Arizona Cities Ban Recreational Only Marijuana Establishments

Arizonans knew zoning issues could cause headaches for dispensary owners. However, what was unanticipated are the new bans by some of the Arizona cities for recreational marijuana establishments.

Shortly after the passage of Proposition 207, otherwise known as the Smart and Safe Arizona Act (the “Act”), several Arizona cities moved to ban recreational marijuana sales, unless the dispensary is a “dual licensee”. A dual licensee means an establishment that is licensed both as a medical marijuana establishment and an adult use (or recreational) establishment. The Act specifically allows dispensary owners to hold both licenses (medical and recreational) and to sell both types of products from the same dispensary location. The cities in Arizona, like Mesa, found a way to end run the Act, by prohibiting, among other things, recreational only marijuana dispensaries. While Mesa and the other Arizona cities are certainly allowed to pass such ordinances, it certainly appears to frustrate the purpose of the Act, even though apparently lawful to do so.

Why did these cities seek a ban of recreational only establishments? There have been several theories espoused by others. As the Phoenix New Times reported:

Others have since followed Gilbert[] [Arizona’s] lead, creating de-facto monopolies for existing medical marijuana facilities and building barriers for new players looking to get into the new recreational cannabis market in Arizona. In the weeks after the election, several local governments passed similar laws, including Scottsdale, Mesa, Goodyear, and Surprise. Tempe is currently soliciting public input for its own recreational marijuana regulations.

Click here to read the full Phoenix New Times article.

Not only are recreational only dispensaries banned in some Arizona cities, but so are marijuana testing facilities. For example, as set forth in Ordinance Number 5601 for the City Mesa, “[t]he operation of a marijuana testing facility is prohibited in the City [of Mesa].” Click here to view the entire Mesa Ordinance.

Mesa likewise has banned (a) “the possession and consumption of marijuana and marijuana products on City property”, (b) “delivery of recreational marijuana and marijuana products within the City”, and (c) “the consumption of marijuana and marijuana products on prohibited property.” See Mesa City Ordinance No. 5601.

In addition to these issues, the new ordinances will also have a negative effect on the new Social Equity Opportunity Program in Arizona. As noted in the New Times Article:

[Mason] Cave [president and chairman of the Arizona Cannabis Chamber of Commerce] added that the new restrictions will create obstacles for people to obtain Prop 207’s 26 so-called social equity licenses, which are intended to go to dispensary operators who come from communities disproportionately impacted by cannabis criminalization.

What is likely the most fascinating part of these new restrictions are the purported reasons for such ordinances. As part of the preamble to the Mesa Ordinance, Mesa provided the following reasons for the new bans:

WHEREAS, the City of Mesa, Arizona (the “City”) finds that Proposition 207 authorizes marijuana establishments and testing facilities to use chemical extraction or chemical synthesis, including butane and other flammable gases, to extract marijuana concentrate, which poses a threat to the health, safety and security of the community and increases the responsibilities of law enforcement and other City departments to respond to violations of state and local laws, including building, electrical, plumbing, and fire codes.

WHEREAS, marijuana contains tetrahydrocannabinol, which remains on Schedule I of the Controlled Substances Act pursuant to 21 United States Code sections 811-814, and any possession or use is a violation of federal law pursuant to 21 United State Code sections 841-865.

According to Mesa, marijuana extraction is so dangerous and it creates such a heavy burden for City employees, that it needs to be banned. What about other industries that use similar extraction and chemical techniques? Will they be banned by Mesa next? Since there are taxes imposed on the sale of marijuana, one would assume that these taxes would cover any such additional expenditures by Mesa. And this argument completely overlooks the fact that medical licensees are not banned from these activities. The reasons for the passage of the new ordinance seem rather flimsy once you dig a little deeper.

The second reason set forth above – that marijuana remains a Schedule I drug – likewise misses the point. Mesa permits the sale of both medical and recreational marijuana by dual licensees, so why does it now use federal law as a justification to ban recreational only marijuana sales and related activities? Again, this seems to defy logic. If the federal ban on marijuana was really such a monumental issue, one would assume that Mesa would seek to ban the sale of medical marijuana as well (to the extent permitted by law). If the federal ban on marijuana is eventually lifted, will Mesa and other cities move to retract these ordinances? That would seem logical if that is truly a sound basis to ban recreational use sales.

Unfortunately, these ordinances seem to have gained traction in the Phoenix area cities. Hopefully, in time, these cities will reevaluate the wisdom of these ordinances and the deleterious effects they have on sales taxes and consumer choice.

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Virginia lawmakers agree to legalize marijuana, but not until 2024

Sorry, Virginia. You'll have to wait nearly three years before possession becomes legal.

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Cannabis Litigation: How Effective Are Motions to Dismiss?

Last month, I wrote this post on the latest development in the trademark infringement lawsuit filed by Veritas Fine Cannabis (“VFC”) against Veritas Farms. Unfortunately for VFC, Magistrate Judge Michael E. Hegarty had issued a recommended order that the Court grant Veritas Farms’ motion to dismiss – and to dismiss the claims with prejudice (meaning, VFC cannot amend or try to bring these claims again).

Since then, both VFC and Veritas Farms have filed responses, and VFC’s primary argument is that it should be allowed to amend its claims and get a second shot. This got me thinking about an issue that often comes up at the very beginning of many cannabis lawsuits we see: should the defendant file a motion to dismiss?

Federal Rule of Civil Procedure 12(b)(6) governs motions to dismiss. Quoting Judge Hegarty:

The purpose of a motion to dismiss under Fed. R. Civ. P. 12(b)(6) is to test the sufficiency of the plaintiff’s complaint. “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Plausibility, in the context of a motion to dismiss, means that the plaintiff pled facts which allow “the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Twombly requires a two-prong analysis. First, a court must identify “the allegations in the complaint that are not entitled to the assumption of truth,” that is, those allegations which are legal conclusions, bare assertions, or merely conclusory. Second, the Court must consider the factual allegations “to determine if they plausibly suggest an entitlement to relief.” If the allegations state a plausible claim for relief, such claim survives the motion to dismiss. (Citations omitted).

As the cannabis industry has generated more and more litigation, complaints have generally improved – but quite a few still come across our desks that are so bare and insufficient under the standard above. When our defendant clients ask what to do about them, we typically run through these considerations:

Advantages of filing a motion to dismiss:

• Forcing plaintiff to clarify an ambiguous complaint will refine the claims to be addressed. Vague claims are harder to defend against. This often also means the scope of discovery will be narrowed.
• It may signal to the judge that there are weaknesses in plaintiff’s case – we’ve seen this result in everything from the judge holding the parties to a higher standard to really pushing the parties towards settlement.
• It may also expose potential defenses that can be used in dispositive motion practice down the line.
• Finally, forcing plaintiff to clarify an ambiguous complaint often sends the signal that you’re ready to fully litigate – even at this very early stage.

Disadvantages of filing a motion to dismiss:

• Clients often experience sticker shock when they see how expensive it can be to file a motion to dismiss, so early in the case. (However, this should be weighed against the potential cost of defending against such claims at a full-blown trial.)
• It may educate the plaintiff and opposing counsel on the weaknesses of their case early on, providing them with foresight on how to strengthen their claims.
• And of course, in most cases, the defect that is raised by a motion to dismiss can be corrected and the courts lean toward granting leave to amend. In such cases, the defendant ultimately gains little (maybe a few months delay).

All of these factors should be carefully considered in every case, as this decision can really set the tone for the next one or two years of litigation that might result. To ensure you are considering all available options from the moment you find yourself dragged into a lawsuit, make sure to consult with a knowledgeable cannabis business litigator from the get-go.

