cannabis trademark amazon

Although selling products that violate federal law is understandably prohibited on the Amazon platform, we have many clients that do sell their legal ancillary goods, as well as their hemp goods, on Amazon. And what many of them are unaware of is that Amazon’s Brand Registry is an excellent tool for protecting and maintaining control over your brand.

The Amazon Brand Registry gives sellers “access to tools that enable [them] to more accurately represent [their] brand, find and report violations, and share information that can help [Amazon] proactively prevent violations.” Utilizing the Brand Registry is a great way to efficiently (and cheaply) stop infringers in their tracks without having to resort to litigation. Some of the benefits of the program include:

  • Users have more control over Amazon product pages that utilize their brand names, meaning that users control the way customers view their brand;
  • Users have access to search and report tools that can help them find product listings on Amazon that match their products or logos and can generate reports of potential infringers to take action against;
  • Amazon utilizes information provided by users about their brands to “implement additional predictive protections that attempt to identify and remove potentially bad listings, including:
    • Product listings that aren’t for your brand and incorrectly use your trademarked terms in their titles;
    • Images that contain your logo, but are for products that don’t carry your brand name;
    • Sellers shipping products from countries in which you do not manufacture or distribute your brand; and
    • Product listings being created with your brand name when you have already listed your full product catalog on Amazon.

In order to enroll in the program, your company must have:

  • An active registered text or image-based trademark issued by the U.S., Brazil, Canada, Mexico, Australia, India, Japan, France, Germany, Italy, Spain, the U.K., the E.U., or the United Arab Emirates that matches the brand name on the application;
  • The ability to verify your company as the rights owner or authorized agent for the trademark; and
  • An Amazon account.

The first step to all of this, of course, is securing your trademark rights. If your company, whether cannabis, hemp, or otherwise, is considering selling anything on Amazon, obtaining trademark protection such that you will have access to Amazon’s brand protection tools will be crucial. We’ve written extensively about trademark protection for ancillary goods and services and for hemp, which you can read more about at the links below:

fda cbd hemp

The Food and Drug Administration (“FDA”) seems to be listening.

For the past six months, the federal agency has been bombarded with messages, urging the FDA to promptly develop a regulatory pathway for the lawful use of hemp-derived CBD (“Hemp-CBD”) in foods and dietary supplements.

Some of these messages came from Oregon’s hemp champion,  Senator Ron Wyden (D), who in two occasions has publicly pressured the FDA to act on this issue.

Back in January, Wyden issued a joint letter with Jeff Merkley (OR-D), in which the Oregon senators demanded that the agency update federal regulations governing the use of certain hemp-derived ingredients in food, beverages and dietary supplements.

At the end of June, Wyden issued a second letter to the agency in which he criticized Former Commissioner Scott Gottlieb’s suggestion that it may take the agency three to five years to issue a final regulation authorizing the lawful use of Hemp-CBD in foods and dietary supplements. Specifically, Wyden explained that the regulatory confusion and uncertainties surrounding CBD could not continue much longer. To that end, Wyden recommended that the FDA adopt certain steps to streamline the regulatory process and directed the agency to issue “enforcement discretion guidance” by August 1 of this year and to follow up by issuing final rules as quickly as possible while the agency develops permanent final regulations.

In response to Senator Wyden and other stakeholders’ demands, FDA Acting Chief Information Officer, Amy Abernethy, recently announced on Twitter that:

[FDA] is expediting its work to address the many questions about cannabidiol (CBD). This is an important national issue with public health impact, & an important topic for American hemp farmers and many other shareholders.”

Abernethy went on to explain that while the agency is enthusiastic about research into the therapeutic values of CBD-infused products, it is also concerned with the need for safety.

To understand the breadth of issues and gather data on safety we have conducted a public hearing, reviewed the medical literature, and have an open public docket.”

If you recall, the public hearing to which Abernethy refers was held on May 31 and offered stakeholders a platform to share their thoughts and experience with the FDA and to stress the importance of developing a regulatory framework that would legalize the marketing and sale of CBD-infused foods and dietary supplements.

The public had an opportunity to weigh in with the FDA through July 16. Four days before the deadline, over three thousand comments had been published on the public docket. Now that the public comment period is over, the FDA will review the submitted data and anticipates reporting on its progress “around end of summer/early fall.”

