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RE: WINTER LLP Update (COMMENTS SUBMITTED RE DRAFT REGULATIONS)

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Hello all,

We wanted to share with you the formal comments we submitted to the BCC re the recent draft regulations. These comments were submitted prior to the deadline Monday.

In our opinion and experience in this industry, the draconian approach the state has taken on each of these two issues (addressed below) will be catastrophic if approved. Not only to many of our clients, but the entire industry. We are hopeful the state receives many similar comments and backlash from other cannabis professionals, and responds favorably to our comments below.

We will keep you posted as we learn more. And regardless of the outcome, we will figure out a path forward for each of you. We’ve had to retool our legal/business approaches many times over the last 11 years, so that’s nothing new. We will always get you to the finish line in the end.

Here are our comments on these two particular draft regulations:

Letter to BCC re IP Licenses / While Labelling:

Dear BCC,

Please see comments regarding Section 5032(b), Commercial Cannabis Activity.

We do not believe that licensees should be prohibited from (1) manufacturing cannabis goods according to the specifications of a non-licensee (IP licensing); (2) packaging and labeling cannabis goods under a non-licensee’s brand (white-labeling), or (3) distributing cannabis goods for a non-licensee.

The authority upon which Section 5032 is based, BPC Section 26013(c) states: “Regulations issued under this division shall be necessary to achieve the purposes of this division, based on best available evidence, and shall mandate only commercially feasible procedures, technology, or other requirements, and shall not unreasonably restrain or inhibit the development of alternative procedures or technology to achieve the same substantive requirements, nor shall such regulations make compliance so onerous that the operation under a cannabis license is not worthy of being carried out in practice by a reasonably prudent businessperson.” (emphasis added.)

Section 5032(b) unreasonably restrains or inhibits the development of alternative procedures to achieve the same substantive requirements. There are already hundreds of pages of regulations in place to ensure that cannabis products are grown, manufactured, tested, transported, and sold in a manner that will promote public peace, health, safety, and general welfare. Section 5032, which restricts a licensee’s ability to accept IP licensing contracts or white-labeling contracts does not increase the health, safety or welfare of the public. All products that are manufactured or packaged for a non-licensee must still comply with all testing, packaging and labeling regulations. Labels are already required to contain the name and contact information of the manufacturer. Products are not more dangerous to society merely because there is different IP/branding.

Moreover, IP licensing and white-labeling are well-established business practices in almost every goods and services industry in the U.S. and abroad, and have been successfully utilized by the cannabis industry for years. If a manufacturer has sufficient equipment, materials, and employees in place to produce goods for others and achieve economies of scale, the BCC should not limit that manufacturer’s ability to produce goods with different IP. Requiring each brand/company to manufacture goods under their own license dramatically drives up costs (license fees, equipment, employees), slows time to market, while wasting natural and environmental resources to build out these additional facilities. It also creates a monopoly for the limited manufacturers that have obtained licensing to date. This draft regulation will significantly damage the California cannabis industry and put long-standing companies out of business through an immediate devaluation.

If the issue is disclosure of participants in the legal market, the BCC should implement something similar to the Beer Brand Registration model, in which the ABC requires beer brands to register and disclose whether beer is “contract brewed.” Licensees that contract with IP companies or white label companies may be required to fill out a simple disclosure form each year. This would resolve the disclosure issue, while allowing manufacturing licensees, IP companies, and brands opportunities to continue to manufacture safe cannabis products in an efficient and cost-effective manner. Whatever the solution, it cannot be this draft regulation, which if passed will have immediate and catastrophic consequences, including loss of thousands of jobs, bankrupt businesses, and loss of industry leaders, to name a few.

Letter to BCC re Designation of Owner:

Dear BCC,

Please see comments regarding Section 5003(b)(6)(D), Designation of Owner, which states:

Owner means any of the following:

An individual who will be participating in the direction, control, or management of the person applying for a license. Such an individual includes any of the following:

Any individual who assumes responsibility for the license. Such an individual includes but is not limited to, the following:

(i) An individual who is managing or directing the commercial cannabis business in exchange for a portion of the profits.

(ii) An individual who assumes responsibility for the debts of the commercial cannabis business.

(iii) An individual who is determining how a portion of the cannabis business is run, including non-plant-touching portions of the commercial cannabis business such as branding or marketing.

(iv) An individual who is determining what cannabis goods the commercial cannabis business will cultivate, manufacture, distribute, purchase, or sale.

As we disagree with the addition of Section 5032(b), we cannot agree that individuals who determine how non-plant touching portions of the commercial cannabis business is run, such as branding or marketing, should be considered owners.

The authority upon which Section 5032 is based, BPC Section 26013(c) states: “Regulations issued under this division shall be necessary to achieve the purposes of this division, based on best available evidence, and shall mandate only commercially feasible procedures, technology, or other requirements, and shall not unreasonably restrain or inhibit the development of alternative procedures or technology to achieve the same substantive requirements, nor shall such regulations make compliance so onerous that the operation under a cannabis license is not worthy of being carried out in practice by a reasonably prudent businessperson.” (emphasis added.)

