulations. Stay tuned to the Canna Law Blog for any further developments with Arizona CBD and hemp laws.

joe biden marijuana cannabisEvery Saturday, at least for a while, we plan to run a series of blog posts that take a close look at each of the Democratic Party candidates for President in 2020. We will examine each candidate’s historic approach to marijuana law and policy, and also canvas each politician’s current stances on marijuana.

Today, we start with Joe Biden, the former vice president and U.S. senator from Delaware. As of today’s post, Biden may still be the current party front-runner, and is certainly near the top of the heap.

Overall Grade: D

Stance on marijuana: Biden wants to decriminalize marijuana use and automatically expunge prior criminal records showing marijuana possession convictions. He is, however, far from an advocate for cannabis legalization. Biden’s campaign website nowhere even addresses his beliefs on cannabis. Instead, it makes a vague statement about criminal justice reform that nowhere mentions the War on Drugs or marijuana:

We need to reform the criminal justice system to prioritize prevention, eliminate racial disparities at every stage, get rid of sentencing practices that don’t fit the crime, and help make sure formerly incarcerated individuals who have served their sentences are able to fully participate in our democracy and economy….”

His failure to mention the War on Drugs or marijuana on his website despite using “criminal justice reform” as a policy point is presumably because he zealously supported the War on Drugs, as described below. If Biden truly believes “Nobody should be in jail for smoking marijuana,” as he told voters this past March, he owes an explanation for why he previously supported the arrest and incarceration of countless Americans for weed.

History with marijuana legislation: Biden’s failure to mention marijuana on his website is probably intentional. Over the course of his political career, Biden has expressed his disdain for marijuana, with both his rhetoric and his legislation. The former vice president is described as an architect of the War on Drugs by Michael Collins, the director of national affairs at Drug Policy Action. As a senator, Biden was largely responsible for creating the “drug czar” in 1982, a cabinet position that would go on to form the Office of National Drug Control Policy and increase enforcement of anti-drug laws. Biden consistently pushed for stepping up enforcement of draconian drug policies, even criticizing then-President George H.W. Bush for being too soft on drugs.

As vice president, Biden’s position on marijuana seemed more subdued as major drug policy changes were enacted under the Obama administration, including the Cole memo which made it easier for states to legalize marijuana. However, the Obama administration deflected all attempts to reschedule marijuana, leaving it classified as a Schedule I drug, the same schedule as heroin.

As the Democratic Party’s platform increasingly becomes pro-legalization, Biden continues to oppose the legalization of marijuana, even for medical use:

We have not devoted nearly enough science or time to deal with the pain management and chronic pain management that exists. There’s got to be a better answer than marijuana. There’s got to be a better answer than that. There’s got to be a better way for a humane society to figure out how to deal with that problem.”

Biden gets one thing right: we do need more research surrounding pain management. However, his refusal to acknowledge the viability of cannabis as a possible treatment exposes his basic misunderstanding of both marijuana and the drugs currently used to manage pain. Though extensive research is necessary to determine the efficacy of marijuana for specific maladies, there is little doubt that it has tremendous potential for reducing the U.S.’s ongoing opioid epidemic, among other things. Considering the existing scientific evidence, Biden’s perspective that marijuana is somehow “inhumane,” and thus not to even be considered as a treatment for pain, is simply illogical. His opinion stems more from prejudice against cannabis (and the people who use it) than from science.

Conclusion: Biden receives a “D” grade for his views on cannabis because he both fails to recognize or acknowledge its medicinal uses and because he is the only prominent Democratic Party presidential candidate who does not support cannabis legalization. The only thing Biden has going for him is a stated desire for criminal justice reform, which saves him from a failing grade.

california cannabis contractObviously, work in the cannabis industry for attorneys is way more than just state license acquisition. In fact, after a few years and with the exception of competitive licensing regimes, state licensing slows down and is usually taken in-house by cannabis companies that formulate compliance teams. In turn, as time goes on, a significant amount of the legal work in the industry turns on transactions between licensees. California has certainly been no different (though we’re dragging in the licensing department, mostly because of local control issues). Still, existing licensees are having no trouble conducting transactions with each other and with third parties for goods and services as they race to gain market share and build their brands.

