cannabis fraud

Welcome back to our litigation series on California cannabis claims. Fraud is one of those claims that clients believe will be easy to pursue, but it actually requires a lot of factual development and proof, even just to assert it in a complaint.  Below is a primer.

Introduction

A fraud claim requires six elements: (1) a misrepresentation, (2) knowledge of that representation’s falsity, (3) an intent to induce reliance, (4) reliance, (5) causation, and (6) resulting damages. Even in a complaint, fraud must be pleaded specifically – a plaintiff must plead facts that show the how, when, where, to whom, and by what means the misrepresentations were made. This level of detail is not typically required of a plaintiff’s first filing, which is why we commonly see fraud claims challenged early via a demurrer, which is a defendant’s first chance to challenge a plaintiff’s claim as legally insufficient on its face.

Statute of Limitations

The statute of limitations for fraud is three years. The clock starts ticking when a plaintiff discovers the facts constituting the misrepresentation. So if you wait three years and a day after discovery of facts leading to a fraud claim, your claim will likely be barred.

Elements of a Breach of Fiduciary Duty Claim
  1. The misrepresentation. While it’s clear a false representation would qualify, note that a failure to disclose facts or a promise made with no intent to perform also qualify as misrepresentations. Most opinions, puffery (“seller’s talk”), and statements about the future on the other hand, do not qualify. One really important thing to note: the failure to perform a promise is not enough to constitute a misrepresentation in itself. While we understand it’s completely frustrating, we often have clients ask to “throw in” a fraud claim because something they were promised doesn’t end up happening. We need more facts (for example, maybe evidence of the defendant’s behavior after making the promise) that tend to prove the defendant never intended to perform.
  2. Knowledge of that representation’s falsity. Also known as “scienter,” the defendant must know that the statement is false or act with “reckless disregard” of its truth or falsity when making the representation.
  3. Intent to induce reliance. The defendant must also intend to induce the plaintiff to act in reliance on the misrepresentation. This is different from an intent to deceive the plaintiff, or an intent to cause some particular harm. The standard is much lower.
  4. Justifiable reliance. Logically, the next thing a plaintiff must prove is that he/she did, in fact, justifiably rely on the misrepresentation in taking some action. The misrepresentation doesn’t need to be the sole motivating factor. It doesn’t even need to be the predominant factor. As long as the plaintiff truly believed the representation and decided to do (or not do) something, this element is satisfied.
  5. Causation. As with most tort claims, the plaintiff must demonstrate that the defendant’s fraud proximately caused the plaintiff’s damages.
  6. Damages.  Finally, the plaintiff must prove his/her damages that were proximately caused by defendant’s fraud.
Remedies

Like I wrote above, fraud is hard to plead and prove. If done successfully though, it opens doors to more remedies than most causes of action because it’s considered a more egregious, malicious harm.

  • Compensatory damages. Again, this remedy attempts to compensate the plaintiff for all his/her harm caused by the fraud. How this is measured depends on the relationship of the parties and the transaction itself. Perhaps most commonly, we see damages measured by the “out of pocket” rule – the plaintiff will receive the difference in value between what he/she gave to the defendant and what he/she received (in an attempt to restore the plaintiff to the position just before the fraud occurred). Sometimes, damages are measured by the “benefit of the bargain” rule – the plaintiff will receive the value of what he/she was promised.
  • Punitive damages. If the plaintiff is able to show that the defendant is guilty of malice, oppression, or fraud, punitive damages are also awarded.
  • Damages for physical harm or emotional distress. The contexts in which these types of damages are limited (for example, they’re not recoverable in property transactions) but these should also be considered in every case.
  • Statutory damages. Similarly, there are limited situations in which a fraud claim also opens the door to additional remedies provided by statute. For example, if the defendant receives stolen property due to the fraud, Penal Code s. 496 also allows recovery of treble damages (tripling of your damages), costs of suit, and reasonable attorneys’ fees.

Hope this helps clarify this commonly sought claim! We also covered breach of contract here and breach of fiduciary duty here. As always, if there’s a specific claim you have questions about or would like to see covered, don’t hesitate to reach out!

psilocybin trademark

A few weeks back, Twitter was abuzz about the fact that the United State Patent and Trademark Office (“USPTO”) granted a federal trademark registration for the word PSILOCYBIN. The mark was registered by the company Black Pandas LLC and applies to the following services in Class 041:

“Development and dissemination of education materials of others regarding psychoactive plants, psychoactive fungi, and chemicals and related topics in the field of spirituality, religion, politics, art and science; Publication of articles, books, pamphlets and newsletters regarding psychoactive plants, psychoactive fungi, and chemicals and related topics in the field of spirituality, religion, politics, art and science.”

