Cannabis Dispensaries and the Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”) – Part I

Clients have often as asked whether HIPAA applies to the cannabis industry. As with anything else in healthcare, the answer can be complex. HIPAA was enacted in 1996 to help protect a patient’s healthcare information. While HIPAA is expansive, to the extent state law is more restrictive or protective, then state law will control in those instances. 45 CFR § 160.201 et. seq. But the first question is whether HIPAA applies to the cannabis industry.

Are Cannabis Dispensaries Covered Entities?

For information to be protected under HIPAA, there are several aspects to analyze. Boiled down to its basics, HIPAA will apply when a “Covered Entity” has “Protected Health Information”. As with any other statutory regime, the first place to start with the analysis are the definitions. A “covered entity” includes a health plan (e.g., a third-party payor), a health care clearinghouse (e.g., a third-party system that interprets claims data between healthcare provider systems and third-party payers), and a health care provider. 45 CFR § 160.103. So, is a dispensary a “health care provider”? For adult use or recreational dispensaries, the answer is no. However, for medical marijuana dispensaries, a deeper dive into the HIPAA regulations is essential.

A health care provider is defined to include, (1) a provider of services, as defined in the Social Security Act, (2) a provider of medical or health care services, again, as defined in the Social Security Act, and (3) any other person or organization who furnishes, bills, or is paid for health care in the normal course of business. Id. Under this definition, clearly a hospital, physician, healthcare clinic and many other types of healthcare providers are covered entities.

But a dispensary is not of the entities specifically enumerated under the statute. Does this mean a medical marijuana dispensary is not a health care provider? No. To help illuminate the definition of a health care provider, it is also important to understand the definition of “health care”. As the HIPAA regulations state, “health care means care, services, or supplies related to the health of an individual.” Id. The regulations then provide specific examples (that are not intended to be all-inclusive) of health care. Overall, health care includes:

(1) Preventive, diagnostic, therapeutic, rehabilitative, maintenance, or palliative care, and counseling, service, assessment, or procedure with respect to the physical or mental condition, or functional status, of an individual or that affects the structure or function of the body; and

(2) Sale or dispensing of a drug, device, equipment, or other item in accordance with a prescription. Id.

Under either of the foregoing sections, an argument can be made that medical marijuana dispensaries are health care providers. Depending upon which state you live in, medical marijuana may be “prescribed” for “therapeutic” or “palliative” care. See, e.g., A.R.S. 36-2801(11) (In Arizona, “‘Medical use’ means the acquisition, possession, cultivation, manufacture, use, administration, delivery, transfer or transportation of marijuana or paraphernalia relating to the administration of marijuana to treat or alleviate a registered qualifying patient’s debilitating medical condition or symptoms associated with the patient’s debilitating medical condition.”). Moreover, when a “prescription” is required to attain medical marijuana, then certainly the second part of the above definition would apply (e.g., the “sale or dispensing of a[n]” “item in accordance with a prescription.”).

A cogent argument can be made that a medical marijuana dispensary is a covered entity under HIPAA. The ultimate determination is made on a case-by-case basis and state laws play an integral role in assessing these issues.

Protected Health Information

The second part of the analysis is whether a medical marijuana dispensary possesses “protected health information”. As with the above analysis, definitions are the starting point.

HIPAA defines “protected health information” to mean individually identifiable health information: that is: (1) transmitted by electronic media; (2) maintained in electronic media; or (3) transmitted or maintained in any other form or medium. Id. Thus, before analyzing the applicability of protected health information in the cannabis context, the definition of “individually identifiable health information” is essential. Individually identifiable health information includes –

Demographic information collected from an individual, and: (1) is created or received by a health care provider, health plan, employer, or health care clearinghouse; and (2) relates to the past, present, or future physical or mental health or condition of an individual; the provision of health care to an individual; or the past, present, or future payment for the provision of health care to an individual; and (i) that identifies the individual; or (ii) with respect to which there is a reasonable basis to believe the information can be used to identify the individual. Id.

Certainly, a medical marijuana dispensary could very well maintain protected health information. For example, if the dispensary maintains information that includes the patient’s name, social security number and/or any other identifying information, as well as the patient’s diagnosis and purchase information, then it is not a stretch to see how HIPAA would apply.

