Taming California’s medical market

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Will the Wild West be Tamed?

What type of impact will the Medical Marijuana Regulation and Safety Act have on California’s cannabis industry?

By Katie Podein

As the first state in the nation to legalize medical marijuana with Proposition 215 in 1996, California helped pioneer the “green frontier” movement. Prop 215, also known as the Compassionate Use Act, legalized the possession and cultivation of marijuana by patients and their designated primary caregivers for medical use upon approval by a California-licensed physician. Even though the state Legislature attempted to clarify the scope of Prop 215 with the passage of Senate Bill 420 in 2003, the medical marijuana industry was still left with little to no guidance in terms of a regulatory framework on the state level.

 

The End of Laissez-Faire

Under Prop 215 and Senate Bill 420, regulation was left up to individual cities and counties, which meant the laws varied greatly under each jurisdiction. Nineteen years later, some localities have even left their municipal codes noticeably void of any regulation, thus allowing the medical marijuana community to develop self-imposed standards (or lack thereof).

As a result, patient demand led the medical marijuana industry to rapidly develop new businesses and products. Current estimates indicate as many as 2,000 dispensaries are operating in California. Although illegal, it is not uncommon for a California-licensed doctor to hand out a medical marijuana recommendation to a one-time patient after a cursory 15-minute examination. Delivery services operating from unknown locations have rapidly risen in popularity, especially in cities with expensive real estate like Los Angeles and San Diego.

However, with the recent passage of the Medical Marijuana Regulation and Safety Act (MMRSA), these questionable activities will soon be controlled or eliminated as the state attempts to tame what can be labeled as the “Wild West of Weed.”

 

New Sheriff in Town

The MMRSA was signed into law by Governor Jerry Brown on Oct. 9, 2015, with an effective date of Jan. 1, 2016. It is comprised of three bills that provide regulations for different areas of the medical marijuana industry, while simultaneously establishing a comprehensive system for control.

The Bureau of Medical Marijuana Regulation (BMMR) is the newly created entity that will develop and implement all rules necessary to enforce the new regulations, including the oversight of state licensing for and regulation of dispensaries, distributors and transporters. The BMMR — cleverly nicknamed “Bummer” by the cannabis industry — is a branch of the Department of Consumer Affairs. The state will also establish a comprehensive database of licensees and to report the movement of commercial cannabis and cannabis products (also known as a “track and trace” program). Additionally, the Department of Food and Agriculture and the Department of Public Health have the power to promulgate and pass any rules necessary to implement the MMRSA as it applies to cultivators and testing facilities.

Keep in mind that cities and counties are allowed to impose stricter standards for commercial cannabis businesses and are even allowed to ban all commercial cannabis activity within their borders. Cities and counties are also granted the power to tax and assess fees against these businesses.

 

Lassoing the Marijuana Industry

The MMRSA creates a new, strict licensing structure for the medical marijuana industry. Every person engaged in commercial cannabis activity is now required to obtain a state license, as well as any local licenses or permits required by each city or county. Under the new legislation, there are 17 different types of medical marijuana operational licenses — 10 licenses for cultivation, two for manufacturing, two for dispensaries, and one each for testing, distribution and transportation.

The BMMR will only grant a state license in up to two separate categories, and will permit only certain combinations of licenses. These regulations limit vertical integration, with one very specific exception. If a licensee’s city or county has an ordinance that permits vertical integration, and the licensee’s business was vertically integrated before July 1, 2015, and the licensee has been continuously operating and registered with the Board of Equalization, then that person may keep the business vertically integrated until Jan. 1, 2026. All vertical integration will be repealed thereafter.

 

Preparing for Priority Licensing

Priority licensing was permitted to begin as early as Jan. 1, 2016. A commercial cannabis business that can demonstrate to the state’s satisfaction that it was “in operation and in good standing” with its local jurisdiction by Jan. 1, 2016 will receive priority licensing by the state. A facility or entity that is operating in compliance with local zoning ordinances and other state and local requirements on or before Jan. 1, 2018, may continue its operations until its application for a license is approved or denied. (To have a shot at priority licensing, business owners should complete a criminal background check on all employees, make sure their businesses are compliant with all local laws, and have their taxes squared away with the Board of Equalization, including all local, state and federal taxes.)

 

New Laws of the Land

Although all of the new rules and regulations are too lengthy to list, the highlights are as follows:

– Track and Trace: The Department of Food and Agriculture will implement a unique identification program for all marijuana plants at a cultivation site, requiring a tamper-proof tag be attached at the base of each plant. This allows the state to track the cannabis product from the cultivation site to the transaction with the consumer. Cultivators who fail to abide by the traceability program face civil and criminal penalties and fines for each violation.

