Webinar Replay: Cannabis and Psychedelics Election Updates and Q&A

On Tuesday, November 15, 2022, Harris Bricken attorneys Vince Sliwoski (Portland) and Griffen Thorne (Los Angeles) hosted a free, hour-long webinar analyzing the election results. The panelists broke down a number of the state and local election outcomes and answered your questions about the impact of these new laws.

For anyone who was not able to join the webinar, we’ve got you covered! Below, please find the full webinar.

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California Large Licensing Gets Really Small

California law required the state Department of Cannabis Control to begin accepting large license applications on January 1, 2023. Earlier this year, DCC published proposed large licensing regulations (which I described here). As usually happens, on December 5, 2022, DCC dropped its second set of modifications to the proposed regulations. When DCC’s rules take effect, they will make it very difficult for people to get large licenses.

The new DCC rules and large licensing

To summarize my earlier post, the state will allow cultivators to apply for larger licenses than were previously available. Up until now, larger farms had to aggregate small licenses, which they can now convert into large ones. One of the key issues here though – which state law mandated years ago – was that large license holders couldn’t own testing labs, microbusinesses, and distributors. More on that below.

The big change though concerns prohibitions on license ownership. When I wrote my original post, the original proposed regulations said that “holders” of large licenses were ineligible to hold the other license types referred to above. This was an incredibly vague term. Did it mean that a business that holds a large license couldn’t hold the other types? Did it extend to owners of a business that had a license? It wasn’t clear at all.

On August 30, 2022, DCC did its first set of modifications to the proposed regulations. It expanded the definitions here by saying that any person that holds an ownership or financial interest in a large license cannot hold a prohibited license type. While this definition is also a bit vague, it is now incredibly expansive due to the inclusion of financial interest holders.

For reference, DCC defines financial interest holders as:

(1) A person with an aggregate ownership interest of less than 20 percent.

(2) A person providing a loan to the commercial cannabis business.

(3) A person entitled to receive 10 percent or more of the profits of the commercial cannabis business . . . .

The final category is too long to copy but can include things like employees with profit-share plans, lenders, brokers, etc. These changes are not exactly consistent with state law, which says only “A Type 5, Type 5A, or Type 5B licensee shall not be eligible to apply for or hold a Type 8, Type 11, or Type 12 license.” The expansion to beyond the licensee will be a huge issue for large and small businesses alike.

Since the DCC’s rules will forbid financial interest holding in both large licenses and distribution licenses, they will likely make life difficult for large cannabis companies rolling up small licenses into cultivation licenses. This is because large companies tend to have distribution licenses within their chain. Even if they don’t, they tend to have larger lists of stockholders or members, and if even one of those members holds a small financial interest in a distribution licensee, that will prevent a large license for cultivation.

The new DCC rules affect players large and small

These changes won’t just affect large cannabis businesses and MSOs. Smaller cannabis companies that need loans, want to enter into IP license agreements, want to engage with independent contractor brokers or salespeople, etc., will need to be very careful before applying for large licenses.

As a result of these rules, cannabis companies that don’t have financial interest barriers when they apply for large licensing will need to vet new stockholders/members as well as third-party contract relationships to determine whether they hold financial interests in prohibited license types. This can be an incredibly difficult process, which is likely to impose a greater burden on smaller businesses without robust compliance programs.

Get your comments in

DCC noted in its email announcing these new modifications that:

The DCC is currently accepting comments on the further modifications to the proposed text of regulations. Any interested person, or the interested person’s authorized representative, may submit written comments relevant to the proposed regulatory action to the DCC. Please limit your comments to the modifications to the text.

All comments must be received by 5:00 p.m. on December 21, 2022.

In all likelihood, this will be DCC’s final round of modifications and it won’t change them again. Unfortunately, the broadening of state law here will make life more challenging for large and small cultivators alike. Stay tuned for more updates on California cannabis licensing.

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Update: DOJ and SAFE Banking Act

As we blogged about last week, the SAFE Banking Act is trying to claw its way back from the dead during this lame duck session of Congress. Interestingly, on December 2, Punchbowl News reported that the Department of Justice (DOJ) issued a memo outlining its “issues” with the SAFE Banking Act. Here’s the memo (“Memo”).

Whenever we get a cannabis-related memo from DOJ, I get pretty excited. Mainly because we get a tiny peak into the minds of enforcement and what their priorities are at the time. This five-page memo is of particular import because it deals with cannabis financial crimes and enforcement. Unless you’ve been living under a rock, you know that two of the biggest problems for the cannabis industry overall are access to financial institutions and I.R.C. Section 280E.

