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Oregon Cannabis Securities: Raising Money Right

The deals in Oregon cannabis are getting very big and much of what we do these days involves mergers, acquisitions and cross border work. It’s amazing this happened so fast. Less than four years ago, as the OLCC began writing rules for the adult use marijuana industry, there was a distinct small business tenor to everything. At that time, our Portland office began forming the first of what eventually became a few hundred local cannabis companies. It was an exciting time, and a typical set-up looked something like this: two founders with limited capital, medical market bona fides and maybe credit card debt, would join forces with an investor and her few hundred grand. This crew would then form an LLC or corporation to grow weed on somebody’s property.

Today, many of those businesses have disappeared for one reason or another, others are humming along, and a few have really crushed it. Despite all of the consolidation in the OLCC world, though, the small deals and simple structures are making comeback. The only difference is that this time it’s on the hemp side. Oregon has seen a staggering increase in registered growers and acreage this planting season, owing to the new Farm Bill and the CBD craze. So here we’ve been forming small LLCs and corporations again, alongside the seven figure deals– and just in time for planting season. Who would have thought?

One commonality among most of these transactions, large and small, is something called “securities.” Simply defined, a security is a negotiable financial instrument (company stock, certain debt instruments, investment contracts, etc.) offered or sold to an investor who lacks real authority to manage the investment. Many of those early Oregon marijuana companies and the new hemp companies have been trading in securities from the outset, even if unaware of this fact. Noncompliant companies have sometimes skated by, but given the liability exposure here–including lawyer liability for bad deals–it’s crucial to get the securities issuance right.

Probably best to find an exemption.

Federal and state securities laws are very complex, but they apply even to small businesses (including cannabis businesses) offering or selling a security to even just one person. Federal law requires that the issuer either: 1) register the offering and sale with the SEC (“go public”), or 2) conduct that offering and sale within a registration exemption. Fortunately, there are quite a few exemptions available, but you’ve got to hit the target square. And even when you don’t have to register, it’s a really bad idea not to make extensive disclosures to offerees and investors in conjunction with any solicitation.

Finally, in addition to federal securities laws, an Oregon cannabis business issuing securities must comply with Oregon blue sky laws and also the blue sky law of each state in which a purchaser is located. For this reason, our cannabis company clients often end up paying registration fees in other states. Those can add up pretty fast and there may be circumstances where it’s just not worthwhile.

All of that said, below are the Oregon small offering exemptions typically used for a new cannabis business, which do not require registration when done correctly.

Sales to Accredited Investors

An “accredited investor” is an investor with special status under financial regulation laws, generally due to high net worth. ORS 59.035(5) exempts transactions between start-ups and accredited investors from registration, so long as there is no public advertising or general solicitation in connection with the transaction. This is a self-executing exemption, which means that no state filing is necessary to take advantage of the exemption.

The “10 in 12” Exemption

ORS 59.035(12) exempts from Oregon registration requirements transactions that result in not more than 10 purchasers within Oregon during any consecutive 12 months. Note that accredited investors do not count as “purchasers” here. Repeat transactions with the same purchaser during a 12-month period also do not increase the number of purchasers (in other words, each purchaser is counted as one purchaser for the 12-month period). To use this exemption, no commission or other remuneration can be paid, and no public advertising or general solicitation can be used.

Federal Rule 506 (Regulation D) Offerings

If you’ve made it this far, I’m not going to thrill you with an outline of SEC Rule 506; instead, there is a good overview of allowed offerings here. Suffice it to say that in Oregon, for any Rule 506 offering, ORS 59.049(3) provides that the local start-up must, within 15 days after the first sale in the state, file a completed Form D (including the state signature page) with the Oregon Securities Division. There is also a $250 filing fee requirement.

The bottom line is that very often, new Oregon cannabis businesses raising money are subject to securities laws. That is true even if the business intends to break federal laws by trading in marijuana, and even if the business is taking on investment (equity, loan, whatever) from just one person. With a new wave of cannabis businesses coming online, it’s important to get it right. The alternative may be getting sued for securities violations–or even cannabis investment fraud–and that’s no fun at all.

from Canna Law Blog™ https://www.cannalawblog.com/oregon-cannabis-securities-raising-money-right/

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BREAKING NEWS: California Opens Up for Commercial Hemp Cultivation

We have been closely following California’s commercial hemp cultivation licensing law since it was proposed last year as Senate Bill 1409 (see here, here, and here). In March, I wrote about some of the roadblocks to implementing SB-1409’s commercial hemp cultivation programs, and the lengthy review process of the California Department of Food and Agriculture (“CDFA”) regulation which would allow hemp cultivators to register with their county agricultural commissioners.

The CDFA’s regulation was recently approved, and as of April 30, 2019, the CDFA posted applications for registration for commercial hemp cultivation and hemp seed breeders (see here and here respectively).  It looks like these respective apps will not be submitted to the CDFA directly, but will instead be provided to county agricultural commissioners in the county in which a cultivator or seed breeder wishes to cultivate hemp. Applicants for commercial cultivation must provide basic information about themselves, as well information about the cultivation site, the purpose of the site (cultivation v. storage), GPS coordinates and other information regarding the site, a boundary map, and certain information about seed cultivars. The seed breeder application is relatively similar.

Despite the fact that these applications are now live, it’s not completely clear how they will be implemented. There are a number of counties in California that restrict or prohibit hemp cultivation. The memo attached to the application itself identifies a number of counties with restrictions: Amador, Calaveras, Glenn, Humboldt, Lassen, Marin, Mariposa, Mendocino, Merced, Modoc, Mono, Monterey, Napa, Nevada, Orange, Placer, Sacramento, San Bernardino, San Joaquin, Santa Barbare, Shasta, Sierra, Siskiyou, Sonoma, Tehama, Trinity, Tulare, Tuolumne, Yolo, and Yuba. Since the application is so new, we haven’t evaluated which of these counties fully prohibit cultivation, but it’s a safe bet that if any of them do fully prohibit it, their agricultural commissioners are probably not going to accept these applications.

But what about counties that don’t say anything or only have some minor restrictions? It’s not clear yet whether counties will try to delay implementing hemp cultivation by claiming that they need to establish local protocol for registration. Ultimately, each county may do something different, and it will take time before we know what the full effect of the law is.

It’s also not clear how this will be impacted by the federal Agricultural Improvement Act of 2018 (or “2018 Farm Bill”). I summarized parts that law in my previous post linked above, but notably for this post, hemp produced per the former 2014 Farm Bill will be permissible. The 2014 Farm Bill doesn’t explicitly allow commercial cultivation, and so it’s not clear how this will play out. What is clear is that once the U.S. Department of Agriculture begins accepting state hemp-production plans for review per the 2018 Farm Bill, California will need to send its plan for review by the USDA. This could affect registered hemp cultivators, but as per usual, it’s not clear how that will happen just yet.

Stay tuned to the Canna Law Blog for more details on California hemp laws.

from Canna Law Blog™ https://www.cannalawblog.com/breaking-news-california-opens-up-for-commercial-hemp-cultivation/

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Cannabis and Immigration: Marijuana Activity a Conditional Bar to Obtaining U.S. Citizenship

On April 19, the U.S. Citizenship and Immigration Services (USCIS) announced that it would formally update its Policy Manual regarding how cannabis-related activity–even when it took place in states that have legalized the medical and recreational use of marijuana–would impact naturalization.

The Policy Manual is self-defined by the USCIS as its centralized online repository for immigration policies. It serves as a guide for immigration officers to follow when adjudicating applications and petitions.

Prohibited cannabis-related activity, as we explained previously, includes possession, prior use, as well as employment or investment in cannabis industry, each of which is deemed a violation of the federal Controlled Substances Act (CSA). In all, it’s a very broad array of exclusionary activity.

Lifetime bans on Canadians have increased public awareness that foreign nationals can be deemed inadmissible and refused entry into the U.S. based on their involvement in cannabis-related activity. It is not well-known, however, that such prohibitions may also affect lawful permanent residents of the U.S. (i.e. green card holders). The USCIS’s announcement on Friday, clarifying that cannabis-related activity (including activity that is legal under state law) creates a conditional bar on one’s eligibility to naturalize, is aimed at clarifying this misconception.

Naturalization is the process by which a green card holder can become a U.S. citizen upon meeting five core requirements: (1) be a green card holder for the statutory period (at least five years at the time of filing the naturalization application, or at least three years if the green card holder has been married to the same U.S. citizen spouse during that entire time); (2) be physically present in the U.S. for at least half of the applicable statutory period; (3) be continuously domiciled in the U.S. during the applicable statutory period; (4) possess “good moral character” (GMC); and, (5) demonstrate a willingness to actively support the Constitution of the U.S.

Of those prerequisites, the focus of this post is the GMC requirement. In order to demonstrate GMC, the applicant must demonstrate a lack of involvement in a series of unlawful activities ranging from felonies to a failure to register for Selective Service.

