In January 2020, Governor Newsom announced that he intended to consolidate the Bureau of Cannabis Control (BCC), the California Department of Food and Agriculture’s CalCannabis Program (CDFA), and the Manufactured Cannabis Safety Division (CDPH) of the California Department of Health Single cannabis agency: the Department of Cannabis Control (DCC) (as summarized in the governor’s budget summary for 2021). Consolidation should be completed by July 2020 to enforce cannabis regulations and oversee licensees in California. These efforts have been stalled by the emergence and ongoing impact of COVID-19.
The budget breakdown for 2021 generally covers what the trailer bill will do in terms of California cannabis and will be rotated into the DCC for the proposed consolidation for July this year. Unsurprisingly, all of the regulations currently in force under the Law on the Regulation and Safety of Cannabis for Medical and Adult Use will be automatically enacted by the DCC when they are created, if and until they are repealed, replaced, amended, etc. It is no secret that some of the current MAUCRSA regulations need serious revision to ensure that licensees are successful and that the regulations are indeed clear. So if the DCC comes to life while no one really knows what’s around the corner (although we recently wrote about how at least cannabis contracts will be affected by the consolidation), here are some of the regulatory corrections (rather than the legal ones) that we perform think we might see:
- Transfer of licenses. California does not currently allow state license transfers. Instead, the BCC, CDPH and CDFA are forcing cannabis licensees to make business purchases if a cannabis license is to change hands at all. These company acquisitions are tortured by regulatory ambiguities about the concept and definitions of “owners” and “financial interest holders” as well as original owners who must remain with the company to maintain “business continuity”. And every time you interact with one of these agencies, you get a different answer from each and every analyst about what will and will not be allowed in the final acquisition document. If the DCC is wise, it will take a page off the Oregon and Washington books and repeal the current change of ownership regulations, and it will allow direct license transfers. The ability for third parties to only purchase state licenses would reduce the burden on cannabis companies and regulators alike, and stop the arbitrary back and forth of regulations and the often poor buyer and seller behavior when changing ownership.
- Better enforcement and consistency of interpretation. Fortunately, we need to see consistent enforcement priorities and interpretations from a single agency. What annoys licensees is that all three agencies currently appear to be approaching seemingly identical rules in a variety of ways to ensure enforcement and interpretation. Perhaps more than an outright regulatory solution, the focus on this “could see” is that a regulator will definitely limit the number of wild legal and regulatory actions we’ve seen. Of course, different DCC analysts can also give different interpretations of different DCC regulations, but at least we know that between farmers, manufacturers, traders, laboratories and retailers, the legal and official license definitions are the same in all areas.
- IP licensing clarity. With the final adoption of the current rules, the BCC has really tarnished the waters to some extent in terms of party disclosure regarding intellectual property licensing agreements (previously the agency caused an industry freak on the subject). To sum it up, we have a single “fact sheet” in which the BCC states: “Licensees can enter into intellectual property licensing agreements with unlicensed companies. However, the intellectual property owner cannot exercise control over the licensee’s commercial cannabis activities. If the intellectual property owner exercises control over the licensee’s commercial cannabis operation, the intellectual property owner must be identified as the owner of the license. “The fun part is that“ control ”is undefined, so there’s a myriad of confusion as to whether or not“ owner ”disclosure is required when California IP licensing agreements come into play. And of course, the IP licensor exercises some control over the licensee’s cannabis operations, where the IP licensing agreement dictates what the licensee can and cannot do with the licensed intellectual property. As a result, once and for all, the DCC should really clean up the problem once it comes to power, where California cannabis branding is big business and getting more serious.
- Borderless delivery solution. Another California cannabis debacle is the limitless delivery rule adopted by the BCC as part of the final rules. It was a heavily prosecuted lawsuit as the 2020 BCC defended its Limitless Service Ordinance in the Fresno District Supreme Court. Look here. The bottom line of the struggle was that while the BCC maintains a rule that allows retailers to deliver cannabis to any city or county in California, cities and counties are still free to ban delivery (which it already did because California had a so strong local population has control limits for cannabis). While the BCC will not bring retailers to their knees for deliveries in jurisdictions that prohibit it, these retailers can still find themselves in great trouble in these cities and counties. I wouldn’t be shocked if the DCC tried to reconsider this issue by ruling that retailers would certainly benefit from being able to ship anywhere without legal ramifications.
- Billboards. I was recently interviewed on KCRW about the duel billboard bills in Sacramento. In 2020, a judge in San Luis Obispo County ruled Prop. 64 bans cannabis billboard advertising on California’s highways (here is the BCC’s mandatory notice to licensees of the outcome of the case). Now, AB 273 (which failed in session recently but could be reconsidered) would ban all cannabis billboards, and AB 1302 would allow them with certain restrictions on freeways and California borders. Regardless of the implications, the DCC is likely to respond with regulations in the future, which will affect the marketing decisions of hundreds of licensees.
- Restrictions on Type 3 Cultivation Licenses and Beyond. The CDFA exercised its authority to limit cultivators to one type 3 license per facility. To get around this, large cultivators simply stack infinitely smaller license types in multiple rooms to literally group several acres of canopy together. As a result, there is a chance that DCC could just override the current Type 3 restriction and be in line with reality. In addition, Type 5s will be available in 2023 and we have no regulation for these license types so the DCC may just fall into the Type 5 restrictions when it comes to power supply.
Definitely be up to date when this massive consolidation comes into play.