What Does a Dispensary Need to Do if it is a Covered Entity?

While the foregoing is primarily an academic exercise, instituting HIPAA compliant protections is much more practical. The Office of Civil Rights (“OCR”), which is housed in the U.S. Department of Health and Human Services, is the regulatory authority under HIPAA. The OCR has the power to assess monetary penalties for HIPAA breaches, which can be quite significant. Moreover, a breach under HIPAA can lead to lawsuits by the affected patients under various legal theories, including invasion of privacy and other tort claims.

To avoid HIPAA breaches, some of the basic actions include implementing comprehensive policies and procedures and educating the dispensary’s staff on a regular basis. Moreover, a dispensary owner would be wise to procure cyber-liability insurance in the event of HIPAA breach. In future posts, we will detail more of the requirements under HIPAA.

HIPAA is a complex statute. As noted above, there is also an interplay with state law which makes the analysis even more complex. A medical marijuana dispensary owner would be wise to seek counsel on whether HIPAA applies, and if so, how to come into compliance with HIPAA (and possibly state privacy laws as well).

The post Cannabis Dispensaries and the Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”) – Part I appeared first on Harris Bricken.

Friday, May 7, 2021 Headlines | Marijuana Today Daily News

Marijuana Today Daily Headlines
Friday, May 7, 2021 | Curated by host Shea Gunther

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Check out our other projects:Marijuana Today— Our flagship title, a weekly podcast examining the world of marijuana business and activism with some of the smartest people in the industry and movement. • Marijuana Media Connect— A service that connects industry insiders in the legal marijuana industry with journalists, bloggers, and writers in need of expert sources for their stories.

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Cannabis in New York: Intro to the Marijuana Regulation and Taxation Act: The Webinar Video Replay

For anyone who was unable to join our May 4th webinar, Cannabis in New York: Intro to the Marijuana Regulation and Taxation Act, we’ve got you covered! Below, please find the full presentation for your viewing pleasure.

You can download the transcript HERE.

Stay up to date on cannabis in New York via the Canna Law Blog.

The post Cannabis in New York: Intro to the Marijuana Regulation and Taxation Act: The Webinar Video Replay appeared first on Harris Bricken.

USPTO Refusal To Register Cannabis Trademarks Hurts Public

The U.S. Patent and Trademark Office’s policy of rejecting applications to register trademarks that identify nonhemp cannabis products, as well as certain hemp CBD products, reflects an unduly doctrinaire approach that ultimately makes Americans less safe. As the cannabis industry continues to enter the business mainstream, the extension of trademark rights to cannabis companies’ products would provide them with additional incentives to develop reputations for quality and safety, setting them apart from actors on the margins of legal markets at the state level. In addition, it would empower cannabis companies to, in concert with law enforcement, pursue counterfeiters peddling unregulated products.

In March, it was reported that Florida law enforcement agencies were expressing concern about “THC-laced candy and snacks … making their way into the hands of children and teens.” THC refers to tetrahydrocannabinol, “the substance … primarily responsible for the effect of marijuana on a person’s mental state.” The level of THC in a cannabis plant determines if that particular plant is legally considered marijuana or hemp. Cannabis with a THC concentration of more than 0.3% on a dry-weight basis is considered marijuana, which is a scheduled drug according to the Controlled Substances Act. By contrast, following the enactment of the Agriculture Improvement Act of 2018, commonly known as the 2018 Farm Bill, cannabis with 0.3% THC or less is considered hemp, which is not a controlled substance per the CSA.

But while hemp and hemp products with 0.3% THC or less are no longer treated as controlled substances, certain hemp products containing cannabidiol are still unlawful under federal law. To be clear, CBD itself is not illegal. However, it is the view of the U.S. Food and Drug Administration that foods, dietary supplements and drugs containing CBD cannot be sold legally, in accordance with the Federal Food, Drug and Cosmetic Act.

The THC candies found in Florida were of particular concern to officials because “some of the marijuana edibles are hard to spot at first glance.” In a Facebook post, the Charlotte County Sheriff’s Office, or CCSO, warned that, “without looking closely, you would never know that these candies, that bear a striking resemblance to ordinary candy, [are] actually THC infused edibles.”

