Category: Law & Politics

Well, the big Cannabis Control Board (CCB) meeting happened on May 11, 2023, and it was as action packed as advertised. There were rules and regulations, Conditional Adult-Use Retail Dispensary (CAURD) licenses issued, and heated exchanges between the regulators. Here are the key takeaways:

The revised adult use rules were released

As expected, the Office of Cannabis Management (OCM) posted the revised adult-use rules and regulations on its website on May 10, 2023. We will follow up with a detailed breakdown of the changes, but here are some high level items:

• actually securing real estate prior to submitting an application is no longer required. The revised rules and regulations allow the CCB to issue a provisional license if all of the required materials are provided except for information about a secured location.
• All dispensaries and microbusinesses will have the ability to include on-site consumption, with the on-site consumption rules and regulations forthcoming.
• The timeline for the 10 existing Registered Organizations (“ROs”), i.e. existing medical licensees, opening adult-use retail dispensaries was moved up, with each RO allowed to enter the adult-use market with one location after December 29, 2023, and two more locations after June 29, 2024. As part of those revisions, each RO will be required to pay a $5,000,000 upfront fee, another $5,000,000 upon opening its second adult-use location, and $10,000,000 in installments tied to the RO’s revenue (with the full $20,000,000 to be paid by 2033).
• The True Party in Interest rules were changed, increasing the maximum amount of revenue to $250,000 from $100,000. We’ll cover the specifics of the TPI rules in a later post, given their significance in the application process.

CCB “confirmed” the application timeline

OCM Chief of Staff Axel Bernabe reiterated that the OCM is targeting opening the application portal in the fall of 2023 (with the final adult-use rules and regulations approved in August of 2023). Mr. Bernabe’s statement was corroborated by a statement to amNewYork Metro from Trivette Knowles, a spokesperson from the OCM, who stated that the CCB “anticipates issuing general licenses at the beginning of next year (2024).”

CCB issues more CAURD licenses

The CCB issued another 50 CAURD licenses, with the total licenses issued to date reaching 215. We’ll cover it on a later post, but the new batch of CAURD licensees included applicants from the previously enjoined regions. It is clear that the CCB and OCM are pushing the applicants affected by the injunction.

The social and economic equity plan was released

OCM Chief Equity Officer Damian Fagon introduced the social and economic equity plan, although many specifics were not included (a source of much heated discussion during the meeting). A corresponding action plan for social equity license application assistance should be forthcoming.

Stay tuned

All in all, this meeting delivered in that the revised rules and regulations were released, the application and licensure timelines were softly confirmed, we finally got to see a social and economic equity plan, and more CAURD licenses were issued. Stay tuned for our detailed breakdowns of the revised rules and regulations and summary of the new TPI rules!

The post THE Cannabis Control Board Meeting Summary! appeared first on Harris Bricken Sliwoski LLP.

The U.S. Department of Transportation (DOT) has finalized a rule to amend its drug testing policy in a way that could have significant implications for truckers, commercial drivers, pilots and other federally regulated transit workers who use marijuana off the job.

In a notice last Tuesday, the department said that it has completed the rulemaking process for the policy change, which would allow oral saliva drug testing as an alternative to urine-based tests.

Urine tests for THC are notoriously unreliable as metabolites can show up for weeks or months after consumption. Said tests often result in false positive results for people who are not actually impaired on the job, but have consumed on their free time. These ‘false positives’ are noteworthy because the DOT data released in January showed that tens of thousands of commercial truckers have tested positive for marijuana as part of federally mandated screenings and a significant portion of those truckers refused to return to work, contributing to a labor shortage.

Accordingly, DOT proposed last year that testing of oral saliva be added as an alternate option. Following a public comment period, the DOT finalized the oral saliva testing rule, which will take effect on June 1.

Depending on frequency of use, THC is generally detectable in saliva anywhere from one (1) to 24 hours after use, according to DOT. In their release, the DOT said that “Oral fluid testing can detect the recent use of some drugs, including marijuana and cocaine, while urine drug testing has a longer window of detection.”

Additionally, DOT’s finalized rule sets a 4 nanogram per milliliter screening test cutoff for THC, so that it would not only detect THC but would also eliminate the possibilities of positive tests resulting from passive exposure.

It will be interesting to see if the local, city and state law enforcement agencies begin utilizing these testing methods to determine if drivers are impaired and/or under the influence of THC.