Expediting the rulemaking process of CBD products will not only help clarify the legality of these products and render the cultivation and processing of hemp economically viable, it will also settle the position of many federal agencies on this issue. As we previously explained, numerous federal agencies, including the U.S. Patent and Trademark Office and the U.S. Alcohol and Tobacco and Trade Bureau, defer to the FDA in dealing with CBD-related issues.

Whether or not the FDA meets its proposed timeline, we will continue to monitor and report on its progress.

california hemp

A week or so ago, I wrote a post outlining the current state of California hemp laws, and noted that there are two pending pieces of legislation that could change the state of hemp law in California: AB-228 which deals more with adding hemp-derived cannabidiol to foods and other consumer products, and SB-153, which would re-write a significant portion of California’s Food and Agriculture Code that relates to hemp cultivators. Today, I’m going to talk about SB-153, which could have a massive impact on California’s hemp cultivation industry.  Below are some of the highlights of the bill.

A New Definition of “Industrial Hemp”

Currently, the California Health and Safety Code defines “industrial hemp” as follows:

“Industrial hemp” means a crop that is limited to types of the plant Cannabis sativa L. having no more than three-tenths of 1 percent tetrahydrocannabinol (THC) contained in the dried flowering tops, whether growing or not; the seeds of the plant; the resin extracted from any part of the plant; and every compound, manufacture, salt, derivative, mixture, or preparation of the plant, its seeds or resin produced therefrom.

Current provisions of the Food and Ag. code relative to hemp use this definition. But if SB-153 is passed, it’ll add a brand new definition of “industrial hemp” to the Food & Agriculture Code, as follows:

“Industrial hemp” means an agricultural product, whether growing or not, that is limited to types of the plant Cannabis sativa L. and any part of that plant, including the seeds of the plant and all derivatives, extracts, the resin extracted from any part of the plant, cannabinoids, isomers, acids, salts, and salts of isomers, with a delta-9 tetrahydrocannabinol concentration of no more than 0.3 percent on a dry weight basis.

To be clear, this new definition would be in addition to—and not a replacement of—the current state definition. And significantly, the two definitions are different. For example, the general H&S Code definition appears to place caps on the total amount of THC, whereas the Food and Ag code’s definition would place limits on delta-9 THC. This could create confusion or different standards among state agencies. We’ve written about how “total THC” limits have caused a headache in Oregon, and it’s possible that these different definitions could lead to similar issues.

Additionally, the Food and Ag code’s definition only applies to agricultural products, and may not apply to many other derivatives, for example, hemp products imported from other states.

A California Hemp Production Plan

SB-153 would force the state to create and submit to the U.S. Department of Agriculture a hemp production plan. If you haven’t read about the 2018 Farm Bill yet, in short, it allows states to set up their own hemp production programs after approval by the USDA. States aren’t forced to submit plans and have to affirmatively take steps to do it, and SB-153 would put CA on track to do just that.

New Definitions of “Established Agricultural Research Institutions”

Current California law creates a scheme for commercial cultivators to register to cultivate hemp, and then exempts established agricultural research institutions (“EARIs”) from needing to register. EARIs currently can include:

(1) A public or private institution or organization that maintains land or facilities for agricultural research, including colleges, universities, agricultural research centers, and conservation research centers; or

(2) An institution of higher education (as defined in Section 1001 of the Higher Education Act of 1965 (20 U.S.C. 1001)) that grows, cultivates or manufactures industrial hemp for purposes of research conducted under an agricultural pilot program or other agricultural or academic research.

Part (2) of the EARI definition is pretty consistent with the 2014 Farm Bill, which is still in effect, but part (1) is much broader. In the wake of this law, many institutions that may not necessarily qualify for cultivation under federal law would be able to cultivate in CA.

SB-153 would close that gap. The bill would re-define EARIs to only include:

an institution of higher education, as defined in Section 101 of the federal Higher Education Act of 1965 (20 U.S.C. Sec. 1001), that grows, cultivates, or manufactures industrial hemp for purposes of research conducted under an agricultural pilot program or other agricultural or academic research in accordance with Section 7606 of the federal Agricultural Act of 2014 (7 U.S.C. Sec. 5940) or otherwise approved by the secretary.

This new definition of EARIs would be much more in line with the 2014 Farm Bill, and would not allow many different kinds of parties to claim EARI exemptions. But note, this definition change won’t take effect until after the state’s hemp production plan is approved. So it could take a long time.