First, it is important to note that the registration does NOT provide the registrant with exclusive rights to use the word “psilocybin” on all goods and services, and particularly not on goods that could be described as “psilocybin.” One of the requirements for federal trademark protection in the U.S. is that a mark is “distinctive.” Simply put, this means that a mark cannot be “merely descriptive” of the goods or services on which it is applied. So, for example, no one would be eligible to protect the word “psilocybin” for use on mushrooms, because this would be merely descriptive. It would be against public policy to limit the ability of other businesses and individuals to describe the goods they are selling (note that I’m setting aside the legality issues that come into play here, which are nearly identical to those faced by cannabis businesses attempting to procure federal trademark protection).

So, what happened here with the PSILOCYBIN registration? Initially, the examining attorney assigned to the file rejected the application under Section 2(e)(1) of the Trademark Act, meaning that she deemed the mark merely descriptive of the applicant’s services stating:

“Here, the term PSILOCYBIN is a naturally occurring psychedelic compound produced by various mushrooms.  Applicant’s services feature materials regarding “psychoactive plants” and related topics; thus, the term PSILOCYBIN is descriptive of the subject matter of applicant’s services.  Consumers encountering this mark – in the context of those services – will immediately understand the descriptive significance of the mark.”

However, in this case, the mark was only refused registration on the Principal Register. The examining attorney gave the applicant the opportunity to amend their application to seek registration on the Supplemental Register, so long as they could amend their application to show use in commerce.

Many trademark applicants are unaware of the existence of the Supplemental Register, let alone what it is. The Supplemental Register is “a second trademark register where trademarks can be registered that are not yet eligible for registration on the Principal Register, but may, over time, become an indicator of source. Marks registered on the Supplemental Register, like those registered on the Principal Register, are protected against conflicting marks in later-filed USPTO applications. However, Supplemental Register registrations do not receive the same legal advantages and presumptions of Principal Register registrations.”

What this means is that in a trademark dispute, the owner of a mark on the Supplemental Register does not enjoy a presumption of federal ownership. It’s much harder to win an infringement lawsuit with a Supplemental Register registration.

After five years of continuous use, an applicant for a mark that would otherwise be rejected for being merely descriptive can apply to register its mark on the Principal Register if it has additional proof of “acquired distinctiveness,” which can include evidence of notoriety, extensive advertisement of the mark, and declarations from third parties. A good example of a mark that made it onto the Principal Register through this process is SKATEBOARDER, which is a skateboard magazine. The mark would have been deemed merely descriptive and rejected, but the applicant was able to show sufficient notoriety over time to prove acquired distinctiveness.

It remains to be seen whether or not the PSILOCYBIN trademark will ever make it to the Principal Register. The more companies that begin to use the word “psilocybin” in conjunction with their online publications and services, the less likely it will be that the owner of this mark will be able to prove acquired distinctiveness five years from now.

los angeles dcr cannabis license

On Friday, January 31, the Los Angeles Department of Cannabis Regulation (“DCR”) issued an updates bulletin to stakeholders via email that outlines some important highlights and reminders for licensees and would-be licensees in the City. Below are the key points, with analysis.

1. 100 Phase 3 Retail Round One applicants determined eligible for further processing.

The initial 100 applicants in Round 1, Phase 3 are moving forward in the licensing process with the DCR. On September 3, 2019 at 10 a.m., the DCR opened the flood gates to would-be Round 1 applicants. Prior to that date, the DCR verified more than 1600 social equity applicants (folks had to be approved as social equity applicants by July 29, 2019). 802 social equity applicants vied for the first 100 coveted Type 10 retail licenses (75 of which went to Type 1 social equity applicants and 25 of which went to Type 2 social equity applicants).

Round 1 licensing was first come, first served with an online application via the City’s Accela licensing portal. One of the hallmark criteria for Round 1, in addition to meeting the social equity qualification, was proof of right to real property the intended license type. The real property had to meet all sensitive use buffers and zoning requirements, too. And applicants had to file a slew of other paperwork while racing against the clock (against other applicants) in the City’s online system.

There was immense scrutiny of the Round 1 application process by stakeholders. On October 28, 2019, Council member Herb Wesson alleged in a letter to DCR that:

Over the last couple of weeks, including at the Cannabis Regulation Commission meeting last Thursday, allegations have been made that multiple applicants had access to the application portal prior to the announced start time of 10 am on Tuesday September 3rd. Unfortunately these allegations have been substantiated by the Department at the Commission meeting and the Phase 3 Retail Round 1 process was compromised. While it was always understood that not every applicant would get a license, it is paramount that the application process have the utmost integrity, be transparent, and fair. There appears to be no scenario in which the Retail Round 1 process can meet those three principles currently.

