Winter LLP Update: Self-Distribution of Cannabis Products
There has been a lot of confusion recently about Self-Distribution under state and local laws. It hasn’t helped matters that some local (city/county) ordinances, in jurisdictions such as Monterey County, for example, allow cultivation and manufacturing permit holders to “self-distribute” their material or products without the use of a third-party distributor.
As such, this update is being provided to help you understand what, exactly, “self-distribution” means at the state level.
Under current California law, there are only two types of businesses that can legally transfer or transport cannabis: (1) Licensed dispensaries that are authorized to provide delivery services can “transfer” cannabis or cannabis products directly to a customer, and (2) licensed distributors can “transport” cannabis and cannabis products between licensees. It is important to emphasize that Section 26070 of the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) expressly states that “the transportation of cannabis and cannabis products shall only be conducted by persons holding a distributor license.”
Section 26110 of MAUCRSA does allow a cultivation or manufacturing licensee to self-distribute its cannabis or cannabis products to other licensees. However, this is only allowed if the business also holds a valid Type 11 state distribution license. Accordingly, while a local city or county ordinance may allow a permitted manufacturer or cultivator to distribute its own cannabis or cannabis products without a separate locally issued distribution permit, a Type 11 state distribution license is still required.
Whether self-distributing or not, all must comply with the regulations and requirements placed upon regularly licensed distributors, which include the following:
- Prior to transportation, distributors shall:
- Complete an electronic shipping manifest.
- Transmit the manifest to the bureau and the licensee receiving product.
- During transportation, distributors shall:
- Maintain a physical copy of the manifest and make it available upon request to the Department of Consumer Affairs and law enforcement officers.
- Upon receipt, licensee receiving shipment shall:
- Submit to the licensing authority a record verifying receipt of the shipment and the details of the shipment.
We hope this clears up some of the confusion surrounding the requirements placed on cannabis businesses that hope to Self-Distribute their material or products to other licensees.
As always, should you have any questions or want any additional information regarding Self-Distribution, or any other local permitting or state licensing requirements, please let us know.
Thank you, stay safe, and good luck out there! Todd Winter, WINTER LLP.
What is Proposition 65?
1. What is Proposition 65?
Proposition 65 (Prop 65) requires businesses to notify Californians about significant levels of chemicals in products they purchase, in their homes or workplaces, or that are released into the environment. Prop 65 also prohibits California businesses from knowingly discharging significant amounts of listed chemicals into sources of drinking water. Once a chemical is listed as one of the Prop 65 chemicals, businesses have 12 months to comply with warning requirements and 20 months to comply with the discharge prohibition. The Office of Environmental Health Hazard Assessment (OEHHA) administers Prop 65, which is part of the California Environmental Protection Agency (EPA). The California EPA also evaluates all currently available scientific information on substances considered for placement on the Prop 65 list.
Businesses are required to provide a “clear and reasonable” warning before knowingly and intentionally exposing anyone to a listed chemical. This warning can be given by labeling a consumer product, posting signs at the workplace, distributing notices at a rental housing complex, or publishing notices in a newspaper.
2. Which types of businesses are exempt from Prop 65 warning requirements?
- Businesses with less than 10 employees;
- In Consumer Advocacy Group, Inc. v Pilot Automotive, Inc., the court found that the defendant corporation’s staff of less than 10 employees, was a substantial factor in finding that the corporation had not violated Prop 65 when it sold steering wheel covers which contained lead. The court stated:
- The corporation’s staff cannot be held liable under Health & Safety Code § 25249.11 because it contains fewer than 10 employees. Health & Safety Bode § 25249.11(b) states that a “person” under the Act does not include a “person employing fewer than 10 employees in his or her business.”
- Government agencies; and
- Businesses whose exposures are so low as to create no significant risk of cancer, birth defects, or other reproductive harm.
3. What are the content requirements that a Noticing Party must comply with before commencing an action alleging a Prop 65 violation?
