Prop 65 Warning on California Cannabis Products Opens the Floodgates for Lawsuits

Starting January 3rd, all cannabis products sold in California will now require a Prop 65 warning on the label, a move that will likely spark an influx of product-liability lawsuits within the industry.

In theory, health warning labels are a good thing – they alert consumers that the product they are buying can potentially have an impact on their health. However, in practice, they lead to overregulation, frivolous lawsuits, and many California consumers have started to ignore them because they can be vague and are so liberally applied.

The Proposition 65 labels date back to the mid-80s and applies to any product that contains known toxins or carcinogens, even if the amounts are trace and research is inconclusive. Once the new mandate goes into effect next month, all products that create “marijuana smoke”, as well as those containing Delta-9 THC will need a warning label. This covers pretty much every product in the legal market, minus CBD (cannabidiol) or CBG (cannabigerol) topicals and edibles.

Legal experts say that these types of mandates are often enforced by private attorneys and plaintiffs rather than state regulators. This practice was initially intended to keep the court system from backlogging over minor cases, but it has transformed into a sort of under-the-radar industry that preys on small business owners.

“The bounty hunters (people who go to stores specifically to look for unlabeled products) will be able to start regulating and enforcing those come Jan. 3, 2021,” Anne Marie Ellis, an Orange County attorney who specializes in product liability, said during a webinar in early December.

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A little bit about Prop 65

Proposition 65, formally known as the Safe Drinking Water and Toxic Enforcement Act of 1986, was established to protect California’s drinking water sources contamination by chemicals known to cause cancer, birth defects, or other reproductive harm, and it requires business to keep and current list (which is updated regularly) of chemicals that cause these reactions.

The program has expanded in the last couple decades and you can find Prop 65 warnings on everything from food items, children’s toys, hygiene products, and even entire buildings (for example, my local Wal-Mart has a Prop 65 warning stating that chemicals within the building are known carcinogens).

Additionally, there is no penalty for posting an unnecessary sign, which leads to vague and overused warnings that rarely resonate with the consumer. It’s for these reasons, among others, that the law has been harshly denounced over the years with critics saying it causes “over-warning” and “meaningless warnings”. These sentiments have been backed in numerous court cases as well.

Applying it to the cannabis industry

Again, starting January 3rd all products the create cannabis smoke and/or contain THC will be subject to the new law. The labels these new products will be sporting can come in two different formats: a standard warning or a short-form version.

The standard warning is quite long and a bit more detailed, while the short version is straight to the point and intended for smaller products. Most likely, you will see more of the short-form version on dispensary products, and this version reads: “WARNING: Cancer and Reproductive Harm – www.P65Warnings.ca.gov.” Short and ominous.

“If a product doesn’t have the warning on its actual packaging, then the alert must be placed somewhere obvious so consumers can see it,” Ellis said. “And because both marijuana smoke and THC are about to be triggers for Prop 65 requirements, literally every company that does business in California needs to comply with the law, not just companies that produce smokable cannabis products.”

This will include many noncombustible products such as edibles, topicals, and vapes, unless they both, contain isolated CBD or other non-psychoactive cannabinoids AND do not produce any smoke during consumption.

Prop 65 laws and litigations aren’t new to the Golden State cannabis industry, however. Cannabis smoke has been on the state’s list of carcinogens since 2009, and THC since 2018. In January 2020, a ruling by the California Office of Environmental Health Hazard Enforcement listed both as potential reproductive toxins.

Conflicting research on THC and cancer

Now, about this issue of THC (tetrahydrocannabinol) being named a carcinogen. The existing studies on this are conflicting but overall, research indicates that it’s helpful, not harmful. For example, a number of small studies found that inhaled cannabis is helpful in treating nausea and pain (especially neuropathic) associated with chemotherapy.

More recent studies have even documented THC and other cannabinoids as cancer inhibitors, noting that they can slow the growth and/or cause death in certain types of cancer cells. This was demonstrated numerous times in lab petri dishes as well as live-animal studies.

In Israel, research on the medicinal use of cannabinoids has been going on for decades. Just last year, Professor Raphael Mechoulam from Hebrew University of Jerusalem received a $2,000,000 grant for just this purpose.

Mechoulam is leading a research team to work on developing cannabis-based treatments for three aggressive forms of cancer: melanoma (skin cancer), neuroblastoma (cancer originating in the surrounding and mostly neural system in children), and glaublastoma (brain cancer).