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In a precedential decision, the Trademark Trial and Appeal Board (“TTAB”) affirmed an examining attorney’s refusal to register two “Bakked” trademarks by deeming the goods to be illegal drug paraphernalia under the Controlled Substances Act (the “CSA”) and deciding the two exemptions of the CSA did not apply.

The Bakked trademark applications

National Concessions Group (“NCG”), a Colorado-based subsidiary of Canadian company SLANG Worldwide, filed two trademark applications to protect its brand name “Bakked” in connection with a product identified as “an essential oil dispenser, sold empty, for domestic use.” The examining attorney took the position that the product constituted illegal drug paraphernalia because it was primarily used for “dabbing” cannabis-based oils, and it denied the applications. Appeals ensued, and the refusals remained in effect until it escalated to the TTAB. Unfortunately for NCG, the TTAB agreed.

The TTAB decision

First, the decision (which is marked “This Opinion is a Precedent of the TTAB”) analyzes whether the product should be considered drug paraphernalia under the CSA:

“equipment or products primarily intended or designed for use in ingesting, inhaling, or otherwise introducing marijuana into the human body (e.g., water pipes, roach clips and bongs) constitute unlawful drug paraphernalia under Section 863(d) of the CSA, but for two exemptions set out in Section 863(f).”

Here, the TTAB cited several extrinsic pieces of evidence to show that the oil dispenser should be considered drug paraphernalia. This included a press release by National Concessions, which advertised itself as “The Largest Cannabis Company in the US” as well as news articles describing “dabbing” as a new way to get high – which is what the oil dispenser was primarily linked to.

Having decided the dispenser did constitute drug paraphernalia, the decision then examines whether it fell under an exemption of the CSA. Section 863(f)(1) of the CSA exempts “any person authorized by local, State, or Federal law to manufacture, possess, or distribute such items.” Here, NCG argued that because it is authorized by Colorado state law to produce such a product, it should qualify for the exemption. The TTAB disagreed that Colorado state law should have any bearing on federal trademark registration and protection:

“[A]ny authorization by Colorado of Applicant’s manufacture, possession or distribution of the goods cannot override the laws of the other states or federal law outside Colorado. … While Applicant may be correct that Colorado has authorized it to manufacture, possess or distribute the goods, such authorization does not extend beyond the borders of Colorado. … But that exemption is insufficient to support the federal trademark registration Applicant seeks, which would be nationwide in effect. We hold that when a Section 863(f)(1) exemption is applicable based on state law, that exemption does not support federal registration.”

The TTAB similarly found that NCG did not qualify for the second exemption either. Section 863(f)(2) of the CSA exempts “any item that, in the normal lawful course of business is imported, exported, transported, or sold through the mail or by any other means, and traditionally intended for use with tobacco products, including any pipe, paper, or accessory.” Here however, NCG just fell short of convincing the TTAB its product was traditionally intended for use with tobacco products.

Conclusion

While the Opinion is certainly in keeping with the lack of USPTO protection for the industry, it’s notable in that it unabashedly declares marijuana’s legality in any one state has no bearing on whether federal registration and protection should be granted. It’s disappointing for those in the industry who want to (rightfully) protect their brand, but it looks like that’s how it’s going to be for the foreseeable future.

We’ve also written about other TTAB decisions and its general process here:

• PUREXXXCBD Can’t Be Trademarked
• Cannabis Trademarks: Understanding the Opposition Process
• The Anatomy of a Cannabis Trademark TTAB Decision

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On May 4, 2023, the New  York Office of Cannabis Management (OCM) formally announced a Cannabis Control Board (CCB) on May 11, 2023. Why is this such a big deal? Well, as we wrote about here, OCM’s Chief of Staff and Senior Policy Director Axel Bernabe provided this response to a question by Green Market Report’s John Schroyer about the timeframe for the final adult-use cannabis rules and regulations:

“What’s the timeframe for when New York industry regulations will be finalized and done?”

“The regulations that we filed for public comment, we’re really trying to get them done by our May 11 board meeting. If we get it done by then, we should be able to file final regs by the end of August. Then we can start opening the general application period within a couple months of that.”

Where does this leave us?