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Past Pot Use OK For Some White House Jobs Under New Policy

The new policy applies to those who used only cannabis and only in the past.

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Are all drugs really legal in Washington State? For now, the answer is yes

The state Supreme Court just tossed Washington's felony drug possession law. What exactly does that mean?

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Is CBG better than CBD and THC for pain, inflammation, and aging?

Learn about the unique benefits of rare cannabinoid CBG and find out how you can add it to your wellness routine

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Morocco Expected To Pass Cannabis Legalization Soon

Morocco may be the next country to legalize cannabis next week.

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Recreational Cannabis Bill Heads to New Mexico House Floor

The next step for House Bill 12 is a debate on the House floor.

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Federal Cannabis Lobbying: Altria Has Entered the Chat

In my experience, lobbying is truly an art and not a science, and a very important art at that. And there’s been no shortage of cannabis lobbying over the years on both the state and federal level. Typically, cannabis trade groups (and there seems to be one for every cannabis topic now, including a recently formed one for cannabis regulators) focus on overall federal legalization and decriminalization of cannabis, but they are also committed to addressing commercial issues, like the notorious banking and tax situations faced by cannabis businesses.

2021 is seems different though when it comes to the cannabis lobby. Why? There are now a significant number of states that have cannabis legalization and/or medicalization and more are contemplating jumping on the bandwagon through legislative action (rather than a vote of the people through the initiatve process). More importantly, the democrats now control the Senate and maybe for the first time in recent history there is a legitimate chance that we’ll see federal legalization of cannabis within the next two years before midterm elections.

What’s even more interesting is to see which companies are joining the cannabis lobby. Probably the biggest splash of all in recent weeks is the slow-but-increasing crawl of Altria to get a piece of the action in the U.S. And this, of course, is the stuff of dreams for the majority of cannabis licensees that seek to potentially sell their state licensed cannabis businesses to that kind of “Big Marijuana” operator.

But are such events even realistic in the event of federal legalization? I’m here to make the argument that those juicy exits will only exist for a select few business operators. What that means then is that cannabis lobbying and advocacy to both Congress and the federal agencies that will oversee any kind of federal legalization just went from a potentially obscure task to one of great importance for existing cannabis businesses.

In any event, what kind of operators will the Altrias of the world look to acquire when the iron cannabis curtain falls in the U.S.? In my opinion, those kinds of companies will seek out state-licensed, large operators that have already scaled their operations, and that will only be in certain states where the costs of operation make sense (for example, California will be a target state for cultivators because we allow outdoor cultivation, and you can aggregate small licenses into vast acres). These states already have a robust agricultural scene where cannabis cultivation is treated like any other agricultural product (as opposed to, for example, states with bad weather half the year and no outdoor possibilities, and/or where energy costs are sky high and/or the environmental impact is significant).

Another criterion will be compliance–even now, purchasers only look to acquire “clean” operators with no history of state violations or regulatory issues, and that tends to be the already well-capitalized and larger cannabis companies that have teams of people dedicated to constant compliance with state cannabis laws and regulations. The larger cannabis operators have also built some of the most recognizable brands in a multitude of states, and no doubt a large acquirer like Altria will also be attracted to the consumer goodwill built up by those “household” brands.

Not to burst anyone’s bubble, but the above contemplates that an Altria-like company would even be interested in acquisitions; maybe they would just head straight into competing with existing brands, building off of their existing market share in the tobacco world (or maybe they’ll just use Cronos, apparently already in the U.S. CBD space). Altria could go from there with targeting the U.S. cannabis vape market first (where Altria’s recent focus has been on proprietary vaping technology).

That is an equal possibility that Altria already has the money and the well-established power to lobby local and state governments over real estate, zoning and development issues, taxes, and operational requirements. So, even our large U.S. multi-state operators (MSOs) could feel the pain of federal legalization if companies similar to Altria start to compete in the space when interstate commerce is allowed (though there’s no doubt that MSOs will have a head start just by having been first to market during federal prohibition).

Earlier in the month, George Parman, an Altria spokesman, told Cannabis Wire that “Altria supports the federal legalization of cannabis under an appropriate regulatory framework.” And undoubtedly Altria is going to be lobbying our Democratic Congress to ensure that the “appropriate” regulatory framework fits their needs and wants from a competitive standpoint just like they’ve done with cigarettes (and now nicotine vaping) for the past several decades. Note that, among its many federal lobbying registrations, Altria is planning to lobby on “non-tobacco excise taxes“, “FDA Cannabidiol Enforcement Policy: Draft Guidance for Industry,”and “Issues related to hemp-based cannabidiol“). Altria also recently registered in the State of Virginia to lobby on issues related to the “Responsible and Equitable Regulation of Cannabis Sales in Virginia“.

It’s more important than ever now for existing, state-licensed cannabis companies to really organize and unify to ensure that they too have a seat at the table with Congress alongside the Altrias in the room. Failure to do so will very likely result in those companies becoming regulatory cannon fodder under any kind of federal reform, assuming the states don’t step up to protect the more cottage nature of the existing industry.

Unity around lobbying has been tough over the years in the state-licensed cannabis industry, mainly because cannabis companies are more immediately affected by their state’s laws and regulations rather than any federal movements (other than banking and taxes)– especially since the advent of the Cole Memo in 2013. Things are getting increasingly serious though when it comes to federal reform that will definitely impact all cannabis companies in this country. State-licensed cannabis companies should certainly be re-examining their ability to access lawmakers and regulators at the federal level before it’s too late to make any kind of a difference over future laws and regulations.

__

To learn more about the current lobbying scene and challenges under the Biden Administration, be sure to join us on March 24th for a free webinar with Capitol Hill Policy Group where we’ll cover the current and proposed federal cannabis reforms and how lobbying efforts from various interests are taking shape around them.

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The best new cannabis strains to grow in 2021

More than 60 trending marijuana varieties: auto-flowering, feminized, fresh Cookies, heritage OGs, modern Purps, and old school sativas.

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Alabama Senate Approves Medical Marijuana Legalization Bill

A medical marijuana bill has cleared the Alabama state Senate.

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Red White & Bloom Announces Florida Acquisition

In their announcement, the company noted that they will be selling High Times branded products in the Sunshine State.

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NFL Finally Exploring Cannabis and CBD as Pain Management

Could this finally open the door for meaningful change in the organization?

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Connecticut Governor Makes Plan To Legalize Cannabis

Governor Ned Lamont has introduced a bill that would legalize and regulate cannabis.

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California Cannabis Supply Chain Contracts: Termination

I will continue publishing a series of posts identifying common issues with cannabis supply chain contracts in California over the next few months. If you haven’t already read earlier articles on this topic, I suggest you start with the following:

• California Cannabis Supply Chain Contracts: Inspection and Rejection
• Top Four Concerns for Tri-Party Cannabis Supply Chain Agreements
• Issues to Consider When Drafting Your Cannabis Licensing Agreement
• Terrible, No Good California Cannabis Distribution Contracts

Today, I want to talk about termination rights. Believe it or not, our California cannabis lawyers have seen a fair amount of cannabis supply chain contracts that don’t even address basic concepts like how long of a term the contract is for, the grounds for termination of a contract, and what happens after termination. I’ll unpack why each of those things is necessary below:

Most supply chain contracts, with the exception of things like a one-time sale of a single good, contemplate a continued relationship over a period of time. If the contract does not fix that amount of time by clearly defining the “term”, there will almost certainly be issues later down the road and getting out of the contract for parties who want to may be challenging.

