California, Marijuana

Top 10 Unknowns For California's Medicinal And Adult Use Cannabis Regulation And Safety Act

The big question is whether California will significantly revise the rules already proposed under MCRSA.

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With California’s recent passage of its Medicinal and Adult Use Cannabis Regulation and Safety Act (“MAUCRSA” a/k/a the Governor’s Trailer Bill, a/k/a SB 94), California has combined government oversight of its medical and adult use cannabis industries into one master regulatory regime. MAUCRSA is almost guaranteed to make California’s cannabis industry more business friendly and less bureaucratic and protectionist, but questions remain about how the California Bureau of Cannabis Control (and its sister agencies) will fill in the gaps posed by the MAUCRSA legislation. Though we have 200-plus pages of proposed regulation under the now repealed MCRSA, those rules will need to go back to the drawing board to accommodate MAUCRSA’s changes stemming from Proposition 64. The big question is whether California will significantly revise the rules already proposed under MCRSA.

The short answer is probably not.

We say this because regulators knew it was pretty much inevitable MAUCRSA would pass. We also say this because California’s regulators are on a tight timeline to begin accepting applications for licenses in January 2018 and slashing and burning MCRSA is not a good way to finish by that date. We expect the proposed MCRSA rules will not change much, except where necessary to make them better line up with MAUCRSA.

In turn, here are the top 10 issues with which California regulators will have to grapple when revising MAUCRSA rules:

  1. Premises and Multi-Tenant Operations. MAUCRSA defines premises as “the designated structure or structures and land specified in the application owned, leased, or otherwise held under the control of the applicant or licensee where the commercial cannabis activity will be or is being conducted. The premises shall be a contiguous area and shall only be occupied by one licensee.” MAUCRSA’s definition of premises is pretty much the same as in the proposed MCRSA rules, but it is not clear whether MAUCRSA rules will permit multi-tenant operations on the same parcel of land. Proposed MCRSA cultivator rules explicitly allowed for multi-tenant cultivation, but the MCRSA retail and manufacturing rules were silent on it. We’ll now have to see if the revised draft MAUCRSA rules will continue to permit multi-tenant operations.
  2. Local Approval Process. Under MCRSA, proof of a “local permit, license, or authorization” was required before you could receive your California state operational license. Though this has changed under the MAUCRSA, you still must be in compliance with local laws to secure your California state cannabis license. Among other things, the state of California will notify relevant local governments when a license applicant applies from within their borders. California’s cities and counties will then have 60 days to tell the state whether the applicant is in compliance with local laws. If the applicant is not in compliance, the state will reject the license application. If the local government stays silent, the state will presume the license applicant is in compliance with local laws, but will still not renew the license if the local government at any time notifies the state that the licensee is out of compliance with local laws. What we don’t know is how active local governments will be in communicating with the state about local law compliance. We expect litigation will emerge against local governments that “allow” cannabis operators to proceed via their silence, but then later object to those operations because of changes in local laws.
  3. Prohibited Products and Potency. The California Department of Health’s proposed manufacturing rules had a pretty aggressive list of prohibited products and everyone wants to know whether that list will change. Under MCRSA, California was not going to allow cannabis-infused alcohol, caffeine, or nicotine products and no cannabis product made of “potentially hazardous food.” Potentially hazardous food means any food “capable of supporting the growth of infectious or toxigenic microorganisms when held at temperatures above 41 degrees Fahrenheit.” This would mean products that must be refrigerated at less than 41 degrees and any dairy or meat products would not be allowed. MCRSA edibles also can’t contain more than 10 milligrams of THC per serving or more than one hundred 100 milligrams of THC per package of finished product. And, for non-edible manufactured cannabis, no finished package can contain more than 1000 milligrams of THC. Unfortunately, the consensus among our California cannabis attorneys is that it is unlikely MCRSA regulations will ease up on these restrictions.
  4. Advertising. Though MCRSA said nothing about cannabis business advertising other than that state agencies would generally regulate it, MAUCRSA heavily restricts it — there’s also bill in the California legislature to kill off cannabis business branded merchandise of all varieties.  What we don’t know is if regulators will further tighten advertising rules now that they have a roadmap from the state to do so. Specifically, under MAUCRSA both medical and adult use cannabis operators must:
    • Accurately and legibly identify the licensee responsible for advertising content.
    • Use a method to confirm age if involving direct, individual communication by the licensee.
    • Be truthful and appropriately substantiate their factual claims.
    • Not advertise or market cannabis in any of the following ways:
      • On billboards located on an Interstate Highway or State Highway that crosses the border of any other state;
      • In a manner intended to encourage people under 21 to consume marijuana;
      • With symbols, language, music, gestures, cartoon characters, or other content known to appeal primarily to people under 21;
      • On an advertising sign within 1,000 feet of a day care center, K-12 school, playground, or youth center; and
      • Through free giveaways of marijuana or marijuana accessories as part of a business promotion.
  5. Non-Storefront Retail Delivery. Pursuant to MAUCRSA, “delivery” means the commercial transfer of cannabis or cannabis products to a customer and the retailer’s use of any technology platform it owns and controls. The MCRSA retailer rules required retailers to have brick and mortar storefronts from which to deliver cannabis product to patients. MAUCRSA on the other hand allows California cannabis retailers to “conduct sales exclusively by delivery” from a physical location that doesn’t have to be open to the public. Since the MCRSA regulations didn’t contemplate such a model, California cannabis regulators will need to craft rules regarding such operations, which will have huge ramifications for those delivery-only retail operators.
  6. Anti-Competitive Behavior. MAUCRSA zeroes in on preventing anti-competitive behavior between licensees, probably because, unlike MCRSA, MAUCRSA currently allows for near total vertical integration for almost all licensees and doesn’t yet limit the number of licenses a person can have in a given category (outside of Type 3s, see below). Specifically, MAUCRSA states that, it “shall be unlawful for any person to monopolize, or attempt to monopolize, or to combine or conspire with any person or persons, to monopolize any part of the trade or commerce related to cannabis. The Attorney General shall have the sole authority to enforce the provisions of this subdivision.” Though the Attorney General’s office will be the one to enforce here, there’s nothing to stop California’s regulating agencies from creating additional rules to prevent exclusive or long term contracting between licensees or to prevent cannabis licensees from exerting undue influence over each other. We have yet to see those rules, but they’re bound to arise as they have in other states with highly regulated cannabis regimes.
  7. State Due Diligence on “Owners.” MAUCRSA slightly changes and consolidates the definition of owner. “Owner” now means a “person with an aggregate ownership interest of 20 percent or more in the [entity] applying for a license or a licensee, unless the interest is solely a security, lien, or encumbrance; the chief executive officer of a nonprofit or other entity; a member of the board of directors of a nonprofit; and an individual who will be participating in the direction, control, or management of the person applying for a license.” MAUCRSA requires owners go through increased vetting (as opposed to those considered “non-owners”), but the consensus among our California cannabis attorneys is that the state will up the ante on background checks during the application process for those considered non-owners.
  8. Self-Distributorship. The MCRSA mandated cannabis cultivators and manufacturers go through separately owned third party distributors to get their products to market with retailers. MAUCRSA undoes this standard by allowing cannabis licensees to be their own distributors — with the exception of Type 5 licensees (i.e., large scale growers), which won’t exist for the first five years of the program. The proposed MCRSA rules thoroughly covered how distributors could interact with licensees and operate. We don’t yet know whether those comprehensive regulations (like being able to take title to cannabis products and mandating separate storage facilities for inventory) will remain under MAUCRSA regulations now that almost all licensees can distribute their own products.
  9. Continuing Operations. The proposed MCRSA rules all had the following “continuing operations” standard: “All applicants that were in operation prior to January 1, 2018 . . . may continue to operate while their application is pending if a completed application is submitted to the Department no later than 5:00 p.m. Pacific Standard Time on July 2, 2018, and the continuing operations of the applicant are the same activities in which the applicant is seeking licensure.” MAUCRSA does not have this standard, which is somewhat problematic for those securing local permits, licenses, and approvals right now. Experience tells us that California will probably keep this regulation to make sure there is no shortage of product or access to cannabis when 2018 rolls around.
  10. Limitation on Type 3s and Total Plant Canopy. The MCRSA required the California Department of Food and Agriculture (“CDFA”) to limit the number of Type 3 cannabis licenses. Type 3s are mid-size grow facilities between 10,001 and 22,000 square feet of plant canopy. MAUCRSA has this same limitation requirement. Under the proposed MCRSA cultivation rules, the CDFA limited “a person … to one Medium Outdoor, or one Medium Indoor, or one Medium Mixed-Light license,” and all cultivation licensee applicants to no more than 4 acres of total plant canopy statewide. It is not yet known whether the CDFA will keep these limitations in place.

To help you better understand what MAUCRSA means for your cannabis business, three of our California attorneys will be hosting a free webinar on August 8, 2017, from 12 p.m. to 1 p.m. PT. I will moderate San Francisco-based Alison Malsbury and Habib Bentaleb in a discussion on the major changes between the MCRSA and MAUCRSA, including on vertical integration and ownership of multiple licenses, revised distributorship standards, and what California cannabis license applicants can expect more generally from California’s Bureau of Cannabis Control as rule-making continues through the remainder of the year. We will also address questions from the audience both during and at the end of the webinar.

To register for this free webinar, please click here. We look forward to your joining us!

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Hilary Bricken bio photoHilary Bricken is an attorney at Harris Bricken in Los Angeles, and she chairs the firm’s Canna Law Group. Her practice consists of representing marijuana businesses of all sizes in multiple states on matters relating to licensing, corporate formation and contracts, commercial litigation, and intellectual property. Named one of the 100 most influential people in the cannabis industry in 2014, Hilary is also lead editor of the Canna Law Blog. You can reach her by email at [email protected].

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