Murder and other felonies result in a permanent bar to naturalization, meaning that the applicant will forever fail the GMC requirement regardless of how far back in the past the criminal conduct took place.

Apart from felonies, the Policy Manual, in Part F, Chapter 5, includes a laundry list of criminal activities that result in a conditional bar to citizenship, meaning that such conduct within the statutory period will prevent an applicant from naturalizing. Cannabis-related activity is among those crimes.

It is important to note that the Policy Manual specifies that an applicant may be conditionally-barred from establishing GMC not just because of “a conviction” for a cannabis-related offense, but also for:

An “admission” to having committed such an offense;

An “admission to committing acts that constitute the essential elements of a violation of any controlled substance law”;

A “conviction or admission that the applicant has been a trafficker in a controlled substance, or benefited financially from a spouse or parent’s trafficking”; and even

“Possession of controlled substance related paraphernalia”.

Somewhere, Jeff Sessions is smiling. Failure to establish GMC for any of the above could not only result in a denial of the naturalization application, but also jeopardize the applicant’s ability to preserve the green card, and result in removal from the U.S.

The recent update to the Policy Manual also spells out the conditional bar to GMC applies even where the offense may have taken place in a state that has laws permitting “medical” or “recreational” use of marijuana because of its classification as a ‘Schedule I’ drug under the CSA. The updated Policy Manual language is crystal clear:

Such an offense under federal law may include, but is not limited to, possession, manufacture or production, or distribution or dispensing of marijuana. For example, possession of marijuana for recreational or medical purposes or employment in the marijuana industry may constitute conduct that violates federal controlled substance laws. Depending on the specific facts of the case, these activities, whether established by a conviction or an admission by the applicant, may preclude a finding of GMC for the applicant during the statutory period….Note that even if an applicant does not have a conviction or make a valid admission to a marijuana-related offense, he or she may be unable to meet the burden of proof to show that he or she has not committed such an offense.

A conditional bar is difficult to overcome because it requires the applicant to show “extenuating circumstance” about why a particular unlawful act was committed. Such extenuating circumstances must have occurred before or at the time the unlawful act was committed. The Policy Manual explicitly instructs officers to disregard any evidence of an applicant’s subsequent reform, or to evaluate any positive factors about the applicant’s character when making a decision on a naturalization application.

With its April 19, 2019 Policy Manual update, the USCIS has shown its zealous commitment to interpreting marijuana use under the 1971 federal CSA in spite of the tide of marijuana legalization that has swept nearly half the states in our union. It’s unfortunate, but green card holders and other affected parties should be warned.

from Canna Law Blog™ https://www.cannalawblog.com/cannabis-and-immigration-marijuana-activity-a-conditional-bar-to-obtaining-u-s-citizenship/

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USDA Now Offers Plant Variety Protection for Seed-Propagated Hemp

Lock ’em down with the PVPO.

On April 24, 2019, the United States Department of Agriculture (USDA) announced that the Plant Variety Protection Office (PVPO) would begin accepting applications of seed-propagated hemp for plant variety protection.

In the United States, there are three different ways to go about protecting intellectual property associated with plant varieties:

Plant Variety Protection – available for seeds and tubers and issued by the PVPO;

Plant Patents – available for asexually propagated plants except for edible tubers and issued by the United States Patent and Trademark Office (USPTO); and

Utility Patents – available for genes, traits, methods, plant parts, or varieties and also issued by the USPTO.

The PVPO is responsible for implementing the Plant Variety Protection Act (PVPA) and will analyze an application to determine whether the variety specified is new, distinct, uniform and stable. Anyone who is the breeder of a unique variety of a sexually reproduced or tuber-propagated plant can apply for plant variety protection. The PVPO grants certificates to protect plant varieties for 20 years (25 years for vines and trees). According to the PVPO, “[c]ertificate owners have rights to exclude others from marketing and selling their varieties, manage the use of their varieties by other breeders, and enjoy legal protection of their work.”

The basic requirements for submitting an application under the PVPO program are as follows:

Completion of all applicable forms;

Payment of applicable fees ($4,382 to be paid with the application and $768 upon issuance of the certificate);

A variety name that doesn’t conflict with an existing name for that crop; and

Deposit of seeds or tissue cultures:

3,000 viable untreated seeds of the variety; additionally for hybrids, 3,000 seeds of each parent needed to reproduce the variety, or

Live tissue culture samples (for potatoes) of the variety and payment of tissue culture fees. Ten (10) separate in-vitro plants (1 plant per tube) 4 to 6 weeks old, firmly rooted in one percent agar. It is recommended that plantlets be sent by an overnight delivery service to minimize the risk of damage.

Seed samples are important because they serve as a voucher specimen for PVPO’s use should a question arise about the validity of the subscription. According to PVPO, the samples are sent to the National Center for Genetic Resources Preservation (NCGRP) in Colorado. After analysis, seed samples are placed in long-term storage.

In addition to legalizing industrial hemp, the 2018 Farm Bill amended the U.S. Plant Variety Protection Act to add asexually propagated plants, previously not available under the Act. A revision of the U.S. PVPA will be needed and proposed rules are currently under development.

It is also important to note that there are penalties, including fines, for claiming that a variety is plant-variety protected when it is not.

While we are still waiting for the USDA to develop a regulatory framework for hemp under the 2018 Farm Bill, this update from the PVPO is an indication that we will be seeing regulatory changes of many kinds in the months to come.

from Canna Law Blog™ https://www.cannalawblog.com/usda-now-offers-plant-variety-protection-for-seed-propagated-hemp/

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Oregon Cannabis Delivery: How to Enter the Market

In the past year or so, we’ve seen an influx of cannabis delivery businesses enter the Oregon market– specifically in Portland. Those businesses are getting a lot of press, and we have received multiple inquiries from outfits looking to enter this space. Given this growing interest, we thought we would go over some of the basic steps a cannabis delivery company should take before jumping on the bandwagon.

In Oregon, marijuana items may only be delivered to a consumer’s home by an Oregon Liquor Control Commission (“OLCC”)-licensed retailer (“Retailer”) or a Retailer’s representative. A representative is “an owner, director, officer, manager, employee, agent, or other representative of a licensee, to the extent that the person acts in a representative capacity.”

Any person delivering marijuana items on behalf of a Retailer must:

be registered in the Cannabis Tracking System (“CTS”) as an “employee” of that Retailer with a valid marijuana worker permit number; and

be declared on the required transport manifest as recorded in CTS.

Although drivers must be listed as “employees” in CTS, they do not have to be actual employees of the Retailer. The OLCC requires that any driver who delivers marijuana items to consumers on behalf of the Retailer be listed as an “employee” for lack of a better term in CTS. (You won’t find any of this spelled out in the rules; it’s OLCC policy mostly.) However, it is worth nothing that the Retailer, as the licensee, will be liable for any violative acts or omissions by the driver.

Consequently, the OLCC allows private cannabis delivery companies to deliver marijuana items to Oregon consumers by partnering with Retailers, even if the delivery service does not have a brick-and-mortar presence. Although Oregon law does not expressly provide for this particular type of partnership between a private cannabis delivery company and a Retailer, the Retailer, as the licensee, must ensure compliance with all OLCC rules pertaining to the home delivery of marijuana items.

Nevertheless, cannabis delivery companies should familiarize themselves with OLCC rules as they are about to engage in retail delivery. The most pertinent OLCC rules include:

OLCC Approval. Prior to undertaking delivery service of marijuana items, Retailers must obtain approval from the OLCC by filing a Retailer Home Delivery Registration. Therefore, before a company enters into a business agreement with a Retailer, the company should do its due diligence and ensure, at a minimum, that the Retailer (a) possesses a valid OLCC license; and (b) has not been sanctioned for violations pursuant to the OLCC rules.

Location of Delivery. A driver may only deliver marijuana items in the jurisdiction in which the Retailer premise(s) is/are licensed. In addition, a delivery may be made only to a residence (i.e., home or apartment, but excluding any residence located on publicly-owned land), which means deliveries are strictly prohibited to dormitories, hotels, motels, bed & breakfasts, or other commercial businesses.

Receiving Orders. An order must (a) be placed before 8:00 PM on the day the delivery is to be made; (b) by the person who will receive the order; and (c) contain specific information, such as the requester’s name and date of birth.

Delivery Documentation. A Retailer must create a manifest in CTS for each delivery or series of deliveries and must document and retain certain information pertaining to the order and the requester.

Delivery Requirements. Deliveries must be made between 8:00 AM and 9:00 PM in a motor vehicle equipped with an alarm system. Every marijuana item must be kept in a lock-box securely inside the delivery vehicle, shielded from public view. Numerous restrictions are imposed on drivers, including: (a) not delivering marijuana items to an individual who is not 21 years of age or older and who is visibly intoxicated at the time of delivery; (b) not making deliveries more than once per day to the same physical address or to the same individual; and (c) not carrying or transporting at any one time more than a total of $3,000 in retail value worth of marijuana items designated for retail delivery.

