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Are All “Cannabis Appellations” Malarkey?

To differentiate superior product, command higher prices, and create regional unity, California launched a Marijuana “appellation of origin” program validating sun-grown Cannabis’ geographical origin and production methods with a protective designation.

While aspiring to mirror its wine industry counterparts’ success and empower small growers to compete in an increasingly challenging marketplace, it is unclear whether a critical mass of consumers is willing to pay a premium price for appellation-containing-Cannabis or what impact federal Marijuana legalization will have on state-based Cannabis certification.

1. Cannabis Industry Supply Chain and Regulation

Whether deemed “medical” (purchasable only with state-issued card to treat residents’ statutorily defined “covered medical condition”) or “adult-use” (purchasable by anyone over 21 from any state with a valid identification), Cannabis takes four (4) forms: “flower” that is smoked; “oils” ingested by vaporizing; “concentrates” consumable after being heated to a high temperature; and “infused” products ranging from eye drops to “edibles”.  Those cultivating, processing, infusing, transporting or dispensing Cannabis are deemed to be “plant-touching” Marijuana related businesses (“MRBs”) and, despite being legal in 38 American states, Cannabis remains federally illegal.

The Controlled Substance Act, 21 U.S.C. §§ 801, Et. Seq(1970) (“CSA”) currently lists Marijuana next to heroin as a Schedule I controlled substance having “a high potential for abuse” and for which there’s “no currently accepted medical use in treatment” and “a lack of accepted safety for use” “under medical supervision”.  21 U.S.C. §812(b)(1).  The CSA prohibits Marijuana’s cultivation, distribution, dispensation and possession and, pursuant to the U.S. Constitution’s Supremacy Clause, state laws conflicting with federal law are generally preempted and void.  U.S. Const., Art. VI, cl. 2; Wickard v. Filburn, 317 U.S. 111, 124 (1942)(”[N]o form of state activity can constitutionally thwart the regulatory power granted by the commerce clause to Congress”).

As a result of this federal illegality, plant-touching MRBs are denied federal privileges like trademark protection.  In re Brown, 119 USPQ2d 1350, 1351 (TTAB 2016). Further, because the CSA prevents Cannabis from being sold outside of each respective legalized-Marijuana state and, thus, no “interstate Cannabis commerce” can occur, state regulators like California’s Department of Cannabis Control, and not federal agencies like the Food and Drug Administration, issue licenses and regulate MRBs.

2.  Marijuana Cultivation, Terroir, and The Emerald Triangle

Cannabis can be cultivated in the ground, water (i.e.,hydroponically), or pots outdoors, indoors, or in a “greenhouse”, a structure made of transparent material enabling natural sunlight and fresh air cultivation and reducing precarious elements (e.g., rain and wind, wildlife and pests, bacteria, and diseases).

While hydroponic and planter-based indoor and greenhouse grows offer greater control, consistency and multiple yearly harvests, outdoor soil-based annual grows confer the magic of “Terroir”; the combination of environmental factors (e.g., soil and compost composition, humidity and pH balance, altitude, precipitation, humidity, temperature and sunlight) imbuing Cannabis with a distinctive and superior character.

Yielding the nation’s most distinctive and highest quality Marijuana (and domestic Cannabis cultivation’s historic epicenter), Northern California’s Emerald Triangle is comprised of Mendocino, Humboldt and Trinity counties.  Often “legacy growers” (i.e.,those growing and distributing Marijuana prior to its legality), Emerald Triangle cultivators are unable to afford legalized Cannabis’ steep licensing fees and taxes or compete with deep-pocketed, publicly-traded Marijuana growers.

Although multiple factors impact a Cannabis plant’s quality and how it expresses the Tetrahydrocannabinol and other Cannabinoids (including farming techniques like biodynamic and organic practices), an appellations system would bestow a distinctive value-marker on sun-grown Emerald Triangle Cannabis, facilitate production of high-quality Marijuana, and create an international brand while salvaging these legacy cultivators.

3. California’s Cannabis Appellations Program

Originating in France in the 1930s, an “appelation d’origine controlee” is a certifying body’s label indicating that an agricultural product originates from a specific region and was produced in a certain manner enabling the item to fetch a higher price.  Dating back to the 16th century, the concept arose from French statutes dictating which cheeses could be labeled “Roquefort” (which must be aged in Roquefort-sur-Soulzon’s natural Combalou caves in southern France) and extends to wines (e.g., sparkling wine can only be called “Champagne” if emanating from France’s Champagne region) and meats (Prosciutto di Parma must be made from pigs raised in Italy’s city of Parma).  Beyond encouraging food producers to retain traditional farming and production methods, appellations promote specific geographic areas and benefit the region’s economy.

Comprising the world’s first Marijuana appellation scheme, California’s “Cannabis Appellations Program” (“CAP”) implements a terroir-based system limiting its certification to sun grown, inground cultivation. Specifically, the Medicinal and Adult Use Cannabis Regulation and Safety Act, California Business and Professions Code, §§ 26000, et seq.(2017) tasked California’s Department of Food and Agriculture (“CDFA”) with developing “a process by which licensed cultivators may establish appellations “for Cannabis” grown in a certain geographic area in California” in compliance with required standards, practices and varietals. California Business and Professions Code, §26063.  As supplemented by 2020’s Senate Bill 67 (limiting CAP participation to outdoor full sun cultivation) and 2021’s Assembly Bill 141 (transferring Cannabis-cultivation-regulation-creating-authority from CDFA to California’s Department of Cannabis Control), CAP allows regional groups of Cannabis cultivators satisfying specific requirements to apply for a regional appellation identifying their products’ origin and source enabling recipients to establish regional credentials, maintain uniform quality standards, command a higher price, and obtain the ”product differentiation designation” that “Cannabis federal trademark bar” stripped away.