Based on Mr. Bernabe’s comments, we are hopeful that the upcoming CCB meeting will come with the release of the revised adult-use rules and regulations after the initial 60 day public comment period that ended in February of 2023. We should know for sure in the day or so before the May 11 meeting, as the OCM generally publishes a meeting agenda leading up to the meeting itself. In fact, there is a good chance the revised rules and regulations will be released a few days in advance, as was the case when the initial adult-use rules and regulations were released in the days leading up to the November 21, 2022 CCB meeting.

Where to go for New York cannabis updates

Anyone who is interested in applying for an adult-use cannabis license should check the OCM’s website (and the Canna Law Blog) as we get closer to the May 11 meeting, and should strongly consider watching the meeting itself (which is live streamed). Stay tuned!

The post THE New York Cannabis Control Board Meeting is Here! May 11 appeared first on Harris Bricken Sliwoski LLP.

Delaware has joined the ranks of jurisdictions with legal adult-use marijuana, with the recent enactment of two bills by the state’s legislature. House Bill 1 (HB 1) amends Title 16 of the Delaware Code to remove all penalties for the use or possession of marijuana, as long as the amount does not exceed certain statutory quantities. For its part, House Bill 2 (HB 2) establishes a legal marijuana industry. Both initiatives were sponsored by Rep. Ed Osienski, a Democrat, and approved largely along party lines.

The approval of these legislative initiatives has taken place without the signature of Gov. John Carney, also a Democrat, and a vocal opponent of adult-use legalization. Despite “remain[ing] concerned about the consequences of a recreational marijuana industry in [the] state,” Gov. Carney chose not to veto the bills, opining that Delawareans had “spent far too much time focused on this issues when [they] face more serious and pressing concerns every day.”

Legalizing cannabis in Delaware

Possession of one ounce or less of marijuana (“personal use quantity”) was decriminalized in Delaware in 2015, but was subject to a civil penalty of $100 until the enactment of HB 1. This bill refined the definition of personal use quantity to include 12 grams or less of concentrated cannabis, and cannabis products containing 750 miligrams or less of Delta-9 THC. The new also excludes items used, or intended primarily for use, with marijuana from the application of Delaware’s drug paraphernalia statute.

Despite the enactment of the new laws, it still constitutes a misdemeanor in Delaware to possess marijuana in amounts that exceed the personal use quantity. Moreover, public consumption remains prohibited. In addition, growing cannabis in the First State without a license is still unlawful, even for personal use.

Establishing a cannabis industry in Delaware

For its part, HB 2 creates the Delaware Marijuana Control Act. The Act calls for a regulated marijuana sector whose products are “tested, labeled, and subject to additional regulations to ensure that consumers are informed and protected.” This underscores a point we have made more than once in these pages regarding the insufficiency of decriminalization-only as a cannabis policy. As we have explained, the absence of a legal, regulated industry “prevents the state from engaging in constructive regulation geared to promote health and safety (such as ensuring cannabis products are properly labeled).” It also prevents taxation of marijuana-related activities: The Act establishes a 15% levy on retail sales of marijuana.

The Act provides for licensing of certain activities involving marijuana, including retail, cultivation and processing. Delaware authorities are to issue up to 30 retail licenses, 30 manufacturing licenses, 60 cultivation licenses and five testing licenses, subject to the existence of a sufficient number of qualified applicants. Considering Delaware’s small size (2,489 square miles) and population (just over one million), those seem like generous allotments: Perhaps legislators are counting on more than a few customers driving down from Pennsylvania, the only one of the states bordering Delaware without legal adult-use cannabis at this stage (downtown Philadelphia is about 23 miles from the Delaware border).

Social equity and microbusiness applicants

Special provisions are made under the Act for social equity and microbusiness applicants, including discounted application fees. One-third of the cultivation and manufacturing licenses, one-half of the retail licenses, and two out of the five testing licenses are reserved for social equity applicants. Current and former residents of a Delaware “disproportionately impacted area” (one with high rates of marijuana-related arrests, conviction, and incarceration) are eligible for social equity applicant status, as are those convicted for marijuana-related offenses and their families, with some caveats.

Turning to microbusiness applicants, the principal criteria for eligibility is that the business in question does not intend to employ more than ten persons. There are also restrictions on the size of the cannabis plant grow canopy and the total number of marijuana plants the business will possess on a monthly basis. A total of 20 cultivation licenses and ten manufacturing licenses are reserved for microbusiness applicants.