Cannabis delivery companies should also be aware of the fact that in addition to obtaining OLCC approval, Retailers must generally register with the cities in which their stores are located before they can start operating a recreational marijuana business and delivering items to consumers. However, not every jurisdiction allows it, so companies should consult with knowledgeable attorneys before jumping on the bandwagon of cannabis home delivery.

from Canna Law Blog™ https://www.cannalawblog.com/oregon-cannabis-delivery-how-to-enter-the-market/

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Are CBD Topicals Allowed in California?

I’ve written quite a bit on the legality of hemp-derived cannabidiol (“Hemp CDB”) products in California over the past few months (see my posts on Hemp CBD in general and my specific posts about Hemp CBD in foods and hemp cultivation). One of the areas I haven’t explored in great detail is topical products, i.e., cosmetics. I will address the murky status of Hemp CBD cosmetics in this post.

If you haven’t read my earlier posts, the gist is that the California Department of Public Health (“CDPH”) has taken a fairly hardline stance against adding Hemp CBD to foods and beverages via its now-infamous FAQs. These FAQs, notably, are based on federal law (the Controlled Substances Act which has since been amended so that hemp is no longer scheduled), but also on the federal Food and Drug Administration’s (“FDA”) prohibition on CBD in similar products (which definitely is still the FDA’s current position). Notably, the FAQs are silent on cosmetics and topical products.

While a bit less clear from the FAQs’ text, the CDPH has authority over certain products pursuant to the California Sherman Food, Drug, & Cosmetic Law (not to be confused with the federal Sherman Act). The CA Sherman Law gives the CDPH authority over foods and beverages, but notably also over cosmetics, which are defined as:

[A]ny article, or its components, intended to be rubbed, poured, sprinkled, or sprayed on, introduced into, or otherwise applied to, the human body, or any part of the human body, for cleansing, beautifying, promoting attractiveness, or altering the appearance. The term “cosmetic” does not include soap.

Under this law, the CDPH could theoretically initiate enforcement actions or assess penalties against companies who sell adulterated or misbranded cosmetics. But until now, the CDPH hasn’t been extremely vocal about cosmetics in California—as is evident by reading the FAQs which don’t even mention them. We aren’t aware of any explicit enforcement actions against Hemp CBD topicals. So while the CDPH hasn’t said Hemp CBD topicals are prohibited, it hasn’t necessarily ruled that out.

Adding to the lack of confusion is the federal position, which my colleague, Daniel Shortt, recently discussed. In a nutshell, the FDA may view a cosmetic product as prohibited if its ingredients or the product itself is unsafe, or if it is intended to be used in a way that makes it a “drug” (i.e., it is “intended to affect the structure or function of the body, or to diagnose, cure, mitigate, treat or prevent disease”). In other words, the FDA hasn’t taken as hardline of a stance against cosmetics as it has against foods and unapproved drugs, but we still have a sense of the FDA’s willingness to crack down on products that aren’t safe or that make medical claims.

In spite of the general confusion in California and with the FDA’s policy statement, at least some clarity may soon be taken away if a new piece of California legislation, AB-228, is passed. If passed in its current form, AB-228 would state:

A cosmetic is not adulterated because it includes industrial hemp . . . or cannabinoids, extracts, or derivatives from industrial hemp. The sale of cosmetics that include industrial hemp or cannabinoids, extracts, or derivatives from industrial hemp shall not be restricted or prohibited based solely on the inclusion of industrial hemp or cannabinoids, extracts, or derivatives from industrial hemp.

What this would mean is that if passed, CDPH could not use the CA Sherman Law to find that CBD-containing topicals adulterated simply by virtue of containing Hemp CBD (the same would also apply to foods). This may lead to more clarity for California CBD companies who have topical products.

That said, it’s not yet clear whether the CDPH would continue to follow federal law even in spite of AB-228 passing. The state may find itself in a position of ignoring federal positions (like it has done with marijuana), or the CDPH may continue to follow federal agencies. Even the California Attorney General’s office has recognized that this could happen:

Even if it [AB-228 passes], it is not clear whether changing California law on this adulteration issue would be sufficient to alter the decision calculus of the CDPH, which has to this point relied on the FDA’s interpretation of federal law. That is, it might be the conclusion of these agencies that federal law still prohibits adding CBD to food or dietary supplements, even where derived from industrial hemp.

Though this is just speculation, I don’t think that the CDPH will follow the FDA if AB-228 passes. The FDA’s policy guidelines are so broadly written that they would prohibit the introduction of marijuana into food products in California—yet we don’t see any state agencies pulling those products. This includes products that are manufactured by CDPH licensees.

It’s also important to point out that even if AB-228 passes, the CDPH will be able to find Hemp CBD cosmetic products “misbranded”. However, this is also probably less likely to occur except in cases where products make unsubstantiated or false claims or are advertised in a deceptive manner. This may very well happen for some Hemp CBD products, which is why it’s important to consult with an experienced attorney prior to marketing or advertising new products.

In sum, the current state of topical Hemp CBD laws in California is less than clear (which at this point should surprise nobody). Keep following the Canna Law Blog to keep up with all California CBD updates.

from Canna Law Blog™ https://www.cannalawblog.com/are-cbd-topicals-allowed-in-california/

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Vireo Health Gets a Patent Win on its Tobacco Mitigation Cannabis Product

Vireo is crossing the finish line with this patent.

Some pretty cool news: on Thursday, Vireo Health International, Inc. (“Vireo”) announced that the United States Patent and Trademark Office (“USPTO”) finally issued a Notice of Allowance for its patent application filed back in March 2017 – ““Tobacco Products with Cannabinoid Additives and Methods for Reducing the Harm Associated with Tobacco Use.”

Receiving a Notice of Allowance is the final step in the long patent application process (in this case, two years, which seems to be a little above the average). It’s issued when the assigned patent examiner has finished reviewing all the information about the invention (including the description, design, drawings, etc.), and is 100% satisfied that the application is entitled to the patent under the law. Once the Notice of Allowance is issued, all the applicant usually has left to take care of is paying the issue and publication fees (within three months from the date of mailing of the notice of Allowance).  In some cases, the applicant might also have to submit revised or final drawings of the invention. Once all that’s taken care of, the applicant will be mailed an Issue Notification that includes the patent number and anticipated issue date.

Circling back to Vireo – its website describes the corporation as a “physician-founded, patient-focused company dedicated to providing best-in-class cannabis-based products and unrivaled care.” The subject patent application covers “cannabis-based additives” that can be incorporated into tobacco products to reduce the overall harmful effects that come with tobacco use. This novel application of cannabis covers the use of one or more carefully formulated cannabinoids as harm reducing agents in tobacco products such as cigarettes, cigars, pipe tobacco and smokeless tobacco products. As Vireo’s CEO, Kyle Kingsley, commented:

This patent is a component of our strategy to disrupt the tobacco industry and help save lives. As a physician, I am passionate about finding ways to use cannabis to reduce the harmful effects of tobacco. We look forward to collaborating with research institutions and tobacco companies committed to developing less harmful tobacco products.”

Not only is this exciting cannabis patent news, it’s also exciting for the general health and wellness space that seems to be gaining more traction every year. Vireo has reported that the potential benefits of this patent, which allows incorporation of cannabinoid additives in tobacco products, includes reduction in irritation, inflammation, and carcinogenicity. Now that the issuance of Vireo’s patent is finally imminent, it’ll be really interesting to see what Vireo achieves through it in the coming years.

For more on cannabis patents, check out the following posts:

Cannabis Patents: The 101

How to Read a Cannabis Patent

Do Cannabis Patents Create Monopolies?

Mystery Cannabis Litigation Theatre 2017: Future Enforcement of Pot Patents

Open Cannabis Project: The Fight to Get Marijuana Patents Right

Breaking News: First Cannabis Patent Lawsuit Filed

Cannabis Patents are Approaching the Patent Trial and Appeal Board

Cannabis Patent Litigation Update: Is Extraction and Preparation Prior Art?

Cannabis Patents: The Potential Power of the PCT Application

from Canna Law Blog™ https://www.cannalawblog.com/vireo-health-gets-a-patent-win-on-its-tobacco-mitigation-cannabis-product/

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Top Five Suggested Revisions to California Form Leases for Cannabis Tenants

I cringe every time a form lease comes across my desk for a California cannabis tenant. While C.A.R. and A.I.R. lease forms certainly have their advantages (brokers and veteran landlords are comfortable with them, and they can be cheap and efficient if the transaction is simple), because of the complexity involved in leasing to cannabis industry tenants, they do not work for cannabis tenancies. Redlining form leases is messy, and the addenda I’ve seen tend to create conflicts and ambiguity, making the problems with form usage even worse.

Cannabis is a heavily-regulated industry. The standard language in most lease forms not only fails to account for the nuanced requirements in state and local laws and regulations, but in some cases the forms actually conflict with what the law requires.