The following photograph, courtesy of the CCSO, clearly depicts packages that prominently display the trademarks of famous candy brands, such as Skittles and Nerds. As the CCSO notes, it is only upon close inspection that the true nature of the candies becomes evident. For example, a Cheetos bag shown in an image supplied by the Sarasota County School District is imprinted on the bottom left with a small square containing the letters “THC” and a content in milligrams that is illegible on the image provided. On the bottom right corner, there is a triangle framing a cannabis leaf and an exclamation point, with the letters “CA” below it.

Those familiar with cannabis terminology and imagery will be immediately alerted to the presence of the term THC and the familiar shape of the cannabis leaf. However, it is reasonable to assume that there are many people who are not be able to make the connection between these symbols and marijuana. As a result, there is a real risk that the edibles will in some cases be consumed by people who do not wish to ingest THC, or any cannabis at all.

Trademark Rights

It is precisely because of the risks presented by counterfeits such as the candies found in Florida that the laws of the U.S. — and those of virtually every country in the world — protect trademarks rights. Lawmakers want the public to have the assurance that the Skittles bag it purchases in a store in Sarasota or Bradenton, Florida, is made by or under the authority of the Wrigley Co. In order to offer that assurance, the law grants to brand owners such as Wrigley the exclusive right to use trademarks such as SKITTLES and prohibits unauthorized use of those trademarks.

The fact that the fake candies found in Florida contain a controlled substance is certainly newsworthy, but largely irrelevant in the context of trademark rights. Needless to say, a candymaker like Wrigley does not want a product containing THC inside a bag bearing its trademarks. At the same time, it does not want real candy of unknown provenance inside such a bag either. This is true for a number of reasons, not least the potential for lost profits. In addition, companies like Wrigley do not want the good reputations they have built over decades tarnished because of some criminal’s unsanitary or foul-tasting fakes.

For their part, government authorities worry about the risks to consumers presented by fake products. By definition, counterfeiters operate on the margins of the law; their business model is predicated upon anonymity and the accompanying lack of accountability. If a candymaker is willing to infringe a trademark in pursuit of profit, there is a good chance it is also willing to ignore  food safety laws, just as we should not expect the makers of counterfeit toys to heed child safety rules.

Trademark rights play a key role in the efficient operation of consumer markets, incentivizing companies to innovate, by protecting their exclusive right to monetize their brands. These rights also provide additional rewards for maintaining high quality and safety standards.

The case of the Florida THC candies, however, serves as a reminder of the fact that many cannabis companies operating legally in an increasing number of states are being denied trademark protection, to the detriment of the public. The USPTO refuses to register trademarks for products considered marijuana — that is, cannabis over the 0.3% THC limit — as well as certain CBD products such as edibles, whose sale the FDA considers unlawful.

Challenges for Cannabis Companies

Like companies in other sectors of the economy, cannabis companies face the risk of having their products counterfeited. As with other instances of counterfeiting, this presents risks not just to cannabis companies themselves, but also to consumers.

Consider for example a company that manufactures CBD edibles legally under the laws of Washington state. This company is subject to stringent regulatory oversight in its home state, yet it is not entitled to federal trademark protection against an anonymous infringer selling edibles made in completely unregulated fashion.

Another risk involves the misidentification of products. For example, a counterfeiter might introduce into the market products that contain THC with fake labeling indicating that they are just hemp products. It might also misstate THC or CBD amounts.

The THC edibles found in Florida presented serious risks to potential consumers. Fortunately, the fact that the fakes infringed on the trademarks of household names such as Cheetos and Skittles probably helped trigger alarms. Perhaps a teacher who eats genuine Cheetos noticed something askew with the packaging on a student’s Cheetos bag. A parent may have been surprised by the soft consistency of the edibles, at odds with how actual Skittles should feel.

However, for the time being at least, few if any cannabis companies enjoy such powerful brand recognition, meaning that few people will be able to notice irregularities in packaging or product characteristics.

In addition, companies such as Wrigley, Ferrara Candy Co. and Frito-Lay Inc., owners of the “Skittles,” “Nerds” and “Cheetos” trademarks, respectively, usually run brand protection programs. As part of these programs, they conduct market monitoring to help detect traffic in their fakes and incorporate anti-counterfeiting technology in their genuine products.