DOJ “issues”

The SAFE Banking Act neither legalizes cannabis nor reschedules it on the Controlled Substances Act. Given that fact, the memo starts out by saying that

Because marijuana would remain illegal under federal law, Congress should ensure efforts to provide access to financial services for state-legal businesses does [sic] not unintentionally erect obstacles to prosecution of other illicit activity or activities involving money laundering of proceeds of other illegal drugs or sales of marijuana that do not comply with state requirements

The DOJ’s first beef then is that the bill would technically immunize from prosecution cannabis businesses or providers that fall into certain legal classifications under the Act, rather than examining the types of legal or illegal activities in which those entities are engaged. The example provided in the Memo is that the DOJ could not go after a “cannabis-related legitimate business” that’s engaged in state licensed commercial cannabis activities but also fraud. Luckily, the DOJ instructs Congress in the Memo on how to fix the offending language by suggesting that immunity be limited to:

“the state-legal activities in which entities engage (again, ensuring those activities are in conformity with state law), rather than basing it on their classification as a particular business type, i.e., a ‘cannabis-related legitimate business’ or a marijuana-related ‘service provider.’”

The DOJ also thinks that the SAFE Banking Act is too broadly drafted to immunize cannabis companies from existing money laundering statutes, basically for the same reasons above. The DOJ also bemoans the fact that such a broad protection would put an additional burden on prosecutors to show the difference between legal and illegal activities in the cannabis trade. The DOJ provides the example that “a marijuana-related business could be laundering proceeds from fentanyl sales on the side, or from marijuana sales conducted outside of the state regulatory framework”, and that the SAFE Banking Act, as written, wouldn’t allow law enforcement or prosecutors to do their jobs effectively.

The DOJ also takes issue with the fact that the SAFE Banking Act doesn’t do much to solve the issue of total compliance for financial institutions with the Bank Secrecy Act, existing anti-money laundering laws, and countering-the-financing regulations to collect—or verify—information demonstrating that a particular business is operating in accordance with applicable state law. This is definitely an issue with these piecemeal cannabis bills: there will always be collateral effects regarding compliance with other, existing federal laws. The DOJ also opined that there will be forfeiture issues related to depository institutions’ interests in collateral, because the SAFE Banking Act doesn’t also amend current forfeiture laws.

Technical comments

Helpfully, the DOJ then trots out a list of technical assistance comments, pointing out to lawmakers where legal and interpretive inconsistencies will exist if the SAFE Banking Act is passed “as-is”. These mainly touch on things like definitions in the bill, the use of the term “cannabis” versus “marijuana” as compared to existing federal laws, and enforcement ambiguities.

Notable concern

Towards the end of the Memo, the DOJ states that

Section 3 and 14 (“Definitions”) read together result in interpretive uncertainties. The
definition of “cannabis-related legitimate business” is ambiguous. For example, this Section says nothing about how states will determine compliance with state law or what happens when state laws conflict – e.g., some states have different restrictions on movement of marijuana within or out of the state, or different registration and compliance regimes. Nor does it explain how to deal with fraudulent declarations of alleged compliance with state laws (many states do not have the bureaucratic capability to ensure full compliance yet, and DEA has law enforcement intelligence demonstrating that criminal organizations are exploiting the marijuana industry in states where the industry is legalized).

This is a somewhat troubling observation by the DOJ, but probably an accurate one.

What happens now?

Without a doubt, Congress will listen to the DOJ on technical changes to the bill. The fact that the DOJ isn’t entirely fighting the legislation is a good development. On the whole, the suggested changes are mostly helpful (from a legal/technical standpoint to avoid conflict) and they strike a compromise in that the DOJ still needs to be able to do its job if the SAFE Banking Act passes. To date, politics have played a big role in the SAFE Banking Act going nowhere, but now that we have DOJ weigh-in on the bill, we may actually be crossing into a phase of serious consideration. So, stay tuned.

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Will LA’s Social Equity Retail Licensing Be Stopped?

This Thursday, December 8, 2022, the City of Los Angeles will open Phase 3, Round 2 of storefront retail licensing. The City will only accept applications from verified social equity applicants. It will select winners via a “triple-blind” lottery, awarding up to 100 retail licenses. But a guy in Michigan is trying to prevent the lottery from moving forward on constitutional grounds. Let’s look at what’s going on.