Wesson went on to write that:

I am recommending that the Department: 1) suspend all Retail Round 1 applications; 2) refund all monies paid by Retail Round 1 applicants and cancel all invoices; and 3) prepare a full audit and report by an independent third party not involved in the process – unless there are other options like processing every application that would provide the necessary assurances that the process was not compromised. These are the only options that will provide the clarity and time we need to ensure that the Phase 3 Retail process is fair, transparent, and has integrity .

In the City’s update on January 31, the DCR let everyone know that the first 100 selected applicants are still moving forward and that “the Phase 3 Retail Round One application process is currently under review by an independent third-party auditor. That audit is being managed by the office of the City Administrative Officer (CAO). Once final, the audit will help to inform our approach to the application process.”

As far as when Round 2 of the Phase 3 licensing process will open, the DCR hasn’t said yet. ICYMI, the Round 2 window will be 30 calendar days for 150 licenses that will also go to pre-verified Tier 1 and 2 social equity applicants. In Round 2 though, at the time of filing, applicants only have to submit to the DCR “a financial information form; a labor peace agreement attestation form; and an indemnification agreement.” Those 150 applicants will then have 90 days to supplement their applications with the more robust information required by the DCR. There’s also no update regarding when the Phase 3 general public application window will open.

2. Phase 1s.

There are only 188 Phase 1 EMMDs in the City. Their license renewals are due by the end of March or they forfeit their EMMD status. Simple.

3. Phase 2 pre-licensing inspection has a new deadline.

There are currently 158 Phase 2 applications that received temporary approval from the DCR. However, in order to operate, Phase 2 applicants have to pass a pre-licensing inspection with the DCR and the L.A. Fire Department (and have a state license). The new deadline for Phase 2 applicants to pass pre-licensing inspections is extended to March 31, and Phase 2 applicants must request their pre-licensing inspection by or before March 1.

4. Undue concentration update.

There are currently 10 community plan areas that have reached undue concentration limits. Recall, undue concentration basically stands for soft licensing caps within the City. The areas affected by undue concentration now include Boyle Heights, Central City, Central City North, Harbor-Gateway, Hollywood, North Hollywood-Valley Village, Sherman Oaks – Studio City-Toluca Lake-Cahuenga Pass, Sun Valley – La Tuna Canyon, Venice, and West LA. Folks can still apply for licensure in these areas, but they have to request a finding for Public Convenience or Necessity (PCN) from the local City Council. To date, “the [DCR] has received 75 PCN applications since the opening of Retail Round 1 on September 3, 2019.” It’s important to note that the PCN process is only available right now to social equity applicants.

5. Amendments to applications are now available.

The DCR released some pretty helpful guidance on how to make amendments to your licensing application (including change of entity and/or ownership). See here for instructions on how to fill out the specific form.

We’ll be sure to give a full analysis of the City’s progress towards Round 2, Phase 3 licensing, which is the next big licensing milestone in L.A. So, stay tuned!

europe cbd

This past year, the cannabidiol (“CBD”) craze has taken the world by surprise, showing remarkable prospect for economic growth.

According to BDS Analytics and Arcview Market Research, the CBD market is expected to surpass $20 billion by 2024 in the United States alone. Europe has also witnessed a huge demand for the most coveted cannabinoid, whose market, Brightfiled Group predicts, will grow by 400% by 2023.

Unlike the U.S. CBD market, the European CBD market is just beginning to take hold with both product availability and consumer awareness being quite limited. Consequently, Europe offers great opportunity for U.S. CBD brands to enter and expand their existing business in a less competitive atmosphere. Nevertheless, entering the European market is not as easy as it may seem.

European markets are complex, particularly when it comes to hemp-derived CBD (“Hemp CBD”). Indeed, the Old Continent is composed of 44 countries, 28 of which are member states, that have adopted 24 different languages and apply their own sets of laws and regulations. With this in mind, we now turn to the three main challenges international Hemp CBD players should consider before venturing into the European Hemp CBD market.

  1. Novel Food Regulations 

The main challenge in selling Hemp CBD products in Europe is that the European Foods Safety Authority (“EFSA”) has classified the most coveted cannabinoid as a “novel food” ingredient. “Novel food” is “food that was not used for human consumption to a significant degree within the Union before 15 May 1997, irrespective of the dates of accession of the Member States to the Union.” Pursuant to EU regulations, anyone who wishes to sell food containing a “novel food” ingredient must first secure a license from the EFSA.

