Governor Newsom Calls In the National Guard

Posted by Raza Lawrence on February 19, 2019

Are we about to see more enforcement against unlicensed cannabis?

California Governor Gavin Newsom recently announced he is calling for the California National Guard to work with federal officials to target the California illicit market.  Given the history of the war on drugs and the current federal laws imposing harsh criminal and civil sanctions for cannabis, the involvement of the National Guard and the federal government in a new crackdown is concerning.  Governor Newsom’s announcement of this increased enforcement, however, comes amid growing frustration with perceived dysfunction in the state regulatory system and a persistent illicit market that crowds out regulated cannabis.

California has a thriving illicit market in cannabis, estimated by New Frontier Data to be valued at $3.7 billion last year.  This is due to many factors, including California’s unregulated cannabis collectives and cooperatives that operated for years before licensing came, the slow speed at which state and local governments in California have issued licenses, the high taxes and burdensome regulations of the new licensing system, and the demand for California cannabis products throughout the country.

In a sense, the entire cannabis market is an illicit market, as cannabis remains illegal under federal law, which makes any inconsistent California state law allowing cannabis invalid under the Supremacy Clause of the US Constitution. This federal illegality has caused most banks to refuse to do business with cannabis-linked companies, resulting in a largely cash business that is more difficult to track and regulate than it would be if banks were involved.  Federal illegality also makes it so the entire interstate market is illegal and unregulated, though lucrative. 

The California Bureau of Cannabis Control, tasked with regulating cannabis retail sales, has issued a few enforcement actions against some unlicensed dispensaries, but the efforts have been largely symbolic, against only a tiny fraction of the unlicensed operators.  Los Angeles and other cities have also filed misdemeanor cases against unlicensed operators for violations of local licensing laws, but unlicensed dispensaries seem to pop back up faster than they are shut down.

 In order for California’s regulatory project to succeed going forward, the state will need to convince more operators to move to the regulated market, through some combination of greater enforcement and lower taxes and regulatory burdens. 

The large illicit market and slow roll-out of the licensing process have shaken the confidence of many people who are attempting to comply with California laws.  Hopefully, state and local regulators will take advice from frustrated operators, learn from their mis-steps and continue to develop a functioning system.  The state and local governments are trying to find the right regulatory balance.  Over-regulation makes it so difficult and burdensome to comply that only rich people and companies with lots of resources can operate, and an expensive final product that leads many consumers to buy from the illicit market.

For now, many license holders are playing the long game, hoping the illicit market will shrink over time, and more consumers throughout the state (and eventually the country and world) join the regulated cannabis market.  Governor Newsom says that he expects it may take at least five years to develop its complex regulatory system.  If the state gets it right, this can be an industry that drives the state economy, creating more resources and jobs for everyone.

One approach that could be successful would be to offer a more simplified and inexpensive process to get new cannabis businesses up and running.  More burdensome regulations and higher taxes could kick in only after businesses have gotten through the startup phase and adapted to the regulations.  There could be a tiered or graduated system of compliance, taxes, and enforcement that is welcoming to new operators.  Startup costs for new businesses are already very expensive, and high licensing expenses and a burdensome application process can dissuade many people from pursuing licenses who might otherwise want to follow the law.  Lowering the tax rates in the beginning, while businesses get off the ground, could also encourage new entrants to the regulated market.  Once businesses become established and there is a healthy regulated market, taxes could be increased to desired levels.  The government has many tools available to help establish a functioning market.  We are optimistic that the future is bright for the cannabis economy in California.

LA Cannabis Update: New Recommendations from the Los Angeles Department of Cannabis Regulation

Posted by Raza Lawrence on February 15, 2019

Cannabis attorney Raza Lawrence attended today’s special meeting of the Los Angeles Rules, Elections, and Intergovernmental Relations Committee. At the meeting, the discussion focused on three main points:

  • The City of LA is considering and discussing different possible ways to process Phase 3 applications, including a first-come first-served method, a lottery, a “merit-based” system, or some combination of these three methods.

  • It’s possible that the city will lower the percentage of a Tier 1 or Tier 2 social equity business that is required to be owned by the individual who satisfies the social equity criteria.

  • The DCR’s lack of funding, and the need for more funds in order to move forward and process all the applications from Phases 1, 2, and 3.

The current situation with regard to cannabis retail is tense – the city has considered cracking down on non-compliant businesses by shutting off their water and power, among other methods.