- General Information. Each notice shall include as an attachment a copy of “The Safe Drinking Water and Toxic Enforcement Act of 1986 (Proposition 65): A Summary” prepared by the lead agency. This attachment need not be included in the copies of notices sent to public enforcement agencies.
- Description of violation.U A notice shall provide adequate information from which to allow the recipient to assess the nature of the alleged violation, as set forth in this paragraph. The provisions of this paragraph shall not be interpreted to require more than reasonably clear information, expressed in terms of common usage and understanding, on each of the indicated topics.
4. What information must the Noticing Party identify in the Notice?
- The name, address, and telephone number of the noticing individual or a responsible individual within the notice entity and the name of the entity;
- The name of the alleged violator or violators;
- The approximate time period during which the violation is alleged to have occurred; and
- The name of each listed chemical involved in the alleged violation.
5. What information is the Notice not required to contain?
- The specific retail outlet or time or date at which any product allegedly violating the Act was purchased;
- The level of exposure to the chemical in question;
- The specific admissible evidence by which the person providing the notice will attempt to prove the violation;
- For product, the UPC number, SKU number, model or design number or stock number or other more specific identification of products;
- For geographic areas, the lot, block or other legal description of the property in question
6. Do the products alleged to be in violation of Prop 65 need to be included?
Yes. For notices of violation of § 25249.6 of the Act involving consumer product exposures, the name of the consumer product or service, or the specific type of consumer product or services, that cause the violation, with sufficient specificity to inform the recipients of the nature of the items allegedly sold in violation of the law and to distinguish those products or services from others sold or offered by the alleged violator for which no violation is alleged.
7. Do the means by which an individual alleges to have been exposed to the chemicals in the products need to be stated?
Yes. For all notices of violation of § 25249.6, the route by which exposure of the listed chemical is alleged to occur needs to be stated in the Notice. For example, various types of ways people are exposed to harmful chemicals include inhalation, ingestion, dermal contact, etc.
8. How must the Notice be served on the alleged violator?
Notices shall be served by first class mail or any manner that would be sufficient for service of a summons and complaint under the California Code of Civil Procedure. In lieu of service as prescribed in the California Code of Civil Procedure, a notice may be served on the Attorney General and a district attorney or city attorney by electronic mail if:
- The Attorney General, District Attorney or City Attorney has specifically authorized such service and the authorization appears on the Attorney General’s Web site.
- The Notice and related documents are sent to the electronic mail address specified, and in the format (e.g. Word, Adobe Acrobat) specified.
- Service by this method is not effective until the documents are actually received. Notice is actually received when it is acknowledged by the recipient.
- Where a document is served electronically, time shall be computed as it would for service by mail within the State of California.
9. Does the Notice require a certificate of service?
Yes, certificate of service shall be attached to each notice listing the time, place, and manner of service and each of the parties upon which the notice was served.
10. Who else shall be served with the Notice of an alleged violation?
Notices shall be served upon each alleged violator, the Attorney General, the district attorney of every county in which a violation is alleged to have occurred, and upon the city attorneys of any cities with populations according to the most recent decennial census of over 750,000 and in which the violation is alleged to have occurred.
- Where the alleged violator has a current registration with the California Secretary of State that identifies a Chief Executive Officer, President, or General Counsel of the corporation, the notice shall be addressed to one of those persons.
11. What other necessary documents must the Noticing Party provide to the alleged violator in its Notice?
If a private party alleges that a violation occurred based on one of the exposures described above, the private party must first provide the alleged violator a notice of special compliance procedure and a proof of compliance form. The alleged violator must complete and submit the compliance form to the Noticing Party at an address provided postmarked within 14 days of receiving the notice.
12. How does an alleged violator respond to a Notice?
A private party may not file an action against the alleged violator for these exposures, or recover in a settlement any payment in lieu of penalties or any reimbursement for costs and attorney’s fees, if the notice of violation was served on or after October 5, 2013, and the alleged violator has done all of the following within 14 days of being served notice:
- Corrected the alleged violation;
- Agreed to pay a civil penalty of $500 to the private party within 30 days
- Notified the private party serving the notice in writing that the violation has been corrected
An alleged violator may satisfy these conditions only one time for a violation arising from the same exposure in the same facility or the same premises. The satisfaction of these conditions does not prevent the Attorney General, a district attorney, a city attorney of a city greater than 750,000 in population, or any full-time city prosecutor with the consent of the district attorney, from filing an enforcement action against an alleged violator. The amount of any civil penalty for a violation shall be reduced to reflect a payment made by the alleged violator for the same alleged violation to a private party.