They also cooperate with law enforcement, for example recording their intellectual property with customs agencies such as U.S. Customs and Border Protection to facilitate efforts to prevent the trade in counterfeit goods.

A Way Out?

Cannabis companies are largely deprived of tools to combat piracy. A company may discover counterfeiting activity, but it may not be of much use if there is no enforceable trademark. The logical solution to remedy this issue is to allow cannabis companies duly registered with state authorities to register their trademarks at the federal level for all their products, including those considered marijuana, as well as the CBD products not approved by the FDA.

The USPTO’s examination guide notes that “Use of a mark in commerce must be lawful under federal law to be the basis for federal registration” and points to the authority of Section 907 of the Trademark Manual of Examining Procedure. In turn, the manual points to various authorities, including sections 1 and 45 of the Trademark Act.

It is worth noting that the word “lawful” does not appear at all on Section 1, while Section 45 simply defines “commerce” as “all commerce which may lawfully be regulated by Congress.”

However, lawful use has become a requirement in practice, upheld by several Trademark Trial and Appeal Board rulings on the subject. According to the TTAB:

to hold otherwise would be to place the [USPTO] in the anomalous position of accepting as a basis for registration a shipment in commerce which is unlawful under a statute specifically controlling the flow of such goods in commerce.

Given USPTO and TTAB practice, the only realistic path extending trademark protection to cannabis companies may be through an amendment the Trademark Act or new federal legislation. Such an initiative would represent a step toward harmonizing federal law with the nation’s changing cannabis landscape, without requiring lawmakers to consider a change to the legal status of marijuana and CBD themselves.

Considering how extending full trademark protection to cannabis companies would be in the public interest, by keeping unregulated products out of consumers’ hands, it should not be a controversial move.

Editor’s Note: A version of this article first ran on Law360 on May 3, 2021.

The post USPTO Refusal To Register Cannabis Trademarks Hurts Public appeared first on Harris Bricken.

Hemp Litigation: D.C. Trial Court Dismisses Hemp Industry Challenge to DEA Interim Final Rule

On May 3, the District Court for the District of Columbia ( “trial court”) dismissed a petition filed by the Hemp Industries Association and others (“Petitioners”) challenging a DEA interim final rule (the “Rule”) that amended its regulations following the enactment of the Agricultural Improvement Act of 2018 (“2018 Farm Bill”). Although not a good result for the hemp industry, all hope of challenging the rule is not lost because of a similar proceeding filed in the Court of Appeals for the District of Columbia (the “D.C. Circuit”).

Here, the trial court dismissed the challenged to the Rule for lack of subject matter jurisdiction, essentially telling Petitioners that the D.C. Circuit is the only court that may grant the relief they seek.

Nathalie Bougenies and other hemp lawyers at Harris Bricken have tracked the rule since its adoption, and the ensuing litigation since its inception:

By way of summary, the Rule has significant negative consequences for hemp extractors/processors. That is because the Rule “suggests that in-process hemp extract is a Schedule I controlled substance during any point at which its THC concentration exceeds .3 percent on a dry weight basis.” In other words, hemp processors may find themselves subject to DEA raids and criminal liability for processing raw hemp into oil or other derivatives even though the THC content of the final product is less than .3 percent on a dry weight basis.

The DEA (no surprise) claims the Rule was intended to “conform” its regulations to the statutory amendments of the 2018 Farm Bill. Our take on that, as stated in the articles above, is that “it is clear that the Rule is a pretext for the DEA to maintain its authority over cannabis.”

If you find the DEA’s position blatantly at odds with the purpose and language of the 2018 Farm Bill, you are not alone. Hence the two lawsuits challenging the Rule, the first filed in the D.C. Circuit, the second filed in the trial court.

A key takeaway for non-lawyers is that the trial court’s decision is not a decision on the merits of the case. It is not an affirmation of the DEA’s position in any respect. Rather, the trial court reasoned that the applicable statutes and precedent compelled it to the hold that Petitioners’ challenge to the Rule must be made in, and heard by, the D.C. Circuit. Even the trial court’s ruling on jurisdiction was written narrowly:

It is important to clarify what this decision does not mean. The Court does not conclude that any challenge, without qualification, touching on any issue related to DEA comes within the scope of Section 877 such that a district court may not entertain it. Nor does it find that Section 877 necessarily vests exclusive jurisdiction [in the] courts of appeals over any and all enforcement actions under the CSA. Its holding, rather, is far more modest — namely, that when the substance of a lawsuit challenges an assertion of agency authority set forth in a DEA rule committed to the exclusive review of the court of appeals by statute, such lawsuit falls within the ambit of that exclusive-review provision.