Expansion of Hemp Registrations

What will all of those companies who used to qualify as EARIs and don’t want to cultivate commercial do if the definition changes? Well, the answer is that SB-153 would expand required registrations from only commercial cultivators to include all cultivators except EARIs. So purely private companies who wanted to do hemp research and could not qualify as EARIs or work with EARIs would probably need to get registered with their county commissioner and follow the Department of Food and Agriculture (and localities’) requirements for registered cultivators.

Penalties for Misbehavior

SB-153 would add some pretty key penalty provisions that are not currently in the Food and Ag code.

First, SB-153 says that “[a]ny person convicted of a felony relating to a controlled substance under state or federal law before, on, or after January 1, 2020, shall be ineligible, during the 10-year period following the date of the conviction, to participate in the industrial hemp program.”

This is exceptionally broad. Anyone who has been convicted, ever, in any state, for any drug, would be barred from participating in the program for 10-years post conviction. We don’t have hemp regs yet or even know what the production plan will look like. But the extent of this could be far-reaching. If “ownership” is anything like in the cannabis rules, this may exclude a wide class of persons from even owning relatively minor stakes in hemp companies.

Second, “A person that materially falsifies any information contained in an application [for commercial or non-commercial registration], or other application to participate in the industrial hemp program, shall be ineligible to participate in the industrial hemp program.”

This is also significant. Companies who are seeking registrations will need to be 100% sure that everything they put into their application is accurate. Even minor slip-ups could lead to ineligibility to participate in the hemp industry.

These are just a few examples of the significant changes that SB-153 might bring about. The bill isn’t guaranteed to pass, and it’s possible that it gets amended again. It’ll be a while before it’s fully implemented, but it’s clear now that the state wants to get up to speed and in compliance with the federal farm bills as fast as possible. We’ll continue to report on SB-153 and its aftermath in the coming months.

All of us at Canna Law Blog were saddened to learn that the estimable Mark Kleiman passed away over the weekend. Kleiman was probably the most influential scholar on cannabis policy. His views were creative and nuanced, data-driven and humanitarian. He was a strong opponent of the War on Drugs going back to the early 1980s, yet he also opposed a full commercial model for marijuana legalization. Instead, he argued for a middle ground that would end prohibition and mass incarceration, while preventing the rise of Big Marijuana and its potentially detrimental public health consequences.

Our Seattle lawyers have distinct memories of watching Kleiman serve as Washington’s appointed “Pot Czar” as it built out the first state cannabis program in 2014. We spoke alongside him on issues as far afield as tribal cannabis programs back in those days, and we conferred with him over the years and used his writings to teach law students annually going back to 2016.

Kleiman was excellent in interview, lecture and print formats. For just a few of his greatest (and most accessible) hits, check out the following:

If we were to identify the most prominent theme in Kleiman’s scholarship, it would probably be that the lack of a coherent national policy on cannabis legalization is bad for everybody. States will race to the bottom on regulation and pricing, making the same mistakes as they did with alcohol and tobacco; public health will suffer.

Kleiman also did not shy away from saying things the cannabis industry and its regulators didn’t want to hear, on issues from cannabis use disorder as a real and growing problem, to his strongly held belief that taxes should correlate to each product’s intoxicating power. Our cannabis business lawyers did not always agree with Mark, but to a person we always considered him well-informed, thoughtful, and honest.

Kleiman left at a very interesting time for cannabis policy in the United States. Federal cannabis policy is still a disaster. States are building their programs on revenue-raising models, rather than emphasizing public health. The industry is dividing into THC companies and CBD companies. International norms are changing fast. Overall, it feels like things are moving more quickly than ever, but in a more chaotic manner than ever before.

The next few years will see continued need for strong voices on cannabis policy. Think tanks like the Brookings Institution and RAND Corporation continue to do important work, along with advocacy organizations like the Drug Policy Alliance and Marijuana Policy Project. As far as individuals, though, Kleiman was probably the single most respected and important voice in the field. He leaves an enduring legacy and giant shoes to fill.

Mark Kleiman will definitely be missed.

