Today’s headlines are brought to you by our friends over at Eaze.com, California’s top one stop website for legal marijuana delivery. If you live in the golden state, swing over to Eaze.com to see if they are active in your area. With deliveries taking place in less than an hour, it’s never been easier to get legal California marijuana delivery. And of course, if you don’t live where Eaze delivers, you can still benefit from all the useful bits of industry insight and analysis they’ve developed using their properly aggregate and anonymized sales data stream.
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.
Today’s headlines are brought to you by our friends over at Eaze.com, California’s top one stop website for legal marijuana delivery. If you live in the golden state, swing over to Eaze.com to see if they are active in your area. With deliveries taking place in less than an hour, it’s never been easier to get legal California marijuana delivery. And of course, if you don’t live where Eaze delivers, you can still benefit from all the useful bits of industry insight and analysis they’ve developed using their properly aggregate and anonymized sales data stream.
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.
Every Saturday, at least for a while, we plan to run a series of blog posts that take a close look at each of the Democratic Party candidates for President in 2020. We will examine each candidate’s historic approach to marijuana law and policy, and also canvas each politician’s current stances on marijuana.
Today, we start with Joe Biden, the former vice president and U.S. senator from Delaware. As of today’s post, Biden may still be the current party front-runner, and is certainly near the top of the heap.
Overall Grade: D
Stance on marijuana: Biden wants to decriminalize marijuana use and automatically expunge prior criminal records showing marijuana possession convictions. He is, however, far from an advocate for cannabis legalization. Biden’s campaign website nowhere even addresses his beliefs on cannabis. Instead, it makes a vague statement about criminal justice reform that nowhere mentions the War on Drugs or marijuana:
We need to reform the criminal justice system to prioritize prevention, eliminate racial disparities at every stage, get rid of sentencing practices that don’t fit the crime, and help make sure formerly incarcerated individuals who have served their sentences are able to fully participate in our democracy and economy….”
His failure to mention the War on Drugs or marijuana on his website despite using “criminal justice reform” as a policy point is presumably because he zealously supported the War on Drugs, as described below. If Biden truly believes “Nobody should be in jail for smoking marijuana,” as he told voters this past March, he owes an explanation for why he previously supported the arrest and incarceration of countless Americans for weed.
History with marijuana legislation: Biden’s failure to mention marijuana on his website is probably intentional. Over the course of his political career, Biden has expressed his disdain for marijuana, with both his rhetoric and his legislation. The former vice president is described as an architect of the War on Drugs by Michael Collins, the director of national affairs at Drug Policy Action. As a senator, Biden was largely responsible for creating the “drug czar” in 1982, a cabinet position that would go on to form the Office of National Drug Control Policy and increase enforcement of anti-drug laws. Biden consistently pushed for stepping up enforcement of draconian drug policies, even criticizing then-President George H.W. Bush for being too soft on drugs.
As vice president, Biden’s position on marijuana seemed more subdued as major drug policy changes were enacted under the Obama administration, including the Cole memo which made it easier for states to legalize marijuana. However, the Obama administration deflected all attempts to reschedule marijuana, leaving it classified as a Schedule I drug, the same schedule as heroin.
We have not devoted nearly enough science or time to deal with the pain management and chronic pain management that exists. There’s got to be a better answer than marijuana. There’s got to be a better answer than that. There’s got to be a better way for a humane society to figure out how to deal with that problem.”
Biden gets one thing right: we do need more research surrounding pain management. However, his refusal to acknowledge the viability of cannabis as a possible treatment exposes his basic misunderstanding of both marijuana and the drugs currently used to manage pain. Though extensive research is necessary to determine the efficacy of marijuana for specific maladies, there is little doubt that it has tremendous potential for reducing the U.S.’s ongoing opioid epidemic, among other things. Considering the existing scientific evidence, Biden’s perspective that marijuana is somehow “inhumane,” and thus not to even be considered as a treatment for pain, is simply illogical. His opinion stems more from prejudice against cannabis (and the people who use it) than from science.
Conclusion: Biden receives an “D” grade for his views on cannabis because he both fails to recognize or acknowledge its medicinal uses and because he is the only prominent Democratic Party presidential candidate who does not support cannabis legalization. The only thing Biden has going for him is a stated desire for criminal justice reform, which saves him from a failing grade.
Cannabis Queens. Marijuana Moms. The Women of Weed.
Those are some of the monikers bestowed upon the four Illinois legislators who collaborated, cajoled, and prodded the United State’s most comprehensive adult-use marijuana legislation to the finish line.
On June 25, 2019, Democratic Gov. J.B. Pritzker is slated to sign into law the 610-page Illinois Cannabis Tax and Regulation Act, which will take effect Jan. 1, 2020, and make Illinois the 11th state to legalize adult use cannabis.