Because the C.A.R. and A.I.R. lease forms are prepared by real estate broker associations, their primary purpose is to protect the interests of the brokers (ensuring commissions and limiting broker liability).

Any issue not addressed in the lease will be governed by state law. State law tends to be very protective of tenants in residential leases, but provides little protection to commercial tenants.

My best advice is to avoid use of forms altogether when entering into a lease for cannabis activity. But if the landlord insists on using a lease form, here are my top five suggested revisions and issues to be aware of:

1. Notice and Cure Provisions – Tenants Need More Than Three Days

The C.A.R. commercial lease form does not include notice and cure provisions addressing how long a tenant has to cure a violation of the lease before the landlord can move forward with eviction. Accordingly, state law governs the notice and cure process, which is bad for tenants, especially in the cannabis industry. Code of Civil Procedure section 1161 provides that when a tenant violates a lease covenant and the violation is curable, the landlord may serve a 3-day notice to perform or quit.

Three days is generally not enough time to resolve any issue involving a cannabis business. It usually takes at least that long to get even a canned response from a government agency regarding a generic license or permitting question. Actually resolving an issue involving a government agency takes much longer. We have seen cannabis tenants receive three-day notices to quit for various alleged lease defaults, including violating a use clause (where cannabis was not specifically enumerated as a permitted use), storing or using hazardous materials (which becomes a very complex issue when dealing with manufacturing operations), lack of state or local licenses, and operating as a nuisance, among others.

If a landlord insists on using a form lease that lacks a notice and cure period, tenant should negotiate a revision to the form for cure periods of at least 10–30 days for non-monetary defaults, because most types of default cannot be cured within such a short period of time.

2. Express Allowance of Cannabis Activity and Exclusion of Controlled Substances Act

As mentioned above, we have seen many leases that fail to expressly name cannabis as a permitted use (never a good idea for cannabis tenants). While the lease should expressly include commercial cannabis activity as a permitted use, the applicability of federal law, specifically the Controlled Substances Act, should be expressly disclaimed. While it would be difficult for a landlord to evict on grounds that a tenant is violating federal law where commercial cannabis activity is expressly allowed as a permitted use, if cannabis activity is not specified in the lease, then the tenant should at least eliminate the requirement that tenant comply with federal laws.

The C.A.R. form, for example, requires that tenant not “use the Premises for any unlawful purposes, including, but not limited to, using, manufacturing, selling, storing, or transporting illicit drugs or other contraband, or violate any law or ordinance, or committing a waste or nuisance on or about the Premises.” Tenants should strike this provision from the lease, or at a minimum, exclude cannabis and cannabis products from “illicit drugs,” and make clear that “any law” excludes the federal Controlled Substances Act.

3. Inspection and Access Rights – Make Subject to MAUCRSA

Both the A.I.R. and C.A.R. forms provide access rights to the landlord for repairs, inspections, and showing the property to prospective tenants and purchasers, among other reasons. Neither form provides tenants the right to exclude landlord from restricted areas or to limit access only to authorized people in compliance with MAUCRSA. If a landlord or the landlord’s agents enter into the limited access areas in a licensed cannabis premises in violation of MAUCRSA, the state holds the licensed tenant responsible for such violation. Accordingly, tenants should amend the form to make landlord’s access rights subject to the restrictions and requirements in MAUCRSA governing access to licensed premises.

4. Landlord Authorization Required

While every lease is subject to the covenant of good faith and fair dealing, that covenant only gets a tenant so far. In reality, many landlords enjoy collecting premium rents from cannabis tenants but when tenants ask them to provide authorization to a local or state agency in order to enable the tenant to obtain a license, many landlords get cold feet and refuse to provide the authorization needed.

We have seen many cannabis license applicants pay months of premium rent just to hold a spot in a local application process, only to have the landlord back out at the last minute (this happens far more frequently when the relationship is governed only by an LOI and not a full lease). In order to avoid any ambiguity and to ensure that the cannabis tenant will be able to submit all necessary documentation to obtain a local and state license, the lease should expressly require the landlord to provide the property owner authorization as required under state and local laws.

5. Hazardous Materials or Substances – Exclude Cannabis, Cannabis Products, and Substances Used in Production 

Both the C.A.R. and A.I.R. forms prohibit use and storage of hazardous materials. The C.A.R. form does not define “hazardous materials,” while the A.I.R. form provides a broad definition of “hazardous substances” (anything potentially injurious to the public health, safety or welfare, the environment or the premises). Both forms allow usage if the material or substance is necessary in the normal course of the permitted use in the lease. To avoid any confusion and to protect against potential liability, in addition to making commercial cannabis activity an expressly permitted use, tenant should revise the lease to state that cannabis and cannabis products are not hazardous materials or substances, and disclose any potentially hazardous substances tenant intends to use (this is especially true for manufacturers).

This is not an exhaustive list of all issues that should be addressed in a form lease. Ideally, form leases should not be used for cannabis tenancies, but if the landlord insists, cannabis tenants to make sure they make the changes necessary to enable them to run their business.

For more on California cannabis leasing, check out the following:

Navigating California Cannabis Leases in 2019

California Cannabis Landlords: More Regulatory Snags to Avoid

California Cannabis Leasing: Landlord Pitfalls

California Cannabis Leasing: The Normalization of Cannabis Landlords

California Cannabis Leasing: Federal Enforcement Is Not The Only Concern

California Cannabis: Commercial Leasing Changes in New Emergency Regulations

California Approves First Commercial Cannabis Landlord Insurance Coverage

California Commercial Cannabis Leasing: Top 5 FAQs

California Commercial Cannabis Leases: Planning in a Time of Uncertainty

California Cannabis: In 2018, Resolve to Make Your Leases Better

California Commercial Cannabis Leases: Will Courts Enforce Them?

California Cannabis Leases: Five Keys to Doing Them Right

California Cannabis Leases: The 101

  from Canna Law Blog™ https://www.cannalawblog.com/top-five-suggested-revisions-to-a-form-lease-for-a-cannabis-tenant/

[jodieshazel]

USDA Expressly Legalizes the Importation of Hemp Seed

Here come the hemp seeds!

Last Friday, the U.S. Department of Agriculture (“USDA”) released a statement, in which the agency clarified that the passage of the 2018 Farm Bill rendered the importation of hemp seeds legal.

As we previously explained, the 2018 Farm Bill legalized hemp, hemp seeds, and other derivatives by removing them from the Controlled Substance Act. Accordingly, the USDA held that the DEA “no longer has authority to require hemp seed permits for import purposes.”

The agency further explained that the statement aimed to provide assistance to U.S. producers and hemp seed exporters who have repeatedly requested assistance from the USDA.

Indeed, the USDA received numerous comments pertaining to this issue during its March 13 webinar. Senator Jon Tester (D-Montana) was among some of the commentators who requested assistance with hemp importations. According to the Montana senator, the DEA was blocking Montana farmers from importing hemp seeds. USDA Executive Director, Sonny Perdue, explained that while the USDA was in the process of promulgating rules and regulations, farmers registered under an existing state research pilot program, pursuant to the 2014 Farm Bill, were allowed to import and cultivate hemp.

In its statement, the USDA maintained Perdue’s statement and further clarified that the agency now holds authority over hemp seeds and aims “to provide an alternative way for the safe importation of hemp seeds into the United States.” Specifically, the USDA set forth ways in which hemp seeds should be imported from Canada and other foreign countries.

Hemp seeds imported from Canada must be accompanied by:

a phytosanitary certification from Canada’s national plant protection organization to verify the origin of the seed and confirm that no plant pests are detected; or

a Federal Seed Analysis Certificate (SAC, PPQ Form 925) for hemp seeds grown in Canada.

Hemp seeds imported from countries other than Canada, must be accompanied by a phytosanitary certificate from the exporting country’s national plant protection organization to verify the origin of the seed and confirm that no plant pests are detected.

The agency further explained that “Hemp seed shipments may be inspected upon arrival at the first port of entry by Customs and Border Protection (CBP) to ensure USDA regulations are met, including certification and freedom from plant pests.”

As USDA Commission Purdue has expressed on numerous occasions, the hemp rule making process will take some time given the complex nature of the crop and its close connection with marijuana. However, even if hemp won’t be grown pursuant to the 2018 Farm Bill until regulations are in place, hemp growers who are registered under state pilot programs, and who comply with the newly released importation requirements, are free to import hemp seeds without the risk of DEA enforcement.

For additional information on the importation of hemp and hemp seeds, please contact our team.

from Canna Law Blog™ https://www.cannalawblog.com/usda-expressly-legalizes-the-importation-of-hemp-seed/

[jodieshazel]

Cannabis Patents: The Potential Power of the PCT Application

Last week, Canadian corporation Yield Growth Corp. announced that its subsidiary, Urban Juve Provisions, filed a Patent Co-operation Treaty Application (PCT Application) entitled “Cannabis Root Extract, Method of Manufacture, Method of Use.” The PCT Application claims priority to eleven U.S. patents filed in the last year by the company and contains claims to a method of manufacturing cannabis root oil, as well as use of that oil as an active ingredient in various formulas for cosmetics and therapeutics. Penny Green, CEO of Yield Growth commented in the announcement: “Topical products represent a huge opportunity in the cannabis industry. We intend to be a leader in the industry with our use of powerful ingredients like our proprietary hemp root oil combined with our expertise in global brands and international distribution.”