SAFE act cannabis banking

Tomorrow, a Republican-controlled Senate Banking Committee hearing will examine cannabis businesses’ lack of access to banking services to further consider the SAFE Banking Act. The July 23, 2019 hearing will include Senators Jeff Merkley (D-OR) and the legislation’s chief GOP cosponsor, Cory Gardner (R-CO). As we’ve discussed on the blog previously, the legislation would allow financial institutions to serve state-legal marijuana businesses without fear of federal repercussions. Supporters of the Act have stressed the public-safety concerns that have resulted from the lucrative cannabis industry conducting business on a cash-only basis.

Scheduling of the hearing took industry officials by surprise based on prior comments. In April and May 2019, Chairman of the Committee, Senator Mike Crapo (R-ID), indicated he might refuse to give the topic a hearing: “as long as cannabis is illegal under federal law, it seems to me to be difficult for us to resolve ‘the financial services piece.’” The scheduling comes after pressures have increased, with state banking associations, the National Association of State Treasurers, the top financial regulators of twenty-five states, a majority of state attorneys general, and bipartisan governors of twenty states all having now endorsed the legislation and calling on Congress to act.

The hearing, titled “Challenges for Cannabis and Banking: Outside Perspectives,” will include witnesses such as representatives of the Credit Union National Association (CUNA), executives from the banking industry like Citywide Banks, prohibitionist group Smart Approaches to Marijuana, and CEO of marijuana retail chain LivWell Enlightened Health, John Lord. CUNA President and CEO, Jim Nussle, already commented:

At its heart, cannabis banking is a public safety issue. It’s an $8.3 billion industry that’s currently being forced to operate almost entirely in cash. … While 33 states, territories and DC have legalized cannabis, it’s been overwhelmingly difficult to provide these businesses financial services because handling transactions are currently considered money laundering. Credit unions have been leading the way in helping to get this money off the streets. We are dedicated to finding a solution to this ongoing challenge that impacts every community around the country and look forward to working with Senate leaders during this hearing and with Congress at large.”

CEO of the Cannabis Trade Federal, Neal Levine, said in a statement that he hoped the organization’s testimony will contribute to the “growing momentum behind meaningful and historic cannabis policy reform”:

This hearing is yet another sign that Congress is taking the cannabis banking problem seriously and intends to take action to correct it,” said Levine. “Cannabis businesses operating legally under state and local laws should have the same access to banking and financial services as any other type of business.”

As a reminder, the companion legislation cleared the House Financial Services Committee with a bipartisan vote in March and now has 206 cosponsors (almost half the body!).  The Senate legislation is presently backed by 32 out of 100 senators. The House version of the SAFE Banking Act was expected to be voted on by the full chamber by now, but it’s been delayed – a spokesperson for Representative Ed Perlmutter (D-CO) indicated: “House Democrats have a robust agenda which has made it tough to get time on the legislative calendar. … But as we continue to talk with people, we keep gaining more and more support and look forward to a strong vote on the floor of the House soon.” Tomorrow’s hearing is another step in the right direction.

colorado hemp

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”). Each Sunday we will summarize a new state in alphabetical order. So far, we have covered AlabamaAlaska, ArizonaArkansas, and California. This week we turn to Colorado.

When it comes to hemp, few states have embraced hemp like Colorado.  According to a report prepared by Marijuana Business Daily,  in 2018, Colorado allocated 12,042 outdoor acres and 2.35 million square feet indoors to the cultivation of hemp.  If you buy a product containing hemp, in any state across the country, it likely came from Colorado.

The state’s cultivation program is overseen by the Colorado Department of Agriculture (“CDA”). “Industrial hemp” or “hemp” means “the plant Cannabis sativa L. and any part of the plant, including the seeds of the plant and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of no more than three-tenths of one percent on a dry-weight basis.” CDA oversees the cultivation of hemp does not regulate the processing of hemp into other products, including Hemp-CBD other than requiring that cultivators disclose agreements with Colorado hemp manufacturers.

However, in 2018 Colorado enacted House Bill 18-1295 (“HB 18-1295”), codified in part in C.R.S. 25-5-426, which establishes that the manufacturing of an “industrial hemp” or “hemp product” must comply with Colorado’s Food and Drug Act. HB 18-1295 defines an “industrial hemp product” as “a finished product containing industrial hemp that”:

  • Is a cosmetic, food, food additive, or herb;
  • Is for human use or consumption;
  • Contains any part of the hemp plant, including naturally occurring cannabinoids, compounds, concentrates, extracts, isolates, resins, derivatives; and
  • Contains a delta-9 tetrahydrocannabinol concentration of no more than three-tenths of one percent.