Although the European Industrial Hemp Association and the Cannabis Trades Association have challenged this guidance, a handful of European countries such as Spain, Italy, and Austria have already taken enforcement actions against Hemp CBD products on the basis of being “novel foods.” Therefore, much uncertainty remains regarding the legality and regulation of these products.

  1. Different Laws and Regulations

Another challenge associated with entering the European market is the fact that each country is implementing its own set of rules and regulations pertaining to importation, manufacturing, testing requirements and distribution. Of particular relevance to the Hemp CBD industry is the lack of clarity or consistent guidance regarding the acceptable levels of THC in Hemp CBD products. For instance, the United Kingdom authorizes the sale of products with a THC concentration of less than 0.1% whereas the Netherlands and Switzerland allow products that contain less than 1% THC.

  1. Different Languages

Foreign Hemp-CBD manufacturers and distributors will also need to ensure that their product labels comply with varying labeling and marketing laws. Take for example Belgium. Although the country is only composed of roughly 11 million inhabitants, it has adopted three official languages: French, Flemish (a Dutch dialect) and German. Consequently, any label of products imported to Belgium must be written in all three languages.

To shed additional light on these considerations, our firm will soon present a blog post series of some of Europe’s Hemp CBD laws. Stay tuned!

north carolina cannabis marijuana

The 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”). Today we turn to North Carolina.

The North Carolina Department of Agriculture (“NCDA”) provides a useful summary of the state’s law regarding hemp cultivation:

Hemp production has been legalized in North Carolina, but only as part of the state’s pilot program as allowed under federal law. The N.C. General Assembly passed Senate Bill 313 in 2015, allowing the Industrial Hemp Commission to develop the rules and licensing structure necessary to stay within federal laws. The law was modified in 2016 in House Bill 992. The Industrial Hemp Commission adopted temporary rules for review in February 2017; these were approved by the Rules Review Commission of the Office of Administrative Hearings.

Currently, NCDA is operating under the 2014 Farm Bill, not the 2018 Farm Bill. Apparently, that’s how the state wants to continue to operate.

On December 19, 2019 the North Carolina Industrial Hemp Commission (the “Commission”) sent a letter USDA Secretary Sonny Perdue. The Commission is a group of individuals, appointed by the Governor and representing agricultural and law enforcement interests, who have the authority to oversee the hemp cultivation in North Carolina.

The Commission’s letter is worth reading. In short, the letter basically opts out of the USDA’s hemp cultivation program meaning that North Carolina will continue to operate under the 2014 Farm Bill until its hemp provisions expire on October 31, 2020 or “until a viable pathway forward is available to satisfy federal and state requirements.” This is in large part due to the USDA’s interim hemp rules, which the Commission believes “do not provide a framework flexible enough to ‘help expand production and sales of domestic hemp, benefiting both U.S. producers and consumers.'”

The Commission goes on to outline “significant concerns” with the interim hemp rules:

  • The interim hemp rules provide that hemp that tests above 0.5% THC will result in a negligent violation. Under the 2018 Farm Bill, if a grower receives three negligent violations in five-year window that grower is prohibited from cultivating hemp for five years. The Commission believes that negligence standard should be set at 1% because a number of factors such as weather conditions and sampling protocols can lead to test results at or above 0.5% THC. The Commission is concerned that growers will be harshly penalized and suffer massive economic loss based on “an arbitrary number.”
  • North Carolina also raised concerns about the interim rules requiring testing for all hemp. The Commission has some numbers to back this up: ” This past fall, [NCDA] tested 55% of the thousands of hemp fields planted across our state, with employees working up to 70 hours a week. It is impossible to ask this staff to do more and we are not aware of any state that has been able to physically sample each field.” The Commission suggests that states be allowed to perform random and risk-based sampling of hemp grown in their state.
  • The interim hemp rules require that hemp be tested 15-days prior to harvest. The Commission believes this “narrow timeframe” is an “unnecessary obstacle for compliance.” Factors such as weather could require that growers harvest hemp earlier than expected, without knowing whether hemp material is compliant. The Commission is also concerned about “inevitable delays in laboratory results because of high sample volumes” which are exacerbated by the interim hemp rules’ requirement that labs testing hemp to obtain DEA registration.

On January 31, 2020, NCDA sent a letter to hemp licensees stating that the future of the state’s hemp program was uncertain due to the decision not to submit a plan to the USDA. Attorney Rod Kight provides a copy of this recent letter on his blog, Kight on Cannabis.