Looking ahead

With the enactment of these two marijuana bills, Delaware becomes the 22nd state to legalize adult-use marijuana. Factoring in the District of Columbia and the U.S. territories of Guam, the Northern Marianas and the U.S. Virgin Islands, more than half of all U.S. jurisdictions now have legal recreational marijuana (as well as certain Native American tribes). As we celebrate the Small Wonder’s step forward, we should take a moment to applaud Gov. Carney for his common sense approach. If only all governors were as reasonable.

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One thing to know about litigation is that timing is everything. Many clients that come to us are unaware that the process of litigating is governed by a series of statutorily-defined deadlines and schedules. Failing to abide by those deadlines can have huge effects on a litigant’s position in a lawsuit. One of the worst positions someone can find themselves in is “in default,” which ultimately triggers a cut-off of a defendant’s rights to defend itself until a default judgment is entered.

Phase 0.5: Being “In Default”

A defendant is technically “in default” if they fail to file an answer or any other permitted response to a complaint within the time allowed by law (typically, 30 days within being personally served). Being in default doesn’t really have any legal consequence in and of itself. The court can’t refuse to accept a response even if it’s a few days late – the defendant can appear until the clerk has entered the default (which is step 1 defined below).

As a side note, a response filed after the deadline can be challenged by a motion to strike. But these are generally not granted because, by not requesting entry of default, the law generally views this as a situation in which the plaintiff has allowed the defendant further time to respond.

Phase 1: The Entry of Default

Once a defendant is in default, the plaintiff must request the court clerk to make a formal entry of default. In California, the plaintiff needs to make this request within ten days of the missed deadline. Importantly, entry of default instantly cuts off a defendant’s right to appear in the action.

The defendant is now what we call “out of court.” That defendant no longer has any right to participate in the case until (a) its default is “set aside” and it can then respond, or (b) a default judgment is entered. In the latter case, the defendant cannot even participate in the prove-up hearing to challenge the default judgment. This is because by defaulting, the law deems the defendant to have admitted the material allegations of the complaint. It has to wait for the default judgment to be entered, and then appeal. This is the worst position to be in.

Phase 2: The Default Judgment

After the default is entered, the plaintiff then may apply for a default judgment. This needs to be done within 45 days after entry of default. In California, this breaks down into two types of default judgments:

1. Clerk judgment: in more simple cases pursuing a fixed amount of money, the clerk can enter a default judgment without any judicial hearing.
2. Court judgment: in other cases, where the plaintiff may need to “prove up” the default, a court hearing is necessary.

If the plaintiff is successful in obtaining a default judgment, that’s it – the defendant now has a judgment entered against it without being able to do a single thing about it. The defendant now faces the costly options of (a) appealing, or (b) trying to reach a settlement with a party that already has a full judgment against it (not a great negotiation position).

The above is a primer on what the default judgment process is. If you find yourself or your company served with a lawsuit, please act on it quickly – engage with experienced litigators who can strategize options with you and ensure you don’t find yourself in arguably the worst position possible in litigation.

The post Cannabis Litigation: Defaults and Default Judgments appeared first on Harris Bricken Sliwoski LLP.

As foreshadowed by our recent post, on May 3, 2023, New York Governor Kathy Hochul signed cannabis legislation that significantly increases the civil and tax penalties for unlicensed and illicit cannabis sales. The legislation was passed in conjunction with New York budget for the 2024 fiscal year.

So what’s included in the new cannabis legislation?

• The addition of willful evasion of taxes as part of the cannabis tax, with criminal penalties ranging from a Class A misdemeanor for a first offence to a Class E felony for a second offense within three years.
• Authorizes the New York Attorney General (AG) and/or the Office of Cannabis Management (OCM) to go after illicit cannabis activities, with the maximum penalty for violations under the MRTA increased to $20,000 per day penalty for engaging in cannabis activity without a license.
• Authorizes the AG and the OCM to to conduct investigations of business where illicit cannabis activities are suspected, including the authorization for the AG and OCM to obtain search warrants in connection with investigating suspected illicit activity.
• Illicit cannabis stores could be prosecuted for tax fraud.

Just about everyone has been clamoring for increased enforcement against illicit cannabis dispensaries and, as we have repeatedly opined, without such enforcement it will be difficult, if not impossible, for New York to have a fully functioning adult-use cannabis industry. To that end, Governor Hochul’s press release included quotes from Office of Cannabis Management Executive Director Chris Alexander and New York Acting Commissioner of Taxation and Finance Amanda Hiller.