Another common problem we see with contract terms is how they are renewed. If a contract has a one-year term but does not address renewal, it will end and any additional contract term will be up to the negotiation of the parties. Depending on the party at hand, this could be very bad. For example, lets assume ABC Co. had a one-year term and was buying a certain quantity of goods for $10/each, and that during the term the demand for these goods rose steeply and that getting them elsewhere on the market would cost $15. If the term automatically renewed with the same terms, then ABC Co. would be in luck. If it didn’t renew, it would have to renegotiate the contract, and the supplier would almost certainly demand a higher price.

Renewal or extension of a contract term itself can be tricky. Sometimes it is automatic but subject to one party deciding not to extend it at a fixed point before the original term ends; sometimes it is at one party’s discretion; and sometimes it is subject to both parties’ agreement. In any case, clearly defining how and when to exercise renewal or extension rights. Otherwise, again, disputes crop up.

Next up is defining the events of termination. As noted, we’ve seen many contracts that fail to do this. Some people simply assume that if the other side breaches, they will be able to terminate. In reality, it’s not always that clear, and so clearly defining the grounds on which one party may terminate the contract is essential. Grounds for termination will change substantially from contract to contract and party to party, so use of boilerplate language can be problematic unless it is amended and tailored to each specific contract.

Finally, even many contracts that clearly define a term and the events giving rise to termination fail to clearly explain what happens in the event of termination or expiration of the contract term. This can be a problematic mistake. For example, let’s consider a distribution agreement where ABC Co. engaged XYZ Co. to distribute ABC’s goods, the distribution agreement expires at a fixed point in time, and XYZ still has 100 units of ABC’s products at the time of expiration. What happens to those goods? Is there a sell-off period? Does XYZ have to return them to ABC? Can they even return them under California’s cannabis regulations?

The moral of the story is that a California cannabis supply chain contracts can be problematic if: it doesn’t clearly set a term, explain how it’s renewed, detail grounds for termination, and explain how the parties must act and what rights they have following termination or expiration. Stay tuned to the Canna Law Blog for more updates on California cannabis supply chain agreements.

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After Two Years, American Hemp Experts Applaud USDA Rules While Waiting On Further Clarity

One step forward does not equate to a completed process.

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Pennsylvania State Senators Introduce Bipartisan Cannabis Legalization Bill

A Pennsylvania Republican lawmaker is officially onboard with legalizing cannabis.

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Virginia Lawmakers Pass Bills Allowing Herbal Forms Of Medical Marijuana

If passed into law, the bills would open the door to substantial changed in Virginia's medical cannabis program.

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Joe Biden thinks ‘forced rehab’ is positive drug reform. Here’s why he’s wrong

A choice between rehab and prison is no choice at all. Biden's 'mandatory rehab' is a bad idea masked as drug reform.

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South Dakota May Let Banks Choose Whether To Work with Cannabis

While it would be a great step in the state if the bill passes, there are some downsides.

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Washington Cannabis: Buckle Up for a Brisk 2021 in M&A Activity

The year 2020 was a shock for all of us from both personal and business perspectives, but 2021 is shaping up to look much better, especially for Washington cannabis companies. In the past three months, I have had serious conversations with many clients and prospective clients regarding M&A activities. The pace of inquiries has accelerated significantly since early January.

Recently I wrote about Washington M&A activity (see here):

MSOs (multi-state operators) and international cannabis companies (especially Canadian public companies) are trying to buy and sell interests in WSLCB licensees. We can expect more of this in 2021 and more WSLCB resistance to MSOs and foreign funds investing in the Washington cannabis market.

Based on the term sheets we have been receiving and preparing, it is clear that retail licenses, which have always been in demand, continue to be the most desirable acquisition targets and command the best value. We have seen offers for bare retail licenses go as high as $1MM each, while groups of retail licenses with a consistent, solid retail brand go for many times that amount.

There is increasing interest in producer and processor licenses, as well, with bare licenses generally topping out around the mid-$400k range for a Tier 3 license. Where additional assets are involved, and especially where the seller has created a viable business ecosystem (and not just sat on a license), many other valuation factors come into play in the negotiation process.

Purchase options are always in demand where non-Washington and non-U.S. funds are involved because the pure sale of a purchase option, where no money flows through to the licensed company, does not need to be disclosed to the WSLCB. That allows MSOs and international operators to buy and sell the bulk of a licensee’s Washington marijuana-affiliated assets without WSLCB oversight.

This restriction also means that companies that are willing to hold cannabis escrow funds and act as closing agents are always in high demand. As attorneys we cannot represent our clients and act as escrow or closing agent for our deals, so if you know any good cannabis transaction escrow, please send them my way. I am always on the lookout for more industry contacts.

With industry consolidation comes a general increase in sophistication among potential acquirers, and that also means there are more tire kickers and window shoppers. If you are a prospective buyer, do not try to save money by avoiding an attorney and having your broker prepare your term sheet or letter of intent (LOI). You will most likely come across as an unmotivated buyer and get ignored.

I know that brokers provide valuable input and services, and many of them are well worth their salt. But I can always spot a term sheet, LOI, or contract that was prepared by a broker – or sometimes worse – by both sides’ brokers before any attorney is consulted. Save yourself some time by having your broker put your bullet points down in an email to your transaction attorney. Your attorney will thank you for it, and your deal will go much smoother from the gate.

And one other tip: don’t confuse a real estate broker with a business broker. I cringe every time I get an LOI that comes from a real estate broker’s office because it is always less helpful than one coming from a business broker who is playing attorney. I have no problem with brokers flexing outside their core territory if they get it right, but it is often not right. (Once I was involved in a deal where the contract needed six amendments because the parties insisted we stick with the original subpar contract prepared by the brokers. It wasn’t cheap or easy for anyone involved from that point on.)

On the bright side, I had a great conversation recently with an M&A advisory firm based in Silicon Valley, and they report that cannabis business valuations are getting more grounded in reality. That is better for buyers than sellers, but it is really good for everyone because it means the market is maturing and we will have more solid data to rely on. This firm formerly worked exclusively in tech and since 2017 has worked exclusively in cannabis, helping prospective sellers and buyers justify company valuations as the purchase price negotiations are happening. Here is what I learned:

• Private companies are currently valued at ~8-10x earnings
• The market is shifting away from earnings toward an EBITDA model to reward better companies
  • For 2021 sales, a current EBITDA of 5-6x is appropriate
  • A $20-30MM revenue company could defend 8-10x multiple of EBITDA
• For retail companies
  • Valuations dropped to 0.75x revenues in 2020 but have already increased to 1.25x revenues in 2021
  • EBITDA margins of at least 15% and there is still some room for growth
  • Brands still hold the most potential; a good brand can get 2-2.5x revenue

So as we’re off to the races in 2021, keeping these points in mind will help sellers get good value for their companies and buyers establish good metrics upon which to make their offers. See you out there.

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Feds Arrest Emma Coronel Aispuro, ‘El Chapo’ Guzmán’s Wife, On Drug Trafficking Charges

Emma Coronel Aispuro, the wife of notorious cartel leader known as "El Chapo", is charged with conspiracy to distribute cocaine, methamphetamine, heroin, and marijuana.

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North Dakota Lawmakers Advance Cannabis Legalization Bills

North Dakota's House of Representatives approved two bills that are in favor of legalizing cannabis.

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Study Finds Cannabis Legalization Not Directly Linked To Cannabis Use In Crash Victims

The aim of the study was to show whether or not cannabis incidents in car accidents were different in states with legal cannabis.