Law360 recently reported on a case filed by a Michigan resident seeking to halt LA’s program. The same plaintiff successfully halted licensing in parts of New York on similar grounds, and has also filed claims in other jurisdictions to varying degrees of success. His claims boil down to one key question: do LA’s social equity violate the Dormant Commerce Clause of the United States Constitution?

Before analyzing LA’s retail licensing program, let’s look at why the Dormant Commerce Clause is important. As we wrote in a recent post:

[I]n general the [Dormant Commerce Clause] prohibits states from enacting laws that place substantial burdens (discriminate) on interstate commerce. This means that when a state enacts a law that regulates interstate economic activity by favoring its own residents, as with Maine’s residency requirement, it must be “narrowly tailored”.

Broadly speaking, this means the state must be able to justifiable the discriminatory law. That’s the rub: Maine’s (and many other states’) requirement that medical marijuana licensees be state residents is clearly discriminatory against non-residents. In this case, Maine did not dispute that the law was not narrowly tailored and as a result the First Circuit found it unconstitutional.

States often try to stack the deck in favor of locals by implementing residency requirements, which we have noted for quite a while violate the Dormant Commerce Clause (see here from all the way back in 2015 and here from more recently). In virtually any other industry, challenging laws like this would have yielded a clear victory. But since cannabis is federally illegal, many folks didn’t raise Dormant Commerce Clause challenges until much more recently. And as mentioned above (in the case of Maine and New York, for example), they are starting to win.

Now turning back to LA’s social equity retail licensing program, LA required social equity applicants to meet the following criteria.

  • A qualifying California Cannabis Arrest or Conviction* prior to November 8, 2016; and,
  • At least one other eligibility criteria:
    • 10 years of cumulative residency in a Disproportionately Impacted Area, as defined by police reporting districts; or,
    • Low Income in the 2020 or 2021 calendar year.

In other words, to qualify, one must have an arrest in California. The plaintiff here claims he meets all of the above criteria except that he had an out-of-state conviction. So he alleges a Dormant Commerce Clause violation.

The plaintiff’s claims are very interesting from a legal point of view. LA did not adopt a residency requirement. Instead, it just required evidence of an in-state conviction, not an in-state residence.

Technically, nothing would prevent someone who lived in Los Vegas, London, or Beijing from applying so long as they had been convicted in California. So the city has some leeway to argue that there are no Dormant Commerce Clause issues in play. It’s less clear how the case will play out.

Stay tuned to the Canna Law Blog for updates on the Dormant Commerce Clause and cannabis licensing.

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Don’t Miss! New York Retail Dispensary Guidelines: What Every CAURD Applicant Needs to Know

Register Here

Date: December 7th, 2022

Time: 2 – 3pm EST


New York recently released its adult-use cannabis retail dispensary guidelines and there is a lot to unpack. We will likely see additional changes to New York’s rules and regulations, but the released guidelines provide a robust initial framework for applicants (past and future) to follow.

Join Harris Bricken’s lead New York cannabis attorneys, Simon Malinowski and Matthew Schwartz as they analyze the recently released regulations.

Simon and Matt will cover operating requirements, employee training, and marketing rules, among many other topics covered in New York’s retail dispensary guidelines.


Check out some of our past Canna Law Blog posts on New York’s cannabis regulation updates:

  1. BREAKING: NY Federal Judge Blocks CAURD Licensing in Five Regions
  2. New York’s Cannabis Retail Dispensary Regulations Are Here!
  3. New York’s Cannabis Retail Dispensary Regulations, Part 1: Dispensary Operations

The post Don’t Miss! New York Retail Dispensary Guidelines: What Every CAURD Applicant Needs to Know appeared first on Harris Bricken Sliwoski LLP.

Will the Senate Ever Do Anything with the SAFE Banking Act?

As we’ve written about over the past several years, there have been consistent rallying cries for common-sense banking reform for the cannabis industry.

The SAFE Banking Act, which would allow federally regulated financial institutions to work with state-legal cannabis businesses, has been passed by the U.S. House of Representatives a whopping seven times. However, the Senate has yet to take up the SAFE Banking Act, ever – despite the fact that it’s sponsored by Senator Jeff Merkley and has 42 co-sponsors.