This historic legislation will:
Create adult-use markets in the country’s sixth-most populous state.
Expunge more than 700,000 criminal records of minor marijuana offenders.
Guarantee that a portion of cannabis sales revenues will return to communities devastated by the federal war on drugs.
Allocate jobs, training, and cannabis business opportunities for people of color and residents of low-income communities.
Legalize marijuana use for Illinois residents and visitors.
When the law goes into effect, Illinois residents 21 and older will be able to legally keep up to 30 grams, or a little more than 1 ounce, of cannabis flower, while out-of-state visitors can possess half that amount. Medical marijuana cardholders can legally cultivate up to five plants at home. Licensed cultivators and dispensaries currently under the state’s medical marijuana program have the option of also serving the new adult-use population.
Illinois state Sens. Toi Hutchinson and Heather Steans, and state Reps. Jehan Gordon-Booth and Kelly Cassidy, all Democrats, along with the bill’s campaign manager, Rose Ashby, a former high-school English teacher, succeeded in guiding and delivering the bill over a two-year period.
They said it helped that both houses of the Illinois General Assembly and the incoming governor shared one political party. But political control hasn’t guaranteed legalization in other states, as New Jersey and New York have found out.
Sisterhood of the Cannabis Plants
The bill’s journey to law is a story about sisterhood and friendship, listening to others — even opponents — and crafting a bill that meets the needs of many diverse communities.
“Illinois succeeded because of great leadership from strong, committed women and the collaborative approach they took to build consensus and then follow through after the meetings ended,” explained Kelli Hykes, Weedmaps’ Director of Government Relations.
“The women who crafted the historic legislation convinced a governor who initially was not quite on board to go from indifferent to being an enthusiastic supporter, Hykes said.
Illinois became the second state to enact adult-use legalization through legislation and the first to legislatively regulate cannabis sales. Nine adult-use states achieved legalization through a ballot initiative. With Illinois, 11 U.S. states will permit adult-use marijuana.
Co-sponsor Cassidy, who previously worked on the state’s medical marijuana law, began crafting a version of the current legislation two years ago.
“We spent a lot of time working on it and it passed on the first vote. That’s because we decided to go about it a little differently,” Cassidy told Weedmaps. “The four of us had worked together on other issues and had been friends for a long time.”
A new crop in addition to famous Illinois corn could be coming to the Land of Lincoln when marijuana becomes legal in 2020 in Illinois. (Photo by Bob Bowie on Unsplash)
The Path to Passage
Cassidy said early on the sponsors realized that the legalization process would require dedicated attention.
“Rose (Ashby) assumed the campaign manager role as the herder of cannabis cats, the point person who keeps track of all the moving parts. I don’t know whether it could have been done without her,” Cassidy said.
“I know I couldn’t have survived without her. She had a mastery of the details. We did so many of these town halls and community meetings that I think I talked about cannabis in my sleep. But it’s so important to keep reaching out and keep all of that enthusiasm flowing.”
Hykes also credited Ashby as a driving force behind the landmark bill.
“Rose is not an entrenched political operative. But people believe and trust her because she’s honest. She listened to the concerns and motivations of many disparate groups and insured that they were addressed in the bill’s final form,” Hykes said.
Everyone Counts
The Marijuana Policy Project, which also worked to help craft the law’s language, said the bill contains “the most far-reaching social equity provisions ever included in a legalization law.”
Hykes said the legislation would never have passed without the social justice and social equity components.
“The sponsors made sure those were included in the spirit and the wording of the legislation. They were so successful because of the consensus-building efforts they took and how their constituent issues were addressed in the final legislation,” Hykes explained. “They legislated like women legislate.”
Cassidy concurred.
“America spent decades dismantling these communities, disinvesting economically, and destroying the lives and careers of generations of young people. Being able to engage in this conversation, hear their concerns, and craft a collaborative, credible response to that was huge.”
In addition to Gordon-Booth, Hutchinson, and Steans, Cassidy also credited state Rep. Celina Villanueva.
“Much of the talk has been about the four of us legislators, but Celina, who used to be a community organizer, also played a big role in this effort. It’s unusual for a freshman legislator to get this deeply engaged.”
Can the Illinois Model Be Replicated?
The “Marijuana Moms” think their method not only can serve as a template for other states seeking a path for legalization, but also become a standard for making politics work in an era marked by political divisiveness and legislative inertia.
Cassidy said she believes other states can follow Illinois’ blueprint: “I think our dream team is the dreamiest, but you can build one anywhere people are willing to be collaborative. Nobody in our group had any strong individual ownership feelings. We were all happy to accomplish this collectively.”
