The Medical Marijuana Regulation and Safety Act: The Stakes Have Never Been Higher For California’s Medical Marijuana Growers And Operators

by Peter B. Langbord – Partner, and Jacqueline Karama, Foley & Mansfield Los Angeles

The smoke has finally cleared. Nearly twenty years after California became the first state in the nation to legalize medical marijuana, California  approved the first statewide regulation of medical marijuana. On October 9, 2015, Governor Jerry Brown signed three medical marijuana bills (AB 243, AB 266, and SB 643) into law. These three bills, collectively known as the Medical Marijuana Regulation and Safety Act (MMRSA), created a uniform statewide licensing and operating rules for individuals and businesses in the commercial medical marijuana industry. Specifically, the MMRSA did three things: established provisions for dual licensing, addressed law enforcement concerns, and protected the autonomy of cities and counties in regulating medical marijuana businesses within its borders,

Dual  Licensing

The MMRSA has established 17 types of licenses for growing, distributing, transporting, testing, manufacturing, and dispensing commercial medical marijuana. Under the MMRSA, holders of certain license types cannot simultaneously hold other licenses and only two licenses may be held in any one category. The Bureau of Marijuana Regulation (BMMR or “BUMMER”), the California Department of Food and Agriculture (DFA), and the Department of Public Health (DPA) are the designated state licensing authorities. These state agencies are slated to accept state licensing applications in 2018. In 2018, anyone engaged in commercial cannabis activity must obtain both a state license and a local license or permit.

To qualify for state licensing, the applicant must provide proof of local approval and evidence of a legal right to operate in the proposed location. Additionally, licensees with 20 or more employees must abide by terms of a labor peace agreement. Lastly, applicants must submit fingerprints to the Department of Justice for a criminal background check. It should be noted that applicants who obtain a state license may not begin to operate until that applicant also obtains a license or permit from the city or county in which he or she plans to operate. Further, applicants whose local license or permit is revoked will be prohibited from operating under a state license.

A facility or entity that can demonstrate to the authority’s satisfaction that it was operating and in good standing with the local laws by January 1, 2016, will receive priority state licensing in 2018. The MMRSA does not specify what is needed to demonstrate good standing to the “authority’s satisfaction.” However, since February of 2007, the California State Board of Equalization (BOE) has issued special notices informing medical marijuana sellers, growers, and dispensaries that they are subject to tax and are required to hold a seller’s permit. Thus, it is likely that a facility or entity that acquired a seller’s permit with the BOE by January 1, 2016 and satisfied all their tax obligations will be able to demonstrate good standing to the authority’s satisfaction.

Further, a facility or entity operating in compliance with local zoning ordinances and other state and local requirements on or before January 1, 2018, will be allowed to operate until its application for state licensure is approved or denied. Thus, a facility or entity interested in participating in the future commercial cannabis industry should acquire a seller’s permit with the BOE by January 1, 2018 and satisfy all their tax obligations. Currently, there is no fee to register for a seller’s permit and as of July 15, 2015, commercial cannabis business owners may pay their tax liability to the BOE in cash. This protects business owners who are concerned about obtaining bank accounts for their commercial cannabis business due to the risk of having their funds seized by the federal government. Moreover, a facility or entity must also ensure that they are operating in compliance with local zoning ordinances, pay local taxes, and otherwise comply with local requirements pertaining to medical marijuana businesses. This will allow them to operate in 2018 while waiting for their state licensure application to be considered.

Law Enforcement Concerns

Under the MMRSA, licensed individuals or businesses engaged in commercial cannabis activities permitted by a state license and local regulations are protected from state criminal prosecution. Previously, under Senate Bill 420, only qualified patients, persons with valid identification cards, and their primary care givers were protected from state criminal prosecution.

City and County Autonomy

The MMRSA explicitly provides that cities and counties have an unrestricted right to establish local ordinances and tax policies regulating medical marijuana businesses within its borders. Likewise, a city or county that previously banned medical marijuana businesses from operating within its borders may continue to do so. Authorizing cities or counties to form their own medical marijuana regulations resulted in several cities and counties imposing bans on medical marijuana cultivation, dispensaries, and delivery services within their borders.

In light of this, qualifying for both local and state licensing can be a real bummer for growers and operators. For instance, a facility or entity that  was  legally operating in the city or county prior to the ban, must either leave the city or operate illegally within that city or county. Although relocating a business is costly, it is recommended that facilities or entities that find themselves in this predicament should relocate to a city or county with more favorable laws towards medical marijuana businesses. Complying with local ordinances and requirements now will allow the facility or entity to continue to operate legally in 2018 while waiting for their state licensure application to be considered. Furthermore, a facility or entity that complies with local regulations can avoid arrest and criminal prosecution. Under the MMRSA, applicants may be denied state licensing if the applicant has been convicted of an offense substantially related to qualifications, including: (1) felony conviction for the illegal possession for sale, manufacturing, transportation, or cultivation of a controlled substance; (2) a violent or serious felony conviction; (3) a felony conviction for fraud, deceit or embezzlement; and (3) any sanctions by a local licensing authority in the past 3 years.

What Growers and Manufacturers Should Know

The DFA will issue growers licenses and the DPH will issue manufacturing licenses. Under the MMRSA, licensed growers and manufacturers must keep accurate records related to commercial cannabis activities and their facilities must be at least 600 feet from schools. In addition, growers and manufacturers must submit their products to a licensed distributor, who transports the products to a licensed lab testing entity for quality assurance. Distributors are entitled to collect a fee from growers for their services. After testing is completed, and depending on the contract entered into, the distributor can either transport the product to a licensed dispensary or return the product to the grower.