As California’s regulated cannabis industry continues to emerge, licensee transactions are becoming more sophisticated and diverse. At the same time, because of the newness of California’s regulated market (combined with regulators’ continuing evolution of regulatory interpretations), certain transactions are posing larger and riskier issues for licensees. This post is dedicated to the top five most dangerous licensee-to-licensee contracts in California:

1.      Slotting Fees.

In recent months, our California cannabis business attorneys have seen a good amount of “pay-to-stay” and slotting fee agreements between cannabis cultivators, manufacturers, distributors, and retailers for dedicated, prime-time shelf space. In commodities, especially saturated ones, face time with consumers isn’t great and margins can be really poor and the competition is vast. In California, only cannabis retailers can sell to the public, so it’s hugely important for wholesale and distributor licensees to have good placement on shelf space in dispensaries and on the retailers’ online menus. The slotting fee agreement essentially amounts to the lump sum fee the supplier pays to the retailer to reserve their sacred, strategic shelf space. The pay-to-stay agreement (which can be similar to the slotting fee) typically takes things a step further where it’s instituted after the initial slot and addresses issues for existing products like marketing, promotion, inventory stocking, failure fees, and paying extra to ensure that your competitors don’t get any valuable shelf space near you or at all. The question, though, is whether such agreements are kosher in California in the first place given that our state cannabis laws generally prohibit anti-competitive practices by licensees. The answer on validity under these laws is that “it depends.” Analyses around anti-competitiveness and slotting fee contracts is highly factually intensive, and California cannabis regulators don’t seem aware that this practice even exists. While these contracts can give great security to licensees, they can also be used to block and strangle out other wholesales that may not be as capitalized or strategic in the marketplace. For more on slotting fee agreements, see here.

2.     Distribution Agreements. 

Even though the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”stripped distributors of massive amounts of power (since, unlike alcohol, cannabis distributors don’t have to take title to the products they distribute), they are still 100% necessary in the California cannabis marketplace because they are the only license type that can transport marijuana products and they’re also the only licensees that can coordinate the required third-party testing of licensees’ products. Plus, prior to any retail sale, licensees must ensure that a distributor undertakes quality assurance packaging and labeling reviews of their products, and they’re almost exclusively in charge of collection and remittance of the cultivation and excise taxes to the California Department of Tax and Fee Administration. Since wholesale licensees have to go through distributors to get to market, distribution agreements are necessary. If your distributors is just your freight middle man, these agreements are not that potent and risk-laden. However, if you’re using your distributor similar to an alcohol distributor (i.e., a brand house), you’ll need to ensure that your distribution agreement is way more aggressive regarding term, circumvention to retailers, purchase amounts, timing, acceptance and rejection of products, testing issues and recalls, regulatory compliance and accountability, and representations and warranties regarding the products at issue. Specifically in California, our cannabis business lawyers have seen far too many one-sided distribution agreements that aren’t properly drafted, aren’t compliant with MAUCRSA, and that pay no attention to detail.

3.     Real Property Leases. 

The reason why real property leases make the list is because all too often our California cannabis business attorneys have clients coming to them with boilerplate lease documents that don’t even mention MAUCRSA and/or the collateral effects and contingencies born by using real property for commercial cannabis activity. Real estate is one of the most important assets and must-have’s for all forms of licensure and permitting, so details around licensing timeline, code of conduct, federal intervention, commercial cannabis insurance, and local and state licensing compliance should be huge for the parties, and not some after-the-thought from a form lease document. For more on California cannabis leases, see here, here, and here.