Manufacturers of industrial hemp products must register with the Colorado Department of Public Health and Environment (“CDPHE”).

Colorado imposes certain labeling requirements on hemp products:

  • An identity statement, which indicates what the product is (not a brand name).
  • A net weight statement.
  • A list of all ingredients.
  • The company name with an address

The label must also clearly identify that it includes hemp as an ingredient and if there is CBD, the amount of CBD and whether it is an isolate. Labels must also include the statement “FDA has not evaluated this product for safety or efficacy,” and may not contain any health claims.

In this 50-state series, we’re moving through states alphabetically. However, if we were ranking the states, Colorado would almost certainly come in first due to its full-on embrace of hemp. The state was one of the first to legalize recreational marijuana so we’d give them a pass if they were to slow things down when it came to hemp. Obviously, that’s not the route taken by the Centennial State. In addition, in light of the uncertainties surrounding how the FDA would regulate Hemp-CBD, the state has tasked CDPHE with overseeing the manufacture of products containing hemp and Hemp-CBD. Kudos to Colorado for boldly moving forward with hemp.

elizabeth warren marijuana

Each Saturday, we have been running a series of blog posts that take a close look at each of the Democratic Party candidates for President in 2020. We examine each candidate’s historic approach to marijuana law and policy, and we also canvas their current respective stances on marijuana.

Over the past three weeks, we covered Joe BidenBernie Sanders and Kamala Harris. Today, we turn to Elizabeth Warren, the Senator from Massachusetts.

Grade: B+

Stance on marijuana: This past April, Senator Elizabeth Warren clearly vocalized her support for cannabis legalization at a CNN town hall. On social media, Warren has also come out strongly in support of legalization. Warren’s website, however, does not specifically advocate for legalization but rather for “rewriting our laws to decriminalize marijuana.” It is unclear whether this is an important distinction in Warren’s platform as a presidential candidate.

History with marijuana legislation: Warren’s stance on marijuana has evolved over the course of her senate career. In 2011 during her first campaign for Senate, Warren expressed openness to legalizing medical marijuana but opposed legalization in general. At the CNN town hall this past April, Warren declared that she had supported Massachusetts’ ballot initiative to legalize marijuana back in 2012. In reality, Warren was hesitant to offer her support for the ballot initiative, vacillating between silence and tentative approval. In a 2018 interview with Rolling Stone Magazine, Warren also exaggerated her support for Massachusetts’ 2016 ballot initiative to legalize marijuana; she said she had endorsed it, but her only statement about the initiative was that she was “open to the possibility of legalizing marijuana.”

In 2018, however, Warren pushed for marijuana reform through both her rhetoric and legislative action. In 2018, she co-wrote a letter to President Donald Trump asking him to reinstate the Cole memo. Later that year, she co-sponsored the STATES Act, a bi-partisan bill which, if passed, would amend the Controlled Substances Act to allow States to “implement their own marijuana laws without federal interference.” She also co-sponsored the Marijuana Justice Act (which would legalize marijuana if passed) as well as multiple other marijuana reform bills.

Warren became a vocal advocate of legalization just a year before announcing her intention to run for president in December of 2018. Considering that the majority of Americans support legalization, this shift in Warren’s platform was most definitely a deliberate move as Warren geared up for her presidential campaign.

Conclusion: Warren receives a “B+” grade on cannabis. She obviously wants to come across as a long-time advocate for marijuana reform. Despite her claims, however, Warren did not consistently support legalization of marijuana before 2016. Additionally, the statement on Warren’s website regarding marijuana calls for decriminalization, rather than legalization, even though Warren herself has called for legalization. Fortunately, Warren’s recent legislative action surrounding marijuana is promising, indicating Warren would likely reform marijuana laws if elected President.

washington marijuana residency requirement

On June 26, 2019 the Supreme Court of the United States (SCOTUS) issued a ruling in Tennessee Wine and Spirits Retailers Association v. Thomas invalidating a two-year residency requirement for Tennessee retail liquor stores. The Washington State Liquor and Cannabis Board (LCB) has a similar six-month durational-residency requirement required for any person applying to be a true party of interest (TPOI) in a marijuana business. The Thomas decision could mean that days are numbered for Washington’s durational residency requirement.