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Interview With an Arizona Cannabis Expert – Peter Davis, CPA, ABV, CFF, CIRA, CTP, CFE

I recently had the opportunity to sit down and interview Peter Davis. Most people in the Arizona cannabis industry know Peter. Peter was one of the first receivers appointed over a dispensary in the United States. Since then, Peter has built a very reputable cannabis practice. He is currently the receiver over a Phoenix based dispensary that also has a grow operation. Peter has been a receiver over dispensaries on three occasions. In addition to Arizona, Peter has also assisted clients in California and Nevada.

Peter also comes from the insolvency and financial advisor world. I have had the good fortune of working with Peter on Chapter 11 bankruptcy matters. Among other things, Peter was appointed as an Examiner for group of c-stores that filed bankruptcy in Arizona where my client was one of the senior secured creditors.

Peter started Simon Consulting in 2000 and recently merged with JS Held, which has 1,200 professionals worldwide. Peter is a newly appointed practice lead for JS Held’s cannabis practice. To read more about Peter and his background, please CLICK here.

Ethan: Peter, thank you for taking the time to sit down with me. What are some of the issues you’re seeing in the cannabis industry in Arizona?

Peter: Good question, Ethan. Right now, the biggest issue facing the industry is supply. Since recreational marijuana became legal in Arizona, there has been a shortage of product.

Ethan: What impact has that had on the market?

Peter: The price per pound has gone up rapidly. Before recreational marijuana was legalized, a pound of flower was selling for around $700. Now, the price per pound is $2,000, and I see the price continuing to go up until supplies can catch up with demand. The pricing also depends on how the cannabis is grown. Essentially, there are three ways to grow marijuana – outdoor, in-door greenhouse or in-door grow facility where all of the grow conditions are controlled by specialized lighting and nutrients. The in-door grow facilities typically produce the best products. However, it cost millions of dollars to properly build-out such a facility.

Ethan: Given the cost of a state-of-the-art grow facility, are you seeing any investment activity in that area?

Peter: Definitely. Current owners need access to capital to build-out these type facilities. Because traditional financing is not available, and alternative financing can be very expensive, some owners have turned to outside investors. So, while procuring a new license is difficult given the cap on the number of licenses in Arizona, there are other ways to get involved in the industry.

Ethan: What kind of regulatory issues have you seen lately?

Peter: If you aren’t in compliance with the regulations, then the Arizona Department of Health Services will take notice and may revoke a license or pursue other disciplinary action. The industry is subject to random audits by the Department, but so far, I have found the Department pretty reasonable to work with. If you follow the regulations and ensure compliance, you should be in good shape.

Ethan: Now that Arizona allows recreational use, are you seeing a lot new players in the market?

Peter: Yes, we are seeing national players enter the Arizona market. They’re interested in all facets of the industry – from owning and running their own dispensaries to assisting current owners with growing more product. They are also well financed and able to pay the price for a license in the open market.

Ethan: You just touched upon a subject I wanted to ask you about. Given the limited number of dispensaries allowed in Arizona, how is that impacting the price for a license?

Peter: We have seen the price for just a license go as high as $10,000,000 to $15,000,000 – and that would be for an average type dispensary. That’s just for the naked license, without real estate and other assets. I don’t see the price coming down any time soon, and in fact, now that dispensaries can sell both medical and recreational products, I think the prices will continue to go up. As long as you have a limit on the number of dispensaries, you’re going to see high values as well.

Ethan: How much does location impact profits?

Peter: We moved a dispensary in receivership, pursuant to a Court order, from Wickenburg to Phoenix. It is possible to move a dispensary and moving to the right location can result in significantly higher revenues as we experienced in the recent move.

Ethan: Now that marijuana has been legalized and some people are trying it for the first time, do you expect recreational sales to stay high or level off?

Peter: We are at a tipping point in Arizona and nationally. Now that states are legalizing marijuana, I think we will see continued demand, especially as less stigma is attached to the use of marijuana. Eventually, marijuana will be viewed like alcohol and become part of a mainstream for entertainment.

—

Well, this seems like a good place to stop for today. I want to thank Peter for his time and insights. In the coming months, we intend to check back in with Peter to get a bird’s eye view of the market.

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Here’s what’s legal under New Jersey’s updated marijuana laws

The state's first adult-use stores could be open as early as Labor Day weekend.

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New Jersey Governor Signs Marijuana Legalization Bills

Finally, after much delay, Governor Phil Murphy has signed legislation legalizing cannabis in New Jersey.

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New Jersey governor signs cannabis legalization into law, finally

The final bill locks in legal reforms to make sure young people and people of color aren't targeted by local cops.

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Unboxing the Crafty+ portable vaporizer

The Crafty+ is a portable vaporizer optimized for grip and feel, with built-in convection and conduction heating elements for efficient, even vapor delivery

The post Unboxing the Crafty+ portable vaporizer appeared first on Leafly.

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California May Decriminalize Psychedelics

On February 17, 2021, California Senator Scott Wiener introduced SB-519, a bill that if passed, would decriminalize a host of both natural and synthetic psychedelic drugs. In this post, I’ll unpack what the law would do in its current form.

Before I get into the specifics of the bill, there are three things that are important to note. First, this bill was just introduced and it’s highly likely that it will be amended–possibly even substantially–during the legislative process. Second, it’s by no means guaranteed that this bill will pass. The California legislature has had a hard enough time trying to pass a hemp CBD law that we don’t recommend getting your hopes up just yet.

Third, and most importantly, this law would NOT legalize psychedelics in the same sense as states have legalized cannabis across the nation. There is a big difference between decriminalization and legalization, and the difference can often be complex. But in the simplest terms, this bill won’t open up legal commercial opportunities; instead, it is mainly designed to reduce and eliminate penalties for possession and personal use by persons over 21. And it certainly won’t change federal law.

With that, let’s take a look at what the law would do:

Remove possession penalties.  The law would remove criminal penalties for possessing a host of drugs on Schedule I of California’s Uniform Controlled Substances Act, such as DMT, ibogaine, LSD, mescaline, peyote, psilocybin, and psilocyn. Again, this is not full-fledged legalization, but the removal of certain penalties for possession only.

Allow social sharing.  The law would also allow the possession, processing, obtaining,  ingesting, “social sharing” or transport of DMT, ibogaine, LSD, mescaline, psilocybin, or psilocyn. It would also make lawful cultivation or processing of plants capable of making these substances at a person’s property for personal use or social sharing.

It’s important to note that any kind of sharing would have to be with someone over 21 and provision to a minor could lead to penalties. Social sharing is limited to giving away or counseling the administration of these substances to persons over 21 without financial gain and in the context of things such as group counseling or spiritual guidance. This does NOT allow for commercial sales–the law is clear that social sharing cannot be for financial gain. The one seeming exception is that the term “financial gain” does not prohibit charging fees for services such as counseling or spiritual guidance. There are similar, though more narrow, provisions for MDMA.

Decriminalize paraphernalia.  Existing law criminalizes drug paraphernalia. This law would provide a carveout to existing law for paraphernalia related to the personal possession, growing, sharing, or safe use of a host of substances, including DMT, LSD, psilocybin, MDMA, and ketamine. The purpose of this carveout is to allow for harm-reduction tools such as drug-checking kits and other paraphernalia that can help test and ensure the safety of these substances.

Working Group.  The California Department of Public Health would be required to convene a working group to study and make recommendations regarding decriminalization and even legalization and regulation of psychedelic substances. The CDPH’s report to the state legislature will be due by January 1, 2024.