(Quotations and citations omitted). Consequently, this decision is not a great victory for the DEA either, in the long run, because the trial court did not disavow its ability to hear other challenges concerning the DEA and did not uphold the Rule.

So what happens next?

As noted, the same Petitioners filed the lawsuit challenging the Rule in the D.C. Circuit.  In October 2020, the D.C. Circuit held its case in abeyance pending resolution of the trial court proceeding. Now that the trial court matter has been resolved, absent appeal, the D.C. Circuit may “re-start” the litigation and proceed with reaching the merits of Petitioners’ challenges to the Rule.

The near-term practical effect of the trial court’s decision is limited as well, which is not good for the hemp industry. The Rule has been in effect for nearly a year, and will remain in effect. The trial court’s decision also means that no immediate relief from the Rule is forthcoming by way of an injunction that prevents the DEA from enforcing the Rule. So unfortunately, hemp extractors and processors remain in legal limbo for the foreseeable future. One bright spot, I suppose, is that hemp industry news has not been dominated with headlines of DEA raids on extractors. Still, the chilling effect on capital investment and the growth of the industry as a result of the Rule is no small matter.

The post Hemp Litigation: D.C. Trial Court Dismisses Hemp Industry Challenge to DEA Interim Final Rule appeared first on Harris Bricken.

Wednesday, May 5, 2021 Headlines | Marijuana Today Daily News

Marijuana Today Daily Headlines
Wednesday, May 5, 2021 | Curated by host Shea Gunther

No news.

Check out our other projects:Marijuana Today— Our flagship title, a weekly podcast examining the world of marijuana business and activism with some of the smartest people in the industry and movement. • Marijuana Media Connect— A service that connects industry insiders in the legal marijuana industry with journalists, bloggers, and writers in need of expert sources for their stories.

Love these headlines? Love our podcast? Support our work with a financial contribution and become a patron.

Photo: Richard Ricciardi/Flickr

California Cannabis Supply Chain Contracts: Fee-Shifting Provisions

California’s cannabis regime is set up to separate every point in the supply chain into different license types: cultivation, manufacturing, distribution, testing, and retail sales, to name a few. Except for a few vertically integrated companies, virtually all cannabis businesses must rely on other companies in the supply chain to get products from farm to consumer.

To that end, our California cannabis attorneys regularly draft “supply chain” agreements, which is a broad term that includes cannabis contracts such as purchase agreements, distribution agreements, manufacturing agreements, supply agreements, license agreements, and so on. We have been publishing a series of posts identifying common issues with cannabis supply chain contracts in California and will continue to do so in the coming months. If you haven’t already read earlier articles on this topic, I suggest you start with the following:

Today, I’m going to dive into a pretty dry, but very important provision in supply chain agreements. Frankly, it’s an important topic for any contract but this series is about supply chain contracts so we’re sticking with that.

For some background, the general rule in the United States is that in actions based under a contract (i.e., claims for breach of a contract or to interpret or enforce a contract), each side bears their own attorneys’ fees. That means that if a party wins or loses, it generally must pay its own legal fees but not the legal fees of the other side. This is called the “American Rule” and is in contrast to the “English Rule” where the loser pays the winner’s legal fees. I won’t get into the nuances of the differences between these two systems but there is a ton of scholarship on which one is better, if you’re into reading that sort of thing.

One other important side note about the American Rule is that there are a lot of exceptions. The government often creates statutes (codified laws) that provide for fee shifting in disputes. For example, attorneys fees can get shifted in some cases under the federal Lanham Act or state counterpart statutes. In these cases, the laws will lay out the specific standards by which fees can be shifted. More on this later.

Turning to supply chain agreements, parties that want to shift fees will need to be cognizant of the American Rule and realize that fee shifting’s probably not going to happen without an attorneys’ fees provision. Even parties who don’t want to shift fees may still think it’s a good idea to actually say that in the contract so that it’s abundantly clear and so that nobody wastes time dealing with the issue during litigation.