Cassidy advised legalization advocates in other states to “stay at the table when it’s hard not to leave, to keep talking throughout the process, and never give up, not just with your side, but with your opponents as well. Our willingness from day one to engage with people who would never support this bill gave us the training to pursue legalization to the finish line.”
Cassidy said the sponsors knew that Illinois law enforcement associations would never publicly support the bill.
“But we wanted them to know it would be coming and felt obligated to explain what they would need to know and to listen to their concerns. In the end, nobody could say we didn’t care what they thought. But we knew that these leaders would have to enforce this law and would need tools to do so.
What Comes Next?
Hykes said the law’s tax structure is a little complex and warned that its relatively high tax burden potentially could threaten future revenues. She predicted the state also will need to add more retail licenses to meet market demands.
“But the bill got them to where they needed to be. They succeeded in passing one of the biggest social justice laws in Illinois history. It is a remarkable success.”
They succeeded in passing one of the biggest social justice laws in Illinois history. It is a remarkable success. Click To Tweet
Cassidy agreed that the law will require some cleanup and views the law as a historic first step in an ongoing process.
“We knew we would revisit this legislation. This will never be over. Congress repealed the Prohibition law in 1933 and we’re still dealing with it. I can see us going back to work on home cultivation. For this bill to pass, we could only get it for medical marijuana patients. But when people see that the sky hasn’t fallen and the world didn’t come to an end with plants in the basement, I can see us going back to allow home growth.”
Ashby pointed out that Colorado’s legislature has returned to tweak its adult use bill five years in a row.
“This is a new industry. You don’t know what you don’t know,” Ashby said. “I don’t foresee any substantive changes. We’re in a place we want to be. We set out to create the standard and I hope that’s what this ends up being.”
Featured Image: Visiting the mirrorlike Cloud Gate sculpture in Millennium Park is considered a must for Chicago visitors. When marijuana becomes legal on Jan. 1, 2020, there would be more reasons to visit Illinois, too. (Photo by Dayne Topkin on Unsplash)
Obviously, work in the cannabis industry for attorneys is way more than just state license acquisition. In fact, after a few years and with the exception of competitive licensing regimes, state licensing slows down and is usually taken in-house by cannabis companies that formulate compliance teams. In turn, as time goes on, a significant amount of the legal work in the industry turns on transactions between licensees. California has certainly been no different (though we’re dragging in the licensing department, mostly because of local control issues). Still, existing licensees are having no trouble conducting transactions with each other and with third parties for goods and services as they race to gain market share and build their brands.
As California’s regulated cannabis industry continues to emerge, licensee transactions are becoming more sophisticated and diverse. At the same time, because of the newness of California’s regulated market (combined with regulators’ continuing evolution of regulatory interpretations), certain transactions are posing larger and riskier issues for licensees. This post is dedicated to the top five most dangerous licensee-to-licensee contracts in California:
1. Slotting Fees.
In recent months, our California cannabis business attorneys have seen a good amount of “pay-to-stay” and slotting fee agreements between cannabis cultivators, manufacturers, distributors, and retailers for dedicated, prime-time shelf space. In commodities, especially saturated ones, face time with consumers isn’t great and margins can be really poor and the competition is vast. In California, only cannabis retailers can sell to the public, so it’s hugely important for wholesale and distributor licensees to have good placement on shelf space in dispensaries and on the retailers’ online menus. The slotting fee agreement essentially amounts to the lump sum fee the supplier pays to the retailer to reserve their sacred, strategic shelf space. The pay-to-stay agreement (which can be similar to the slotting fee) typically takes things a step further where it’s instituted after the initial slot and addresses issues for existing products like marketing, promotion, inventory stocking, failure fees, and paying extra to ensure that your competitors don’t get any valuable shelf space near you or at all. The question, though, is whether such agreements are kosher in California in the first place given that our state cannabis laws generally prohibit anti-competitive practices by licensees. The answer on validity under these laws is that “it depends.” Analyses around anti-competitiveness and slotting fee contracts is highly factually intensive, and California cannabis regulators don’t seem aware that this practice even exists. While these contracts can give great security to licensees, they can also be used to block and strangle out other wholesales that may not be as capitalized or strategic in the marketplace. For more on slotting fee agreements, see here.
2. Distribution Agreements.
Even though the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”) stripped distributors of massive amounts of power (since, unlike alcohol, cannabis distributors don’t have to take title to the products they distribute), they are still 100% necessary in the California cannabis marketplace because they are the only license type that can transport marijuana products and they’re also the only licensees that can coordinate the required third-party testing of licensees’ products. Plus, prior to any retail sale, licensees must ensure that a distributor undertakes quality assurance packaging and labeling reviews of their products, and they’re almost exclusively in charge of collection and remittance of the cultivation and excise taxes to the California Department of Tax and Fee Administration. Since wholesale licensees have to go through distributors to get to market, distribution agreements are necessary. If your distributors is just your freight middle man, these agreements are not that potent and risk-laden. However, if you’re using your distributor similar to an alcohol distributor (i.e., a brand house), you’ll need to ensure that your distribution agreement is way more aggressive regarding term, circumvention to retailers, purchase amounts, timing, acceptance and rejection of products, testing issues and recalls, regulatory compliance and accountability, and representations and warranties regarding the products at issue. Specifically in California, our cannabis business lawyers have seen far too many one-sided distribution agreements that aren’t properly drafted, aren’t compliant with MAUCRSA, and that pay no attention to detail.