Yield Growth’s PCT Application can be used as a basis for obtaining this patent protection in over 150 countries simultaneously. As the cannabis industry rapidly develops, it won’t be surprising to see a rise in corresponding cannabis PCT Applications as well.

So, what is a PCT Application? It’s essentially a “placeholder” application that establishes a filing date for your invention, which can then be “nationalized” in any of the 150+ countries that are members of the PCT. It can be the first patent application you ever file, or it can claim priority to an earlier-filed application. The process generally looks like this:

You file the PCT Application. You will also designate an International Search Authority (ISA), which is the patent office that will perform an initial review of the claims in your PCT application.

Your ISA searches for prior art. Remember when we talked about prior art here? Your ISA will identify what it deems to be relevant prior art in an International Search Report (ISR). Your ISA will then issue a non-binding Written Opinion (WO) that contains its view on the patentability of your claims. (If you designate the U.S. Patent Office, it aims to issue the ISR and WO within 9 months of the PCT filing date if the PCT application is the first application, or 16 months from the priority date if the PCT application is a subsequent filing). If the WO is favorable, you can enter prosecution early in some jurisdictions. If the WO is not favorable, you can amend the claims at various points during the PCT process.

Your PCT application publishes approximately 18 months after the priority date.

Generally, within 30 months (longer in some jurisdictions) from your priority date, you will “nationalize” the application in the countries you desire. Note that there are sometimes substantial costs for translation preparation and application filings in each of your selected jurisdictions.

Each of your nationalized patent applications will then follow their own country-specific procedures for prosecution to grant. Your PCT Application itself will expire, and it alone cannot issue as an “international patent” (those don’t exist).

There are various benefits to filing a PCT Application instead of starting off with separate patent applications in each country, including deferral of costs and time constraints and the prior art that necessarily gets created when a PCT Application gets published. Circling back to Yield Growth, this was an effective and efficient way for it to ensure its eleven provisional patent applications in the United States are primed for globalization.  We’ll be monitoring its path through the nationalization process and report back on any cannabis-specific issues that may arise.

For more on cannabis patents, check out the following posts:

Cannabis Patents: The 101

How to Read a Cannabis Patent

Do Cannabis Patents Create Monopolies?

Mystery Cannabis Litigation Theatre 2017: Future Enforcement of Pot Patents

Open Cannabis Project: The Fight to Get Marijuana Patents Right

Breaking News: First Cannabis Patent Lawsuit Filed

Cannabis Patents are Approaching the Patent Trial and Appeal Board

Cannabis Patent Litigation Update: Is Extraction and Preparation Prior Art?

from Canna Law Blog™ https://www.cannalawblog.com/cannabis-patents-the-potential-power-of-the-pct-application/

[jodieshazel]

California Cannabis: Los Angeles Moves to Reform Phase 3 Cannabis Licensing

This past weekend was the hallowed 4/20 holiday for those who celebrate and participate. Prior to 4/20, the City of L.A. made some progressive moves towards bolstering consumer protection in the City concerting illegal cannabis (see this pretty great interactive map for your legal cannabis providers in City borders) and rounding out (legally speaking) the Phase III licensing process that’s been long awaited by stakeholders.

When I last wrote about Phase III back in February, things were still fairly up in the air for how the City would allocate the remaining coveted retail licenses. In early February, the Department of Cannabis Regulation (“DCR”) proposed to the Rules, Elections, and Intergovernmental Relations Committee (“Committee”) the concept of a first come, first served system, lottery, or merit-based review to divvy up those licenses between those social equity applicants that had real property and those that didn’t in order to “make our licensing process more efficient, transparent, and, most important, equitable.” The Council (after a hearing with the Committee and the DCR) came back at the DCR with a different set of proposals for Phase III reform. Namely, to study how other cities have handled social equity and limited licensing.

On April 16th, after adopting the City Attorney’s April 12th report, the Council also decided to adopt this April 12th draft ordinance (subject to certain Council amendments and additions to the DCR and City Attorney from April 16th). Council will review this amended ordinance for adoption on April 30th.

The April 12th ordinance does a lot of things to reform cannabis regulations in L.A. It’s biggest impact is the creation of a first come, first served system for Phase III licensing, which basically tracks the original proposals from DCR from back in February. Here is a general overview of how Phase III will now work (assuming the revised ordinance passes on April 30th):

When the DCR decides it’s time, for 60 calendar days (or, on Council’s April 16th recommendation, this window will close 30 days after Council “adopts the findings of the Enhanced Social Equity Analysis”), applicants for Phase III Type 10 retail licensing (i.e., brick and mortar) can apply to the DCR to be vetted and approved as either Tier 1 or Tier 2 Social Equity applicants. Licensing will then be split up into two “Rounds”.

For Round 1 licensing, for a period of 14 calendar days (provided that the DCR posts written notice of Round 1 on its website 15 days before the 14-day window opens), the DCR will process the first 100 Type 10 retail licenses.

To qualify in Round 1, an applicant business must have a Tier 1 or Tier 2 Social Equity applicant already verified (for more on social equity in L.A. generally, see here). Importantly, a Tier 1 or Tier 2 cannot be the social equity component for more than one business applicant in Round 1. And any individual who is an “owner” of an EMMD can’t be the Tier 1 or Tier 2 Social Equity applicant.

During the 14-day application window, applicants have to submit to the DCR a complete application that includes the following: 1) a copy of an executed lease agreement with proof of a deposit or property deed for its business premises; 2) an ownership and financial interest holder form; 3) a financial information form; 4) a Business Premises diagram; 5) proposed staffing and security plans; 6) a dated radius map including horizontal lines and labeling of any sensitive uses relative to a Type 10 retail license; 7) a labor peace agreement attestation form; 8) an indemnification agreement; 9) a current Certificate of Occupancy for retail use for the business premises; and 10) all business records and agreements necessary to demonstrate that a Tier 1 or Tier 2 Social Equity applicant owns the minimum equity share in the business as required under current City law.

The first 100 applicants that meet all of the foregoing will go forward for further license processing, which represents the “first come, first served” system in play.

For Round 2 for the remaining Type 10 retail licenses (which Council instructed the City Attorney to increase the number to 150 from the originally contemplated 100 because of Undue Concentration), when the DCR decides it’s time to open the window, they’ll process Round 2 applications for 30 calendar days, but this Round 2 window cannot open “until DCR has made business, licensing, and compliance assistance available to  [pre-verified] Tier 1 and Tier 2 Social Equity applicants . . . for a period of at least 30 calendar days” (note that Council wants this assistance in place for 45 days before Round 1 opens instead of for 30 days before the commencement of Round 2).

To qualify for Round 2, an applicant must have an individual “owner” that is a Tier 1 or Tier 2 Social Equity applicant that’s already been verified by the City.

During the 30-day application period, applicants have to submit a complete application that includes the following: 1) an ownership and financial interest holder form (though Council requested that the ownership structure information only be required as part of number 9 below); 2) a financial information form; 3) a labor peace agreement attestation form; and 4) an indemnification agreement.

The first 150 applicants that submit an application that meet the foregoing requirements then get 90 calendar days, when the DCR calls it, to then submit: 1) a copy of an executed lease agreement with proof of a deposit or property deed for its Business Premises; 2) a business premises diagram; 3) proposed staffing and security plans; 4) a dated radius map including horizontal lines and labeling of any sensitive uses relative to a Type 10 retail license; 5) an indemnification agreement; 6) a current Certificate of Occupancy for retail use for the business premises; and 7) all business records and agreements necessary to demonstrate that a Tier 1 or Tier 2 Social Equity applicant owns the minimum equity share required by current City law.

Note also that Council wants to add to the ordinance: the ability of Type 10 or 9 retailers to be able to add other non-retail commercial cannabis uses to their license applications when they’re in pursuit of their City annual licenses; that as of January 1, 2010, DCR is allowed to process additional Type 10 retail license applications so long as mandatory social equity ratios are honored and Undue Concentration isn’t violated; and a prohibition on the “sale or major change of ownership” of a social equity licensed business until “minimum standards are adopted” unless “extenuating circumstances” exist as determined by the DCR.

We finally know what Phase III is going to look like in L.A., which will probably cause a lot of relief and also major anxiety. Without a doubt though, Phase III retail licensing in L.A. is now going to be a massive race to get in complete applications, and it will be a feeding frenzy for business folks to partner with social equity applicants (so be on the look out for predatory tactics). For those out there that have been sitting on property in L.A. just waiting for Phase III to open, now is the time to start preparing for the submission of your complete application to the DCR as one missed or incorrect document can spell rejection. Be sure to organize and analyze accordingly.