Fee-shifting provisions often are set in the miscellaneous section of a contract or otherwise somewhere towards the end, and are usually bunched up with the governing law and dispute resolution clauses for obvious reasons. There are many different ways to write them and a lot of different nuances. For example:

  • Some jurisdictions may require specificity when listing out the kinds of fees that are recoverable. If the clause just says attorneys’ fees, the prevailing party may not be able to get expert witness or other legal consultant fees reimbursed. In that same sense, court or arbitration fees or appellate fees may not be recoverable if not called out.
  • Most contracts will specify that only reasonable attorneys’ fees are recoverable. This can lead to a lot of fighting over what fees are and are not recoverable. For example, if a party’s attorney spent 10 hours billing on something that the average attorney would arguably have spent 2 hours on, the party who is being forced to pay those fees will often resist them. Going line by line through billing records can be a time consuming process. Even if a contract doesn’t specify that only reasonable fees are reimbursable, a court or arbitrator still may read that standard in and not award unreasonably high fee awards.
  • Usually the language used in these clauses refers to the “prevailing party” getting its fees. Given the complexity of commercial litigation these days, it’s not always crystal clear who the prevailing party is. What if there are more than two parties in litigation and a number of cross-complaints, where each party prevails on a few claims but loses on the rest? Contracts can really drill down on this and may define prevailing party more or just note that the “substantially prevailing party” gets its fees.

To add one more twist to this, remember how I said that there are some exceptions to the American Rule for statutory fee-shifting laws? Well what happens if there is an action that has a contract that is silent as to shifting fees or explicitly bars fee shifting, and in that same action statutory claims are advanced that have fee-shifting clauses? It can be pretty easy for parties to end up in these situations to be honest, especially where contracts involve intellectual property because many different IP statutes have fee-shifting provisions–and many supply chain agreements involve IP.

The answer to the above question is very complicated and will depend heavily on the judge, jurisdiction, and whether the written agreement is just silent on the matter or explicitly bars fees. There may be instances in which courts don’t allow fees related to some tasks in litigation but allow them in others. It really is a fact-dependent issue and is wise for parties to consider depending on the type of contract.

While this is definitely a dry area of the law, it’s something that is important for contracting parties to consider. Stay tuned to the Canna Law Blog for more on California cannabis supply chain agreements.

The post California Cannabis Supply Chain Contracts: Fee-Shifting Provisions appeared first on Harris Bricken.

Tuesday, May 4, 2021 Headlines | Marijuana Today Daily News

Marijuana Today Daily Headlines
Tuesday, May 4, 2021 | Curated by host Shea Gunther

No news.

Check out our other projects:Marijuana Today— Our flagship title, a weekly podcast examining the world of marijuana business and activism with some of the smartest people in the industry and movement. • Marijuana Media Connect— A service that connects industry insiders in the legal marijuana industry with journalists, bloggers, and writers in need of expert sources for their stories.

Love these headlines? Love our podcast? Support our work with a financial contribution and become a patron.

Photo: Nakhon100/Flickr

FREE Webinar Tomorrow, May 4! Cannabis in New York: Intro to the Marijuana Regulation and Taxation Act

Register HERE!

New York just became the latest state to legalize recreational cannabis. It will likely be several months before industry regulations are released and license applications are possible, but NOW is the time to start preparing.

Join Harris Bricken’s lead New York cannabis attorney, Simon Malinowski for a FREE hour-longQ&A webinar, TOMORROW Tuesday, May 4th, at 2 pm EDT/ 11 am PDT to learn about New York’s Marijuana Regulation and Taxation Act and New York’s cannabis industry. This event will be moderated by Harris Bricken’s cannabis practice chair, Hilary Bricken.

Simon will cover the available license types, the framework for the license application process, and details about New York’s social and economic equity plan, among many other topics. Please submit any questions you have regarding New York’s Marijuana Regulation and Taxation Act when you register.

See you tomorrow, May 4th!

Register HERE!

The post FREE Webinar Tomorrow, May 4! Cannabis in New York: Intro to the Marijuana Regulation and Taxation Act appeared first on Harris Bricken.

California Cannabis Changes: What Might We See From the DCC?

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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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