3. Real Property Leases.
The reason why real property leases make the list is because all too often our California cannabis business attorneys have clients coming to them with boilerplate lease documents that don’t even mention MAUCRSA and/or the collateral effects and contingencies born by using real property for commercial cannabis activity. Real estate is one of the most important assets and must-have’s for all forms of licensure and permitting, so details around licensing timeline, code of conduct, federal intervention, commercial cannabis insurance, and local and state licensing compliance should be huge for the parties, and not some after-the-thought from a form lease document. For more on California cannabis leases, see here, here, and here.
4. IP Licensing.
Intellectual property licensing in cannabis is already precarious where cannabis companies cannot secure federal protection for their trademarks from the USPTO. More often than not though, cannabis companies can get trademark protection from the state governments in the states in which they operate. Of course, there can be additional oddities when it comes to state-specific IP protection for cannabis companies. In California, in particular, only cannabis licensees can register and protect their cannabis trademarks with the State of California. And California was also about to have a very complicated relationship between third party, unlicensed companies that license their IP to cannabis companies, but backed off on second thought on adoption of the final rules in January of this year. The common case issues with cannabis IP licensing are whether the licensor even has the IP they say they do (and whether or not that IP is protected or even protectable, which oftentimes its not because of existing infringement problems) and the regulatory ins and outs applicable to IP licensing. In California, if you’re going to be an IP licensor to a cannabis licensee, you will need to be disclosed to the state as a “financial interest holder,” including if you’re taking a royalty as consideration for the granting of the license. Many operators and their IP licensors fail to make this disclosure and/or don’t understand regulators’ position relative to this requirement, which makes performance obligations and regulatory accountability in the agreement even more opaque.
5. Influencer Agreements.
Influencer agreements made the list because licensees typically forget or ignore that these contracts constitute advertising, marketing, and promotion, which is heavily controlled by MAUCRSA and the Bureau of Cannabis Control. Basically, as a licensee, if you use an influencer, you’re on the hook for their words and actions as they relate back to your company and products. All of this means that cannabis companies who want to work with influencers must use detailed contracts, training, and/or guidelines to educate their influencers on how to not violate applicable regulations. And this is not something that cannabis companies should gloss over in a two-page, boilerplate contract. Generic provisions that require all parties to follow all applicable legal requirements may be sufficient in some contexts, but influencers are probably not aware of the specifics in cannabis regulations, and in California, for example, you better make sure that your influencer is gearing their ads and promotions to adults only (and that they can prove that to a reasonable degree of certainty if regulators ask). In addition, the influencer pretty much can’t do anything that’s attractive to a kid (under the age of 21) and if they do, the licensee is going to be on the hook.
All of the above agreements need to be handled with significant care and a deep grasp of the regulatory landscape in California. As always, the boilerplate will not cut it when it comes to compliance and accuracy, so don’t get caught on the wrong side of one of these dangerous contracts.
Most of the hemp litigation we’ve written about has concerned a hemp purchaser suing a hemp farmer. This week concerns a $2.5 million lawsuit recently filed in Oregon wherein a hemp farmer sued a CBD processor.
The plaintiff, JNV Farms, alleges that in the fall of 2018 it entered into a manufacturing agreement with one of the defendants, C&N Ag LLC (“C&N”), by which JNV Farms was to provide industrial hemp to C&N who was to process the hemp into CBD Isolate and market and sell the finished product. The complaint alleges that profits were to be split 50/50.
According to the complaint, JNV Farms provided the defendants 13,800 lbs of biomass in December 2018. The defendants represented they were testing and preparing to process the material. After JNV Farms made repeated inquiries, defendants became less communicative then eventually refused to respond at all, and refused to meet with JNV Farms or permit inspection of the hemp or finished product.
JNV Farms claimed the defendants (i) neglected or refused to complete the work contemplated by the contract, (ii) failed to return the industrial hemp, (iii) failed and refused to compensate JNV Farms for the hemp, and (iv) failed to provide JNV Farms any of the CBD Isolate or the share of revenue from its sale. JNV Farms alleged claims for breach of contract, breach of the covenant of good faith and fair dealing, unjust enrichment, conversion, and fraud.