North  Carolina issues licenses for hemp cultivation and requires that hemp processors be registered with the state and report to NCDA. When it comes to Hemp CBD products, North Carolina lacks robust regulation. For now, we just have guidance documents. According to a February 8, 2019, NCDA press release. Hemp CBD “cannot be legally added to any human food or animal feed that is for sale.” The press release also indicates that the state will seize or embargo products marketed as drugs. The sale of Hemp CBD cosmetic products are not explicitly mentioned in the press release.

Last year North Carolina lawmakers considered Senate Bill 315 (” SB 315“) which would amend state law on hemp in accordance with the 2018 Farm Bill and would also govern Hemp CBD products. SB 315 may have another chance this year but has come with some controversy.

SB 315 would grant NCDA the ability to “regulate cannabinoid related compounds” which would not include smokable hemp. NCDA would oversee good manufacturing practices for manufacturing, packaging, labeling, or holding operations for Hemp CBD. Manufacturing Hemp CBD products would require a valid NCDA license. A license would also be required for out-of-state and online retailers.

Much of the controversy surrounding SB 315 stems from the bill’s prohibition of smokable hemp, which is defined as “[h]arvested raw or dried hemp plant material, including hemp buds or hemp flowers, hemp cigars, and hemp cigarettes.” If passed, SB 315 would impose the following penalties related to smokable hemp on June 1, 2020:

  • A civil penalty for knowingly or intentionally manufacturing, delivering, selling, or possessing smokable hemp
  • A Class 1 misdemeanor for knowingly or intentionally manufacturing, delivering, selling, or possessing smokable hemp

SB 315 would also require that NCDA and other state agencies submit a report on smokable hemp to the legislature.

North Carolina has a lot going on with regards to Hemp CBD. Many pieces are still in flux as the state has essentially rebuked the USDA’s interim hemp rules and is grappling with Hemp CBD products including smokable hemp. We’ll continue to watch as things develop in North Carolina.

For previous coverage in this series, check out the links below:

***ROOM LOCATION HAS CHANGED to UCLA Law School, Law 1430. See below for details.

Every month from February through June, Harris Bricken is partnering with UCLA’s CannaClub to lead “Cannabis and the Law,” a seminar series examining the myriad of legal questions and concerns related to the present and future of the United States cannabis industry.

As the largest legal market for cannabis in the United States, California state leaders are in a unique position to help define the legal framework for how cannabis can be treated across the United States. From taxation, to business law and social equity programs, California is at the epicenter of a number of important issues. Despite this, the illicit cannabis market in California is still thriving due to problems with consistent enforcement and evolving regulations.

All seminars in this series are free to the public and located on the UCLA campus. Whether you’re an investor, entrepreneur, or a student, these talks are designed for all stakeholders who want to take a deep dive into a dynamic and sometimes contentious legal landscape of cannabis regulations and business.

Future seminars, with time and place subject to change, are below:

  • February 19:  The Legal Landscape of Cannabis in California (Alison Malsbury).
  • March 11: Factors that Are Unique to Business Formation in the Cannabis Sector (Griffen Thorne)
  • April 15: Considerations for Investments and Fundraising for Cannabis Businesses (Tatiana Logan)
  • May 13: Legal Issues Surrounding Hemp, Hemp-Derived Products, and CBD (Griffen Thorne)
  • June 3: Cannabis and Hemp and the Legal Requirements of Testing (Hilary Bricken & Griffen Thorne)

Parking Information:

UCLA Law School, LAW 1430 is located at:
385 Charles E Young Dr. E
Los Angeles, CA 90095

Nearby parking can be found in Parking Structure 2:
602 Charles E. Young Dr. E
Los Angeles, CA 90095

Additional directions can be found by accessing UCLA’s interactive map.

For additional information, please forward all questions to firm@harrisbricken.com.

washington cannabis marijuana

In Part 1  of this two-part series we discussed the Washington State Liquor and Cannabis Board’s (“LCB”) new rules stemming from SB 5318, which passed last year and forced the LCB to transition from an enforcement-first policy to a compliance-first policy when handling violations. We covered how the LCB will handle Notices of Correction (“NOC”) and Administrative Violation Notice (“AVN”). Today we’ll look at the LCB’s revamped structure for penalties.

The new section at issue is WAC 314-55-509 (“Penalty Structure”).  This replaces WAC 314-55-515, the previous penalties section, and establishes the categories outlined below. I’ll summarize each category and offer some analysis as needed.

Category I.  Violations of a severity that would make a license eligible for cancellation on the first offence.