We’ll be sure to keep our eye on the revised Phase III ordinance as April 30th approaches.

from Canna Law Blog™ https://www.cannalawblog.com/california-cannabis-los-angeles-moves-to-reform-phase-3-cannabis-licensing/

[jodieshazel]

The Battle for California Cannabis Access is a Roadmap for States Considering Legalization

Over the last few years, California has gained a reputation of being a state where cannabis is completely legal and out in the open. In reality, cannabis isn’t nearly as “free” as people think it is in the Golden State, with many cities outright banning commercial cannabis activities. Right now, there is an ongoing battle between the state and local governments for access to cannabis, which should be the first place that states (and possibly even Congress) look when considering legalization.

For background, the operative state cannabis law in California—the Medicinal and Adult-Use Cannabis Recreation and Safety Act (“MAUCRSA”)—allows cities and counties to “adopt and enforce local ordinances to . . . completely prohibit the establishment or operation of one or more types of businesses licensed under this division within the local jurisdiction.” This provision (as well as some other related ones) have created a great deal of tension between state and local governments.

The result of this comprehensive local control is that some local governments reject commercial cannabis activity altogether, or only allow very limited licensing and/or no retail sales or delivery. For example, only a small handful of the approximately 90 cities in Los Angeles County allow cannabis retail sales. To boot, many other localities throughout the Golden State prohibit deliveries within their borders. This continued prohibition even occurs in many cities whose voters approved of adult use cannabis sales back in 2016.

Local bans have created a good deal of regulatory and administrative chaos throughout the state, including the fact that the state is not netting the expected tax revenue it would otherwise receive if all local markets were open. One sticking point in particular is the fact that cities that don’t allow cannabis businesses also don’t even allow delivery to their citizens. According to the state though, that’s going to change. And fast.

The Bureau of Cannabis Control (“BCC”) recently created a regulation that allows deliveries by licensed cannabis retailers into any city or county in the state regardless of any local delivery ban. This was widely praised in the cannabis industry but was immediately attacked by localities.

To combat open deliveries, legislation was introduced (AB-1530) to specifically allow cities to forbid deliveries. AB-1530 recently failed passage on April 9, 2019 but may be reconsidered. A number of California cities also recently sued the BCC over this regulation. The litigation was only just filed, but we expect that the cities will move to enjoin the BCC’s implementation of this new open delivery rule—the result would be that deliveries could only occur in cities that allow them, which is the status quo. We don’t yet know how that litigation will unfold but will continue to follow it as it progresses.

Another recently introduced piece of legislation is AB-1356 would require local jurisdictions to allow certain local retail permitting if local voters voted in favor of the Control, Regulate and Tax Adult Use of Marijuana Act of 2016. In other words, AB-1356 would overrule local governments where local voters approved of the adult-use precursor to MAUCRSA.

One thing that’s obvious from these recent challenges and new bills is that there is room for compromise. Cities that don’t want to have brick-and-mortal cannabis operations, for example, could agree to allow regulated deliveries. Whether they agree or not, any total ban is likely to be ineffective and may only result in the further proliferation of the existing black market. Cannabis prohibition didn’t work previously; it’s not likely to work now on the local level either.

This battle is ultimately important for jurisdictions considering adopting cannabis laws. The point of legalization, regulation, and taxation is to outpace the black market and ensure safe and reliable access to cannabis with public health in mind—not to impose additional costs on the state and to shift disputes from the criminal courts to the civil ones. While local control is important and serves a legitimate purpose for protecting communities, lack of access to cannabis will really only serve to harm communities where the unregulated and unscrupulous black market rages on.

from Canna Law Blog™ https://www.cannalawblog.com/the-battle-for-california-cannabis-access-is-a-roadmap-for-states-considering-legalization/

[jodieshazel]

Cannabots: Are the Robots Coming For Your Weed?

Everyone seems to agree that few of us are safe from the impending roboacolypse. Not the farmers, not the restaurant workers, not even the fashion models or (gasp!) the lawyers.

What about those employed in the cannabis industry? Not according to a recent article on Seedo, “an Israeli and Maryland based startup that claims to be able to quadruple the yield of traditional cannabis grows using climate-controlled chambers run by robots.”  According to a news release dated March 19, 2019, Seedo has partnered with Kibbutz Dan in Northern Israel to establish the first fully automated, commercial-scale, pesticide-free containerized cannabis farm in Israel. You can watch the video here.

Seedo claims that its airtight, stackable containers will take the guesswork out of the cultivation process, optimize land-use, and reduce the environmental footprint of the farming operations. Oh – and each container can produce at least 326 pounds of dry cannabis bud per year.

Meanwhile an April 2019 cover story by Marijuana Business Magazine that surveys salaries across the cannabis industry indirectly highlights the benefits of moving to automation. The article notes that at nearly every level of the cannabis industry people tend to earn more than their mainstream counterparts and that for most companies, payroll is the biggest expense.

We would add that payroll aside, employees are often the greatest source of risk for cannabis businesses which are generally held strictly liable for the actions of their employees. This means one bad hire can put at risk an investment millions of dollars. We see this all the time with so-called “consultants,” who offer grand visions of easy money but just as often walk away leaving a business in shambles and carrying a briefcase (or two) full of cash. We also see this in situations where owners and employees are doing their best, but a mistake is made and the regulatory agency steams ahead with license revocation proceedings.

Are robots the answer? Maybe not yet, but in this tightly regulated industry where a mistake (honest or not) can result in license revocation, we should expect cannabis businesses to take advantage of any technology that promises to mitigate risk.

from Canna Law Blog™ https://www.cannalawblog.com/cannabots-are-the-robots-coming-for-your-weed/

[jodieshazel]

Mexican Cannabis: The New Legal Landscape

We are committed to keeping our knowledge of international cannabis news current, and as legalized cannabis has become an international reality, our lawyers in Spain and in China are naturally seeing more of this work. Zozayacorrea Sahagún Arizaga, a leading law firm based in Guadalajara, Mexico, gave Harris Bricken the express permission to provide our own English summary along with the original Spanish article.

Mexico’s New Cannabis Laws

Cannabis legalization and regulation in Mexico is imminent.

Late last year, the current Secretary of Government, Olga Sánchez Cordero, presented a legislative proposal to issue the General Law for the Regulation and Control of Cannabis (“The Cannabis Bill”).

The Cannabis Bill would regulate the growing, cultivating, harvesting, producing, transforming, labeling, packaging, advertising, transporting, distributing, selling, marketing, carrying and consuming of cannabis products and its derivatives for personal, scientific and commercial purposes.

In other words, it would regulate pretty much everything.

The Cannabis Bill also proposes creating the Mexican Institute for Regulation and Control of Cannabis (“IMRCC”) to regulate, monitor, sanction, and concentrate registration of cannabis producers and to establish guidelines for cannabis consumption in public spaces. The IMRCC would have the power to issue cannabis licenses and renewable permits for between 5 and 10 years.

In addition to legalizing cannabis production for personal use via production cooperatives, the Cannabis Bill would also set up the following four commercial cannabis categories:

Therapeutic or Herbal Use: Licensed businesses will be allowed to plant, cultivate, harvest, prepare, produce, process, transport, distribute and sell cannabis and its derivatives for therapeutic purposes. This would not require medical authorization or supervision.

Pharmaceutical Use: This commercial cannabis category would allow sowing, cultivating, harvesting, preparing, producing, processing, transporting, distributing and selling cannabis and its derivatives for pharmaceutical purposes. Sale of cannabis and cannabis-derivative products under this category would require a medical prescription with purchase through a licensed pharmacy in compliance with Mexico’s General Health Law.

Adult Use: Businesses licensed under this category would be able to sow, cultivate, harvest, prepare, produce, process, transport, distribute and sell cannabis to adults. Public consumption of cannabis by adults would be regulated the same as tobacco. The sale of cannabis and its derivatives under this category must be made in authorized establishments, which may only market cannabis, derived products and related items. Cannabis sold under this category will be regulated in its amount of tetrahydrocannabinol (“THC”) levels and will require have strict warning and labeling requirements.

Industrial Use: Cannabis businesses licensed under this category will be permitted to sow, cultivate, harvest, prepare, manufacture, produce, distribute and sell cannabis for industrial purposes.

Businesses applying for licenses under all four of the above categories would need to comply with several legal requirements, including reinforcing the legal age of possession and consumption at 18, and not having been convicted of a “high social impact” crime, money laundering or for organized crime.

Estamos comprometidos a mantenernos al corriente de la actualidad cannábica internacional. A medida que la legalización del cannabis avanza a nivel mundial, nuestros abogados en España y China están atendiendo más consultas sobre temas relacionados. Zozayacorrea Sahagún Arizaga, un prominente estudio de abogados en Guadalajara, México, nos brindó gentilmente su autorización para publicar en su totalidad la versión original en español del siguiente artículo y de resumir el mismo en inglés.