Tennessee requires alcoholic beverages distributed in the state to pass through a three-tiered system overseen by the Tennessee Alcoholic Beverage Commission (TABC). TABC issues licenses to producers, wholesalers, and retailers of alcoholic beverages. Producers may sell only to wholesalers, wholesalers only to retailers, and retailers may sell to consumers. In order to hold a retailer license, an individual must show that he or she has been a resident of Tennessee for the last two years. SCOTUS noted that this requirement is very restrictive, especially when it is applied to corporations:

The rule for corporations is also extraordinarily restrictive. A corporation cannot get a retail license unless all of its officers, directors, and owners of capital stock satisfy the durational-residency requirements applicable to individuals. In practice, this means that no corporation whose stock is publicly traded may operate a liquor store in the State.

In 2012, the Tennessee attorney general issued an opinion stating that the durational residency requirement violated the Commerce Clause of the constitution and TABC stopped enforcing the requirements against new applicants. After TABC recommended approval of several applicants who did not meet the residency requirement, Tennessee Wine and Spirits Retailers Association (Association), a trade association of in-state liquor stores, threatened to sue. In turn, TABC’s executive director filed a declaratory judgment in state court to settle the question of the residency requirements’ constitutionality. The case was removed to federal court and the requirements were deemed unconstitutional. The Association appealed and the Court of Appeals for the Sixth Circuit affirmed the decision. The Association appealed the decision on the constitutionality of the 2-year residency requirement.

The Court’s analysis focused on whether or not Tennessee’s law was “saved” by Section 2 of the 21st Amendment. The 21st Amendment ended alcohol prohibition and Section 2 gives each State leeway in regulating alcohol in light of public health and safety measures. The Court determined that Section 2 did not save Tennessee’s durational-residency requirement stating that Section 2 “is not a license to impose all manner of protectionist restrictions on commerce in alcoholic beverages. Because Tennessee’s 2-year residency requirement for retail license applicants blatantly favors the State’s residents and has little relationship to public health and safety, it is unconstitutional.”

However, the Court also determined that the residency requirement violated the Commerce Clause of the Constitution. The Commerce Clause provides that “Congress shall have Power. . . to regulate Commerce with foreign Nations, and among the several States[.]” SCOTUS has interpreted a “dormant Commerce Clause” (DCC) which implies that the Commerce Clause does not allow states to implement protectionist measures that inhibit trade among states. We have been writing about this in the context of cannabis residency restrictions for a long time.

Under the DCC, “if a state law discriminates against out-of-state goods or nonresident economic actors, the law can be sustained only on a showing that it is narrowly tailored to advance a legitimate local purpose.” SCOTUS determined that “Tennessee’s 2-year durational-residency requirement plainly favors Tennesseans over nonresidents, and neither the Association nor the dissent below defends that requirement under the standard that would be triggered if the requirement applied to a person wishing to operate a retail store that sells a commodity other than alcohol.”

Under this analysis, Washington’s residency requirement appears out-of-line with the DCC and, by extension, unconstitutional. Like Tennessee’s regulation of liquor, Washington uses a three-tiered system to regulate marijuana sales, licensing producers, processors, and retailers. All TPOIs in all license types must meet Washington’s six-month residency requirement. This restriction significantly impacts corporations, even more so than Tennessee’s requirements because it is imposed on all shareholders and their spouses. That means that a person holding less than 1% of an ownership interest and her spouse must qualify as Washington residents.

Marijuana is a unique commodity given that it remains illegal under federal law. It is also illegal under Washington law to import marijuana from any other state. All Washington marijuana must be grown in-state. However, Washington’s 6-month is a clear protectionist measure favoring Washington owners. It would be hard for Washington to argue that this is the narrowest way for Washington to undertake the legitimate interest of regulating marijuana, given that many other legal states have either never imposed such residency requirements or have removed them or loosened those requirements. Utah was the latest state to do so with its medical marijuana regulations, as reported by the Salt Lake Tribune.

