Penned by Hilary Bricken at Harris Bricken. who writes 2 May 2021
In January 2020, Governor Newsom announced that he intended to have the Bureau of Cannabis Control (BCC), California Department of Food and Agriculture’s CalCannabis Program (CDFA), and California Department of Public Health’s Manufactured Cannabis Safety Branch (CDPH), consolidated into a single cannabis agency: the Department of Cannabis Control (DCC) (as summarized in the Governor’s 2021 budget summary). Consolidation was slated to be completed by July 2020 in order to enforce cannabis regulations and oversee licensees in California. That effort was stalled by the advent and continuing impact of COVID-19.
The 2021 budget summary generally covers what the trailer bill will do regarding California cannabis, and shoots for July of this year for the proposed consolidation into the DCC. Not surprisingly, all of the regulations now in play under the Medicinal and Adult-Use Cannabis Regulation and Safety Act will automatically be adopted by the DCC upon its creation unless and until repealed, replaced, amended, etc. It’s no secret that some of the current MAUCRSA regulations need serious revisions to ensure that licensees are successful and that the regulations are actually clear. So, when the DCC comes to life, while no one really knows what’s around the corner (although we recently wrote about how at least cannabis contracts will be affected by the consolidation), here are some of the regulatory fixes (rather than statutory) we think we might see:
- Transfer of Licenses. Right now, California doesn’t allow for state license transfers. Instead, the BCC, CDPH, and CDFA force cannabis licensees to engage in business purchases if a cannabis license is to change hands at all. These business purchases are tortured by regulatory ambiguities around the concept and definitions of “owners” and “financial interest holders” and original owners having to remain with the entity for the preservation of “continuity of operations”. And it seems like every time you interact with one of these agencies, you get a different response from every single analyst about what is and is not allowed in the definitive acquisition document. If the DCC is wise, it will take a page out of the books of Oregon and Washington and do away with the current change of ownership regulations, and it will allow for straight license transfers. The ability for third parties to just acquire state licenses would lighten the load for cannabis businesses and regulators alike, and it would put a stop to the arbitrary regulatory back and forth and oftentimes bad buyer and seller behavior we see around changes of ownership.
- Better Enforcement and Interpretation Consistency. Thankfully, we are bound to see consistent enforcement priorities and interpretations from a single agency. What’s annoyed licensees is that all three agencies right now seem to approach seemingly identical rules in a multitude of ways around enforcement and interpretation. Maybe more than an outright regulatory fix, the emphasis on this “might see” is that one regulator will definitely limit the number of wild legal and regulatory takes we’ve seen. Of course, different DCC analysts may also give different interpretations around various DCC regulations, but at least we’ll know that between cultivators, manufacturers, distributors, labs, and retailers that legal and regulatory licensing definitions will all be the same across the board.
- IP Licensing Clarity. With its final adoption of the current regulations, the BCC really muddied the waters to a certain extent regarding party disclosures around intellectual property licensing agreements (before that, the agency caused an industry freak-out around the topic). To tie things up, we have a lone “fact sheet” where the BCC tells us the following: “Licensees may enter into intellectual property licensing agreements with unlicensed entities. However, the intellectual property holder cannot exert control over the licensee’s commercial cannabis operations. If the intellectual property holder is exerting control over the licensee’s commercial cannabis operation, then the intellectual property holder must be disclosed as an owner on the license.” The fun part is that “control” is not defined, so there’s been myriad confusion around whether “owner” disclosure is necessary when IP licensing agreements come into play in California. And of course the IP licensor exercises some level of control relative to the licensee’s cannabis operations where the IP licensing agreement will dictate what the licensee can and cannot do with the licensed intellectual property. As a result, the DCC should really clean up the issue once and for all once it comes into power where California cannabis branding is big business and getting more serious all the time.
- Borderless Delivery Solution. Another California cannabis debacle is the borderless delivery rule that the BCC adopted as part of the final rules. It was a heavily followed lawsuit when the BCC defended its borderless delivery regulation in Fresno County Superior Court in 2020. See here. The end result of the fight was that, even though the BCC maintains a regulation that retailers can deliver cannabis into any city or county in California, cities and counties remain free to ban delivery anyway (which was already the case because California has such strong local control limits when it comes to cannabis). In turn, while the BCC won’t bust retailers for engaging in delivery in jurisdictions that ban it, those retailers can still get into major trouble in those cities and counties. I wouldn’t be shocked if the DCC tries to revisit this issue through rulemaking where retailers would certainly benefit by being able to deliver anywhere without legal consequence.
- Billboards. I was recently interviewed on KCRW about the dueling billboard bills in Sacramento. In 2020, a San Luis Obispo County judge ruled that Prop. 64 bans cannabis billboard ads on California’s interstate highways (here’s the BCC mandatory notice to licensees on the result in the case). Now, AB 273 (which recently failed in session but could be reconsidered) would ban all cannabis billboards, and AB 1302 would allow them with certain restrictions around interstate highways and California borders. No matter how this one shakes out, will likely see the DCC react with corresponding regulations in the future, and that’s going to affect the marketing decisions of hundreds of licensees.
- Limitations on Type 3 Cultivation Licenses and Beyond. CDFA exercised its authority to limit cultivators to one Type 3 license per premises. To get around that, large scale cultivators just stack unlimited, smaller license types on multiple premises to aggregate literally acres of canopy. As a result, there’s a possibility that DCC just ditches the current one Type 3 limitation and gets with reality. Further, Type 5s will be available in 2023 and we have zero regulation around those license types, so the DCC may well just get into Type 5 limitations once it comes to power.
Definitely be sure to stay tuned as this massive consolidation comes to fruition.
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