Jan 11, 2016 5 min read

2016 LEGISLATIVE UPDATES: Part III

In this final installment in our legislative updates series, we turn to medical marijuana (medical cannabis or MMJ) in 2016. Hopefully you’ve stuck with us, because we’ve reached the end… or is it just the beginning?

OPTIONAL PAIRING: Medical Marijuana

In a move that’s been anticipated with bated breath by the medical marijuana/cannabis industry since 1996’s Compassionate Use Act, the California legislature finally adopted laws to regulate medical cannabis with the Medical Marijuana Regulation and Safety Act (“MMRSA”). This is only the authorizing act to lay the groundwork for further statutes and regulations that will make up the larger code eventually governing the cannabis industry – but it is a big step forward to getting a murky area of the law codified.

For those not following medical and recreational cannabis developments closely, the medical cannabis industry has remained relatively unregulated in California since the voters enacted the groundbreaking Prop 215 initiative in 1996, which prescribed limited protocols for patients, cooperatives and collectives, leaving the cultivators, manufacturers, testing facilities and modern-day dispensaries without much guidance or legal protection. The limited state-wide regulations have resulted in two compliance trends that have plagued this industry: strong local control over the operations of these businesses and inconsistent federal enforcement actions, with a lot of court cases interpreting these permitting and enforcement actions. Many hope that MMRSA will protect businesses producing and selling medical cannabis from local interference and federal prosecution by giving businesses clear state-wide laws and regulations to follow, and by providing the strong and effective regulatory and enforcement systems required by the Department of Justice (“DOJ”) to minimize the threat to federal enforcement priorities per the Cole Memoranda (available here and here).

Early on in the legislative process, it was rumored that ABC might be called upon to regulate medical marijuana, a move that the alcohol industry leaders generally seemed wary of (and in some cases loudly opposed) out of fear it would divert resources from regulating the alcohol industry. The ABC already faces significant employee turnover and enforcement challenges. We generally supported the ABC regulation of medical cannabis because we believe ABC understands how to regulate another controlled substance in a way that generally meets similar enforcement priorities as identified by the DOJ memos. Instead, MMRSA goes in a different direction by giving oversight to numerous agencies and creating a new agency under the Department of Consumer Affairs, the Bureau of Medical Marijuana Regulation, to draft and enforce law and regulation in compliance with MMRSA. Here are the most interesting parts of the MMRSA licensing scheme from our perspective:

License Types: There are seventeen different license types. Ten of them are cultivation licenses, dividing into size (specialty small, small, medium and nursery) and type of light (outdoor sun, indoor lighting or mixed lighting). Two licenses are manufacturing licenses (which includes edible manufacturers who mix cannabis with food ingredients). Two licenses are for dispensaries (one limits ownership to three retail locations), and one each is for testing, distribution and transportation. While there are overall more licenses in alcohol (because of importing licenses, various types of on- and off-premises licenses and different alcohol categories), this licensing scheme starts off with a lot of different license types for cultivation, without clear guidance about what to expect for taxing and permitting distinctions between the license types. We note also that there are no licenses yet for on-premises MMJ consumption.
Mandatory Distribution and Testing: The licensing scheme features a mandatory distribution tier, just like the original three-tier system in alcohol, which over the years since the end of Prohibition has been affected by a slew of state-by-state exceptions for small producers and specific venues, creating an intricate alcohol beverage attorney right to work act. In addition to the product quality assurance and sales that alcohol distributors are responsible for, MMJ distributors are also responsible for getting every batch randomly tested by a licensed testing lab. This process obviously favors larger operations that can make larger batches and differs significantly from the alcohol industry’s testing standards. The TTB, the federal alcohol agency, only tests imported products, products submitted by manufacturers themselves to receive a tax credit, products receiving consumer complaints and post-market products tested as part of an ongoing audit of the marketplace.
“Tied House”: The licensing scheme features a tied house provision (for lack of a cannabis-specific term), as in alcohol to prevent vertical and horizontal integration, with some key exceptions. First, the limited dispensary license with three or fewer retail locations may have manufacturing and/or cultivation interests. This exception provides allowances for smaller dispensaries to create and sell private/control label products, which will likely be an important advantage in the competitive regulated market. Second, small cultivators may also have small manufacturing licenses, which will allow them to create edibles, oils and other manufactured goods in addition to producing flower cannabis. These are important exceptions, and we expect more to come as the industry and regulations develop.
Transportation and Delivery: There are additional transporter licenses required for all delivery between licensees. Transporter licensees may have distribution licenses, but distributors must have transporter licenses. There is a grandfather clause for existing businesses that are vertically integrated and that comply with local permitting restrictions, and a requirement that delivery companies must be dispensaries or dispensaries must do their own delivery. For now, at least, it appears that the intention is to not allow an unlicensed tier for third party providers like many of the alcohol delivery companies, who deliver on behalf of licensees as their agents.
No Alcohol Retailer Cross-Ownership: Alcohol retailers cannot also hold dispensary licenses, a restriction intended to prevent liquor stores, bars and restaurants from being able to sell medical cannabis in combination with alcohol. Noticeably, the MMRSA is silent about any restrictions on other types of alcohol licensees, such as alcohol distributor and supplier licensees, many of whom we know are closely following the licensing scheme and preparing to enter the market.
Local Licensing: In addition to state licenses, there is a requirement for local permits, a system that differs greatly from the alcohol regulation scheme in California. In alcohol, all licenses are issued by the state, but local cities, counties and districts must approve and often condition licenses and can implement their own restrictions or moratoriums on certain types of licenses. The ABC makes the final decision about whether a license issues. In the medical cannabis industry, on the other hand, businesses will need to get separate licenses from their local government, which could have its own system of requirements in order to operate in its community. This gives substantial control to local governments, many of which have been instituting outright bans of cannabis businesses with a tight deadline from MMRSA. A legislative fix is promised, but otherwise, it looks like the required local licensing scheme is already producing more limited patient access to medical cannabis.

With our experience, it’s hard not to compare this time in the history of cannabis with the end of alcohol prohibition, especially with recreational legalization slated for the California ballot in 2016. Whereas with alcohol there was an established network of black market bootleggers and understaffed enforcement, in the pre-prohibition cannabis industry, we see strong local governments grabbing for more control over an industry that has been plagued by raids, lack of banking and incarceration. We also see many industry newcomers who may benefit from the kind of code that requires capital and counsel to navigate. The big difference between these two eras may be public perception and acceptance of the product: teetotalers did not have quite the same hold on the public imagination as the drug warriors have had.