These violations include purchasing or selling marijuana outside of the licensed marketplace, failing to follow a suspension restriction while a license is suspended, transporting or storing marijuana to or from an unlicensed source, diverting products outside of Washington, allowing a person to become a true party of interest (“TPI”) or receiving funds from a person who would not qualify to hold a marijuana based on affiliation with criminal enterprises or criminal history. These violations are all pretty straightforward.

Category II. Violations that create a direct or immediate threat to public health, safety, or both.

These penalties do not allow the LCB to cancel a license on a first offense but do threaten public safety. Penalties include: selling to minors, engaging in criminal or disorderly conduct, operating an unapproved CO2 or hydrocarbon extraction system, intentional use of unauthorized pesticides, soil amendments, fertilizers, or other crop production aids, adulterated usable marijuana, transportation of marijuana without a manifest, obstruction, failure to use and maintain traceability, pickup, unload, or delivery at an unauthorized location. Some of these penalties can end in license cancellation even without four offenses. This is likely to face scrutiny under SB 5138.

Category III. Violations that create a potential threat to public health, safety, or both.

Unlike the previous two sections, all of these penalties do not result in license cancellation at the first offense. These violations include transporting marijuana while the driver does not hold a valid driver’s license, exceeding the maximum serving requirements for a marijuana-infused product, exceeding transaction limits, failure to follow and maintain food processing safety requirements, failure to maintain required surveillance system, retail sale of unauthorized marijuana-infused products, TPI violations, Financier violations, obstruction, failure to furnish records, failure to use or maintain traceability, and noncompliance with marijuana processor extraction requirements.

Category IV. Significant regulatory violations.

These violations include failure to keep records, marijuana being given away or sold below cost of acquisition, use of an unauthorized money transmitter for retail sales, misuse or unauthorized use of license, selling or purchasing marijuana on credit, engaging in nonretail conditional sales or prohibited sales, unapproved operating or floor plan, failure to maintain insurance, unauthorized sale by a processor to a retailer, packaging and labeling violations, and unauthorized storage or transportation of marijuana.

Category V. Procedural and operational violations.

These violations include operating outside of the approved hours of service (8:00 AM-12:00 AM), general advertising violations, engaging in conditional sales, failing to display identification badge, failure to post requires signage, unauthorized change of business name, transporting marijuana in an unauthorized vehicle, exceeding delivery timeframe, failure to maintain standard scale requirements, unauthorized driver or passenger in transport vehicle, load exceeding maximum delivery amount, violations relating to the return of marijuana at retail, failure to use or maintain traceability,  true party of interest or financier violations. Again, it’s hard to overstate the significance of the inclusion of true party of interest and financier violations here as in the past these offenses would carry a recommended penalty of license cancellation.

Category VI. Statutory violations.

These violations include allowing a minor to frequent a retail store or licensed premises, employee under legal age, opening or consuming marijuana at a retail premises, and retail outlet selling unauthorized product. Unlike the other sections, Category VI does not provide for escalating penalties. Each violation carries a $1,000 fine. This leads me to infer that these penalties do not increase over time.


Stay tuned for more coverage of Washington marijuana as we continue to track the LCB’s moves in implementing SB 5318. Also, don’t forget to check Cannabis Observer, a great resource for documentation of each and every LCB meeting.

china u.s. import hemp

Two major President Trump-centric events have been unfolding these past few weeks, and each has alternatingly claimed the limelight and been overshadowed by the other. First, we have the ongoing Senate impeachment hearings, which began January 16, and second, phase one of the U.S.-China trade deal, which was signed and made public on January 15.

With respect to the trade deal, certain commentators have highlighted the appearance of hemp in the agreement. One prominent marijuana publication published an article the day after the trade agreement was made public, on January 16, claiming that, “China Must Import More Hemp From U.S. Under New Trade Deal.” That is an overly generous interpretation. We’ll investigate and clarify that optimistic claim below. The short gloss is that China may buy more hemp from the U.S. under the new trade deal, but China is definitely not obligated to buy more (or any) U.S. hemp as a result of the trade deal.

Even though China has been both officially and unofficially producing hemp for centuries, U.S. hemp is, like most U.S. products and even agricultural commodities, attractive to Chinese businesses and consumers. Like many sectors where China is working a 996 schedule to catch up and overtake the U.S. as the global economic superpower, China and Chinese companies are actively pursuing ethical and unethical ways to acquire U.S. technology and know-how, including our best agricultural practices, trade secrets, and the best crops our hemp geneticists can produce.