4.     IP Licensing.

Intellectual property licensing in cannabis is already precarious where cannabis companies cannot secure federal protection for their trademarks from the USPTO.  More often than not though, cannabis companies can get trademark protection from the state governments in the states in which they operate. Of course, there can be additional oddities when it comes to state-specific IP protection for cannabis companies. In California, in particular, only cannabis licensees can register and protect their cannabis trademarks with the State of California.  And California was also about to have a very complicated relationship between third party, unlicensed companies that license their IP to cannabis companies, but backed off on second thought on adoption of the final rules in January of this year. The common case issues with cannabis IP licensing are whether the licensor even has the IP they say they do (and whether or not that IP is protected or even protectable, which oftentimes its not because of existing infringement problems) and the regulatory ins and outs applicable to IP licensing. In California, if you’re going to be an IP licensor to a cannabis licensee, you will need to be disclosed to the state as a “financial interest holder,” including if you’re taking a royalty as consideration for the granting of the license. Many operators  and their IP licensors fail to make this disclosure and/or don’t understand regulators’ position relative to this requirement, which makes performance obligations and regulatory accountability in the agreement even more opaque.

5.     Influencer Agreements.

Influencer agreements made the list because licensees typically forget or ignore that these contracts constitute advertising, marketing, and promotion, which is heavily controlled by MAUCRSA and the Bureau of Cannabis Control. Basically, as a licensee, if you use an influencer, you’re on the hook for their words and actions as they relate back to your company and products. All of this means that cannabis companies who want to work with influencers must use detailed contracts, training, and/or guidelines to educate their influencers on how to not violate applicable regulations. And this is not something that cannabis companies should gloss over in a two-page, boilerplate contract. Generic provisions that require all parties to follow all applicable legal requirements may be sufficient in some contexts, but influencers are probably not aware of the specifics in cannabis regulations, and in California, for example, you better make sure that your influencer is gearing their ads and promotions to adults only (and that they can prove that to a reasonable degree of certainty if regulators ask). In addition, the influencer pretty much can’t do anything that’s attractive to a kid (under the age of 21) and if they do, the licensee is going to be on the hook.

All of the above agreements need to be handled with significant care and a deep grasp of the regulatory landscape in California. As always, the boilerplate will not cut it when it comes to compliance and accuracy, so don’t get caught on the wrong side of one of these dangerous contracts.

oregon hemp cbd litigation

Most of the hemp litigation we’ve written about has concerned a hemp purchaser suing a hemp farmer. This week concerns a $2.5 million lawsuit recently filed in Oregon wherein a hemp farmer sued a CBD processor.

The plaintiff, JNV Farms, alleges that in the fall of 2018 it entered into a manufacturing agreement with one of the defendants, C&N Ag LLC (“C&N”), by which JNV Farms was to provide industrial hemp to C&N who was to process the hemp into CBD Isolate and market and sell the finished product. The complaint alleges that profits were to be split 50/50.

According to the complaint, JNV Farms provided the defendants 13,800 lbs of biomass in December 2018. The defendants represented they were testing and preparing to process the material. After JNV Farms made repeated inquiries, defendants became less communicative then eventually refused to respond at all, and refused to meet with JNV Farms or permit inspection of the hemp or finished product.

JNV Farms claimed the defendants (i) neglected or refused to complete the work contemplated by the contract, (ii) failed to return the industrial hemp, (iii) failed and refused to compensate JNV Farms for the hemp, and (iv) failed to provide JNV Farms any of the CBD Isolate or the share of revenue from its sale. JNV Farms alleged claims for breach of contract, breach of the covenant of good faith and fair dealing, unjust enrichment, conversion, and fraud.

Finally – and not insignificantly – the complaint seeks to pierce the corporate veil and to hold the two owners of C&N, defendants Mock and Eastburn, personally responsible for the liabilities of C&N. This claim, perhaps more than the others, may strike fear into the defendants. As every business owner knows (or should know) a key purpose of incorporation is to shield company assets from being used to satisfy company obligations. The goal of a veil-piercing claim is to reach past the corporate shield and into the pockets of owners or investors.