Though, the Thomas decision is arguably distinguishable from the current residency situation in Washington marijuana, it certainly does not help the state’s case if the requirement is challenged. Washington’s residency requirement is strict and controversial. As marijuana legalization spreads across the country it seems like the residency requirement is not sustainable, long term. It remains to be seen whether the Thomas decision is the last straw.

california cannabis regulations ownership

We’ve written a lot about cannabis M & A, entity selection choices, and financing on the Canna Law Blog and how these transaction and changes do not amount run of the mill transactions because of the invasive regulatory overlay in almost all states. California though stands alone when it comes to the regulatory gauntlet on changes of ownership, entity, and or financing for a cannabis business. In particular, those licensees governed by the Bureau of Cannabis Control (“BCC”) (specifically, retailers, distributors, labs, and delivery services) face the worst of it though California Department of Public Health and California Department of Food & Agriculture are no picnic either. And where a lot of publicly traded money (including from Canada) is now playing in the California cannabis space, issues of changes of ownership, changes of entities, and changing financial interests are hotter than ever with a good amount of licensees breaking the laws and rules without even knowing it.

1.     Change in Ownership.

Don’t forget that state licenses are not transferable: only the businesses that hold those licenses can be bought and sold. So, changes of ownership are inevitable as the secondary market for licenses picks up. Under current, final BCC regulations (which were adopted on January 16 of this year), in the event of “the sale or other transfer of the business or operations covered by the licensee… if one or more of the owners of a license change, the new owners shall submit [all owner information] for each new owner to the [BCC] within 14 calendar days of the effective date of the ownership change.”

Doesn’t sound so bad other than the 14-day timeline, but here’s the real catch:

The business may continue to operate under the active license while the [BCC] reviews the qualifications of the new owner(s) in accordance with the [Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”)] and these regulations to determine whether the change would constitute grounds for denial of the license, if at least one existing owner is not transferring his or her ownership interest and will remain as an owner under the new ownership structure. If all owners will be transferring their ownership interest, the business shall not operate under the new ownership structure until a new license application has been submitted to and approved by the [BCC], and all application and license fees for the new application have been paid.”

Translated: if you want your cannabis business to continue to operate while the new owners are vetted by the BCC, you need to leave on an original “owner” from the time of initial licensing. Note that “ownership interest” is not defined under the BCC rules or by MAUCRSA. However, to conservatively satisfy this rule, licensees should ensure that at least one original owner maintains at least 20% in equity in the cannabis company (where the definition of owner includes the ownership of 20% or more of a cannabis company).

In California M&A, what this has led to most of the time is two closings, an initial and a final. At the initial closing, the purchaser takes 80% of the cannabis company and one original owner stays on 20%. Then, once the purchaser is recognized as an “owner” by the BCC (which there is no official approval for that, but that recognition will show up in the licensee’s licensing portal), the purchaser moves to close on the final 20%. Importantly:

“[a] change in ownership does not occur when one or more owners leave the business by transferring their ownership interest to the other existing owner(s). In cases where one or more owners leave the business by transferring their ownership interest to the other existing owner(s), the owner or owners that are transferring their interest shall provide a signed statement to the Bureau confirming that they have transferred their interest.”

The last important issue to point out is that the BCC will not pre-vet owners or a transaction; the purchaser has to close, become an “owner”, submit the change of ownership request (via this form) with all corresponding owner information within the 14-day deadline, and then hang on while it’s vetted by the BCC.

2.     Change in Financial Interest Holders.

Unlike other industries, cannabis companies cannot take money from just anyone for financing. With very few exceptions in California, anyone who loans money to, makes an investment in, or has an equity interest (i.e., profit share interest) in a cannabis business must be disclosed to the state as a “financial interest holder” upon the filing of the license applicant’s annual application. And there is now continued reporting requirement when your financial interest holders change. Pursuant to BCC regulations:

“[w]hen there is a change in persons with financial interest(s) in the commercial cannabis business that do not meet the requirements for a new license application under this section, the licensee shall submit [required financial interest holder information]  within 14 calendar days of the change. In turn, any time a new entity or person lends money to a cannabis business, that transaction has to be reported within 14 days to the BCC.”

Same thing goes for the extension of equity interests/profit sharing, and if a person or entity profit shares at 20% or more, they may be considered an owner, which must adhere to the “change of ownership” reporting above. Again, proceed with caution on new financing sources in California.