13. What kind of action is the Plaintiff entitled to commence after the 60 days have elapsed form the date of service of Notice and what can the alleged violator do to avoid such action?
An action is deemed to have been “commenced more than 60 days after the person has given notice” where more than 60 days have elapsed from the date of service of the notice, as the date would be calculated for service of a document pursuant to the provisions of the Code of Civil Procedure § 1013.
The plaintiff is entitled to commence a private enforcement action, which refers to individually initiated litigation, either as stand-alone or follow-on action, before a court to remedy an infringement of antitrust law. If successful, the legal action leads to some sort of civil sanction imposed by a court such as damages, restitution, injunction, nullity or interim relief. Unlike public enforcement agencies, private parties do not have special (public) powers in civil law disputes.
In order to avoid private action enforcement on behalf of the Plaintiff, an alleged violator must ascertain that it has completed the following:
- Posted warning or warnings about the alleged exposure that complies with the law, and attaching a copy of that warning and a photograph accurately showing its placement on its premises
- Posted the warning or warnings demanded in writing by the Noticing Party, and attaching a copy of that warning and a photograph accurately showing its placement on its premises, OR
- Eliminating the alleged exposure, and attaching a statement accurately describing how the alleged exposure has been eliminated.
14. What are the civil penalties for a business found in violation of Prop 65?
A business found to be in violation of Prop 65 is subject to civil penalties of up to $2,500 per day for each violation. In addition, the business may be ordered by a court to stop committing the violation.
 The list contains a wide range of naturally occurring and synthetic chemicals that are known to cause cancer or birth defects or other reproductive harm. These chemicals include additives or ingredients in pesticides, common household products, food, drugs, dyes, or solvents. Listed chemicals may also be used in manufacturing and construction, or they may be byproducts of chemical processes, such as motor vehicle exhaust.
 For chemicals that are listed as causing cancer, the “no significant risk level” is defined as the level of exposure that would result in not more than one excess case of cancer in 100,000 individuals exposed to the chemical over a 70 year life time. In other words, a person exposed to the chemical at the “no significant risk level” for over 70 years would not have more than a “one in 100,000” chance of developing cancer as a result of that exposure.
 For chemicals that are listed as causing birth defects or reproductive harm, the “no observable level” is determined by identifying the level of exposure that has been shown to not pose any harm to humans or laboratory animals. Prop 65 then requires this “no observable effect level” to be divided by 1,000 in order to provide an ample margin of safety.
Prop 64 Quick Reference – Key Points
- Goes into effect immediately
- Anyone over the age of 21
- Can purchase, possess, or give away up to 28.5 grams of cannabis (not in the form of concentrated cannabis) or up to 8 grams of concentrated cannabis
- Can possess up to 6 plants, as well as the cannabis produced from the plants in accordance with any reasonable local regulation or ordinance
- Can purchase, possess, manufacture, or give away cannabis accessories to anyone over 21
- Can smoke or ingest cannabis or cannabis products
- Cannabis and cannabis products cannot be smoke or ingested
- In public place
- Anywhere where smoking tobacco is prohibited
- Within 100 feet of a school, daycare center, or youth center (unless in a private residence)
- Cannot ingest or possess an open container of cannabis or cannabis product while either driving or riding as a passenger in a motor vehicle
Medical Cannabis Patients
- Beginning on January 1, 2018, a qualified patient must possess a new identification card supported by a physician’s recommendation
- Personal information of patients and their primary caregivers are considered “medical information” and enjoys the same protection as all other forms of confidential medical information
- The status as a qualified patient cannot be used to restrict parental rights in any proceeding before a family or juvenile court
Cannabis businesses and Licensing
- State licensing authorities are required to begin issuing licenses to recreational cannabis business no later than January 1, 2018
- Commercial recreational cannabis activity is lawful if the business (1) is in possession of both a state issued license and locally issued license, and (2) operate in accordance with all applicable regulations
- There are nineteen different license classifications to be issued by the state, they are:
- Type I = Cultivation; specialty outdoor; Small.
