2016 LEGISLATIVE UPDATES: Part IV

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

OPTIONAL PAIRING: Medical Marijuana

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

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

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

  • License Types: There are seventeen different license types. Ten of them are cultivation licenses, dividing into size (specialty small, small, medium and nursery) and type of light (outdoor sun, indoor lighting or mixed lighting).  Two licenses are manufacturing licenses (which includes edible manufacturers who mix cannabis with food ingredients).  Two licenses are for dispensaries (one limits ownership to three retail locations), and one each is for testing, distribution and transportation.  While there are overall more licenses in alcohol (because of importing licenses, various types of on- and off-premises licenses and different alcohol categories), this licensing scheme starts off with a lot of different license types for cultivation, without clear guidance about what to expect for taxing and permitting distinctions between the license types.  We note also that there are no licenses yet for on-premises MMJ consumption.

  • Mandatory Distribution and Testing: The licensing scheme features a mandatory distribution tier, just like the original three-tier system in alcohol, which over the years since the end of Prohibition has been affected by a slew of state-by-state exceptions for small producers and specific venues, creating an intricate alcohol beverage attorney right to work act.  In addition to the product quality assurance and sales that alcohol distributors are responsible for, MMJ distributors are also responsible for getting every batch randomly tested by a licensed testing lab.  This process obviously favors larger operations that can make larger batches and differs significantly from the alcohol industry’s testing standards.  The TTB, the federal alcohol agency, only tests imported products, products submitted by manufacturers themselves to receive a tax credit, products receiving consumer complaints and post-market products tested as part of an ongoing audit of the marketplace.

  • “Tied House”: The licensing scheme features a tied house provision (for lack of a cannabis-specific term), as in alcohol to prevent vertical and horizontal integration, with some key exceptions.  First, the limited dispensary license with three or fewer retail locations may have manufacturing and/or cultivation interests.  This exception provides allowances for smaller dispensaries to create and sell private/control label products, which will likely be an important advantage in the competitive regulated market.  Second, small cultivators may also have small manufacturing licenses, which will allow them to create edibles, oils and other manufactured goods in addition to producing flower cannabis.  These are important exceptions, and we expect more to come as the industry and regulations develop.

  • Transportation and Delivery: There are additional transporter licenses required for all delivery between licensees.  Transporter licensees may have distribution licenses, but distributors must have transporter licenses. There is a grandfather clause for existing businesses that are vertically integrated and that comply with local permitting restrictions, and a requirement that delivery companies must be dispensaries or dispensaries must do their own delivery.  For now, at least, it appears that the intention is to not allow an unlicensed tier for third party providers like many of the alcohol delivery companies, who deliver on behalf of licensees as their agents.

  • No Alcohol Retailer Cross-Ownership: Alcohol retailers cannot also hold dispensary licenses, a restriction intended to prevent liquor stores, bars and restaurants from being able to sell medical cannabis in combination with alcohol.  Noticeably, the MMRSA is silent about any restrictions on other types of alcohol licensees, such as alcohol distributor and supplier licensees, many of whom we know are closely following the licensing scheme and preparing to enter the market.

  • Local Licensing: In addition to state licenses, there is a requirement for local permits, a system that differs greatly from the alcohol regulation scheme in California. In alcohol, all licenses are issued by the state, but local cities, counties and districts must approve and often condition licenses and can implement their own restrictions or moratoriums on certain types of licenses. The ABC makes the final decision about whether a license issues. In the medical cannabis industry, on the other hand, businesses will need to get separate licenses from their local government, which could have its own system of requirements in order to operate in its community. This gives substantial control to local governments, many of which have been instituting outright bans of cannabis businesses with a tight deadline from MMRSA. A legislative fix is promised, but otherwise, it looks like the required local licensing scheme is already producing more limited patient access to medical cannabis.  