Finally – and not insignificantly – the complaint seeks to pierce the corporate veil and to hold the two owners of C&N, defendants Mock and Eastburn, personally responsible for the liabilities of C&N. This claim, perhaps more than the others, may strike fear into the defendants. As every business owner knows (or should know) a key purpose of incorporation is to shield company assets from being used to satisfy company obligations. The goal of a veil-piercing claim is to reach past the corporate shield and into the pockets of owners or investors.
Piercing the corporate veil is difficult. As it should be. But the complaint appears to allege facts sufficient to withstand a motion to dismiss. Notably the complaint alleges that when Mock and Eastburn negotiated the contract, and as of the date it was executed, that C&N was not yet in existence because no paperwork had yet been filed with the Oregon Secretary of State. This fact, if true, is not necessarily dispositive. (Indeed, if there was no corporation there is no need to pierce the corporate veil). But no one entering million-dollar contracts (Mock and Eastburn) ought to do so without having completed the necessary steps to form an entity. On the flip side, JNV Farms likely could have done a better job protecting its investment and the lawsuit may, as it often does, come down to whether the defendants have any recoverable assets. Time will tell.
For more on the recent wave of Oregon hemp litigation, check out the following:
Recently, William J. McNichol, Jr., Adjunct Professor at Rutgers University School of Law, wrote an article regarding the enforcement of cannabis patents that should definitely be discussed. As we’ve noted starting last summer, we expect to see an increasing number of patent infringement cases. We’ve also been providing updates on the very first patent infringement case here and here.
Professor McNichol predicts that “the [US]PTO’s willingness to grant cannabis patents is unlikely to be matched by a willingness of the Federal Courts to enforce cannabis patents.” This is because of a centuries-old principle called the Illegality Doctrine (or, Illegality Rule) – the illegality of the use, possession, and distribution of cannabis products will create an undefeatable barrier to the enforcement of most cannabis patents.
So, what is the Illegality Doctrine? It can be summed up by Lord Mansfield’s dicta in Holman v. Johnson (a case from 1775!): “No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act.” The doctrine is based on the public policy that a person shouldn’t be able to benefit from his/her own wrongdoing, and the courts shouldn’t enforce claims that harm the integrity of the legal system. An even older English decision that’s instructive is the “Highwayman’s Case,” where two “highwaymen” committed a string of robberies and ended up in Court because one claimed that he had been cheated out of his share of the monies robbed. The Court refused to consider the lawsuit entirely, turned both men over to the sheriff, and fined their lawyers for bring a suit “both scandalous and impertinent” (talk about a bad outcome).
The Court’s refusal to hear cases founded in illegality is well established and known today and, given the U.S. Supreme Court’s holding in Gonzales v. Raich, 545 U.S. 1 (2005) that the distribution and sale of cannabis products remain actionable crimes under federal law (even in pro-cannabis states), any plaintiff in a patent infringement action would be asking a federal court to protect its illegal enterprise from the unlawful competition posed by another illegal enterprise. Professor McNichol concludes:
“The likely refusal of the Federal Courts to entertain Cannabis patent infringement actions reflects a principle generally applicable to the Cannabis industry and having far reaching consequences that are beyond the scope of this paper. The Illegality Rule will likely operate to close the Federal Courts to all manner of business disputes. Some of these, such as bankruptcy, are like patent infringement actions in that they can be entertained only in Federal Court. Other business matters, such as licensing disputes and complex contract disputes involving diverse parties, are typically and most conveniently handled by Federal Courts. In bringing patent infringement actions, the Cannabis industry draws attention to the Illegality Rule and so hastens its application, which may operate broadly to the Cannabis industry’s detriment.”
One reason of many why the UCANN case is one to watch, is to see if the Illegality Doctrine will be raised by the Court. Judge Martinez hasn’t raised the issue yet, and for all intents and purposes, has treated the UCANN case as any other patent infringement case. If it does come up and sets a precedent that cannabis patents will not be enforced in the federal courts, Professor McNichol is probably right in that it will likely not only effect intellectual property cases, but also other commercial disputes involving cannabis. We’ll continue to keep you posted on how the UCANN case develops and whether Judge Martinez begins to hint that he’s giving the Illegality Doctrine some real consideration.
An issue our clients have encountered in a variety of transactions, including basic product purchase transactions and intellectual property licensing transactions, is that the California rules governing commercial cannabis licensees currently do not allow the exchange of free samples between licensees. We are unaware of an industry in which the wholesale purchaser of a large quantity of product, or the licensor of intellectual property for use on such product, wouldn’t want to ensure the quality of that product. But in California, the regulations don’t always make sense and the regulatory learning curve has been steep.