– Testing: All cannabis shall be tested prior to delivery to dispensaries or other businesses. The Department of Public Health will specify how such testing must be conducted. Testing should be in accordance with methods established by the International Organization for Standardization, in addition to any regulations enacted by the Department of Public Health. The cost of testing shall be paid by cultivators. Testing licensees may not hold any other type of license.

– Cultivation: Growers must abide by a series of size limitations, the maximum of which are 22,000 square feet indoors or one acre (43,560 square feet) outdoors. The number of cultivators who will receive a license to grow the maximum amount will be limited by the Department of Food and Agriculture. Cities and counties must have a cultivation ordinance in place by March 1, 2016 or state law will be imposed as the sole authority for regulation. (Cultivators, keep this date in mind!)

– Home grow: The new cultivation regulations do not apply to qualifying patients engaged in personal cultivation if the grow area does not exceed 100 square feet and if the qualifying patient does not sell, distribute, donate or otherwise provide marijuana to any other person or entity.

Designated primary caregivers are also exempt from the new regulations provided they meet three criteria: the cultivation area does not exceed 500 square feet; marijuana is grown exclusively for personal medical use for no more than five specified, qualified patients; and the grower does not receive remuneration for these activities.

– Growing standards: The Department of Food and Agriculture and the Department of Pesticide Regulation will establish pesticide standards, and work with other state agencies to regulate water use. The Department of Food and Agriculture will make organic certification available by Jan. 1, 2020.

– Manufacturing: All manufacturers of cannabis products are to be licensed by the Department of Public Health. The number of licenses will be limited for manufacturers that use volatile solvents to produce concentrates. All products shall be labeled in tamper-evident packages with specific warning statements and information.

– Distribution: All cultivators and manufacturers are required to send their products to a distributor for inspection before they are passed to the next stage of manufacturing or for retail. The distributor transports a sample of the product to a licensed laboratory for batch testing and certification. The sample then returns to the distributor for final inspection and execution of the contract between the different entities along the supply chain, from cultivator to manufacturer to dispensary. The distributor has the duty to charge a fee that covers the cost of testing and any applicable taxes. Distributors cannot hold any other license.

– Delivery: Delivery services may continue under the new laws. However, delivery services are only allowed by licensed dispensaries in cities and counties where delivery is not prohibited by local ordinance. All deliveries must be documented. Products can only be delivered to qualified patients. Municipalities cannot ban delivered products from being transported through their territories.

– Collectives and cooperatives: All patient collectives and cooperatives, as previously afforded legal protection in 2003, will sunset one year after the BMMR posts a notice on its website that the issuance of licenses has commenced. Thereafter, all collectives must obtain a dispensary or cultivation license except for individual patient and caregiver gardens serving no more than five patients.

– For-profit entities: The MMRSA allows marijuana businesses to be organized as for-profit entities, such as an LLC, LLP or a corporation. This is a major change from previous legislation that required business entities to operate as nonprofits. This is good news for existing marijuana businesses that have had to be creative to comply with the strict rules to maintain non-profit status as a 501(c)3 or 501(c)4.

– Physicians: The MMRSA clarifies the duties of physicians who recommend medical marijuana. The board shall have the power to investigate any physician who over-recommends medical marijuana to patients, including “repeated acts of clearly excessive recommending of cannabis for medical purposes, or repeated acts of recommending without a good faith prior exam.” The MMRSA also reiterates that it is unlawful for physicians who recommend medical marijuana to accept, solicit or offer remuneration to or from a licensed facility in which they or a family member have a financial interest.

 

Prepare now

What do the new laws mean for medical marijuana in California? By the looks of it, the implementation of the MMRSA might be a bummer for the cannabis business. For this reason it is imperative that businesses immediately take steps to come into compliance to ensure uninterrupted operation during this transitional time for medical marijuana in California. In other words, you should check to see if you are compliant with all local laws and zoning, select your new for-profit entity type, implement a meticulous record-keeping system and register with the Board of Equalization — just to name a few tasks to get your business ready for a more tightly regulated business landscape.

 

California Cannabis Law Group is a boutique law firm comprised of attorneys who have represented government entities in all matters related to cannabis enforcement in California for over 10 years. Katie Podein is an attorney with the firm who assists clients in building successful businesses in California’s rapidly-evolving cannabis industry. The California Cannabis Law Group can be contacted at info@califcannlaw.com.

 

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