Expungement Opportunities.  The law would provide mechanisms to seek to recall or dismiss sentences and possible sealing, if those persons would not have been guilty of an offense or would have been guilty of a lesser offense under certain parts of this law. The state Department of Justice would be required to review records in state criminal proceedings and notify, over the next few years, prosecutors of cases that would then be eligible for dismissal or recall. The law then lists out a complex process of allowing challenges to the dismissal or reduction, and ultimately would allow courts to reduce or dismiss convictions in some cases.

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This is a very ambitious law and is likely to undergo substantial changes in the legislative session. Please stay tuned to the Canna Law Blog for more updates.

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Patent Infringement Indemnification: Do You Have It?

Last week, a major cannabis brand was sued for patent infringement by Geographic Location Innovations (“GLI”) in the District Court of Colorado. The Complaint alleges GLI is the owner of the ‘285 Patent, titled “Device, System and Method for Remotely Entering, Storing and Sharing Addresses for a Positional Information Device,” which among other things, allows a user to request an address, such as the address for a store, from a server. The server determines the requested address and transmits it to the user. The system can also determine route guidance to the store address based at least in part on the location of the user.

The defendant’s website has a similar store locator system that GLI claims infringes the ‘285 Patent. A user is able to input an address and the website will provide a list of the nearest retail locations. The website will also load navigation if the user requests directions. If you’re reading this and thinking “wow, most retail websites I’ve accessed lately have this feature,” you’re absolutely right. GLI has been busy – our search of the federal courts found that GLI has filed 49 lawsuits since 2016, with 11 of them still ongoing. And of course, it bears mentioning that this trend of patent infringement litigation will only become more and more prevalent in the industry as players focus on their online presence.

The real takeaway I have from reviewing this lawsuit is this: do you have intellectual property protections in place? Most of our clients are visionaries that are building and implementing their business plans, establishing business relationships, etc. They’re also establishing their online presences, but the actual work of creating a website is being outsourced to web developers more often than not. In such situations, it’s important to not gloss over the indemnification provisions of the agreement.

Some developers, who are aware that intellectual property trolls are on the rise, flat out refuse to agree to any indemnification. These developers feel they’re just building what the client is requesting, and the client should therefore bear the burden of potential patent infringement. However, if the developer is suggesting features, or using “home grown” templates or tools, full intellectual property indemnification is probably proper and should be fought for (or at least, paid a premium for). Given every situation is different, your arguments for partial to full indemnification may change, but in absolutely every case, the risks and benefits that may result from this typically “boilerplate” provision need to be weighed.

As you can see from the cautionary tale above, it may serve you very well to have proper indemnification clauses in place. Otherwise, if you find yourself in litigation over something you had very little to no control over, you might be left holding the bag for someone else’s mistake. Don’t rely on your web developer for legal advice. Our intellectual property team has seen it all and is here to help.

For past posts on the importance of indemnification provisions in other contexts, see:

• Top Four Concerns for Tri-Party Cannabis Supply Chain Agreements
• Watching Your Backside in California Cannabis: Indemnification Issues
• California Cannabis Leases: Remediation Indemnification is Key

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Will the FTC Adopt Less Stringent Substantiation Requirements for CBD Claims?

If you follow our blog, you know we keep a close eye on enforcement actions taken by the Food and Drug Administration (the FDA) and the Federal Trade Commission (the FTC or the Commission) against companies selling and marketing cannabidiol (CBD) products.

Back in December, we discussed the FTC’s decision to adopt new and more stringent enforcement practices on companies making false and deceptive medical claims about their CBD products.

What wasn’t publicly known then was that two FTC Commissioners did not entirely approve of the Commission’s newly adopted enforcement strategy. Ten days following the issuance of this last round of FTC warning letters, Commissioners Rohit Chopra and Christine S. Wilson issued personal statements to the Commission expressing some concerns with the FTC’s CBD enforcement priorities.

Although both Commissioners agreed that the FTC should pursue enforcement actions against companies making deceptive and false claims, they suggested that the Commission shifts its enforcement priorities and refrain from imposing an unduly high standard of substantiation on CBD companies.

In his statement, Commissioner Chopra reminded the FTC of the need to prioritize its authority to crack down on misconduct related to substance use disorder treatments, specifically opioids treatments– particularly given the growing dependence on these substances since the start of COVID-19.

Back in 2018, Congress enacted the Substance Use-Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities Act (the SUPPORT Act), which empowered the Commission to impose civil penalties, restitution, damages and other relief against actors that engage in misconduct related to substance use disorder treatment and to prosecute deceptive marketing of opioid treatment products.

Chopra opines that using the FTC’s penalty offense authority under the SUPPORT Act would make warning letters more effective. Commissioner Chopra further argues that by imposing a “reasonable basis” for claims, the FTC would likely incentivize voluntary compliance by marketers, and thus, would operate more efficiently. To further increase its level of efficiency, Chopra also suggests the Commission shifts its limited resources from small businesses toward large companies that are better funded, and thus, able to provide financial relief to victims.

For her part, Commissioner Wilson recommends the FTC impose stringent substantiation requirements “sparingly.” In her statement, Commission Wilson expresses concerns with mandating such level of claim support, which she fears may result in denying consumer truthful, useful information, diminishing incentives to conduct research and potentially deterring manufacturers from introducing new CBD products to market. To support her argument that the Commission should refrain from imposing such burdensome standard of substantiation, Wilson points out to the existence of “many research studies […] currently seeking to determine whether they are other scientifically valid and safe uses of [CBD].” This, she said, shows that credible science already exists – or is on its way – to reasonably support that CBD products may indeed treat certain conditions.

Though it is clear the FTC will continue to take enforcement actions against bad actors making wholly false and deceptive medical claims about their CBD products, Commissioners Chopra and Wilson’s statements suggest that the Commission may refine and clarify its enforcement standards for the CBD industry and possibly approve–or at least tolerate–“reasonable” claims backed by reliable scientific data. This, of course, would greatly benefit the industry, which for the past two years has conducted a wide range of studies on CBD’s therapeutic values and has begged federal regulators to establish realistic standards to help ensure compliance; and to provide them with an opportunity to lawfully operate in the marketplace.

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New Study Suggests Link Between Cannabis Legalization And Decline In Workers Comp Claims

Researchers found a decline in workers compensation claims that seemed to be in response to cannabis legalization.

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Wisconsin Republicans Want To Throw Out Legalization Efforts

Certain lawmakers in Wisconsin are less than enthusiastic about the governor's proposal to legalize cannabis.

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Cannabis Negotiations Stall in New Jersey

At this rate, will New Jersey ever get a legal cannabis system up and running?

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FREE Webinar! Cannabis in Mexico Part 2: The Q&A Session

Register HERE!

On January 28th, in partnership with Mexico-based law firm Lawgic, Harris Bricken hosted the webinar “Cannabis in Mexico” (replay here). That webinar covered the basics of what stakeholders can and can’t do right now in the Mexican medical cannabis industry, what lies on the horizon for adult use, and how Mexico treats industrial hemp and CBD.

Due to the high number of follow up questions we received before, during, and after the webinar, we decided to host a second webinar to answer the pressing and popular questions we were unable to address during the program.

Please join us for our FREE hour-long, Q&A webinar on Thursday, March 4th, at 12pm PT to learn even more about cannabis legalization in Mexico, including:

• current medical cannabis laws
• current hemp laws
• the status of enacted and proposed regulations
• expectations for adult use cannabis program roll-out
• markets analysis
• insights on how businesses and investors can best position themselves in this industry, now and in the future.

Adrián Cisneros Aguilar, our lead Mexico cannabis law attorney, will join Lawgic’s Roberto Ibarra López to answer questions on these and other topics from our January 28th webinar. The panel will be moderated by Harris Bricken’s cannabis practice chair, Hilary Bricken.