Since distributors are slated to serve as the middleman in the cannabis industry, it is very important that growers and manufacturers form close relationships with distributors now. This will help ensure a smoother and quicker process when contracting for the price and quantity of the products to be distributed as well as fees for the distributor’s services.  Moreover, growers and manufacturers who intend to sell their products directly to dispensaries should form close relationships with a dispensary owner. If a dispensary owner knows who you are and is aware of the quality of your product, more likely than not the dispensary owner will recommend your product to consumers. Likewise, to ensure higher quality product, growers should contract with distributors and begin testing their product to remedy any current problems with mold or pesticides.

Under the MMRSA growers and manufacturers must package or seal all their products in tamper-evident packaging and use a unique identifier. The DFA is slated to start a “track and trace program” that will track these products from the growing or manufacturing facility to a dispensary. Further, growers and manufacturers will have to comply with strict standards for packaging and labeling medical marijuana products. Failure to abide by those rules may result in civil and criminal penalties. In light of the packaging and labeling regulations, it is apparent that branding will be important for growers and manufacturers who want their products to remain compliant and stand out to consumers. Thus, it is advised that growers and manufacturers who want to protect their logos or ideas obtain a trademark. While the United States Patent and Trademark Office will not register trademarks for marijuana products, growers can register a medical marijuana trademark with the state.

Lastly, growers are subject to local land use regulations and permits. The MMRSA authorized several regulatory entities, such as the State Water Resources Control Board, to enact regulations in order to protect the state from environmental degradation as a result of illegal water diversion from marijuana cultivation. It is recommended that all growers become familiar with environmental requirements to ensure their operations do not impact water sources. Likewise, although edible medical marijuana products are not considered “food” or “drugs” subject to California’s food or drug safety standards, manufacturers should still ensure that their products conform to established food and drug safety standards. This will protect their consumers and avoid lawsuits for contaminated products.

What Distributors and Testers Should Know

The MMRSA authorized the BMMER to issue testing and distributer licenses. Licensed distributors and testers are prohibited from having a financial ownership interest in other licensed facilities. After receiving products from growers and manufacturers, distributors must submit the products to a licensed tester for laboratory testing and certification. Testers should ensure that they are complying with standard operating procedures and test all cannabis plants for concentration, pesticide, mold, or other contaminants. Additionally, it is recommended that a licensed tester develop a close relationship with distributors in order to gain more business.

After testing is completed, a licensed tester must return the product to the distributor for final inspection. Based on contract terms, the distributor can directly sell the product to dispensaries or return the product to the grower or manufacturer. It is highly recommended that distributors build close relationships with local growers and manufacturers. By doing so, you will have a better chance of contracting with them to sell their products directly to dispensaries and you can charge fees and applicable taxes for these services. Lastly, the MMRSA explicitly prohibits anyone except a transporter from transporting medical marijuana products from one licensed facility to another. Thus, it is recommended that those who apply for a distributor license should also apply for a transporter license.

What Dispensaries and Transporters Should Know

The BMMER is authorized to issue dispensing and transporter licenses. Applicants can obtain two types of dispensary licenses – a general Type 10 dispensary license and a Type 10 A dispensary license which allows for no more than three retail sites. A Type 10 A dispensary license holder may also apply for a growing, or manufacturing license. If the dispensary provides delivery service to consumers, the local government must approve of such a service. Currently,  dispensaries are not required to obtain a separate delivery service license.

Under the MMRSA, dispensaries are also authorized to organize as a for-profit entity. However, applicants should check their city or county local rules to ensure that the city or county allows for-profit medical marijuana businesses. Moreover, prior to selling cannabis products, dispensaries should ensure that the products were tested, have proper labels and are in tamper-evident packages. Further, the MMRSA explicitly provides that dispensaries “must implement sufficient security measures to both deter and prevent unauthorized entrance into areas containing medical cannabis or medical cannabis products and theft of medical cannabis or medical cannabis products at the dispensary.”

Lastly, the MMRSA provides that transporters may only apply for a Type 11 distributors license and “must license and register each location where the product is stored for the purpose of distribution.” However, transporters “only need to obtain licenses for each physical location where the licensee conducts business while not in transport, or any equipment that is not currently transporting medical cannabis or medical cannabis products, permanently resides.” Further, transporters must transmit an electronic shipping manifest to the state and carry a physical copy with each shipment. Since the MMRSA permits distributors to contract directly with growers and manufacturers, it is highly recommended that those applying for a transporters license should also apply for a distributors license. Otherwise, in order to gain a large consumer base, transporters should form close relationships with local distributors and dispensaries.

Conclusion

The MMRSA has established a detailed, complex regulatory scheme which will necessitate growers and operators to seek the advice of skilled counsel well versed in the intricacies of the MMRSA and other areas of the law. Counsel will be required to interface with city or county government as well as state agencies to obtain state and local licensing and permits. Further, growers and operators will need counsel to help with the following:

• Marijuana Business formation
• Corporate formation
• Business license application
• Business Contracts
• Partnership agreements
• Business planning
• Labor and employment laws
• Land use and zoning expertise
• Intellectual property and trademark services
• Federal government prohibition and seizure of funds in bank accounts held by medical marijuana business owners
• Tax consequences and deductions of business expenses
• Maintaining compliance with environmental regulations