3.     Changes to Entity.

Because of the Compassionate Use Act of 1996, many California cannabis operators (and retailers in particular, especially in the City of L.A.) operated as non-profits. And a lot of those operators were grandfathered in for continued operations in their cities and counties, which if you want to get a state license, you must first secure local approval, so these operators have some very valuable entitlements. If you’re a non-profit and you want to sell that entity, you can’t: there’s no equity to sell in a non-profit, so you must reincorporate as an entity that creates equity to sell (and don’t forget that many of these old non-profits don’t even have bylaws or structures that permit for a lawful conversion). In California, as a non-profit corporation, you must first convert to a corporation and that corporation can then reincorporate as any other business entity, including a limited liability company. However, in California cannabis, you can no longer convert without consequence if you have a state license. Earlier in July, the BCC had posted on one of its FAQ pages, the following statement:

“Licenses issued by the Bureau are issued to a specific person (business entity or individual). Licenses may not be transferred to a new entity or individual. If a licensee wishes to convert their business entity, such as from an LLC to a corporation, they must submit a new application and obtain a new license under the new entity. A licensee who wishes to convert from a non-profit to a for-profit, or vice versa, should contact the Bureau to confirm whether the conversion would require a new application.”

However, the BCC recently changed this language to say:

A licensee that changes their business entity type will usually be required to submit a new application and obtain a new license issued to the new entity. However, a licensee who is converting business entity types must meet all of the requirements of the Corporations Code to be considered the same entity for the purposes of licensing and may not be required to submit a new application.

Translated: if you’re converting your non-profit corporation to a for-profit corporation and your California entity number and other corporate data do not change, the chances of you having to get a new license are probably low. However, if you convert into anything beyond a for-profit corporation and your corporate identification number and data changes, you’re probably going to have to get a new license whether or not there’s also a change of ownership.

Again, regular business changes that happen every day in corporate America are severely curtailed in cannabis and especially in the Golden State. If you’re contemplating any of the above changes, you really need to do your homework before execution or you could end up losing your licensing and incurring months of delay in trying to secure a new state license. Proceed with caution accordingly.

cannabis regulatory agency litigationCannabis companies in regulated states like California often find themselves needing to report to their licensing agency or the municipal government that gave them permits when it comes to pretty much any change in their business, owners, or financiers. These communications typically include:

  • Requesting to modify business operations or their premises
  • Reporting changes to the business
  • Reporting the addition or change of owners or financial interest holders
  • Asking questions about the agencies’ interpretation of rules
  • Self-reporting potential rule violations in order to mitigate potential enforcement
  • Responding to allegations from agencies that rules have in fact been violated

In any of these situations—or in virtually any other situation where a cannabis company is interacting with a state or local agency—it’s important to know exactly how to interact with regulators and what exactly to say and how.

First, what you say to regulators matters. A lot. Our cannabis attorneys have seen licensees ask routine regulatory questions, only to be told that they are violating some obscure rule, which jeopardizes the license. It’s often a challenge to communicate with agencies or governments, but that’s especially so for cannabis companies that don’t have a firm understanding of the applicable laws, regulations, and guidance materials (and especially often buried FAQs) that agencies may rely on to interpret their own rules (such as final statements of reasons for rules, guidance issued in press releases, etc.). While there are situations where even the most seasoned experts can’t avoid enforcement by the agencies, it’s still important to understand the rules before you ever open your mouth to a regulator.

Second, when you communicate with agencies or governments, you are creating a record that can either be used by you or against you. If a cannabis company ever finds itself in a position where it needs to appeal an agency decision, the communications it’s had with the agency on a specific point will be relevant in that appeal. The cannabis company will want the neutral evaluator to see that the company adequately explained how it was in fact complying with the agency’s rules or taking steps to mitigate any potential rule violation before the agency penalized it. If you have an opportunity to effectively communicate with an agency and make your case in writing, you shouldn’t hesitate.

Third, and most importantly, if a rule violation penalty is inevitable, you’re going to be neck-deep in the Administrative Procedure Act of your state, which is pretty difficult to sort on your own. Prosecuting an administrative appeal requires fairly significant litigation experience as well as a deep understanding of an agency’s rules and general administrative procedures. These appeals can carry serious consequences if not charted properly, so get your administrative appeal plan and strategy together now.

The bottom line is that regulatory compliance hinges a lot on your communications with your direct government overseers, and you need to learn the dance of how to interact with those regulators accordingly before you find yourself wading into serious rule violations from which you cannot recover.