Make sure to submit your questions when you register!

Register HERE!

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House Members Call On Biden To Pardon Cannabis Convictions

Members of Congress penned a letter to President Joe Biden urging him to pardon nonviolent cannabis offenders.

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South Dakota voters legalized cannabis, but state politicians aren’t having it

Voters passed both medical and adult-use legalization. Now politicians are trying to undermine the law.

The post South Dakota voters legalized cannabis, but state politicians aren’t having it appeared first on Leafly.

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New York Cannabis Companies Sidestep Flower Ban With Ground Flower Refills

New York's medical cannabis program prohibits smokeable flower. But some companies have figured out a loophole.

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Clinical Trial Shows Association Between Cannabis Inhalation and Improvement in Ulcerative Colitis

The results of a new clinical trial show promise for sufferers of ulcerative colitis.

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Cannabis Securities Litigation: Proceed with Caution Before Investing in International Cannabis

Along with a robust cannabis practice, our law firm works with businesses around the globe on legal matters involving dispute resolution, customs, trade, employment, foreign direct investment, manufacturing, technology, intellectual property, and entertainment. Several years ago, these practice areas rarely overlapped; that is no longer the case.

Our international and cannabis business lawyers now regularly counsel individuals and companies looking to succeed in the global cannabis market. At the bottom of this blog post, I’ve linked to just a few recent posts discussing various aspects of that industry.

Meanwhile, Fred Rocafort and Jonathan Bench are receiving accolades for their Global Law and Business podcast, which recently was named one of the top 25 international law podcasts to follow in 2021. And Adrian Cisneros Aguilar, our lead attorney in Mexico and Latin America, says now is the time to invest in cannabis in Mexico.

Naturally, the rise of a global cannabis has given rise to numerous investment and partnership opportunities for businesses and individuals. Just as naturally is the rise in litigation involving cannabis that has an international flavor. This post concerns a lawsuit involving cannabis and Malaysia and a recent decision allowing a class action securities fraud lawsuit to move forward. The case is Alde-Binet Tchatchou v. India Globalization Company, No. PWG-18-3396. (Email me if you’d like a copy of the decision.)

The facts are familiar to anyone working in cannabis. Plaintiffs allege that IGC attempted to take advantage of a “hot market trend”— namely the “Hemp/CBD-infused energy drink space.” What’s not as familiar is the international aspect. Plaintiffs alleged IGC did so by promoting its entrance into a marijuana-base products business in partnership with a manufacturer located in Malaysia.  The various press releases and announcements caused IGC’s stock to increase six-fold.

Sounds like an interesting opportunity, no? But manufacturing CBD-based beverages was, and is, illegal in Malaysia. This fact was not disclosed to investors (!) and only revealed upon publication of a MarketWatch report identifying numerous “red flags” surrounding IGC. The publication of this report caused a precipitous decline in IGC’s stock price, a delisting of IGD from the NYSE American exchange, and eventually a suspension in trading.

Two class action lawsuits followed, alleging false or misleading statements in violation of Section 10(b) of the Exchange Act and Rule 10b-5. Setting aside the merits of the lawsuits, the problem for the plaintiffs is whether there is anything to recover. My bet is that most investors will see little, if any, of their money returned.

So before you or your business jump on the “hot new trend” of international cannabis, consult an international business lawyer with cannabis experience. In the meantime, check out the following:

• Cannabis in Australia: You Better Run (to It)
• Mexico Medical Cannabis: Fully Legal, But Is It Open?
• EU Adds CBD to Its List of Legal Cosmetic Ingredients
• How Does My International Cannabis Company Do Banking in the U.S.?
• Cannabis and Ballots, Part 1: Ecuador
• Does My International Cannabis Business Need to Register in the U.S.?
• British Virgin Islands Cannabis: Trouble in Paradise
• Israel May Soon Legalize Recreational Cannabis
• Colombia Cannabis: Colombia Tries Again
• Cannabis Trademark Protection in Brazil
• Argentine Cannabis: Legalization Coming Soon?
• What’s Going on in International Cannabis: Voices from South America and Asia

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Maryland Lawmakers Push To Legalize Marijuana And Expunge Convictions

A House bill in Maryland aims to significantly reform the state's marijuana policy.

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Pennsylvania’s Governor Tom Wolf Again Pushes For Cannabis Legalization In State

On Twitter this morning, Governor Tom Wolf reiterated his call to end pot prohibition in Pennsylvania.

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Leafly Buzz: 12 fire cannabis strains of February 2021

12 new, hot, and best-selling strains for February including Animal Face, Zookies, Kush Mints, and Cereal Milk.

The post Leafly Buzz: 12 fire cannabis strains of February 2021 appeared first on Leafly.

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First Women-Owned Cannabis and Hemp CBD Laboratory Gets Certified By WBENC

Green Leaf Laboratory has just received certification by the Women’s Business Enterprise National Council.

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New York Governor Rolls Out 30-Day Cannabis Amendments

Governor Cuomo came up with this proposal after studying and planning for the decriminalization of cannabis and then taking that step a little further.

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The London Stock Exchange Opens For Business With The Cannabis Industry

The Brexited City of London is now allowing cannabis firms to trade on the exchange – what will be the impact in the UK if not the EU beyond that?

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Michigan Leads The Pack In Cannabis Industry Job Growth

The legal cannabis industry is booming, with more and more job opportunities and potential for growth.

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California’s Famous Humboldt County Bans Hemp Cultivation

Humboldt County, famous for being an ideal environment for cannabis farming, has banned hemp cultivation. Here's why.

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California Cannabis Litigation: Who Should Be Sued?

Our litigation team has experience representing both plaintiffs and defendants in the cannabis industry, and one issue we commonly see is whether an individual is rightfully sued along with his/her business. For example, in a breach of contract action, do you sue the company AND its owners, managers, members?  What do you do if you’re the owner/manager/member and you’re sued individually?

As a very general rule of thumb, most business entities provide protection for their principals as a matter of law. Therefore, individuals should not be personally named in lawsuits unless there are specific facts to support their individual liability. A potential plaintiff may desire naming anyone and everyone involved with a company to exert additional pressure, but this strategy is very likely to result in early motion practice that can cost tens of thousands of dollars in the first two months of litigation. If there truly is a basis for claiming an individual is personally liable, that plaintiff should be ready for a battle on whether the Court should allow “piercing of the corporate veil.” An individual defendant who is wrongfully personally named in a lawsuit should be ready for the same.

According to the Legal Information Institute, “‘Piercing the corporate veil’ refers to a situation in which courts put aside limited liability and hold a corporation’s shareholders or directors personally liable for the corporation’s actions or debts.” (Note, this is not limited to corporations). “While the law varies by state, generally courts have a strong presumption against piercing the corporate veil, and will only do so if there has been serious misconduct.”

In California, a common basis for arguing the corporate veil should be pierced is the “alter ego” doctrine or theory. “The alter ego doctrine arises when a plaintiff comes into court claiming that an opposing party is using the corporate form unjustly and in derogation of the plaintiff’s interests. In certain circumstances the court will disregard the corporate entity and will hold the individual shareholders liable for the actions of the corporation.” Two elements must be established:

1. There be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist, and
2. If the acts are treated as those of the corporation alone, an inequitable result will follow.

Commonly cited, relevant factors in this analysis include commingling of funds and other assets, the holding out by one entity that it is liable for the debts of the individual and vice versa, use of the same offices and employees, and use of the entity as a mere shell or conduit for the affairs of the individual.