Senate Bill 475, which is set for hearing today, June 25th, is one of many pieces of pending legislation that would provide clarity to licensees regarding what they can and can’t do with cannabis samples. Currently, licensees are prohibited from giving away any amount of cannabis or cannabis product as part of a business promotion or other commercial activity.
SB 475 would “allow a licensee to designate cannabis or a cannabis product as a trade sample at any time while the cannabis or cannabis product is in the possession of the licensee and would impose specific requirements on the licensee making the designation. The bill would prohibit the sale or donation of cannabis or a cannabis product that is designated a trade sample, but would allow those trade samples to be given for no consideration to an employee of the licensee that designated the trade sample or to another licensee.”
Cannabis trade samples must, upon designating cannabis or cannabis product as a trade sample, record the associated quantity, product type, and unique identifiers of the product into the track and trace program. The cannabis must be labeled, “TRADE SAMPLE. NOT FOR RESALE OR DONATION,” and may only be transported between licensees by an employee of a licensee. Trade samples may not be sold or donated by any licensee.
In addition, samples of cannabis or cannabis products designated as trade samples may be given for no consideration to an employee of a licensee that designated the trade sample or to another licensee, subject to the following requirements:
A trade sample shall only be given for the purposes of conducting research and development, education, or targeted advertising to licensees about new or existing cannabis or cannabis products.
A licensee shall maintain records of cannabis or cannabis products designated as trade samples that are given to employees.
An employee of the licensee shall not possess or transport trade samples in amounts exceeding the following:
Twenty-eight and one-half grams of nonconcentrated cannabis.
Eight grams of concentrated cannabis, including concentrated cannabis contained in cannabis products.
Six immature cannabis plants.
Under SB 475, cannabis or cannabis products can be consumed by the licensee or an employee of the licensee. The bill also clarifies that cannabis or cannabis products may not be given to retail customers, and that all products designated as trade samples are subject to required quality assurance and testing regulations.
If passed, SB 475 will correct what we perceive to be a serious defect in the regulations and will make doing business in the industry just a little bit easier.
If you think your Chinese investor will be able to get your cannabis venture the promised investment funds any time soon, you are in for a long slog. Most companies do not care who provides their investment capital (as long as the investors are content being passive investors), and Chinese households have typically been lauded as excellent savers, much more so than we in the U.S., leaving money available to invest at home and abroad. Recently I spoke with a client in the California cannabis industry who had invested several million dollars into an integrated cannabis operation (cultivation, processing/manufacturing, and distribution). In conducting due diligence about his investment, I was interested to see that he was the only person involved in the business who was non-Chinese. He wanted to get his investment dollars out to put into a new venture, and he said, “The other owners tell me that they have friends in China who can put in enough money into the company that they can buy me out. But they are having trouble getting their money out of China right now. Do you think they will be able to get their money from China to the U.S. in the next few weeks?”
I chuckled in spite of myself and said, “That is not going to happen that soon, and it may not be possible to accomplish even in a few months.” China’s government has a tight grip on its money (technically renminbi (人民币) means “the people’s money”, but the people can’t be bothered to look after their own money, right?). Even when times are good, China controls foreign currency leaving the country, especially U.S. dollars. But times are not good in China, despite recent reassurances from Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission. How do we know times are not good in China? There are a lot of smart people in the world who track where money flows and how that movement (or lack thereof) impacts our qualities of life. They are called macro (big picture) economists. These economists have noticed that (a) although China is encouraging foreign investment in its banking and insurance sectors, promising ownership of up to 100% by foreign investors, so far no one is biting, and (b) foreign lending institutions are loathe to provide capital to Chinese banks and industries, seeing economic risks in China everywhere they look.
Chinese would-be investors in U.S. ventures, including hot market cannabis enterprises, are finding it exceedingly difficult to get money out of China, even their allotted USD $50,000 in foreign currency that each Chinese national is supposed to be permitted to purchase and transfer out of China, according to China’s State Administration of Foreign Exchange. But in practice, such applications are being more closely scrutinized by China’s ever-present bureaucratic machine, and even China’s elites like the former central bank adviser, Yu Yongding, are being denied access to foreign currency. That means your prospective Chinese investor or business partner (or customer who owes you money for your raw inputs, such as U.S. timber) will not be able to get you those U.S. dollars you have been waiting for any time soon, no matter how well connected they are.