CANNABIS: UN VISTAZO AL NUEVO ENTORNO LEGAL MEXICANO

México continúa su transición hacia lo que parece una inminente legalización y regulación del consumo de la marihuana o cannabis.

Recientemente, un paso importante fue dado por la hoy Secretaria de Gobierno, Olga Sánchez Cordero, quien en noviembre de 2018 presentó una iniciativa para expedir la Ley General para la Regulación y Control de Cannabis (Iniciativa).

La Iniciativa contempla regular ─entre otras actividades─, la siembra, cultivo, cosecha, producción, transformación, etiquetado, empaquetado, publicidad, transporte, distribución, venta, comercialización, portación y consumo de cannabis y sus derivados, para fines personales, científicos y comerciales.

Asimismo, la Iniciativa propone crear el Instituto Mexicano de Regulación y Control de Cannabis (IMRCC), un órgano que será desconcentrado de la Secretaría de Salud, la cual tendrá la facultad de regular, monitorear, sancionar, y de concentrar el padrón de productores, así como establecer lineamientos para su consumo en espacios públicos.

También dentro de sus facultades, el IMRCC tendría competencia para la emisión de licencias y permisos prorrogables, por periodos de entre 5 y 10 años, siempre y cuando no se haya incumplido con los términos de la autorización.

Aunado a la legalización para producir cannabis para uso personal bajo un esquema de autoconsumo o de cooperativa de producción, la Iniciativa prevé el uso de cannabis para fines comerciales, siempre y cuando esta actividad se realice dentro del marco de la ley, y con la previa autorización de las autoridades.

En este sentido, la Iniciativa prevé cuatro categorías para la comercialización de cannabis, de acuerdo a sus fines:

Para uso Terapéutico, Paliativo o herbolario

Bajo este esquema de comercialización, estaría permitido sembrar, cultivar, cosechar, preparar, producir, procesar, transportar, distribuir y vender cannabis y sus derivados con fines terapéuticos o paliativos, con autorización, y su venta se delimitará a los puntos determinados por el IMRCC. Se entiende como producto de uso terapéutico, el cannabis para consumo, sus derivados o cannabinoides, destinados a fines de prevención, tratamiento y alivio de los síntomas de enfermedades que no requieren supervisión o autorización médica.

Uso Farmacéutico

Para efectos de la Iniciativa, son productos farmacéuticos los medicamentos que cumplan con la Ley General de Salud que provengan del cannabis.

Esta categoría comercial permite la siembra, cultivo, cosecha, preparación, producción, procesamiento, transporte, distribución y venta de cannabis y sus derivados con fines farmacéuticos.

De esta modalidad destaca que su venta se realizará únicamente en farmacias, mediando receta médica y, en el caso de los cannabinoides sintéticos, sería necesaria receta médica controlada.

Uso Adulto

Se entiende como tal la utilización de cannabis por personas mayores de edad. Como en las modalidades anteriores, bajo esta categoría estaría permitido sembrar, cultivar, cosechar, preparar, producir, procesar, transportar, distribuir y vender cannabis y sus derivados con fines lúdicos, siempre que se cuente con licencia.

Vale la pena señalar que esta modalidad permite además el uso de cannabis en espacios públicos, a excepción de los espacios cien por ciento libres de humo.

La venta de cannabis y sus derivados bajo este esquema deberá realizarse en establecimientos autorizados, los cuales únicamente podrán comercializar cannabis, productos derivados y artículos conexos.

La comercialización en esta categoría estaría regulada por estándares de niveles de tetrahidrocannabinol (THC), advertencias y requisitos de etiquetado.

Uso Industrial

Se prevé que bajo esta modalidad esté permitido sembrar, cultivar, cosechar, preparar, fabricar, producir, distribuir y vender cannabis para fines industriales, siempre y cuando se realice en el marco de la Iniciativa y leyes vigentes en su momento, y se cuente con autorización del IMRCC.

En cualquiera de los casos anteriores, quienes soliciten licencias deberán cumplir con varios requisitos, tales como: ser mayor de edad, no contar con antecedentes penales relacionados a delitos de alto impacto social, de lavado de dinero o delincuencia organizada.

Sin perjuicio de la aplicación de penas aplicables de conformidad con las leyes penales, la Iniciativa prevé un catálogo de sanciones administrativas, que podrán ser desde amonestaciones públicas, hasta multas económicas, suspensiones temporales o definitivas de la licencia, trabajo en favor de la comunidad, o arresto de hasta por 36 horas.

Según fuentes noticiosas, la Iniciativa permanece en la agenda legislativa del Senado de la República en espera de su análisis por la comisión respectiva, por lo que, hasta el momento, el marco legal mexicano permanece bajo su esquema prohibitivo, salvo casos específicos en que particulares han controvertido ante tribunales federales las disposiciones vigentes, obteniendo sentencias que exceptúan o ponen límites a algunas de las prohibiciones legales actuales.

Criterio de la SCJN

La Suprema Corte de Justicia de la Nación (SCJN) dictó en días pasados la tesis jurisprudencial 1a./J.3/2019(10a.), mediante la cual declaró inconstitucional la prohibición del uso recreativo de la marihuana, contenido en la Ley General de Salud, por transgredir el derecho fundamental al libre desarrollo de la personalidad.

De acuerdo con la tesis, las personas mayores de edad tienen la potestad de decidir sin interferencia alguna, qué tipo de actividades recreativas o lúdicas desean realizar.

Sin embargo, la resolución va más allá, reconociendo que la prohibición contenida en los artículos 235, último párrafo, 237, 245, fracción I, 247, último párrafo, y 248 de la Ley General de Salud, efectivamente inciden en el contenido del derecho fundamental en cuestión, toda vez que constituyen un obstáculo jurídico que impide ejercer el derecho a decidir qué tipo de actividades recreativas o lúdicas se desean realizar, al tiempo que también impide llevar a cabo lícitamente todas las acciones o actividades necesarias para poder materializar esa elección a través del autoconsumo de la marihuana: siembra, cultivo, cosecha, preparación, acondicionamiento, posesión, transporte, etcétera.

Esto último no es cosa menor; sienta un precedente que ─consideramos─, complementariamente eleva al rango de derecho fundamental el acceso a los medios para el ejercicio del derecho humano central tutelado, como es adquirir lícitamente de terceros el cannabis, ya sea en su forma incipiente como semilla, en planta, o en presentación diversa, de forma que quienes carecen de los medios, destreza o conocimientos técnicos para producir por sí mismos la substancia, cuenten con esta alternativa, para el ejercicio pleno del derecho fundamental al libre desarrollo de la personalidad que les asiste, con independencia de que el consumo sea para fines recreativos o de salud.

Con lo anterior en mente, estimamos que estos razonamientos podrían intentarse e incluso hacerse valer a través de un litigio estratégico ante un tribunal federal, tendiente a una resolución que declare viable la comercialización y venta de cannabis y sus derivados, lo que podría incidir no solo en un rediseño de las políticas públicas prohibitivas en el país relativas a la cannabis, sino en una posición comercial altamente ventajosa para su promovente.

from Canna Law Blog™ https://www.cannalawblog.com/mexican-cannabis-the-new-legal-landscape/

[jodieshazel]

Washington Lawmakers Poised to Redefine the WSLCB’s Role in Washington Marijuana

  Senate Bill 5318 is making its way through the Washington legislature and seems destined for Governor Jay Inslee’s desk. As of April 16, the bill had cleared both the Washington House and Senate. If signed into law, which seems increasingly likely, SB 5318 would drastically change the way the Washington State Liquor and Cannabis Board (“LCB”) operates.

SB 5318 is titled, “An Act Relating to reforming the compliance and enforcement provisions for marijuana licensees.” Washington marijuana licensees, in this writer’s opinion, face the strictest, most punitive regulatory regime in any state that allows recreational marijuana. This is due to the rules around “true parties of interest” and “financiers.”

A true party of interest (“TPI”) refers to a legal owner of any shares or membership interest in a licensed business. The LCB also considers anyone who has the right to receive any percentage of the gross or net profits from a licensed business a TPI. The true party of interest designation also refers to the spouses of anyone who qualifies as a TPI.  The LCB currently mandates that a person apply to become a TPI, which means that spouses, even for marriages after initial licensing, be disclosed and vetted by the WSLCB. TPI relationships can occur unintentionally which results in a violation. The recommended penalty for the first TPI violation is license cancellation and the LCB pushes for cancellation on nearly all TPI cases.

Financiers are defined as any individual who loans or gifts money or goods to a marijuana business must also be vetted. In addition, the LCB must vet any funds that go towards the operation of a marijuana business, regardless of the amount. Failure to do so can result in license cancellation. For example, if a TPI uses his or her personal money to cover payroll for a month when revenues are short, the LCB will cancel the license for failure to vet those funds.