As a plaintiff, you should know this is an insanely fact-intensive inquiry and as mentioned above, you should be prepared to spend significant money to make the proper investigation and have the factual basis to pursue this kind of claim. Otherwise, the cost-benefit analysis usually does not weigh in favor of naming the individual.

As an individual defendant, you should be prepared to take a hard look at whether you’ve been falling short in any of the above ways. If you haven’t, the usual course is to file a motion to dismiss, even though the standard on a motion to dismiss is tough to win because the Court must accept everything the plaintiff claims in his/her complaint as true. If you have fallen short though, you may unfortunately be along for the ride.

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The US cannabis industry now supports 321,000 full-time jobs

The cannabis industry added 77,300 jobs last year, a 32% gain over 2019—despite a pandemic and economic recession.

The post The US cannabis industry now supports 321,000 full-time jobs appeared first on Leafly.

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Report Finds Adult-Use Cannabis Legalization Not Associated With Adverse Social Effects

A new report published this month has found no link between cannabis legalization and certain public health issues.

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Ohio Officials Seek Public Comments on Medical Cannabis Conditions

Ohio officials are considering the addition of a few more more qualifying conditions for their medical cannabis program.

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Parlez-vous Cannabis Médical? The French Begin National Medical Cannabis Trial

The French, at long last, have decided to move forward on validating cannabis as medicine – and they are doing it differently than anyone else in Europe so far.

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Idaho Cannabis Campaign Gets Green Light to Collect Signatures

Despite a move to constitutionally ban the plant, Idaho medical cannabis advocates may start collecting signatures for a pro-pot ballot measure.

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Cannabis in Australia: You Better Run (to It)

On February 1, the over-the-counter sale of CBD products became legal in Australia, following a schedule adjustment in December by the country’s Therapeutic Goods Administration (TGA). Products must still be approved by the TGA and be included in the Australian Register of Therapeutic Goods (ARTG). The daily dose must not exceed 150 mg.

At the time of the TGA announcement there were no CBD products that met the criteria for over the counter sales, though an increase in the number of applications for inclusion in the ARTG was expected in the wake of the TGA’s announcement. At the moment, only one cannabis product (nabiximols) is approved by the TGA. However, unapproved products can still be obtained with a doctor’s prescription, and this is true of products containing THC as well.

Regulation of medical cannabis varies according to the state or territory. In Tasmania, for instance, a doctor may only prescribe cannabis when conventional treatment has failed, a limitation that is not present in other Australian jurisdictions.

As for recreational cannabis, the legal framework across the country is generally prohibitionist. The most liberal regime is found in the Australian Capital Territory (ACT), where it is lawful to possess up to 50 grams of dried cannabis or up to 150 grams of fresh cannabis. In addition, growing up to two cannabis plants at home is permitted, with a maximum of four plants per household. However, even these relatively modest permissions are contrary to Australian federal law (Americans: does this sound familiar?).

The ACT is smaller and less populated than any of Australia’s six states, so we should not expect it to be a legal trendsetter. Instead it will probably take a move by one of the larger states to kick off a legalization wave such as the one we are witnessing in the United States.

It does not appear that New South Wales (NSW) will provide the spark, at least not until its next elections in 2023. NSW Premier Gladys Berejiklian has said she is “comfortable with the laws where they are” and suggested that states like Colorado were “regretting” legalization (which we should note appears at odds with the Colorado Governor Jared Polis’ views on the subject).

Things appear somewhat more promising in Victoria, where Premier Dan Andrews is bullish about the state’s medical cannabis industry. (As an aside, we just love the images of Andrews visiting a Victorian grow.) Back in 2014, Andrews expressed opposition to the legalization of recreational cannabis, but as far as we can tell he has not made similar comments in recent years. And as we often point out in these pages, a few years are an eternity when it comes to cannabis policy. Victoria will hold elections next year: Will a fourth Andrews term bring with it a major turning point for cannabis in Vic and Australia? (Aussies: We would love to hear your thoughts on this.)

With an Australian lawyer on our international cannabis team, we will certainly be keeping an eye out for legal developments Down Under. The prospect of recreational cannabis legalization, even just in some Australian states, in an exciting one—but cannabis businesses in the United States and elsewhere should not wait until that happens to seek out opportunities.

As it is, the continent represents a CBD and medical cannabis market of more than 25 million people. It is true that access to the entire market requires dealing with eight regulatory frameworks in addition to the federal one, but keep in mind that NSW and Victoria have between them about 15 million residents. Add Queensland and that figure rises to 20 million, more than any American state except California, Texas, and Florida.

Yes, we are trying to tempt you.

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Mexico Medical Cannabis: Fully Legal, But Is It Open?

In our last post, as well as in our Mexico cannabis webinar last month (replay here), we examined the implications, business opportunities and requirements to take advantage of the Medical Regulations that recently entered into force in Mexico.

Yes, medical cannabis is now fully legal in Mexico. However, that does not mean that you are able to do all that is allowed under the Medical Regulations. “Does that mean that there are areas in medical cannabis that are closed to my company?” No, it does NOT. It just means that some areas will be open sooner than others.

For starters, it is important that applicants–particularly foreign investors–keep in mind the difference between publication, entry into force and full implementation of any statute. The Medical Regulations are no exception. Under Mexican Law, every statute contains a final section, of a purely operational character, called Transition Provisions (“Artículos Transitorios”), which provides for:

1. when the statute is going to enter into force
2. whether conflicting related laws or regulations are to be harmonized or repealed, and
3. items of a transitional nature, such as phased implementation of specific provisions.

In the case of the Medical Regulations, Transition Provisions provide for the phased implementation of specific sections– notwithstanding the Medical Regulations as a whole entered into force on January 13, the day after their publication. This was so intended given that there are now several Government agencies in charge of interpreting and applying the Medical Regulations which not only must coordinate with each other, but also update, optimize or streamline their processes to fulfil their new tasks, including servicing and processing cannabis applications.

These agencies must elaborate on the administrative procedures now available for all activities provided for in the Medical Regulations, train their personnel, adapt their structures and develop internal guidelines to issue application formats, fees, etc. The agencies with the heaviest mandate form part of the ministry of agriculture, so much so that they have a specific provision just for them:

FOURTH. The Ministry of Agriculture and Rural Development, including its regulatory agencies, will have 90 working days following entry into force to harmonize its internal guidelines as required thereof, in order to ensure due implementation of these Regulations [translation ours].

What are the implications of what we have said so far? To start, per the provision cited above, you can already apply for any permit/license provided for in the Medical Regulations, so long as they are not related to growing activities, which will open for applications in late May or early June, 2021.

In addition, the fact that Government agencies have to adjust–and some have even a grace period to do so–could mean that provisions governing applications for permits/licenses might not be implemented as written from day one. There are three potential reasons for this.

1. The Transition Provisions expressly mandate that in implementing the Medical Regulations, all agencies shall operate within their approved budget for the current fiscal year and shall not increase it for subsequent fiscal years. In effect, agencies must handle more work with the same staff and without additional financial resources. Because Mexican federal entities are suffering of one of their largest budget cuts in history, we expect that agencies will struggle to make ends meet in order to service cannabis applications.
2. There is no fee schedule provided yet for several application procedures set forth in the Medical Regulations. For this to happen, we would have to wait until relevant agencies (notably the Tax Administration Agency and the Ministry of Economy) send proposals to Congress to amend the Federal Fees Law (Ley Federal de Derechos).
3. Third, against a COVID/low budget backdrop, agencies may fail to issue traceability requirements, application forms, specific implementation requisites or anything in between to apply for each permit/license, the 90-working-day deadline notwithstanding.

