Enforcement in California Commercial Cannabis

The year 2018 has been confusing so far for California’s commercial cannabis industry in terms of the conflict between federal and state legal regimes. It began with California formally opening its doors for licensed cannabis activity. That was soon followed by the U.S. Department of Justice rescinding its 2013 Cole Memo that deprioritized enforcement against state-legal cannabis operations — a move that sparked considerable concern among operators who had invested substantial resources to become legitimate, licensed cannabis businesses. Then we discovered that the former Republican speaker of the House, previously having been “unalterably opposed” to cannabis, had now become a board member of a cannabis investment company.

Next, we heard about a massive enforcement effort against cannabis grow operations in Sacramento involving one of the largest residential civil asset forfeiture efforts in U.S. history. Meantime, California continued to struggle with its persistent black market problem, as the vast majority of operators have declined to come into regulatory compliance, due in no small part to the enormous market advantage of not paying licensing fees or the extremely high taxes levied on legitimate cannabis businesses.

The uncertainty and apparent inconsistency begs the question, what are the current state and federal policies on cannabis enforcement in California? We don’t have a crystal ball, but we can glean some information based on what the state and federal government are saying and doing as of late. It’s good news.

We’ve previously observed how state and federal enforcement incentives have started to converge based on common interests. That convergence has continued and has actually become somewhat solidified through public statements of federal and state law enforcement officials. Recently, the U.S. Attorney for the Eastern District of California, McGregor Scott, issued informal guidance on his office’s cannabis enforcement goals: “The reality of the situation is there is so much black market marijuana in California that we could use all of our resources going after just the black market and never get there … So for right now, our priorities are to focus on what have been historically our federal law enforcement priorities: interstate trafficking, organized crime and the federal public lands.” To that end, the federal government will allocate $2.5 million towards enforcement against illegal grows on public land, a concern arising largely due to an increase in the use of banned pesticides on federal land in California.

It has not been lost on careful observers that Mr. Scott’s announced enforcement priorities align closely with those of the 2013 Cole Memo. Mr. Scott also appeared to distinguish the illegal operations he seeks to target from the legal cannabis regime that California is working to implement: “[California’s black market] is of biblical proportions and what we’re talking about here today is a classic example of that market—people who have no intent of ever entering the legal system that has been created and California has attempted to establish.” In other words, a top federal law enforcement authority in California seems to be conveying that the federal government will not prioritize licensed commercial cannabis operations that comply with California laws and regulations.

On the state side of things, the Bureau of Cannabis Control is working on finalizing its regulations and is continuing to process state licenses, and Governor Brown has sought to put teeth behind those regulations, requesting $14 million “to crack down on tax evasion, conspiracy and other financial crimes by the black market cannabis industry as well as stem the flow of illegal cannabis in the mail and parcel delivery systems.” At the same time, licensed cannabis businesses have started to speak out more forcefully against illegal operators, and rightfully so: black market businesses have an enormous market advantage in that they don’t pay taxes or licensing fees, and follow no advertising or distribution restrictions. While the cannabis industry was largely united behind Prop 64, which legalized cannabis in 2016, those alliances have diverged as some businesses have taken the legal route while others have remained in the shadows. In fact, we’ve now reached a point where licensees are filing formal complaints against illegal operators and local prosecutors are encouraging them to do so.

Given the federal government’s desire to protect public lands, eliminate organized criminal operations, and prevent interstate trafficking of cannabis, and given California’s desire to give meaning to its regulatory regime and prop up those operators that have spent the time, effort, and resources to become licensed citizens of the California cannabis industry, it’s no wonder that the previously unthinkable is now materializing: the federal government is now teaming up with the State of California to crack down on unlicensed cannabis operations. What comes next is uncertain, but one thing is clearer now than ever: commercial cannabis businesses in California are now exponentially better off from an enforcement standpoint if they can demonstrate compliance with California laws and regulation. That includes spending the time and effort to obtain a state license.

source https://www.cannalawblog.com/enforcement-in-california-commercial-cannabis/

Issues to Consider When Drafting Your Cannabis Licensing Agreement

Last week I had the pleasure of attending the International Trademark Association’s (INTA) Annual Meeting in Seattle, where trademark practitioners from around the world convened to geek out on all things brand-related. One of the prevalent topics of conversation was trademark licensing. While we’ve discussed at length some of the challenges of entering into Intellectual Property (“IP”) licensing deals in the cannabis industry, I thought it would be helpful to discuss a few of the key licensing terms discussed at INTA that should be negotiated in any trademark licensing deal, regardless of the industry.

1. Royalties

How payment will be structured is a pillar of any trademark licensing deal, and the way that royalties are structured can often be a source of contention between the licensee and licensor. In the cannabis industry, you’ll need to contemplate what royalty structures are permissible under state cannabis laws, and what implications a royalty based on revenue will have on your state cannabis license. For example, in Washington State, a licensing deal with a royalty structure based on profits or revenue would trigger the “true party of interest” requirements under the Liquor and Cannabis Board’s regulations. In California and Oregon, taking a royalty based on revenue or profit will qualify you as a “financial interest holder” in a licensee.