Piercing the corporate veil is difficult. As it should be. But the complaint appears to allege facts sufficient to withstand a motion to dismiss. Notably the complaint alleges that when Mock and Eastburn negotiated the contract, and as of the date it was executed, that C&N was not yet in existence because no paperwork had yet been filed with the Oregon Secretary of State. This fact, if true, is not necessarily dispositive. (Indeed, if there was no corporation there is no need to pierce the corporate veil). But no one entering million-dollar contracts (Mock and Eastburn) ought to do so without having completed the necessary steps to form an entity. On the flip side, JNV Farms likely could have done a better job protecting its investment and the lawsuit may, as it often does, come down to whether the defendants have any recoverable assets. Time will tell.

For more on the recent wave of Oregon hemp litigation, check out the following:

cannabis patent
Could a court refuse to enforce cannabis patents?

Recently, William J. McNichol, Jr., Adjunct Professor at Rutgers University School of Law, wrote an article regarding the enforcement of cannabis patents that should definitely be discussed. As we’ve noted starting last summer, we expect to see an increasing number of patent infringement cases. We’ve also been providing updates on the very first patent infringement case here and here.

Professor McNichol predicts that “the [US]PTO’s willingness to grant cannabis patents is unlikely to be matched by a willingness of the Federal Courts to enforce cannabis patents.” This is because of a centuries-old principle called the Illegality Doctrine (or, Illegality Rule) – the illegality of the use, possession, and distribution of cannabis products will create an undefeatable barrier to the enforcement of most cannabis patents.

So, what is the Illegality Doctrine?  It can be summed up by Lord Mansfield’s dicta in Holman v. Johnson (a case from 1775!): “No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act.” The doctrine is based on the public policy that a person shouldn’t be able to benefit from his/her own wrongdoing, and the courts shouldn’t enforce claims that harm the integrity of the legal system. An even older English decision that’s instructive is the “Highwayman’s Case,” where two “highwaymen” committed a string of robberies and ended up in Court because one claimed that he had been cheated out of his share of the monies robbed. The Court refused to consider the lawsuit entirely, turned both men over to the sheriff, and fined their lawyers for bring a suit “both scandalous and impertinent” (talk about a bad outcome).

The Court’s refusal to hear cases founded in illegality is well established and known today and, given the U.S. Supreme Court’s holding in Gonzales v. Raich, 545 U.S. 1 (2005) that the distribution and sale of cannabis products remain actionable crimes under federal law (even in pro-cannabis states), any plaintiff in a patent infringement action would be asking a federal court to protect its illegal enterprise from the unlawful competition posed by another illegal enterprise.  Professor McNichol concludes:

“The likely refusal of the Federal Courts to entertain Cannabis patent infringement actions reflects a principle generally applicable to the Cannabis industry and having far reaching consequences that are beyond the scope of this paper. The Illegality Rule will likely operate to close the Federal Courts to all manner of business disputes. Some of these, such as bankruptcy, are like patent infringement actions in that they can be entertained only in Federal Court. Other business matters, such as licensing disputes and complex contract disputes involving diverse parties, are typically and most conveniently handled by Federal Courts. In bringing patent infringement actions, the Cannabis industry draws attention to the Illegality Rule and so hastens its application, which may operate broadly to the Cannabis industry’s detriment.”

One reason of many why the UCANN case is one to watch, is to see if the Illegality Doctrine will be raised by the Court. Judge Martinez hasn’t raised the issue yet, and for all intents and purposes, has treated the UCANN case as any other patent infringement case. If it does come up and sets a precedent that cannabis patents will not be enforced in the federal courts, Professor McNichol is probably right in that it will likely not only effect intellectual property cases, but also other commercial disputes involving cannabis. We’ll continue to keep you posted on how the UCANN case develops and whether Judge Martinez begins to hint that he’s giving the Illegality Doctrine some real consideration.