I did come across one study that suggested cannabis exposure may increase the “susceptibility to and/or incidence of breast cancer as well as other cancers that do not express cannabinoid receptors and are resistant to Delta9-THC-induced apoptosis.” In this scenario, it refers to very specific types of cancer and more research is definitely needed.

Liabilities and lawsuits

According to Ellis, the main issue businesses will face once this law goes into effect is the cannabis industry “bounty hunters” who are basically undercover shoppers that will look for cannabis products in dispensaries that are not in compliance with the new mandate. In these situations, they will often file a “notice of violation” and push for a settlement out of court – so in other words, they’re looking for money.

“This is low-hanging fruit for lawyers who want to make a quick buck and don’t want to do a lot of work,” said Lara DeCaro, a San Francisco attorney who represents numerous cannabis businesses. “Most legal marijuana businesses are already complying with the Prop 65 labelling mandate because such requirements have been on most companies’ radars for a long time.” Nevertheless, she expects there will be an influx of legal complaints who target the “industry stragglers” who are waiting until the last minute to get up to speed.

There are many attorneys who make their living working Prop 65 cases in other industries, since it covers all consumer products and businesses and the list exceeds 1,000 chemicals that are considered dangerous. Roughly 90% of Prop 65 cases – across all industries – are settled out of court. Fines for companies who are in violation can be up $2,500 per product, daily. So if you have 3 non-compliant products, you’re looking at $7,500 in fines every single day until you remedy the situation.

“They will go around, much like they do under the (Americans with Disabilities Act) and find violations and then file numerous complaints,” DeCaro said. “Whether or not those complaints end up having merit, they’re going to name a bunch of people, and defendants will throw a few thousand dollars at it just to make it go away. It’s a cost-benefit analysis at that point. Am I going to spend $20,000 on a lawyer to fight it and get it kicked out, or am I just going to spend $3,000 at it and make the person go away?”

What the future holds

Although this may come as a shock to some of the newer businesses or those that aren’t particularly worried about the logistics of working in the industry, but for the most part, the word is out and most cannabusiness owners are well-prepared for January 3rd.

“The industry is aware. There’s been a fairly good job of discussing the need for Prop 65,” said Pamela Epstein, attorney for Oakland-based Eden Enterprises and a board member of the California Cannabis Industry Association. “Prop 65 is generally on most checklists for incoming and outgoing product at the manufacturing and distribution and retail level, so they should be ready.”

Overall, people are prepared for Prop 65 to hit the California cannabis industry . But for those that aren’t, it could end up being a very costly mistake so you’ll want to do everything you can to get compliant by the beginning of next month.

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California Cannabis Delivery Lawsuit: “It’s NOT a win” For the Industry

Since 2019, cannabusiness owners in California have been in litigation over a lawsuit aimed to further restrict access to legal, recreational marijuana. Last week, a verdict was finally reached.

What initially seemed like a win for the cannabis industry eventually revealed the reality that these legal battles are likely far from over. In case you need a refresher, the initial lawsuit was brought on by 25 local city governments sued the California Bureau of Cannabis Control, arguing that “delivery policy violates state law by overriding their ability to regulate cannabis commerce at the local level.”

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So basically, they’ve already banned dispensary storefronts within city limits, and now they want to ban delivery services as well. And this new ruling allows them to do just that, with two main takeaways to keep in mind.

  1. It upheld the state regulation that allows licensed marijuana delivery companies to offer services anywhere in the state.
  2. It affirmed that cities and counties can forbid those operations, though enforcement of the bans is also up to the local governments.

In other words, marijuana businesses and delivery operators could choose to continue delivering to cities that have bans against them, but they face the risk of expensive legal fights with those local governments. Or they could abide by the ban, but would immediately lose all of their income from that entire city.

“It’s not a loss, but it’s not a win for delivery,” said Zach Pitts, CEO of Los Angeles-based Ganja Goddess and a board member of the California Cannabis Couriers Association. “What I really don’t like is the possibility that we’re still going to have to litigate this,” Pitts said. “And in many ways, that’s putting the litigation onto small companies … with every single city and county that decides to ban delivery.”

Sacramento-based attorney Khurshid Khoja called the ruling a disaster, stating “I don’t see this as a victory at all,” Khoja said. “If this is a victory for anyone, it’s a victory for the cities.”