Why is China holding onto U.S. dollars? We’ve discussed this (and all things related, on our firm’s China Law Blog) but China needs to maintain its foreign exchange reserves (largely held in dollars) for several reasons. One of the primary reasons is so that China can continue to fund its global export machine that does business in U.S. dollars with the rest of the world. Chinese exporters buy their raw inputs in U.S. dollars, so China’s central bank needs to keep foreign exchange reserves on hand to facilitate those transactions. A second reason is that to the extent China can keep U.S. dollars out of circulation, China can artificially keep its currency value low, which makes its exports more affordable to the U.S. and the rest of the world. China holds more than $3 trillion in of its assets in a foreign currency, which equals approximately $2,142 per capita in China’s 1.4 billion population (in comparison, the U.S.’ $126 billion in foreign exchange reserves equals approximately $385 per capita in the U.S.’ 327 million population). China’s currency restrictions are not new. These restrictions are an integral part of China’s economic policies under which China wants to keep its yuan valuation at least seven times higher than the U.S. dollar. China can also use its foreign currency holdings to buy up yuan when others are trying to dump it, to keep the yuan from freefalling in foreign exchange markets due to concerns like a trade war or ongoing economic restrictions or sanctions.
To bring this discussion full circle, if your would-be cannabis business investors are Chinese or have money in Chinese bank accounts that they are having “a little trouble” getting to your U.S. bank account, do not make any near-term plans that rely on their promised dollars, especially if the promised amount is more than $50,000. Chinese currency leaving for foreign markets is a form of capital flight to which China is keenly attuned and to which it will take great measures, both overt (currency manipulation) and covert (denying individual foreign exchange transactions in Chinese banks, even when those transactions are in sync with Chinese law).
Also, if your international investor has already applied or wants to apply for a fast-track EB-5 visa path to U.S. citizenship, their investing your marijuana venture (regardless of current state legality) is a huge red flag that will derail their application process and impact their ability (if they are or become a green card holder) to become a naturalized citizen because they will have been involved with a controlled substance under U.S. federal law. If the potential investor’s immigration attorney is not aware of that minor detail, then you can do your investor a favor and let them know. For a primer on foreign investment in U.S. cannabis businesses, read this. It is reasons like this, the intersection of our firm’s international practice and our cannabis practice, that make my daily law practice so interesting, intellectually rigorous, and fun.
The Agriculture Improvement Act of 2018 (“2018 Farm Bill”) legalized hemp by removing the crop and its derivatives from the definition of marijuana under the Controlled Substances Act (“CSA”) and by providing a detailed framework for the cultivation of hemp. The 2018 Farm Bill gives the US Department of Agriculture (“USDA”) regulatory authority over hemp cultivation at the federal level. In turn, states have the option to maintain primary regulatory authority over the crop cultivated within their borders by submitting a plan to the USDA. This federal and state interplay has resulted in many legislative and regulatory changes at the state level. Indeed, most states have introduced (and adopted) bills that would authorize the commercial production of hemp within their borders. A smaller but growing number of states also regulate the sale of products derived from hemp.
In light of these legislative changes, we are presenting a 50-state series analyzing how each jurisdiction treats hemp-derived cannabidiol (“Hemp-CBD”). Each Sunday we will summarize a new state in alphabetical order. Last week was Alabama. This week we turn to Alaska.
In April 2018, Alaska enacted Senate Bill 6 (SB 6), “An Act Relating to the Regulation and Production of Industrial Hemp.” SB 6 was passed before the 2018 Farm Bill, in compliance with the 2014 Farm Bill. Under SB 6, “industrial hemp” is defined as “all parts and varieties of the plant Cannabis sativa L. containing not more than 0.3 percent delta-9-tetrahydrocannabinol.” SB 6 defines “cannabidiol” oil as the “viscous liquid concentrate of cannabidiol extracted from the plant (genus) Cannabis containing not more than 0.3 percent delta-9-tetrahydrocannabinol.” SB 6 does not address the processing of industrial hemp into Hemp-CBD products
The Alaska Department of Natural Resources (“DNR”), which is a part of the Alaska Division of Agriculture, has regulatory authority over industrial hemp. According to the Alaska Journal, Alaska’s hemp program has been off to a slow start as DNR took time to work with law enforcement to come up with a regulatory plan for hemp.
On May 31, 2019, DNR issued proposed industrial hemp rules. These rules are extremely detailed and are not yet final. This post will summarize some of the highlights including cultivation, processing, sales, and hemp-derived products. The proposed rules also provide a detailed outline of industrial hemp transportation and testing, including procedures for quarantining and destroying non-compliant hemp and hemp products.
Under proposed rules, DNR will issue three “classes of industrial hemp registration for participation in the [Alaska Industrial Hemp Pilot Program],” for growers, processors and retailers.