As I noted in a prior blog post, China has an outsized role in global hemp production, and Chinese companies own approximately half of the global cannabis patents. But it is interesting that China has not yet matured in large-scale way from the labor-intensive growing and processing of hemp to the technology-intensive production of cannabinoids (like CBD, CBG, and CBN) and cannabinoid-derived products. Currently, China only accounts for about 11% of the CBD produced globally, but as more global markets and consumers open up to hemp-derived products, China will exert its influence. Frankly, it is likely impossible for China to house 1/7 of the world’s population and not affect global markets by the mere discussion of a change in government support for China-based industries, companies, and products.

Now to the terms of the trade agreement. The phase one portion of the trade agreement covers the general categories of intellectual property (including pharmaceutical-related intellectual property that is rapidly becoming ground zero for the battle between big pharma/biotech and natural products companies), forced technology transfers, trade in food and agricultural products, agricultural biotechnology, financial services, macroeconomic policies and exchange rate matters, expanding trade generally, and bilateral evaluation of the trade relationship and dispute resolution.

Many commentators have expressed doubts that the trade agreement is good for the U.S. or that it will do anything beyond merely extending the rollout of the next round of tariffs post-the November presidential election on the way toward near-total decoupling between the U.S. and China. But if we take the terms of the trade agreement at face value, in 2020, China must increase its importation of “agricultural goods . . . no less than $12.5 billion above the 2017 corresponding baseline,” and in 2021, “no less than $19.5 billion above the 2017 corresponding baseline.” Also, a footnote in the agreement says, “At the request of the United States, China will strive to purchase and import $5 billion per year of the U.S. agricultural products…in addition to the minimum amounts set forth herein.”

Even though this “import” statement is not binding, it could represent additional purchases of agricultural goods. In the agreement, we find “true hemp (cannabis sativa l.), raw or processed but not spun; tow and waste of true hemp (including yarn waste and garnetted stock)” as one of 216 categories of agricultural commodities of which China is required to increase its purchases. If I were a gambler, I would not take those 1/216 odds (less than half of 1%) that China’s increased agricultural purchases are guaranteed to significantly impact the U.S. hemp industry. That 1/216 equals approximately $90 million of increased purchases in 2020, which would account for a roughly 7% increase in the projected 2020 U.S. hemp industry, which overall is projected to grow at 14% compounded annual growth through 2022. Chinese companies could just as easily decide they want to buy $90 million more human hair, which is also one of the 216 agricultural goods on the list with hemp. U.S. companies wanting to export hemp to international markets is an order of magnitude larger than those willing to research and put forth the investment in order to do so.

In a future post I will delve more deeply into the intellectual property implications of the trade deal on the U.S. and world cannabis (including hemp) industries. China has a big head start in cannabis patents compared to every other nation, but I think that western nations, especially the U.S., are particularly good at catching up, especially if Sputnik was any indication of what we are capable of when we are motivated to make significant advancements in any area we see as strategically important. In the meantime, do not hold your breath that this phase one trade deal will be a windfall for U.S. hemp farmers.

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tribal cannabis hemp marijuana

For people in the know, the cannabis industry is an unpredictable roller coaster for a number of reasons having to do with federal illegality, evolving state regulations, and market volatility. One faction of the industry that many thought would immediately take off is cannabis being grown and sold in Indian Country by Native American Tribes. And with good reason–in December 2014, the federal government announced that when it came to cannabis, it would not essentially treat Native American Tribes as it treats the states. Meaning, cannabis in Indian Country would not be a major enforcement priority similar to the states pursuant to the August 29, 2013 Cole Memo.

Since that announcement, a number of tribes indicated an interest in tribal cannabis, and our law firm ended up putting on the first national Tribal Marijuana Conference, attended by more than 400 people, from more than 75 tribes and more than 35 states. Tribes began to move ahead.

The momentum behind tribal cannabis came from the Wilkinson Statement in which the Department of Justice (DOJ) stated it would not focus its resources on prosecuting growing or selling medical or adult-use cannabis on tribal lands, even when state law prohibits it, and the eight enforcement priorities previously outlined in the 2013 Cole Memo were supposed to guide federal enforcement of cannabis laws on tribal lands . It is important to note that none of this changed federal drug laws or the federal government’s ability to enforce those laws. Therefore, any tribe that considered setting up a legalized cannabis regime would have been wise to enact and enforce “robust regulations” so as to comply with the Cole and tribal cannabis memos and to increase its odds of avoiding unwanted federal intervention.