Marijuana industry attorney Dana Cisneros in Anaheim Hills called the decision “disappointing,” adding: “I think today a lot of folks are going to be confused. I’ve already seen headlines … that say deliveries can occur in any jurisdiction, even if a city bans it. It was a very hair-splitting decision that was made, where the court just said, ‘These are regulations designed to regulate licensees, not local jurisdictions, so there’s not a conflict.’”

Cisneros continued, saying that the “real-world” impact is the added hoops that cannabis operators need to jump through, when they’re already drowning compliance regulations as it is.

“It just adds another layer of insane compliance for our retailers to adhere to, because now, if you’re going to deliver in California, you better know what the specific local law is in every single city,” she added.

As of last month (November 2020) only 187 out of California’s 540 jurisdictions allow marijuana businesses to operate. An additional 42 California jurisdictions have banned store front dispensaries but allow business from outside of their boundaries to conduct delivery services.

It’s notoriously difficult to enforce such laws anyway, because city regulators would have to vet every single dispensary that opens, where there are many of. Not mention the fact that most are no longer advertising on Weedmaps or any one central marketing site, so it would be nearly impossible to know exactly how many dispensaries exist in a given area and what they are doing.

According to Pitts, it all boils down to one thing. “So it’s really going to come out to: How do these cities that have bans decide to enforce them?”

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California’s New Banking Bill Does Little To Help The Cannabis Industry

Last week, California Governor Gavin Newsom (D) signed a handful of cannabis-related bills into law. Among the biggest changes are updates to the state’s banking laws, and while overall positive, the potential of AB 1525 is severely limited.

As anyone in the industry already knows, cannabis professionals have long struggled to gain access to banking and other financial services for their businesses. AB (Assembly Bill) 1525, signed last Tuesday by Gov. Newsom, removes any penalties previously imposed on banks for working with legal cannabis companies.

In his signing statement on the banking bill, Newsom directed state cannabis regulators to establish rules meant to protect the privacy of marijuana businesses that seek financial services, urging that data be kept confidential and is used only “for the provision of financial services to support licensees.”

“This bill has the potential to increase the provisions of financial services to the legal cannabis industry,” Newsom wrote in a signing statement, “and for that reason, I support it.”

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Very Little Help

Newsom isn’t not wrong, this bill definitely has that potential, but it remains only that until cannabis becomes legal at the federal level. Regardless of state laws, banks, which are federal entities, have been hesitant to work with cannabis clients because the plant’s Schedule 1 status.

For reference, a Schedule 1 narcotic is categorized that way because there is a “high risk of abuse and no recognized medical value.” Despite the decades of research in other countries or the fact that medical cannabis is accepted in 33 states already. It’s also worth mentioning Cocaine, which has some anesthetic properties but is known for its high propensity for abuse, is categorized as Schedule II. Alcohol and tobacco aren’t scheduled at all. Yes, it’s the ultimate hypocrisy.

But regardless of our opinions on the subject, the takeaway here is that, with cannabis being a Schedule 1 narcotic, exchanging money for a cannabis business put banks at risk of getting charged with federal money laundering.  

“Until cannabis itself is taken off the dangerous substances list, and the DEA is no longer willing to seek forfeitures for anybody dealing with this substance, the majority of banks are still going to stay away” says Chris Garcia, buyer for Berkeley dispensary Hi Fidelity.  

The Cole Memorandum

In 2013, the Cole Memorandum was issued U.S. Deputy General James Cole. This was to deprioritize the enforcement of these types of laws against state-licensed and completely legal cannabis businesses. In 2014, The Financial Crimes Enforcement Network (FinCEN), a bureau of the Department of the Treasury, issued guidance on how banks could work with cannabis businesses. 

However, in 2018 then-Attorney General Jeff Sessions, a known opposer of any type of cannabis reform, revoked the Cole Memorandum. Although FinCEN state that the established cannabis industry guidelines will remain in effect, most banks are aware of and uncomfortable working in that financial grey area.

Final Thoughts

The cannabis companies that do choose to operate within it have to submit extensive reporting and pay astronomical fees, and even then, most financial institutions will only work with large, well-established companies. According to Tom DiGiovanni, CFO at Harborside Collective, there are roughly 60 U.S. finance companies that actively work with the cannabis industry.

FinCEN reports that as of September 2019, 563 banks and 160 credit unions provided some form of banking services to marijuana-related businesses; although how much service they are willing to provide is incredibly variable.

CLICK HERE to read the full text of the CA AB 1525

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