With more CAURD licenses recently issued and the big Cannabis Control Board meeting coming up later this month, we view this as another sign that New York is getting ready for a fully functioning adult-use cannabis industry. Stay tuned to the Canna Law Blog for more New York cannabis updates!

The post New York’s Legislation to Curb Illicit Cannabis Sales appeared first on Harris Bricken Sliwoski LLP.

Corporate governance is a basic requirement of any business. So of course, cannabis businesses often just ignore it. Some of them may pay a lawyer to put together a simple set of bylaws and an organizational resolution (or operating agreement for an LLC), and then basically close their files until something “big” comes up. This is an absolutely terrible plan and leads to tons of mistakes – many of which are easily avoidable.

In 2021, I wrote a post about why corporate governance is important. Today I want to revisit that post and hopefully hammer home again why this is so important.

What is corporate governance?

First of all, let’s break down what corporate governance even is. As I wrote back in 2021: “a strong corporate governance program is one in which a cannabis business (1) adopts procedures for running the cannabis business, and then – and this is the hard part- (2) actually follows them.”

To break this down even further, lets imagine a cannabis business is formed as a multi-member LLC. This is done by filing articles (or in some states certificates) of organization with the state’s secretary of state. The articles often have barely any information in them so by default the LLC will be governed by the state’s LLC act. LLCs generally don’t have to do anything beyond forming the LLC and getting a tax ID number, but in a multi-member situation, it’s a really bad idea not to.

Better corporate governance would mean that the LLC’s members draft an organizational resolution and operating agreement. Unless the members are lawyers, and even in some cases if they are, they should hire a law firm to do this. It really does not need to be complicated or expensive for cannabis businesses with good corporate counsel (unless there’s an exotic or complicated corporate structure at play), but ripping templates of Google is never a good idea.

Most cannabis businesses go through these steps and then … do next to nothing else. This is where things get hectic. Corporate governance agreements (the good ones at least) will often explicitly require things like holding meetings or properly waiving them, documenting myriad different company actions via a secretary or good record keeping principals, and so on. If companies don’t do this, it not only is nearly impossible to see under the hood in future deals (more on that below), but it can even throw into question actions taken by members of the company.

What are some pitfalls of bad corporate governance at the outset?

Cannabis businesses that don’t even go the first step of getting initial corporate governance documents in place are in for a bumpy road. They’ll be forced to live with their state’s basic laws without any chances to add protective provisions that fit their specific situation. They also won’t be able to take advantage of state-specific laws that might allow them to toss provisions of state law that they don’t want to govern them (this can be done in many states).

I’ll give a good example here, something I’ve seen variations of in the past. Generally, state laws do not impose rights of first refusal, drag-along rights, or preemptive rights on members of a company. Rights of first refusal require members who want to sell their interest to offer it to the company and/or other members before doing so. Drag rights allow the majority member to force the minority members into a sale. Preemptive rights require the company to, before issuing new securities to a third party, offer them to the existing members. All of these are extremely valuable for running a company.

Now imagine an LLC never adopted an operating agreement and the members didn’t have any of these rights. Imagine that the member holding 80% of the unites wanted to sell the company to a third party, and the third party wanted to buy the entire company (and not just the 80%). That 80% member would need to go around and get the approval of ALL LLC members to sell the company. He or she couldn’t just force the other members into the sale (as he or she would have been able to do with an operating agreement with drag rights). There are endless ways in which things like this can lead to massive consequences and even kill viable deals.

What are some pitfalls of bad ongoing corporate governance?

Let’s assume that a cannabis business did the basics and paid a lawyer to get an operating agreement in place. Many of these businesses then drop the ball and operate their companies. Bad idea! Here are some things that can easily go south, many of which I have seen before.

Example 1: The owners of the company haven’t kept good records and don’t know the exact composition of the cap table. They have to spend weeks reconstructing investments and prior deals to figure out who is even a member of a company.

Example 2: Company X gets sued. The plaintiff also sues the officers of Company X, asking the court to “pierce the corporate veil” and impose individual liability against them. This can actually end up happening. One of the elements of a veil piercing claim looks at whether the company adhered to corporate governance practices. Companies that don’t risk exposing their owners and operators to personal liability – the very thing entities are supposed to avoid.