- Type IA = Cultivation; Specialty indoor; small.
- Type IB = Cultivation; Specialty mixed-light; Small.
- Type 2 = Cultivation; Outdoor; Small
- Type 2A = Cultivation; Indoor; Small
- Type 2B = Cultivation; Mixed-light; Small.
- Type 3 = Cultivation; Outdoor; Medium.
- Type 3A = Cultivation; Indoor; Medium.
- Type 3B = Cultivation; Mixed-light; Medium
- Type 4 = Cultivation; Nursery.
- Type 5 = Cultivation; Outdoor; Large.
- Type 5A = Cultivation; Indoor; Large.
- Type 5B = Cultivation; Mixed-light; Large.
- Type 6 = Manufacturer 1.
- Type 7 = Manufacturer 2.
- Type 8 = Testing.
- Type 10 = Retailer.
- Type 11 = Distributor.
- Type 12 = Microbusiness.
- All licenses are valid for 12 months, and must be renewed annually
- A separate license is required for each location where the applicant operates
- A single recreational cannabis business can obtain multiple licenses of different types,
- The exception is that an entity holding a license for testing is prohibited from holding any other license
- The same business can hold both recreational and medicinal licenses
- A recreational cannabis business cannot also be a licensed retailer of alcohol
- No cannabis business can be located within 600 feet of a school or daycare center (although this can be increased or decreased by local ordinances)
- Until December 19, 2018, an applicant must demonstrate five years of continuous California residency to be eligible for a license
- Licensing Authorities will give priority to applicants that can demonstrate they operated in compliance with the Compassionate Use Act prior to September 1, 2016, or is currently in compliance with the Medical Cannabis Regulation and Safety Act (MSCRA)
- Regulations governing commercial cultivation will be issued and enforced by the State Department of Food and Agriculture
- Regulations governing commercial manufacturing will be issued and enforced by The Department of Public Health
Product and Labeling Requirements
- Recreational cannabis and cannabis products cannot be sold to anyone under the age of 21
- Medical cannabis can be sold to persons 18 and older who possess a valid identification card
- All cannabis and cannabis products must be sold in child resistant packaging and display a specific government warning in bold letters
- Cannabis products cannot contain more than 10 milligrams of THC per serving
- Edible cannabis products must be divided into standardized serving sizes, and producers must ensure uniform distribution of THC and other cannabinoids throughout the product
- All cannabis and cannabis products for sale must contain a label stating the manufacture and/or cultivation date, source, and net weight of the cannabis contained in the package
- The labeling of all cannabis and cannabis products must list the pharmacologically active ingredients and the amount of such ingredients per serving and per package
- The labeling of all cannabis and cannabis products must list any solvents, nonorganic pesticides, herbicides, and fertilizers that were used during cultivation and manufacturing
- Labeling for cannabis products must comply with all other state and federal nutritional labeling requirements
- Local governments can enact their own zoning, land use, licensing, and other reasonable requirements
- Local governments can ban any and all forms of commercial cannabis activities
- Local governments can allow cannabis to be smoked and ingested on the premises of a retailer if access is restricted to those 21 years of age or older, cannabis is not visible from a public place, and no alcohol or tobacco are served
- Retail sales of cannabis and cannabis products are subject to a state excise tax of 15% of gross receipts
- Cannabis cultivation is subject to a state tax of $9.25 per dry-ounce weight of cannabis flowers, and $2.75 per dry-ounce weight for leaves (these amounts are subject to adjustment and categories can be added or changed by the state)
- Cities and counties can enact and collect their own taxes on commercial cannabis activity in addition to the taxes established by the state
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