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Reading the Fine Print in California’s Cannabis Codes: Could the Industry There Come to a Screeching Halt?

The “free” ride is over.

For nearly twenty years, California’s cannabis industry labored in the grey market. 1996’s Proposition 215 offered patients their first real protections, by codifying a doctor’s right to recommend the therapeutic use of cannabis. In 2004, the Compassionate Use Act clarified certain patient’s rights, including the ability to cultivate collectively (en masse) without the threat of felony criminal prosecution “on that basis alone.” (Enterprising sheriff’s departments and DEA agents frequently found other bases.) But, the so-called collective model restricted operations’ to the medical needs of the patient members, and required the operations be conducted on a not-for-profit basis.

When Medical Marijuana Regulation and Safety Act (MMRSA, previously known as then Medical Cannabis Regulation and Safety Act – or MCRSA) was first released, amid the hundreds of changes, many professionals took note of the following language contained in the amended Health and Safety Code Section 11362.775:

This section shall remain in effect only until one year after the Bureau… posts a notice on its Internet website that the licensing authorities have commenced issuing licenses….

Recall that, at the time, existing section 11362.775 provided a defense to criminal prosecution for cannabis collectives, who operated on a not-for-profit basis. MMRSA’s contemplated repeal meant two things for the industry:

1) collectives could continue to operate without permitting/licensure for a year after licensure began, with limited disruption to supply chains, as operators attempted to navigate the local and state license process;

2) and, upon being granted a state license, a collective could operate on a for-profit basis.

This first impact engendered significant attention. Early reports on the bureau’s readiness indicated that applications would not be accepted prior to January 1, 2018, with licenses issued probably several months after. The industry generally expected this “grace period” would afford them the opportunity to operate simply as a collective (with no permitting or licensure) until the middle of 2019. As an attorney, the most conservative counsel with clients included a discussion of immediately seeking opportunities for licensure (local permitting being a pre-requisite to obtaining state licensure). However, given the one-year “grace period,” there was no apparent urgency.

Business & Professions Code §19321(c) also previously afforded a more formal grace period, indicating that as long as an application was submitted by the deadline set by the licensing authority, cannabis facilities could continue operating under the pre-2018 (collective) status quo until their application was approved or denied, as long as they operated in compliance with local regulations. Combine this with Business & Professions Code §26070 (“For a limited time… licensees may sell untested cannabis…”) and the industry was left with the general impression that a lengthy grace period/grandfathering program awaited them.

Medicinal and Adult Use Cannabis Regulation and Safety Act (MAUCRSA), however, had other ideas. §19321 was repealed, and new code section 26052(b) penalizes anyone who “violates the provisions of this [Licensing] chapter, or [who] assists… in that violation…” Unlike other sections, this provision doesn’t apply only to ‘licensees,’ so, anyone who engages in commercial cannabis sales without a license, or does business with an operator lacking licensure, risks violating Chapter 5 (by assisting that other operator), and thus exposes themselves to liability for civil fines and penalties.

And, on September 22, the bureau released their new temporary license program as explained in CBE – in which anyone currently possessing a local permit may, in the very near future, apply for a temporary, 120-day, license with the state. The temporary licenses will be issued starting January 1, 2018, with applications being accepted in advance of that date. While seemingly simple to obtain, it begs the question: if an operator obtains a temporary license, do they violate §26052(b) if they continue to do business with a vendor or partner who hasn’t yet obtained their local permit, and can’t participate in the temporary program? Will the industry come to a screeching halt?

A complete shutdown of California’s billion-dollar cannabis industry isn’t likely. But, regulators have yet to directly address this combination of code sections. Operators participating in the temporary license program would be well served to survey their vendor and partner companies to find other participants.

Erin Carlstron and Valerie PerdueErin Carlstron and Valerie Perdue

Erin Carlstron and Valerie Perdue

Erin Carlstrom is senior counsel with the law firm Dickenson Peatman and Fogarty (DP&F), and leads the firm’s cannabis group. Carlstrom’s practice includes state and local compliance, corporate formation and compliance, land use, and government relations. She has specific expertise in land use entitlements and navigating the various regulatory agencies, and has been responsible for major project developments across California. Carlstrom represents cannabis producers, farmers, manufacturers, labs, distributors and dispensaries, as well as investment groups interacting with all sectors, in matters ranging from collective formation and transition, operations management, land use and state and local compliance. She has spoken at a variety of conferences on topics ranging from impacts from local ordinances, to the interplay between cannabis and other agricultural industries, and coalition building for effective government relations. Carlstrom served on the Santa Rosa City Council, including a term as vice mayor, and twice chaired the cannabis subcommittee. Erin’s work helped position Santa Rosa as one of the state’s most progressive cannabis communities, forming predictable and business-friendly paths to operation………….Valerie Perdue joined DP&F in 2017 as an associate in the Labor and Employment group. Her practice covers a wide variety of labor and employment matters including discrimination, harassment, retaliation, and wage and hour law. She is experienced in litigation and has handled matters before administrative agencies including the EEOC, DFEH, Division of Labor Standards Enforcement, and the California Unemployment Insurance Appeals Board.

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