To help streamline the city's regulations and ameliorate the pressure that cannabis businesses currently face, the DCR released a report including a set of recommended amendments to the city’s cannabis procedures. The recommendations, as filed with the city, are as follows:

1. REQUEST the City Attorney, with the assistance of the Department of Cannabis Regulation (DCR), to prepare and present an ordinance to amend Section 104 of Article 4 of Chapter X of the Los Angeles Municipal Code and the Rules and Regulations as necessary to:

a. Modify the definition of “owner” in conformance with state regulations, including clarifying that the meaning of “owner” does not apply to the managers, officers, directors, and equity-holders of the management company.

b. Allow DCR to grant Temporary Approval to a Phase 3 storefront retail license applicant after DCR recommends that the Commission issue the applicant a license.

c. Amend “Program Site Specific Conditions” from the Social Equity Applicant to allow for site specific conditions only as required by CEQA, public health and safety, or as necessary under a DCR, State of California, or City enforcement action in conformance with other sections of the rules and regulations.

d. Eliminate a Tier 2 applicant’s obligation to provide business, licensing, and compliance support to a Tier 1 applicant.

e. Require Tier 3 applicants with Temporary Approval to enter into a Social Equity Agreement within 60 days of the enactment of this ordinance or from the time of application, whichever is later.

f. Allow DCR to issue non-storefront retail licenses in the manner provided in LAMC Sec. 104.06(b) and exempt non-storefront retail license applicants from the community meeting requirement in LAMC Sec. 104.04.

g. Clarify that DCR may require an applicant to submit additional information documents after DCR deems an application complete as necessary to make a licensing decision.

h. Remove the requirement in Regulation No. 10 D. 4. that a retailer store all cannabis goods in a vault or safe during non-retail hours.

i. Revise Regulation No. 7 to provide that DCR shall process applications for licenses in a manner consistent with LAMC Section 104 and these Rules and Regulations.

j. Conform the City’s delivery regulations with state regulations with respect to operational requirements.

K. Allow DCR to enter into Social Equity Agreements with a Tier 3 applicant without Commission approval.

l. Clarify LAMC Section 104.20(i)(9) to state that after the term of a Social Equity Agreement is completed, a Tier 1 or Tier 2 Social Equity Applicant license holder may only transfer control or ownership of a License after first providing the other ownership interests in the business the right of first refusal to buy, at market-rate.

m. Clarify the definition of limited access areas to only include those areas required under the rules and regulations of the State of California.

n. Clarify that any applicant or landowner with evidence against them with respect to illegal cannabis activity at any time since January 1, 2018 will be banned from participation in Phase 3 retail and delivery processing.

2. INSTRUCT the DCR to report back at the next Rules, Elections, and Intergovernmental Relations Committee meeting with a further analysis of the recommendations for Phase 3 Storefront Retail processing and Non-storefront Retail processing, including consideration of a social equity applicant registry platform similar to the City of San Francisco.

3. INSTRUCT the DCR to suspend any Phase 3 processing until the enhanced Social Equity analysis for the San Fernando Valley, Boyle Heights, and Downtown Los Angeles is completed.

4. INSTRUCT the DCR to provide an updated map online within two weeks oft he Council action with respect to the current locations of all Phase 1 and Phase 2 applicants that have received local authorization, temporary approval, or any form of local and state licensure. This shall also include an online document with respect to undue concentration areas by community planning areas, and the capacity left for Phase 3 applicants.

5. INSTRUCT the Department of City Planning (DCP) to include amending the pending draft ordinances pertaining to cannabis in conformance with state regulations with respect to alleyway access, ingress, egress, and door location.

6. INSTRUCT the DCP to include amendments to the pending draft ordinances pertaining to cannabis in a similar manner to the City of Seattle, Washington in which two retail establishments may co-locate within 1,000 feet of each other, and the next retail establishment must be 1,000 feet away from both retail establishments.

7. INSTRUCT the City Clerk to hold Council File No. 14-0366-S5 open and active, including the DCR report on file, for further deliberations by the Rules, Elections, and Intergovernmental Relations Committee.

California Hemp & CBD Update

Posted by Margolin & Lawrence on February 4, 2019

This article is a companion post to our prior update on CBD’s federal legal status.

California Continues to Restrict CBD

The California Department of Public Health has made it clear that CBD is not allowed in food products within California: the Department of Public Health issued a memo in July 2018 confirming that CBD products are not allowed in any food products in the state (unless the products are regulated as commercial cannabis edibles, which by definition contain THC levels of at least 0.3%). Thus, under state law, CBD products are allowed to be sold and ingested as long as they include THC, and are banned in food if they come from industrial hemp with little or no THC. The reason CBD products with no THC are banned by state law is that California incorporates federal law regarding food additives, dietary use products, food labeling, and good manufacturing practices for food.  

The Department of Public Health has cited the Sherman Law as the authority allowing it to restrict the production and sale of CBD products. The Sherman Law regulates food, drugs, and cosmetics in California.  “Drug” is defined in section 109925 of the state law as follows:

“Drug” means any of the following:
(a) Any article recognized in an official compendium.
(b) Any article used or intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease in human beings or any other animal.
(c) Any article other than food, that is used or intended to affect the structure or any function of the body of human beings or any other animal.
(d) Any article used or intended for use as a component of any article designated in subdivision (a), (b), or (c) of this section.