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

 

  1. National Conference of State Liquor Administrators – The Alcohol Industry gathers in Hawaii to figure out how to enforce the US “Highly Archaic Regulatory Scheme.”
  2. Founder John Hinman Honored with the Raphael House Community Impact Award
  3. ROUTE TO MARKET AND MARKETING RESTRICTIONS - NAVIGATING REGULATORY SYSTEM CONSTRAINTS
  4. Alcohol and Cannabis Ventures: Top 5 Legal Considerations
  5. ATF and TTB: Is Another Divorce on the Horizon? What’s Going on with the Agency?
  6. STRIKE 3 - YOU REALLY ARE OUT! THE ABC'S STRICT APPLICATION OF PENALTIES FOR SALES TO MINORS
  7. TTB Temporarily Fixes Problem with Fulfillment Warehouse Tax Credits - an “Alternate Procedure” for Paying Taxes & Reporting
  8. CUSTOMERS WHO HAVE HAD ONE TOO MANY - THE FREE TRANSPORTATION DILEMMA
  9. The Renaissance of Federal Unfair Trade Practices - Current Issues and Strategies
  10. ‘Twas the week before New Year’s and the ABC is out in Force – Alerts for the Last Week of 2017, including the Limits on Free Rides
  11. Big Bottles, Caviar and a CA Wine Strong Silent Auction for the Holidays!
  12. The FDA and the Wine and Spirits Industry – Surprise inspections anyone?
  13. NORTHERN CALIFORNIA WILDFIRES: UPDATED REGULATORY AGENCY DISASTER RELIEF RESOURCES AT A GLANCE
  14. NORTHERN CALIFORNIA WILDFIRES: REGULATORY AGENCY DISASTER RELIEF RESOURCES AT A GLANCE
  15. Soon to come to your Local Supermarket– Instant Redeemable Coupons of the digital age!
  16. The License Piggyback Dilemma – If it Sounds Too Good to be True, it Probably is
  17. A timely message from our Florida colleagues on the tied house laws, the three-tier system and the need for reform
  18. ABC Declaratory Rulings – A Modest Proposal Whose Time has Come
  19. More on FDA Inspections - Breweries, Distilleries and Questions
  20. WHY THE FDA IS INSPECTING WINERIES
  21. Senate Bill 378—The Proposed Demise of Due Process for Alcohol Licensees
  22. ABC Enforcement - Trends and Predictions
  23. The Corruption Chronicles – Volume One: A New Hope
  24. New Alcohol Delivery Oversight on the Horizon
  25. Michigan: Canary in the DtC Coal Mine?
  26. California ABC and Federal Credit Laws – Active Enforcement and Lots of Questions!
  27. Big Bottles For The Holidays - The Highest Calling Of The Winemaker's Art
  28. FINAL COMMENTS TO TTB NOTICE 160 DUE ON WEDNESDAY DECEMBER 7TH – WE ARE ASKING THE TTB TO EXTEND THE COMMENT PERIOD AGAIN TO ALLOW FOR INDUSTRY NEGOTIATION AND ALIGNMENT OF INTERESTS
  29. SONOMA COUNTY WINERY USE PERMITS, EVENT RESTICTIONS AND DTC
  30. New TTB Labeling Requirement Regulations: Out-of-State Bottling Is Not Created Equal and Consumers Right to Know Where the Grapes in their Wine Come from is Compromised
  31. Isn't A Written Agreement With A Distributor Worthless In A Franchise State?
  32. Crowd Funding for Alcohol Producers and Retailers – Down the Rabbit Hole with the Tied House laws
  33. Everything you ever wanted to know about the BPA Warning Statement but were afraid to ask
  34. AB 2082 - A Hunting License for Police and a Lethal Weapon for Politicians that Deprives Licensees of Currently Available Due Process Rights
  35. “Better Late Than Never”-- Judge in Illinois Dismisses 201 Sales Tax Cases against Retailers
  36. The Day the Music Almost Died: The Story of the BottleRock ABC Accusations, the ABC Appeals Board and a Victory for a Common Sense Interpretation of the Tied House Laws
  37. The Arsenic in Wine Class Action Dismissal – what it means
  38. Counterfeit or Artisanal Mexican Spirits? Pick your Poison, or your lime wedge
  39. Warning - CA ABC enforcement teams are on the prowl this weekend!
  40. RELIEF AT LAST! ILLINOIS MOVES TO FIX THE SALES TAX LAWSUITS AGAINST OUT-OF-STATE SELLERS BUT PROPOSES TO PENALIZE WINERIES AND RETAILERS THAT SHIP WITHOUT PERMITS