The ICBA letter

The Independent Community Bankers Association (“ICBA”) is now urging Senate Majority Leader Chuck Schumer (D-NY) and Minority Leader Mitch McConnell (R-KY) to do something with the bill by the end of the year, in this lame duck session of Congress. The letter penned by the ICBA and 44 state banking associations states:

This legislation enjoys strong, bipartisan support, would resolve a conflict between state and federal law, and addresses a critical public safety concern. We urge its enactment without further delay … The Act would create a safe harbor from federal sanctions for financial institutions that serve cannabis-related businesses (CRBs), as well as the numerous ancillary businesses that serve them, in states and other jurisdictions where cannabis is legal. Recent polling found that two-thirds of voters support cannabis banking access.

The ICBA survey: this is what the people want!

The letter cites to that ICBA survey conducted in September 2022 – wherein 71% of voters agree that allowing cannabis-related businesses to access the banking system “would help reduce the risk of robbery and assault at cannabis-related businesses — showing the importance of the policy to public safety.”

The ICBA’s polling also found:

  • More than 80% of voters say that operating exclusively in cash increases the risk of robbery or theft.
  • 62% agree that restricting cannabis-related businesses from accessing banks is a threat to public safety.
  • 63% agree that allowing cannabis-related businesses to access banks will improve public safety.
  • 58% say a Senate vote on establishing a safe harbor for cannabis banking is important.

But will the Safe Banking Act move?

Unfortunately, this isn’t the first time players in both the banking and cannabis industries have been ignored by the Senate: similar letters have been sent and publicized throughout the years. While we’re doubtful that this will move the needle, we will continue to hope that this critical legislative reform will happen very soon for everyone’s benefit.

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Washington Cannabis Update: Non-CBD Cannabinoid Additives

The Washington State Liquor and Cannabis Board (“LCB”) has clarified what cannabinoid additives are allowed in Cannabis products in WA. The LCB recently published a notice that it had adopted interpretive statement IS22-01, “Use of Additives in Authorized Cannabis Products”. The adopted policy statement clarifies that non-cannabidiol (“non-CBD”) cannabinoids may be added to cannabis products in WA if they have been produced by or purchased from an LCB-licensed processor or processor within the I-502 (adult-use statute) system.

Cannabinoids

The cannabis sativa plant produces over 100 cannabinoids, not all of which have psychoactive or intoxicating effects. The two most common cannabinoids are delta-9-tetrahydrocannabinol (“THC”) and cannabidiol (“CBD”). THC is the cannabinoid that has psychoactive effects resulting in users getting “high”, while CBD is not considered psychoactive and is used for a variety of purposes including as an FDA approved treatment for epilepsy (Epidiolex).

The Revised Code of Washington (“RCW”) chapter 69.50.326 already allows for the addition of CBD to cannabis products, but in 2020 the LCB became aware of other cannabinoids being added to cannabis products and has sought to provide guidance on the matter ever since.

Legalization of recreational cannabis in the many U.S. states has led to the development and increased presence of non-CBD cannabinoids in recreational cannabis marketplaces. Among the more common are cannabigerol (“CBG”) and cannabinol (“CBN”). CBN can produce intoxicating effects, but not to the degree of THC, and CBG does not produce intoxicating effects.

Cannabinoids can be derived from the cannabis plant itself, from both hemp and high-THC plants, as well as artificially synthesized. As the recreational cannabis marketplace continues to grow with more states each year codifying recreational use laws, more obscure cannabinoids will undoubtedly be isolated for addition into cannabis products. Naturally, the states have an interest in ensuring that new or novel cannabinoids are safe for use and produced according to regulatory standards, which is the aim of the LCB in adopting IS22-01.

Adding cannabinoids to Washington cannabis products

As is the case for most LCB updates, the important point for cannabis businesses is compliance. At this point, the most affected businesses are going to be those manufacturing cannabis products as opposed to retailers.

Non-CBD cannabinoids may only be added to cannabis products if they were lawfully produced or purchased within the I-502 system. Consequentially, processors in particular need to ensure that supply chains for non-CBD cannabinoids being added to their products comply with this new regulation.

Testing; enforcement

Representative samples of all cannabis infused products must be tested according to the provisions of RCW 69.50.348. Cannabis businesses adding non-CBD cannabinoids to products should keep records showing they were produced and purchased from within the I-502 system. The procedures for dealing with failed test samples in RCW 69.50.348 are that the lot from which the failed sample is taken must be destroyed. This means that if non-CBD cannabinoids are added to cannabis products in WA, and not compliantly sourced from within the I-502 system, they must be destroyed.

The LCB did not opine on how widespread the addition of non-CBD cannabinoids is within the I-502 system. Nonetheless, cannabis businesses should ensure that if such cannabinoids are being added to their products that meticulous records are kept to show that they are sourced from within the I-502 system.