Further, “Food” is defined under section 109935 of the state law as “[a]ny article used or intended for use for food, drink, confection, condiment, or chewing gum by man or other animal.”  This definition of food includes pet food, but does not include products containing cannabis with at least 0.3% THC (which are, as described above, cannabis edibles). California law incorporates the federal laws prohibiting the addition of CBD or THC to food products.

CDPH: Topicals and Vape Pens Are Illegal, Even if Not Marketed with Health Claims

The California Department of Public Health’s position on CBD in food is set forth in a clear written policy – it is not allowed.  Some have asked, however, whether CBD might be lawfully produced and sold in California in non-food products – such as vape pens or other smokable products or creams or other topical treatments.  While there may be legitimate arguments that this is at least a gray area in the law, representatives of the Department of Public Health are currently informing members of the public that CBD-based vape pens and topicals are prohibited under state law (specifically the Sherman law).  

The CDPH’s position is that any vape pens or topicals containing CBD, but no THC, are considered illegal by the State of CA – even though the products are not foods or dietary supplements, and even if they are not marketed with any health claims, they are still considered “unapproved drugs” because they contain the same active ingredient (CBD) as is found in an FDA-approved drug.  

While CDPH representatives maintain that CBD-based topicals and vape pens are all unlawful under state law, there is no clear written policy or statement from California authorities on the issue of CBD in non-food products, and this area of law seems to be in a state of flux.

Non-Food CBD and Hemp in California

For the moment, non-food CBD and hemp products, such as creams, topicals, and cosmetics, seem to be in a legal gray area. The CDFA recommends that manufacturers and sellers check with their local health agencies about any products they plan to make or sell – since enforcement currently seems to be taking place almost entirely at the local level, this is probably the best way to find out whether a particular product is allowed.

According to the CDFA, California law does not currently provide any requirements or issue any licenses for the manufacturing, processing, or selling of non-food industrial hemp or hemp products. Neither the CDPH nor federal agencies have released any guidelines or restrictions describing the allowable uses of non-food hemp or hemp-derived CBD products.

Local environmental health agencies are responsible for enforcing the state guidelines, but, according to the LA Times, local enforcement of restrictions on CBD and hemp products can vary significantly. Likewise, although the FDA has cracked down on CBD businesses that make unsubstantiated or false claims about their products, indicating that they plan to regulate CBD products to some degree, they’re less clear about the future legal status of hemp-derived CBD and non-edible hemp derivatives in general.

Penalties

In California, adulterated or misbranded food, drugs, and cosmetics are penalized under CDPH’s Food, Drug, and Cosmetic Law. All products are considered to be misbranded if they misstate their ingredients or make unproven medical claims, while food products are considered to be adulterated if they contain CBD.

Violations are punishable by imprisonment for not more than one year in the county jail or a fine of not more than one thousand dollars ($1,000), or both the imprisonment and fine. If the violation is committed after a previous conviction under the same code that has become final, or if the violation is committed with intent to defraud or mislead, or if the violation was intentional / intended to cause injury, the person who committed the violation will be subject to imprisonment for not more than one year in the county jail, imprisonment in the state prison, or a fine of not more than ten thousand dollars ($10,000), or both the imprisonment and fine.

The FDA also has the right to enforce federal food, drug, and cosmetic laws, where the fines range from up to $100,000 (for a misdemeanor by an individual that does not result in death) to up to $200,000 (for a misdemeanor by a corporation that does not result in death). The maximum imprisonment for a misdemeanor remains a year for each offense.

Local health authorities may also enforce their own restrictions on hemp and CBD. For instance, food operators in LA County found to be selling products adulterated with hemp will be cited with a violation on their health inspection reports.

Los Angeles Continues to Issue and Promote Tax Registration Certificates to Sell CBD Products

The City of Los Angeles offers a form on the website of the Department of Cannabis Regulation that is to be used for businesses seeking a Business Tax Registration Certificate (BTRC) to engage in commercial activities related to industrial hemp and/or cannabidiol (CBD) derived from industrial hemp in the City of Los Angeles (City). The Department of Cannabis Regulation (DCR) does not regulate the sale of CBD oil, CBD products or hemp products if they are derived from industrial hemp, as defined in Section 11018.5 of the Cal. Health and Safety Code. No cannabis-specific City license is required to sell those products. Therefore, to receive a BTRC and engage in commercial activities related to industrial hemp, you must attest that the products you intend to sell are derived from industrial hemp.

Registration for this tax certificate does not authorize any business to violate state or local law.  It signifies, however, that the government anticipates a continuing market in CBD-based products, and that the government may be preparing to openly allow and regulate these products.

1

Categories

This blog is not intended as legal advice and should not be taken as such. The possession, use, and/or sale of marijuana is illegal under federal law.