Grower registration. A registered grower may grow, store, and transport industrial hemp. A grower may also sell raw industrial hemp to another grower or to a processor or sell industrial hemp “to persons who are not required to be registered by this chapter, including consumers in the state, if the hemp will not be further processed[.]” A grower cannot sell industrial hemp that has been processed unless it holds a processor registration as well. Growers must retain records of the source of all industrial hemp seeds and propagules. Industrial hemp cultivation is only allowed in a registered “grow area,” which cannot be a residence and cannot be within 3,230 feet of a marijuana grow. Growers must submit planting report to DNR 30 days after planting or replanting hemp seeds and propagules. Pesticides are only to be applied by an Alaska Department of Environmental Conservation certified applicator. Growers cannot harvest hemp until it has been tested by DNR unless DNR gives express permission allowing a post-harvest test. In either scenario, industrial hemp must be tested before a grower may sell it.
Processor registration. A registered processor may process industrial hemp in its raw form into any other form or product. Processors may purchase, store, and transport raw hemp. Processors may sell processed hemp or hemp products to retailers. Processors must comply with all applicable health and safety standards. Processors may only create hemp-based extracts using the following methods:
Non-hydrocarbon extractions, including: cold or hot potable water filtration; isopropyl alcohol or isopropanol; ethyl alcohol or ethanol; carbon dioxide; dry ice; or dry shifting or sieve.
Hydrocarbon extractions, including: n-butane; isobutene; propane; or heptane.
Processors may only use solvents in the extraction process that are food grade or at least 99% pure. and Solvent-based extraction must be “completed in a commercial, professional grade, closed loop system capable of recovering the solvent used for extraction.”
Processed hemp products intended for human or animal consumption must be tested for cannabinoid concentration and profile, residual solvents, microbials, pesticides, and heavy metal concentrations. Testing must be performed by DNR or a testing facility authorized by DNR. Processors must retain records and prepare an annual report on the quantity of industrial hemp processed, identification of lot and batch numbers processed, disposition of all raw and processed industrial hemp, and records of all persons who received all raw or processed industrial hemp.
Retailer registration. A registered retailer may sell processed industrial hemp or industrial hemp products to consumers. In addition, retailers may import, store, and transport processed industrial hemp and industrial hemp products. Retailers must ensure that all products are labeled properly and must display a placard from DNR showing that it is a registered retailer. When applying for registration, a retailer applicant must provide a description of the type of store or operations of the retailer, a location or list of locations where industrial hemp will be offered for retail sale, and a list of products intended for sale. Like processors, retailers must keep records and submit annual reports to DNR.
Hemp Product Endorsement. In addition to registering growers, processors and retailers, DNR is also imposing regulations on all hemp products in Alaska. DNR must endorse “any hemp product processed beyond its raw form” that is intended for human or animal consumption before it is “transported in the state or offered with or without compensation to a consumer.” Retailers and processors can apply for an endorsement on an application provided by DNR. Endorsement applicants must provide the following:
A color copy of the product’s proposed label;
A copy of the laboratory test results of each product or batch of product;
A copy of the processor’s DNR registration under or a copy of the processor’s registration or license from other states or qualifying entities that have implemented an industrial hemp pilot under the 2014 Farm Bill;
A copy of the terpene analysis if required under the proposed rules; and
An endorsement fee.
No processed industrial hemp product intended for human or animal consumption may contain more than 50 milligrams of delta-9 THC per individual product. Such products must also include the following items on their label:
The product name;
A batch and lot number for the product;
An expiration date;
The total quantity of the product by weight or volume;
The serving size or recommended dose;
A list of all ingredients;
A statement that the product has not been approved by the Food and Drug Administration or the Alaska Department of Environmental Conservation.
The industrial hemp pilot program from which the hemp originated;
The industrial hemp pilot program that authorized the processing or testing of the industrial hemp in the product; and
If the product conducts any delta-9-THC, the statement “warning: contains THC”.
Bottom Line. At this time, it is unclear when the DNR will start issuing registrations or will start endorsing products.
The most striking thing about the new rules is the endorsement and registration required for the sale of hemp products intended for human consumption, which almost certainly includes Hemp-CBD. On June 20, 2019, the DNR updated a “Questions and Answers” page on its website which indicates the scope of this registration:
Q: Are big stores such as GNC, Natural Pantry, all the gas stations going to have to get retail
licenses? A: Yes. Except for a grower or processor selling raw industrial hemp, all retail sales of hemp and hemp products will require retail registration.
This may preclude the online sale of consumable Hemp-CBD in Alaska as retailer applicants must list the locations where they will sell hemp products and display a placard from DNR in their stores. Online retailers who sell directly to consumers won’t be able to comply with these location-based requirements.
Finally, these rules are focused solely on the 2014 Farm Bill and make no reference to the 2018 Farm Bill. That may need to change as a majority of states are going to be operating under the 2018 Farm Bill next year.
Interested stakeholders should carefully review these rules if they want to make any changes. DNR will be accepting public comments on the rules until 5:00 PM on Tuesday July 3rd, 2019. Comments can be submitted by email to industrialhemp@alaska.gov or online at http://notice.alaska.gov/, and using the comment link.