Example 3: Members of a company are in a dispute. One of the issues concerns whether a company action was authorized at a company meeting where no minutes were recorded. One member says the members decided X, another says Y. Now there is a “he said, she said” dispute, depositions need to be taken for thousands of dollars a pop, and the parties are ultimately at the whim of a jury. All of this could be avoided with a simple set of minutes.

Example 4: A company had 1,000 shares of stock authorized but issued 5,000 to investors. The issuances would potentially be invalid. The officers of the company have to go back and amend their articles of incorporation and explain to investors why this happened. The company needs to ratify the past issuances. All of this costs money. All of it makes the officers look bad. And all of it is avoidable.

Corporate governance is key

For cannabis businesses and cannabis business owners that do not want to spend hundreds of thousands of dollars litigating avoidable disputes, risk personal liability for their owners and operators, and even risk losing out on a deal, corporate governance is a must. Time and time again, our corporate attorneys have seen shoddy corporate governance practices lead to disastrous and incredibly expensive outcomes.

Many of these problems can be avoided by investing in good corporate governance agreements up front. And as I said, that does not need to be expensive in many cases especially for non-complicated governance structures. Those cannabis businesses can avoid operational problems by simply reading and following these corporate governance documents. Cannabis businesses that do this are never guaranteed to avoid all problems, but there are a host of “unforced errors” that can be avoided with simple business basics.

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A “subpoena” is used in cannabis litigation (or any litigation) when third-party witnesses or documents become necessary for a lawsuit. Over the years, we’ve seen the need for subpoenas come up in a variety of contexts. Below is a primer on what to do as a recipient of one:

What is a subpoena?

There are generally three types of subpoenas:

1. The deposition subpoena that asks for a witness to sit for a deposition (a “testimony only” subpoena)
2. The deposition subpoena that asks for a production of documents (a “business records” subpoena); or
3. The deposition subpoena that asks for both (a “records and testimony” subpoena)

If the subpoena is demanding a witness to appear, it should set forth the time and place for doing so. It should also include a description of topics on which the questioning will focus on “with reasonable particularity.” If the subpoena is demanding documents, it should also outline the types of documents that is expected to be produced by providing “specific descriptions” of each.

How to comply with a subpoena

The most important thing about compliance is being mindful of the time for compliance. As mentioned above, if the subpoena is asking for attendance, it will set forth a (typically placeholder) time and location – it’s important to communicate with the subpoenaing attorney and indicate whether attendance will happen or not, whether rescheduling is necessary, etc. If the subpoena is asking for a production of documents, the subpoenaing attorney will typically include a deadline to do that as well, and again, a different compliance date can be negotiated in most cases. Note that, in California for example, that compliance date must be at least twenty days after the subpoena is issued, or at least fifteen days after service of the subpoena, which is later. And obviously, in relation to a subpoena that asks for records and testimony, both issues can be worked out.

How to challenge a subpoena

A subpoena can be attacked on several grounds:

• Form or content defects (like an inadequate description of what documents they’re requesting);
• Service defects;
• Not within the permissible scope of discovery (like the documents sought are protected under various privileges or privacy laws such as consumer or employee laws); or
• “Unjustly burdensome” or oppressive

Where one of the above is particularly egregious, it may be most worthwhile to file an affirmative “motion to quash” – a motion asking the Court to essentially invalidate the subpoena. For example, in California, the Court may in its discretion order the losing party to pay the winning party’s expenses, including reasonable attorneys’ fees in filing the motion.

In other cases (such as when the subpoenaed party is a “consumer” or “employee”), serving written objections is sufficient. These objections need to state specific grounds for why documents will not be produced. This will automatically excuse the custodian from producing the records until the court orders their production or the parties come to an agreement on what should be produced, etc.

Conclusion

It can be particularly annoying to receive a subpoena, especially in a matter that is of no relevance to your particular business. It’s nevertheless important to address the subpoena in a timely manner. For other articles we’ve written about them, please see:

• Cannabis Litigation: Third-Party Subpoenas and the Illegality Defense
• Federal Court: California Must Share Cannabis Licensee Records with Feds
• Here We Go! Feds Sue California for Cannabis Business Records

The post Cannabis Litigation: A Primer on Subpoenas appeared first on Harris Bricken Sliwoski LLP.

