Below is our letter of public comment submitted to California’s Bureau of Cannabis Control for the proposed text of regulations Section 5032(b) regarding commercial cannabis activity. If you share our viewpoint we urge you to repurpose this language and/or submit your own personalized position to the BCC before November 5, 2018. Instructions for submission of public comment by email or mail are found here: https://www.bcc.ca.gov/law_regs/17-065_public_comment.pdf
October 31, 2018
PUBLIC COMMENT: Bureau of Cannabis Control Proposed Text of Regulations – California Code of Regulations – Title 16 – Division 42
SUBJECT: Objection to Proposed Language for §5032(b) – Commercial Cannabis Activity
I submit this public comment regarding the Bureau’s modification to text of proposed regulations under §5032(b) on behalf of my California cannabis industry clients, and generally on behalf of all licensed California cannabis businesses, unlicensed ancillary business servicing the California cannabis industry, as well as all California attorneys representing clients and businesses within the California cannabis industry.
It is our opinion that the modified additions submitted under §5032(b) pertaining to activities between licensed operators and parties not licensed under the Act are overly broad, would unduly restrict ubiquitous existing legal business practices, would largely prohibit the necessary exchange and dissemination of important intellectual property within the industry, and would generally discourage investment, growth and legal, regulated participation in the industry.
Furthermore, the eleventh-hour submission of this proposed language stands to have an unnecessary and disruptive effect on the industry by nullifying or undoing countless binding contractual agreements and carefully-created corporate structures in and outside of California.
§ 5032. Designated M and A Commercial Cannabis Activity
(b) Licensees shall not conduct commercial cannabis activities on behalf of, at the request of, or pursuant to a contract with any person that is not licensed under the Act. Such prohibited commercial cannabis activities include, but are not limited to, the following:
(1) Procuring or purchasing cannabis goods from a licensed cultivator or licensed manufacturer.
(2) Manufacturing cannabis goods according to the specifications of a non-licensee.
(3) Packaging and labeling cannabis goods under a non-licensee’s brand or according to the specifications of a non-licensee.
(4) Distributing cannabis goods for a non-licensee.
Subsection (b) operates under an ambiguous and overly broad definition of “commercial cannabis activities” that risks encompassing parties and activities, arrangements and contracts presumably beyond the scope of what the Bureau reasonably intends, or is able to regulate and enforce.
The plain language states that such activities “are not limited” to the four examples provided in subsections (b)(1) – (b)(4). By one reading, any number of business-to-business transactions entered into, or ancillary services provided “pursuant to a contract” would be prohibited by mere affiliation with the licensed cannabis entity and commercial cannabis activity, simply because they include a party not licensed under the Act.
Would this include unlicensed parties as innocuous as insurance providers? Attorneys regularly inform and instruct on commercial cannabis activity for their licensed clients pursuant to retainer agreements. Would such arrangements and services now be prohibited? As an example more apropos to manufacturing, many cannabis manufacturers are contractually engaged with Chinese companies that license technology or other intellectual property, including standard operating procedures, for the final assembly, filling or packaging of cannabis products (e.g. vaporizer pens or cartridges containing cannabis extracts). Likewise, U.S. and Canadian cannabis companies not licensed in California, but licensed in their home jurisdiction, often enter into co-branding or license agreements with licensed California manufacturers producing goods for sale in state. Would all such agreements be void under the new language?
The below discussion detailing concerns over subsections (b)(2) and (b)(3) notwithstanding, we believe that in lieu of complete removal of subsection (b), the term “commercial cannabis activities” requires precise refinement to narrow the definition of the activities, interactions and agreements subject to the subsection’s prohibition. It is our contention that the phrase “pursuant to contract” is far too inclusive for use in relation to the subject matter of the subsection.
Subsections (b)(2) and (b)(3) further highlight the issue noted above in relation to licensed manufacturers’ necessary utilization of unlicensed third-party services, specialized skillsets and intellectual property in order to function properly and efficiently in their stipulated capacity. Limiting access to these crucial resources would only serve to negatively impact manufacturers by eliminating the flexibility to invest in their own research and development of products and brands, by cutting off the mechanism by which they can attract much-needed investment funds or business partnerships required for professional, compliant operations and growth under the Act, and by shrinking the pool of prospective contractors equipped to provide crucial expertise in the manufacturing of complex products.
In a more immediate sense, many brand manufacturers would suffer loss of revenue generated by existing white-labeling and brand licensing agreements, and in many cases would be forced to absorb the cost of corporate restructuring and legal fees to correct existing integrations between licensed entities and connected owner/interest-holding management and/or IP holding companies functioning respectively as service providers and licensors.
California operators have long been innovators in the cannabis space, and the language of the subsection could also effectively disrupt present and future dissemination of valuable intellectual property to operators in other states with legal regulated cannabis markets, again depriving our California companies of the ability to capitalize on research and development and court additional investors.
It is also worth noting that the addition of subsection (b) would leave California as the only legalized state in the union to bar third-party IP licensing deals of this nature.
Lastly, the result of the subsection’s language would also yield negative consequences for parties aside from licensed manufacturers. Consumers are likely to suffer limited exposure to quality and consistent products via lack of awareness and brand recognition that is essential to overall consumer protection, particularly within an emerging regulated market. Restricting an important conduit to the regulated market for smaller brand owners and contractors without the resources to obtain a manufacturing license would also have the counterproductive effect of pushing business and know-how back into the service of a black market.
It is understood that the Bureau desires a means by which to track participation within the regulated market, and to that end the language of subsection (b)(4) is a sensible prohibition when examined in isolation. However, the remaining language of subsection (b) achieves control over participation at the expense of the greater health and functionality of the industry and its participants, both licensed and unlicensed. Existing disclosure requirements for owners and financial interest holders of licensed entities already largely fulfill the need to monitor participation, and similar disclosure requirements could be employed to close perceived remaining loopholes. In contrast, §5032(b) would impose a drastic ban on participation, and place disruptively burdensome restrictions on licensed operators and their business partners. It is therefore our opinion that the language of the subsection should be removed if not fundamentally refined.
James P. Marion, Esq.
Principal Attorney, Law Offices of James P. Marion, Esq.
California Bar Member