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Patenting Cannabis Genes: Three Ways To Protect New Cultivars

Many cannabis companies spend significant resources developing new cannabis cultivars or refining popular strain genetics. As they do so, more and more are looking for strategies to protect those investments. Plant patents for purportedly novel cannabis plants are increasingly common, but are plant patents really the best way to protect cannabis genes?

In addition to traditional security measures, there are 3 types of intellectual property available that may be used to protect new cannabis strains: (1) plant patents, (2) utility patents, and (3) the Plant Variety Protection Act. Each option has its own set of benefits and comes with its own particular registration requirements.

Plant patents for cannabis genes

Plant patents are one potential option to protect a newly invented cannabis cultivar. Plant patents can protect new plant varietals that are capable of asexual reproduction.

Cannabis is typically a sexually reproducing plant: both male and female versions can contribute genetic material to offspring (but only female plants produce the cannabinoid-rich flowers in which most people are interested).

Cannabis plants, however, are also relatively easy to reproduce asexually via cloning or cutting. Newly created cannabis strains, whether created accidentally or by intentional crossbreeding, may be therefore eligible for a plant patent once they have been reproduced asexually.

Drafting and prosecuting plant patent applications is relatively superficial compared to other patent types, making plant patents cheap and efficient to obtain. But the trade-off, and the reason why plant patents are not very popular for cannabis or other hybridized crops, is that the scope of protection that plant patents afford is extremely limited. Plant patents only cover genetically identical copies, reproduced asexually from the claimed plant.

“In the case of a plant patent, the grant shall include the right to exclude others from asexually reproducing the plant, and from using, offering for sale, or selling the plant so reproduced, or any of its parts….”  35 U.S.C. § 163.

That means to infringe a plant patent, one must directly clone the patented plant– a narrow base for an infringement claim. A plant patent does not prevent someone in possession of an authorized plant from crossbreeding or otherwise sexually reproducing it. Practically, absent direct evidence of theft or breach of a patent license, it is incredibly difficult to prove infringement of a plant patent.

Utility patents for cannabis genes

Utility patents are the most popular flavor of patent and they are the favorite tool of major agricultural genetic companies. They are more expensive to obtain than plant patents, but can provide a far broader scope of protection.

Utility patents are used to protect methods, devices, and chemical compounds. Because utility patents can protect novel chemical compounds, the inventor of a new cannabis strain can claim a plant, seed, or other plant part with a particular genetic sequence (i.e., chemical structure).

One major advantage of utility patents over plant patents is that they can prohibit cross breeding and sexual reproduction. This means that a utility patent owner can, if they wish, prevent a customer from replanting seeds harvested from a licensed plant.

Utility patents require that the inventor describe the claimed invention in sufficient detail to enable a person of ordinary skill in the art to make and use it as claimed (for after the patent expires). Thanks to gene editing technologies such as CRISPR, it may be possible to satisfy that enablement requirement for some genetically modified cannabis strains by describing the gene editing process and reproducing the gene sequence base pairs. In other cases where the gene sequences are more complex or unknown, as is typically the case with cannabis, the inventor must deposit samples with the Patent Office from which others could reproduce the invention.

Plant Variety Protection Act

The last vehicle that can protect the IP of a new cannabis strain is the Plant Variety Protection Act of 1970 (“PVPA”). The PVPA provides similar protections to a plant patent but was designed specifically to protect any new, distinct, uniform, and stable sexually reproducing plants, such as cannabis. The 2018 Farm Bill further extended this protection to asexually reproducing plants.

The PVPA, however, contains a strict requirement that at least 3,000 seeds of the claimed plant species be deposited with the U.S. Department of Agriculture. The deposit requirement adds an additional wrinkle for cannabis breeders. All seed deposits must be made to the USDA depository in Fort Collins, CO. The USDA will not accept any deposits for plants that are classified as controlled substances, including cannabis.

However, in January 2022, the DEA issued an opinion stating that cannabis seeds that with less than 0.3 % delta-9-THC (i.e. pretty much all of them) are not controlled substances. This decision should open the PVPA protection to cannabis cultivar, but it is not yet clear wither the USDA will follow the DEA’s position and accept cannabis seed deposits.

Conclusion

Each type of genetic protection comes with its own set of benefits and challenges. In addition to physical security, trusted employees, and well-drafted contracts, the best strategy for protecting proprietary cannabis genes is a woven network of patent and pseudo-patent rights.

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