The LCB has taken a few half-measures to address this unworkable system. A few months ago it floated the idea of starting an amnesty program for certain TPI/Financier violations. That never happened. The LCB also adopted an interim policy that lets TPI’s infuse their businesses with cash upon submitting an application to add funds. That policy is a step in the right direction, but does not go nearly far enough.

The result of this “enforcement first” policy has been a contentious relationship between the LCB and state lawmakers, as documented by Lester Black for the Stranger. Without diving into the complex relationship between politicians, lobbyists, the LCB, and stakeholders, it seems safe to say that the LCB’s enforcement policy has reached a boiling point and caused lawmakers to overhaul how that agency operates.

Now that we’ve laid the framework, let’s get into the details of SB 5318:

Notice of Correction. If the LCB discovers a license violation during an inspection or visit, the LCB determines that a licensee is out of compliance with laws or LCB regulations, the LCB may issue a “notice of correction” which would include a summary of what’s wrong and how to fix it, a date when the licensee must comply, contact information for technical assistance from the board, and the process for requesting additional time if needed for good cause. These notices are not considered formal enforcement action and not subject to appeal or public disclosure. The LCB would be required to issue a “notice of correction” before bringing a civil penalty and could not issue a civil penalty before the time period in the notice expires. There are some exceptions where the LCB would not be required to issue the above notice:

The licensee has previously been subject to enforcement action for the same or similar violation;

Failure to comply with a previous notice;

Furnishing sales to a minor;

Diversion of revenues to criminal enterprises, gangs, or cartels;

Use of firearms in a licensed facility that poses a direct and significant risk to public safety; or

The commission of non-marijuana crimes.

Restructuring Penalties. The LCB must rework its current penalty structure. The LCB will still have the ability to include escalating penalties, but the cumulative effect of such penalties must be limited to two years, which is a reduction from the current penalty window of three years. Also, to cancel a license, the licensee must have at least four violations in a two year window. In turn, a single violation cannot result in license cancellation unless the LCB can prove by clear, convincing, and cogent evidence that the violation is caused by intentional or grossly negligent action or inaction that involves one of the public-safety scenarios listed in the previous section (i.e., diversion of marijuana, sales to minors, etc.). Additionally, no violations that occurred before April 30, 2017 may be considered as grounds for denial, suspension, cancellation, or non-renewal of a license unless the LCB can prove that one of the public-safety scenarios is implicated.

Compliance emphasis. The LCB must adopt rules to “perfect and expand existing programs for compliance education” for licensees. These rules must include a voluntary compliance program which has recommendations on abating violations. The LCB must also create a system where licensees can request consultation on compliance issues. The LCB is not totally prohibited from using information from these consultation visits, whether in person or done remotely, but they can not treat the consultation as an investigation.

Employee violations. The LCB may not issue a violation if it results from employee misconduct if the licensee documents that before the violation was issued the licensee established a compliance program and performed training to prevent the violation and that licensee had not enabled or ignored similar violations in the past.

Impact on Administrative Hearings. Administrative Law Judges will be authorized to consider mitigating and aggravating factors and can deviate from any penalties prescribed by LCB regulation. In addition, if a licensee enters into a settlement agreement with the LCB or the LCB’s representative, the LCB must give the terms of the settlement substantial weight and can only disapprove or modify the terms if the agreement is clearly erroneous.

SB 5138 seems very likely to pass but it has not done so yet. Differences between the House and Senate versions of the bill must be reconciled and Governor Inslee must still sign the bill. If passed, it will go into effect 90 days after the current legislative session adjourns.

from Canna Law Blog™ https://www.cannalawblog.com/washington-lawmakers-poised-to-redefine-the-wslcbs-role-in-washington-marijuana/

[jodieshazel]

Oregon Cannabis and Liquor: Why is OLCC Harder on Marijuana Licensees?

Why is the OLCC throwing the book at me? This is a question we hear a lot these days from our Oregon cannabis clients in reference to the OLCC’s recent more aggressive approach to enforcement. As we’ve explained, the OLCC has tightened the reins on marijuana applications and rule violations. This has made the prospects of a favorable settlement seem increasingly out of reach for Oregon cannabis businesses that find themselves the subject of an OLCC investigation or receive a proposed notice of cancellation.

Although the OLCC Commissioners have said they are looking for partners in the cannabis industry, it doesn’t always seem that way. This is particularly true when a cannabis business takes reasonable and necessary steps to ensure compliance with the rules only to have an employee violate a rule, whether purposefully or inadvertently. Without fail (in our experience), the OLCC imputes liability for the employee’s actions to the business and the entity finds its license – and its entire business – at risk. Compounding this problem is that for many of regulations, neither the intent of the employee nor the licensee much matter.

The OLCC does not seem to go after holders of liquor licenses with such force.  Here are a just a few such matters that the OLCC has settled in the past few months, on the liquor side:

Failing to verify the age of a minor – $1,485 civil penalty or a nine-day suspension

Licensee permitted employees to sell alcoholic beverages for off-premises consumption without providing proper training – $1,815 civil penalty or a ten-day suspension

Licensee permitted employee to serve alcohol without a valid service permit – $1,485 civil penalty or a nine-day suspension

Licensee permitted unlawful activity by employees including the sale or distribution of controlled substances – $1,485 civil penalty or nine-day suspension

41 documented incidents in 29 months described as “serious and persistent” – surrender of license

It is hard to imagine an entity with a recreational marijuana permit settling similar violations in a similar manner (e.g. failing to verify the age of a minor is a Category I violation) much less that the OLCC would tolerate 41 serious incidents over 29 months, or a licensee distributing controlled substances on premises.

So what gives? Although we understand the OLCC’s desire to maintain the integrity of Oregon’s recreational marijuana industry, we believe that as the industry matures the OLCC should treat violations of the rules governing recreational marijuana more like alcohol, not less. This kind of change likely needs to come from the OLCC or the Oregon Legislature.

The State of Washington is contemplating a wholesale revision of its rules governing the enforcement of the recreational marijuana rules because some of the issues described here. Look for a comprehensive post on this blog tomorrow.

As for businesses caught in the OLCC’s web, you can get some idea of what you’re in for here and here. And you should attend the free webinar Cannabis Agency Litigation Next Tuesday, April 23rd that you can register for here.

from Canna Law Blog™ https://www.cannalawblog.com/why-is-olcc-harder-on-marijuana-licensees/

[jodieshazel]

Industrial Hemp and USDA Organic Certification

We’ve written previously about the inability of cannabis companies to receive United States Department of Agriculture (USDA) organic certification for their products (although there are alternative state-level and private certifications available to fill this gap), but what some of our clients are unaware of is that the USDA will provide organic certification for qualified industrial hemp producers.

The USDA provided clarifying instructions in its September 2018 Instruction on Organic Certification of Industrial Hemp Production for the UDSA’s policy regarding the organic certification of industrial hemp production by certifying agents accredited by the USDA National Organic Program (NOP). The UDSA first noted that Section 7606 of the Agricultural Act of 2014 (the Farm Bill) authorized institutions of higher education and state departments of agriculture to establish industrial hemp research pilot programs in states where the production of industrial hemp is legal and subject to certain other conditions.

The USDA’s official policy is that “[f]or hemp produced in the United States, only industrial hemp, produced in accordance with the 2014 Farm Bill, as articulated in the Statement of Principles on Industrial Hemp issued on August 12, 2016 by USDA, may be certified as organic, if produced in accordance with the USDA organic regulations.”

For industrial hemp producers operating in accordance with their state’s industrial hemp program, becoming a certified organic operation will be no different than for companies in any other industry. The USDA lays out five basic steps to attaining organic certification:

The farm or business adopts organic practices, selects a USDA-accredited certifying agent, and submits an application and fees to the certifying agent.

The certifying agent reviews the application to verify that practices comply with USDA organic regulations.

An inspector conducts an on-site inspection of the applicant’s operation.

The certifying agent reviews the application and the inspector’s report to determine if the applicant complies with the USDA organic regulations.

The certifying agent issues organic certificate.

All certified organic farms and businesses must also undergo an annual review and inspection process.

It is important to remember that touting your hemp (or cannabis) as certified organic when it is not is illegal under federal law. As mentioned above, for cannabis businesses there are alternative certifications available via some states or via private third-party certification companies.

In California, for example, SB 94 mandated that the California Department of Food and Agriculture (CDFA) create an organic cannabis program by 2021. In 2018, the CDFA formed the “OCal” project, which is a four-person team within CalCannabis dedicated to establishing that organic cannabis program. The program will be similar to the National Organic Program (NOP). OCal is currently in the information-gathering stage and is set to begin soliciting input from stakeholders this month.

In short, it’s clear that both hemp and cannabis companies value organic principles and are seeking certification. The path to such certification is clear for qualifying industrial hemp companies, but for other cannabis companies, the options are much more limited.

from Canna Law Blog™ https://www.cannalawblog.com/industrial-hemp-and-usda-organic-certification/