As a result of the excitement on the back of the Wilkinson Statement, several tribes considered regulating, cultivating, and selling cannabis on their sovereign lands. However, very few and perhaps none of those enterprising tribes have experienced much success. Federal intervention was a roadblock in some instances; and even for tribes that entered into state compacts for commercial cannabis production and sales–see, for example, the Suquamish tribe and Warm Springs tribes, in Washington and Oregon–things have been slow to materialize.  Tribes have been beset by internal political and organizational issues, as well as shady consultants and the general chaos that comes with the “gold rush” mentality. In all, the energy behind tribal cannabis slowly fizzled as it became clear that state compacts were pretty much the only way to avoid the Feds when it came to cannabis — and that even those compacts were no guaranty of success.

In early 2018, then acting U.S. Attorney General Jeff Sessions rescinded all DOJ guidance on cannabis, including the Wilkinson Statement. Even before then though, the reality of tribal cannabis hadn’t really materialized. As of today, U.S. Attorneys no longer have any uniform enforcement priorities when it comes to cannabis, and they’re free to address federal cannabis law enforcement as they see fit according to their districts’ priorities and resources. To date, we’re not aware of any U.S. Attorneys taking any action against state-licensed cannabis operators just because they’re in operation in violation of the federal controlled substances act (CSA). And the current U.S. Attorney General, Bill Barr, testified before Congress that he would basically operate according to 2013 Cole Memo principles, which has been accurate to date.

What this means, in all reality, is that tribes can still consider legalizing medicinal and adult-use cannabis on their lands. Whether they should or not will depend on the state in which the tribal lands are located and how and whether the U.S. Attorney in that district is going to treat this tribal experiment. There’s also still the question of whether state cannabis compacts make sense for tribes and how the U.S. Attorneys (now with no Cole Memo in place) will react to tribes that forego compacts.

Perhaps more than any of this, the question of whether legalization on tribal lands makes any business sense still reigns supreme. Is it legally, culturally, and practically better (and cost effective) for the tribe to act as a licensing regulator, a landlord to a licensee, or to be the cannabis licensee itself? Is it better for the tribe to be able to access legalized markets through state licensing systems through a compact that may at the same time eliminate other important tribal cannabis business choices and waive certain tribal sovereign immunity powers? Or is it better for the tribe to treat cannabis like gaming by providing a unique cannabis experience strictly contained within tribal lands but managed by a third party operator?

Tribes likely still have a variety of choices in the cannabis game (including around hemp under the 2018 Farm Bill), but many ambiguities still exist, and no tribal gold standard has emerged. I will say that our firm has seen an uptick of tribal cannabis requests lately (especially in California, which is relatively cannabis-business friendly). This tells me that tribes continue to mull what could still be a very lucrative business opportunity in the years to come. Someone just needs to break the mold.

california retail cannabis qr code

On Thursday, January 23rd, the Bureau of Cannabis Control (BCC) announced new proposed emergency regulations that will make it mandatory for all cannabis businesses to post their unique Quick Response Code (QR Code) in their storefront windows and to carry it with them while transporting or delivering cannabis.

According to the BCC, these new regulations are designed to help consumers identify the licensed cannabis retail store from which they are purchasing, and to help law enforcement and “support the legal cannabis market where products such as vape cartridges are routinely tested to protect public health and safety.” We think much of this is in response to the recent vape crisis, which you can read about here:

Consumers will now be able to use their smartphone cameras to scan each retailer’s QR Code, which will link to the BCC’s Online License Search portal to confirm the status of that retailer’s license. Customers will also be able to view the retailer’s address and license location through the portal in order to ensure that the information displayed is not counterfeit.

BCC Chief Lori Ajax had the following to say about the emergency regulations:

The proposed regulations will help consumers avoid purchasing cannabis goods from unlicensed businesses by providing a simple way to confirm licensure immediately before entering the premises or receiving a delivery. These requirements will also assist law enforcement in distinguishing between legal and illegal transportation of cannabis goods.”

The BCC already launched a campaign to encourage retailers to voluntarily post a QR Code certificate for consumers to scan, but these new regulations will make that mandatory. This week, five business days after last Thursday’s notice, the BCC will file the emergency regulations with the Office of Administrative Law (OAL). Once the OAL publishes the regulations on its website as “under review,” that will kick off the five-calendar day public comment period where the proposed regulations will be designated as “under review” on the OAL website. Submit your comments to both the OAL and the BCC.

We view these new regulations as another step by the BCC to curb illegal commercial cannabis activity here in California, where the black market has continued to flourish despite legalization. We’ll be curious to see how consumers respond to and interact with these QR Codes, and if it serves to undermine the black market at all.