Requiring independent consultants and advisors to register as “owners” is onerous and impractical for a reasonable businessperson. The BCC is overreaching by defining an owner as individuals who determine how “non-plant touching portions of the commercial business” are run, because this could potentially include almost all advisors (attorneys, CPAs) and ancillary business consultants (equipment manufacturers, marketing companies, IP companies, etc.) who provide guidance to permitted licensees. Seeking the professional guidance of independent consultants and advisors is a well-established business practice that does not rise to the level of involvement as an “owner” in any other industry. It does not make sense that they are required to register as “owners” when these ancillary individuals are not required by State law to be on any corporate formation documents, such as Statements of Information, Bylaws, or Operating Agreements. Requiring the registration of these ancillary individuals not only complicates corporate documents and structures, it could potentially lead to unnecessary and frivolous litigation between and against all of the “owners” of a license, especially those with “deep pockets.”

Instead of defining these individuals as “owners,” it should be sufficient that IP companies and brands are disclosed as having financial interests in the business. This would still allow the BCC to track the involvement of these companies, while not further complicating business structures and “ownership” obligations.

AB 2679 – Summary of New Medical Cannabis Legislation

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On September 12th, Assembly Bill (AB) 2679, which seeks to amend regulations relating to medical cannabis research and production currently existing in state law, was sent to Governor Brown’s desk to be signed into law. This letter provides an overview of the changes that the implementation of AB 2679 will have on state law.

Overview

When signed into law by Governor Brown, AB 2679 will amend three sections of California state law pertaining to medical cannabis regulation, research, and production. Two of these amendments are relatively minor, and are not likely to have a significant impact on most of our clients. The third, however, may positively affect a majority of our clients, as well as the California medical cannabis industry in general.

First, AB 2679 makes a change to the annual reporting requirements of the licensing authorities established by the Medical Cannabis Regulation and Safety Act (MCRSA). Under existing law, each licensing authority is required to prepare an annual report detailing the authority’s activities. The authority is required to submit this report to the State Legislature and to post the report on its website. AB 2679 compels the licensing authorities to include the following information in each report: (1) The number of appeals from the denial of state licenses or other disciplinary actions taken by the licensing authority; (2) the average time spent on these appeals; and (3) the number of complaints submitted by citizens or representatives of cities or counties regarding licenses.

The second amendment AB 2679 makes to state law pertains to the University of California Marijuana Research Program authorized by current law. The purpose of this program is to study the general medical safety and efficacy of cannabis. If it finds the medicinal use of cannabis to be safe and effective, the program is to develop medical guidelines for the appropriate administration of tis use. AB 2679 makes a small modification to state law specifying that studies conducted by the Research Program may also include those meant to ascertain the effect cannabis has on motor skills.

The third and final change made to state law by the passing of AB 2679 is also the most likely to have an effect on many of you. As currently codified in state law, until one year after the Bureau of Medical Cannabis Regulation posts a notice on its website that licensing authorities have begun to issue state licenses, the MCRSA exempts cooperatives and collectives who cultivate medical cannabis for qualified patients from criminal prosecution for activities relating to the growing, sale, or distribution of cannabis. AB 2679 will also now exempt manufacturers of medical cannabis without a state issued license from criminal sanctions, for the same time period mentioned above, if specified conditions are met, including the possession of a valid license issued by the local city or county.

Questions and Answers

The following information is provided within the context of California state law only and does not address the applicability of any federal laws, which still hold cannabis for any purpose to be illegal.

What activities are considered “manufacturing” under AB 2679?

According to the language imposed by AB 2679, “Manufacturing” of medical cannabis products means compounding, converting, producing, deriving, processing, or preparing, either directly or indirectly by chemical extraction or independently by means of chemical synthesis, medical cannabis products.

In addition to possessing a valid local license, what other conditions must I meet to be in compliance with AB 2679?

AB 2679 amends existing state law to state that a collective or cooperative that manufactures medical cannabis products shall not, solely on that basis, be subject to criminal sanctions, if all of the following conditions are met:

  1. The collective or cooperative utilizes either (1) a solvent-less manufacturing process, or one that employs nonflammable nontoxic solvents that are generally recognized as safe by the FDA; or (2) a manufacturing process that uses solvents exclusively within a closed-loop system that meets specified requirements.
  2. The manufacturer has received and maintains approval from the local fire official regarding the facility as well as all equipment and operations utilized.
  3. All relevant fire, safety, and building code requirements must be met.
  4. The collective or cooperative possesses a valid Sellers Permit from the Board of Equalization.
  5. The collective or cooperative posses a valid local permit, license, or other form of authorization specific to the manufacturing of medical cannabis, and is in compliance with all conditions imposed by the issuing city or county.

Closing

In addition to some relatively minor changes pertaining to licensing authorities and academic studies into medical cannabis, AB 2670 may help relieve some of our clients from the threat of criminal prosecution for the manufacturing of medical cannabis products without a state license, until such licenses are made available. However, specific conditions must be met including the possession of a valid locally issued license, which is why we are working so diligently with many of you to secure local permits. Today, only a few cities and counties issue such permits, but the landscape is changing weekly.

We hope this has been helpful. And we look forward to hearing from each of you, and helping you navigate these new laws and regulations today and into the future.

This post is provided for educational purposes only. No specific legal advice is intended to be given, or attorney/client relationship established, by providing of this information. Please consult with an Attorney of your choice with respect to questions regarding any matter contained herein.

WINTER LLP® is a corporate, transactional, regulatory and intellectual property law firm focused on traditional and emerging markets, with offices in Orange County, San Francisco, and Arizona, servicing clients around the world.