  41. The TTB Speaks on Category Management or, be Careful What you Ask for Because you might Get it!
  42. Hinman & Carmichael LLP Announces the Addition of Jeremy Siegel to its team of top beverage law lawyers
  43. 2016 LEGISLATIVE UPDATES: Part IV
  44. 2016 LEGISLATIVE UPDATES: Part III
  45. 2016 LEGISLATIVE UPDATES: Part II
  46. 2016 LEGISLATIVE UPDATES: Part I
  47. Hinman & Carmichael LLP is Hiring!
  48. John Hinman Presents NBI Webinar on Basics of Alcohol Beverage Law
  49. ABC DISMISSES SAVE MART GRAPE ESCAPE ACCUSATION BUT REFUSES TO ADOPT JUDGE’S DECISION FINDING NO STRICT LIABILITY FOR ABC VIOLATIONS
  50. Speakeasies are still with us, and proliferating!
  51. The War for the Soul of Sonoma County – the Winery Working Group Battle
  52. Santa Claus isn’t the only one coming to town this Christmas!
  53. Arizona's Direct to Consumer Shipping Rules - An Exercise in Complexity
  54. AB 780 - Social Media and the ABC: The California Legislative “Fix” that Fails
  55. Illinois Finally Offers Certainty and Relief for Victims of Sales Tax Lawsuits, but Prompt Action is Required in Pending Cases
  56. A Modest Proposal – Adopt the federal rule on Tied-House liability in California
  57. The Grapes Escaped - Why the First Amendment Matters
  58. Appellate Court Ruling Strikes Blow Against State’s Arbitrary Beer Label Ban
  59. Illinois Attorney General's Office Announces Intention to Dismiss False Claims Act Against Liquor Retailers
  60. Commercial Speech And Alcoholic Beverages - Part III
  61. Commercial Speech And Alcoholic Beverages - Part II
  62. Craft Beverages: Social Media Marketing the Effective and Compliant Way
  63. Commercial Speech And Alcoholic Beverages - Part I
  64. A LAYPERSON LOOKS AT ARSENIC IN WINE
  65. The Biggest Retailer in the World vs. the TABC
  66. Rebecca Stamey-White presents Emerging Issues in Wine Law
  67. Top Beverage Alcohol Law Firm Adds and Elevates Partners
  68. Illinois Qui Tam Lawsuits—Private Enforcement Of a State Claim: A Bonanza For A Plaintiff’s Lawyer And A Rip-Off Of Retailers
  69. BOOZE RULES OF SOCIAL MEDIA: The Retailer Right to Pay Exception
  70. LIONS AND TIGERS AND TWEETS, OH MY!
  71. AB 2004: Brewer's Incremental Parity with Wine Makers
  72. Expanding, Proud Of It, and Wanting to Tell the World
  73. DC Weighs in Strongly on Third Party Marketer Delivery Services
  74. “Visual Links” between Beer, Wine and Spirits Labels and Retailers Ruled Unlawful in California — the tied house laws run amok
  75. Hard Cider Legislative Update
  76. New Marketing Model for New York – Lot 18 and the NYSLA
  77. Sweeping Changes in Proposed NYSLA Bill Include Expansion for Craft
  78. Minimum Resale Price Policies - How to Control Price-Cutters
  79. AB 2130 – Gloves Off?
  80. “Gluten-Free” Labels for Wine, Beer and Distilled Spirits. We’re Still Waiting.
  81. AB 1252: Sanitation Overkill?
  82. Growlers: Not Just for Beer Anymore
  83. California Legislative Roundup 2014
  84. Build It and They Will Come: Craft Products Get New Privileges in CA and TX
  85. AB 1128: Veto of the “Serve a Minor” Felony Penalty Bill, or How to Lose a Winery in One Sale
  86. California Grocers Association v. ABC, Part 2: California Appeals Court Vacates ABC’s Adoption of a Trade Advisory That Correctly Guided Licensee Conduct
  87. California Grocers Association v. ABC, Part 1: California Appeals Court Prohibits Alcohol Sales at Self-Check Out Stands
  88. AB 1128: The “Serve a Minor” Felony Penalty Bill, or How to Lose a Winery in One Sale
  89. The New York SLA and Online Wine Sales: A Work in Progress
  90. California SB 635: What the 4am Bill Really Means for California Communities
  91. Electronic Invoices in California: Welcome to the 19th Century
  92. The History of Amazon and Wine: What Has Changed?
  93. Third Party Marketing Checklist
  94. BOOZE RULES – PROMOTIONAL APPEARANCES AND AUTOGRAPHS
  95. Washington State: Down the Rabbit Hole of the Tied-House Laws