Thus, even though medical use is already fully legal, one may not be able to conduct all regulated activities from the outset, even if already provided for and legally effective. Applications for permits/licenses could not be submitted nor processed effectively, which would result in delays in issuance and would necessarily push back deadlines in any market forecast and business plan… unless companies are ready to work around delays.

How do you do that? What to do when there are no procedure guidelines or specific requirements in an activity that should be open under the Medical Regulations and therefore in practice you cannot apply for a particular license or permit? Well, that depends on the situation.

Agencies might receive your application, but never process it and therefore never respond. If no guidelines or specific application requirements are issued, you submit your application with the basic requirements set forth in the Medical Regulations, and the relevant agency will have 90 days to respond. If it fails to do so, you file an amparo action claiming that agency failed to issue a resolution, despite being legally obliged to do so. This would be possible because:

1. Legally speaking, you are entitled to exercise your right to conduct an activity from the moment the Medical Regulations entered into force, for the basic means to exercise the right (the application) are contained therein; and
2. Because rights and means are provided for in the Medical Regulations, the fact that the Government is not ready to process applications is irrelevant to exercise such rights. It is worth noting that probabilities of prevailing have increased now that medical cannabis is fully legal.

It could also happen that agencies respond, but do so in a manner that renders any given authorization useless. For example, the Medical Regulations provide that import via mail or parcel services is prohibited; instead, all medical cannabis imports shall pass exclusively through expressly authorized ports of entry. Whenever you receive an import permit, a list of authorized ports of entry will be attached to it.

Now, that list should be jointly drafted by COFEPRIS and the Tax Administration Agency, but there is no list at the moment and no sign that there will be one soon. If you want to import (as U.S. companies have begun to do), and receive an import permit without knowing which ports of entry you may use for your product, you can be proactive and ask for authorization to import through a specific port of entry. If they deny your request, you file an amparo action arguing that they do not give you the means to comply with the Regulations. To that, COFEPRIS and the Tax Administration Agency will have to prove that they did publish a list and made it known to you, which they will be unable to do if they fail to timely draft one. As a result, you could potentially prevail and be able to import through the port of entry of your choice.

Bottom Line: The fact that the Medical Regulations are now in force might not mean an individual or a company can do everything provided for from day one. However, per the examples above, there are ways to work around this and take advantage of the lack of implementing guidelines to apply for medical use permits/licenses effectively.

As of right now, you can apply for any permit license other than those related to growing activities. Businesses and individuals have the rights and the means to exercise those rights under the Medical Regulations. If the authorities are slow in building a structure to service applications, it is in your interest (and indirectly, everyone else’s in the industry) to prompt the Mexican government to fulfill its obligations.

Said another way, if they are taking their time anyway, better to beat the rush. Start applying now!

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ICYMI: California’s Cannabis Consolidation Trailer Bill

Love it or hate it, California continues with its democratic experiment around regulated cannabis production, distribution, and sales pursuant to the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”). Although the licensing program here in California has had many regulatory bumps, the existing regulations are rife with ambiguities, and enforcement has been all over the place (or absent, or almost exclusively dictated by local governments), we’re going to see more technical fixes to the law on the horizon.

Earlier this month, the Governor’s cannabis consolidation bill finally posted. What am I talking about?  Back in January of 2020, Governor Newsom announced that he intended to have the Bureau of Cannabis Control, CalCannabis, and the Manufactured Cannabis Safety Branch consolidated into a single cannabis agency to enforce cannabis regulations and oversee licensees in California. That effort was stalled by the advent and continuing impact of COVID-19. Finally though, as part of the 2021-2022 budget, Governor Newsom revealed his plans for this mass consolidation on February 2.

Back in January, the Governor’s Office released a budget summary which generally covers what the trailer bill will do regarding California cannabis. Here are the highlights as we see them:

Combined Agencies. If this bill passes, the three cannabis agencies now in play will be combined into a single Department of Cannabis Control (“DCC”) (within the California Bureau of Business, Consumer Services, and Housing Agency) that will commence on July 1, 2021.

Regulation Transfers. All of the regulations now in play under MAUCRSA will automatically be adopted by the DCC upon its creation unless and until repealed, replaced, amended, etc. This was a pretty big question for licensees: if consolidated, are we going to see an over haul of all agency regulations? For now, the answer appears to be “not really.”

Expanded Background Checks. Criminal background checks are being expanded under the bill to include criminal records:

. . . from a local or state agency certified records of all arrests and convictions, certified records regarding probation, and any and all other related documentation needed to complete an applicant or licensee investigation. A local or state agency may provide those records to a licensing authority upon request.

Verticality Interruption. If the bill passes, “[a] person with a financial interest in a state testing laboratory license . . . is prohibited from holding a financial interest in any other type of cannabis license.” This was not necessarily the case previously, at least not under the MAUCRSA regulations– even if it makes perfect sense to not allow someone to test their own cannabis.

Ag Product Designation. Cannabis would now be considered an agricultural product under the law, following what some of the other states have done, and affording licensed cannabis certain statuses and protections that it currently lacks.

Environmental Controls. Environmental impact will now take center stage for cultivators. The bill provides that:

In issuing cannabis cultivation licenses, the [DCC] shall consider issues, including, but not limited to, water use and environmental impacts. If the State Water Resources Control Board or the Department of Fish and Wildlife finds, based on substantial evidence, that cannabis cultivation is causing significant adverse impacts on the environment in a watershed or other geographic area, the [DCC] shall not issue new licenses or increase the total number of plant identifiers within that watershed or area.

Plant ID program. The state would have to set up a “unique identification program,” which seems to be different from the track and trace requirements and exclusively applies to cultivators regarding ID’ing the source of all cannabis/cannabis plants.

Chain of Custody Requirements. When testing labs coordinate for quality assurance testing, the drivers moving the product must now be direct employees of the lab, and labs can now receive samples directly from a manufacturer or a cultivator for “quality control purposes,” and such samples cannot be certified for retail sale. Meaning, cultivators and manufacturers would be able to go right to labs to have samples tested first before submitting entire batches to distributors for the state-required quality assurance testing.

Provenance Strictures. It’s now clear that if a cannabis product was cultivated, processed, manufactured, packed or held at any location that doesn’t have a state license, it is considered misbranded and violates the law (and under that circumstance would be destroyed), and any misbranded (or adulterated) products may be recalled by either the affected licensee or the DCC under certain conditions posing a threat to public health and safety. Adulterated or misbranded product (not otherwise derived from or stored at an unlicensed location/source) will be embargoed and the affected licensees can appeal to the DCC to continue making the product if certain limitations/controls are imposed by the DCC.

Social Equity Administration. The Governor’s Office of Business and Economic Development will spearhead state efforts dedicated to social equity licensing (and funding) and businesses in California by working with and being the point of contact for all local equity programs that receive assistance funds under MAUCRSA. The Bureau of Cannabis Control’s Equity-Local Liaison Unit would also be expanded to provide services to all social equity applicants of every license type.

Housekeeping. The bill finally cleans up any legal references anywhere regarding the Medical Cannabis Regulation and Safety Act and the Medical Marijuana Regulation and Safety Act to mean the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA).

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If you recall, MAUCRSA was born out of Governor Brown’s trailer budget bill back in 2017, so it’s not unusual for the budget bill to make sweeping changes to existing laws. While Govenor Newsom’s bill isn’t a massive reform effort, it definitely creates some technical fixes and clarifications needed by the industry. In addition, it certainly cannot hurt to have just one cook in the kitchen — like pretty much every other state with cannabis licensing — when it comes to consistent rulemaking and more centralized enforcement.

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