California’s CAP is more rigorous than its wine industry counterpart, the American Viticultural Areas (“AVA”), which designates grape-growing regions distinguishable by geographic or climatic features within Alcohol and Tobacco Tax and Trade Bureau (“TTB”) defined boundaries.  27 CFR part 9.  AVA petitioners must demonstrate that proposed AVA is: locally or nationally known; contains distinguishing features (ex., climate, geology, soils, elevation and physical components); and “affect viticulture” and are viticulturally distinguishable from “features associated with adjacent areas outside the proposed AVA boundary.” 27 CFR §9.12.  Following receipt of the TTB’s AVA approval, vintners may use it on a label if “[n]ot less than 85% of the volume of the wine is derived from grapes grown in the labeled viticultural area” 27 CFR §4.25(e).  AVAs neither limit the types of grapes grown, grape growing methods, or vinification processes or standards, nor require that AVA designations be linked to specific legacy wines.

Conversely, California’s CAP factors both the product’s geographic location and interaction with, and expression of, that specific location’s the unique terroir.  3 Cal. Code of Regs. §9102(j).  CAP petitions must be submitted by a group of 3 or more licensed cultivators located within the proposed Cannabis appellation region:

  • describing the proposed geographic area;
  • demonstrating use of proposed Cannabis appellation’s name in that area;
  • describing proposed Marijuana appellation’s geographic boundaries and region’s unique geographic features affecting area’s Cannabis production;
  • identifying specific standard, practice and cultivar requirements associated with Marijuanacultivation in proposed Cannabis appellation; and
  • describing Marijuana cultivation’s legacy, history and economic importance                                           within the Cannabis appellation.

3 Cal. Code of Regs. §9102.

Further, CAP petitions require consensus among established cultivators within the proposed appellation’s boundaries regarding traditional cultivation practices and standards which must include measurable, scorable or certified requirements applicable to the Cannabisor cultivation and allowable or prohibited cultivation methods.  3 Cal. Code of Regs. §§9000(d)&(e) and §9107.

CAP petition fees include: (1) $2,850 for proposing new Cannabis appellation; (2) $14,250 to activate Marijuana appellation proposed by an approved petition; (3) $1,425 to amend existing Cannabis appellation; and (4) $7,125 to activate an approved amended Marijuana appellation. CAP petitions are reviewed by “experts panel” (both from within CDFA’s Office of Environmental Farming and Innovation and “civilians” selected via a request for proposal process) and open to public comment.

4. Are Cannabis Appellations Pointless?

While intended to assist small Cannabis farmers compete in an increasingly challenging market and generate higher-end products pursuant to uniform standards, it is unclear whether a critical mass of consumers care about appellations or are willing to pay a premium price for them.

First, certifying products’ origin and production requirements allows Cannabis produced in well-known regions to distinguish itself from the competition, command a higher price, and create a “product differentiation designation” that the “federal trademark bar” removed.  Beyond creating an incentive for a region’s growers work together in promoting their crops, establishing regional credentials, and maintaining a minimum quality standard, CAP provides consumers with higher quality and consistent products.

Second, despite arming small growers to battle larger, better-funded MRBs, the CAP program may amount to little more than legacy cultivators’ “stay of execution”.  Like any other commodity, Cannabis benefits from “economies of scales” and innovation and MRBs capable of surviving down periods, subsidizing technology and affording top-flight professionals will ultimately prevail in the “long game”.

Third, no objective support establishes either that an appreciable number of consumers care about appellations or are willing to pay a premium price for them. Just as Budweiser remains America’s top selling beer, the bulk of Cannabis consumers will favor cheap and plentiful strains. Because outdoor grows yield only an annual harvest subject to Mother Nature’s vagaries, and because satisfying elevated cultivation standards imposes an increased per-gram cost, it’s unclear whether either a material amount of dispensaries will stock the CAP products or consumers will deem “the juice worth the squeeze”.

Further, just as single malt scotch’s splendor gets diluted in mixed drinks, CAP certified Marijuana pertains primarily to “flower” and may have little to no impact in manufactured Cannabis products like vape, edibles or concentrates (which are increasingly displacing Marijuana flowers’ market share).

Fourth, because it remains on Schedule 1 of the CSA, interstate Cannabis commerce is federally illegal confining California’s appellations on product labels and packaging to California sales.  Although appellation proponents suggest that, tracking California’s wine industry and AVA program, the CAP program will fuel “Cannabis tourism” and farm-to-table Marijuana establishments, no empirical data presently supports this position.

Fifth, it is unclear what impact federal Marijuana legalization will have.  Just as interstate-Cannabis-commerce may cause a “CAP certified Marijuana sales explosion” outside of California, federal legalization may equally fuel and consolidate already powerful MRBs, launch competing states’ appellation programs, and provide the FDA with jurisdiction over Cannabis (and, potentially, derail any state appellation system).

Reprinted with permission from the August 25, 2022 edition of the Legal Intelligencer © 2022 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or [email protected].

 

Steven Schain

Steven Schain

Winner of National Law Journal’s “2019 Finance, Banking, & Capital Markets Trailblazer” award, Steve Schain is Counsel to national Cannabis, Hemp and Hallucinogens law firm Smart-Counsel, LLC, is admitted to practice in PA and New Jersey and represents entities, governments and individuals in litigation, regulation and compliance, license applications, and entity formation.  Reach Steve at [email protected]

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