Other considerations include whether to ask for a lump sum payment up front (which is something that a licensor may be in favor of, but that might be burdensome to a start-up licensee). You’ll also need to determine the frequency of payments and what kind of accounting must be provided to the licensor.

2. Use of the licensed assets

In general, a licensor will want to exercise as much control as possible over the use of the licensed IP, where a licensee will likely prefer more flexibility. This can be a particularly difficult issue in a highly regulated industry like cannabis, where state regulations often limit the control a licensor can exercise over certain elements of the use of the IP. It is therefore critical for both parties to have a solid grasp of state cannabis regulations as they pertain to the use of the licensed IP.

3. Quality control

As with use of the licensed assets, a licensor will want to maintain as much control over the quality of the products sold under its licensed brand(s) as possible. In fact, licensors must exercise sufficient control over the quality of the products made pursuant to the license, or risk losing their trademark rights to abandonment. A licensee on the other hand will typically prefer less stringent quality control provisions and will at least seek provisions that provide it with an opportunity to cure or mitigate before license termination. A licensor may require that provisions granting an opportunity to cure be limited in certain ways, such as in the event of a breach that would cause serious reputational harm to the licensor.

4. Indemnification

Indemnification and limitation of liability are often heavily negotiated, where a licensor will both parties will typically require indemnification from the other for a variety of IP infringement and product liability problems.

5. Morality

This is one of the more interesting topics that was discussed at INTA, and is one that seems particularly relevant given many current events. A morality clause may be included in any licensing agreement, but is particularly relevant in agreements involving individual celebrities that are collaborating with brands. These agreements are becoming more and more prevalent in the cannabis industry. A morality clause will provide for termination of the agreement in situations where a party’s moral conduct does not conform with the standards provided for in the agreement. This could be limited to criminal acts, but need not be. The key is to clearly spell out all scenarios that could lead to termination in the agreement, and if a party to an agreement poses particular concerns to the other side, those concerns may be addressed through a morality clause.

Cannabis licensing deals are unique, and although these types of clauses may appear in any licensing agreement, the ways in which the parties approach them will be different, and will vary from jurisdiction to jurisdiction. As always, this makes it critical to incorporate a cannabis regulatory analysis into any IP licensing deal.

For more on cannabis IP licensing, check out the following:

• Marijuana Licensing Works Well When Done Well
• Cannabis IP Licensing 101
• Cannabis Franchising vs. Trademark Licensing: Get it Right or Face the Consequences
• Cannabis Intellectual Property Licensing: How to Avoid Litigation
• Cannabis IP Licensing Deals and SB 5131

source https://www.cannalawblog.com/issues-to-consider-when-drafting-your-cannabis-licensing-agreement/

Oregon Cannabis: Using the Initiative Process to Legalize Local Marijuana Businesses

The Business of Marijuana in Oregon: Join Us Thursday!

This Thursday, June 7th, our own Vince Sliwoski will co-chair an all-day continuing legal education (CLE) event in Portland called The Business of Marijuana in Oregon, along with Jesse Sweet, a lawyer and senior policy analyst at the Oregon Liquor Control Commission (OLCC). The roster of speakers lined up for this CLE is better than any year to date, and everyone, including non-lawyers, would be well served to attend. Other Harris Bricken lawyers presenting include Megan Vaniman (employment) and John Mansfield (litigation). For a full event description, including topics, speakers and registration links, click here.

Looking back over the past four years, it is amazing to see how much things have changed in Oregon cannabis. At this point, the OLCC’s recreational marijuana program is fully built out, with over 3,400 applicants now on file with the state. We are proud to call many of these Oregon producers, processors, wholesalers and retailers our clients, alongside the many investors and ancillary service providers we represent.

Sometimes, it is said that pioneers get slaughtered and settlers get rich. Now that the Oregon regulatory groundwork has stabilized, we have begun to see a second wave of entrepreneurs and investors move in on the local industry. Many of these new entrants bring skills, capital and experience from other regulated markets, while others are new to the space. Over the next year or so, we expect to see big changes in the marijuana industry, especially given OLCC’s announcement last week to pause the acceptance of new applications.

Oregon attorneys and business owners alike need to be familiar with the unique regulatory concepts and industry dynamics that will be discussed on Thursday in order to best serve the Oregon cannabis industry. These concepts include state laws and administrative rules, developments in the highly dynamic federal sphere, and practical approaches to working with and in the cannabis industry. Attendees will hear from regulators, bankers, CPAs, and, of course, lawyers aplenty.

If you are in or around Portland, we hope you will join us on Thursday for an eight-hour survey of Oregon cannabis that is both broad and deep. And if you are a Harris Bricken client or a friend of the firm, please click here to request a promotional discount code, which can be applied to either the webcast, or to in-person attendance.

See you soon.

source https://www.cannalawblog.com/the-business-of-marijuana-in-oregon-join-us-this-thursday/

Tomorrow’s California Primaries and Ballot Measures: How Will They Impact Cannabis?

Equity Financing: Top 5 Deal Terms Cannabis Founders Must Understand, Before the First Term Sheet

As Cannabis Businesses Grow, So Do Applicable Employment Laws: Part 3