On April 20, my colleague Hilary Bricken wrote a post entitled, “Cannabis Collections Headaches and What to Do.” In it, she discussed a problem that’s been plaguing California cannabis businesses throughout: distributors and retailers that don’t pay their bills. Towards the end of the article, she mentioned a piece of proposed legislation to address the problem, AB 766, which would allow – and even require – the state to police cannabis contracts. While I’m in favor of coming up with ways to fix the status quo, this isn’t it. If passed, AB 766 would in my view lead to massive problems, both for licensees and the state. Let’s unpack.

What AB 766 would do

AB 766 would apply only to sales made after January 1, 2024. It would require any licensee to pay for goods and services from another licensee within 15 calendar days after the date of the final invoice. The date set forth on the invoice could not be more than 30 days after the date goods or services are transferred. So hypothetically, if a cannabis contract has net 30 payment terms and is paid 46 days after delivery, problems begin.

Licensees that sell goods with a value of at least $5,000 and don’t receive payment on time must report the unpaid invoice to the Department of Cannabis Control (DCC). At that time, the DCC is forced to intervene in the cannabis contract breach. DCC must then notify the non-paying licensee. If they don’t pay within 30 days, the DCC can issue a notice of warning or citation. If this happens multiple times, the DCC must commence a disciplinary action.

Notably, if a licensee is reported, it cannot buy goods on credit from another licensee until it pays the initial unpaid invoice.

AB 766 also does not apply to excise tax collection.

Why AB 766 is a bad idea

I want to start this section out by noting, in no uncertain terms, that violations of cannabis contracts are bad. There are lots of licensees that simply skip town on invoices for no good reason. It goes without saying that not paying undisputed invoices is a bad thing. But I do not think that AB 766 will make a huge dent in the problem and instead could create even more problems.

First off, AB 766 does much more than tell licensees to pay on time – it instead sets the requirement for what “on time” can even mean. I have seen plenty of cannabis contracts with fully negotiated payment terms that might violate AB 766. If AB 766 becomes law, it will mean that the government dictates commercial contact payment terms.

AB 766 would also force licensees to report other licensees that have not fully paid outstanding invoices. Reporting would be mandatory. It would apply even if the other party was just a few hundred dollars short. It is inevitable that licensees will not report every violation. Would they then be subject to potential discipline? It sure seems like it. I can’t tell you how much harder it will be to settle payment disputes once one side has reported the other to the state. I can entertain an argument that licensees should be free to report each other, but requiring reporting of contract breaches is totally indefensible.

Most egregiously, licensees who are reported would be legally prohibited from buying goods or services on credit from other licensees until they pay the invoices for which they were reported in full. All that has to happen is that a licensee is reported. The person making the report has to give the DCC almost no information in order to make the report. There is no hearing. There does not even seem to be an opportunity to contest the report. The second a report is made, the other side loses its rights to buy goods on credit – presumably even under preexisting contractual arrangements with third parties. This seems like an obvious due process concern and ripe for abuse.

Along those lines, AB 766 doesn’t even really address what happens in the event of a disputed invoice. What if XYZ retailer doesn’t pay ABC because the goods XYZ bought were moldy? Well, it looks like ABC would still have to report it. Again, this makes no sense.

How to fix AB 766

I do not think AB 766 will solve the problem at hand. Instead, it is likely to lead to bigger problems. It seems inevitable that people will be punished for things like failure to report, that licensees will be subject to penalties when they have legitimate grounds to dispute payment, and so on. The bill would also likely bog down the DCC with reports. And given the state’s spotty history with cannabis enforcement, it’s entirely possible that many of those reports would not even be timely addressed.

Rather than create an overly complicated and mandatory reporting system, it would be much simpler if the state could create a statutory right to recover attorneys’ fees in actions between licensees. Many licensees still do “handshake” contracts (still a bad idea!) with limited or no rights to recover attorneys’ fees. Add fees into the mix and you give unpaid licensees a major tool to fight back.

If the state decides to implement a reporting system anyways, then AB 766 should be overhauled so that (1) reporting is optional, (2) licensees can set their own payment terms without the state’s input, and (3) non-paying licensees do not get stripped of any rights until they have an opportunity for some kind of hearing. If the state won’t do that, then there will be problems. Stay tuned to the Canna Law Blog for more updates.

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