As McAllister Garfield, P.C. announced several days ago, the California cannabis regulators have released new draft permanent regulations on October 19, 2018.
See BCC regs at:
The agencies are taking public comment on these rules until the close of business on November 5, 2018.
The main issue that has concerned McAllister Garfield, P.C. is the draft rules appear to ban white labeling, or intellectual property licensing or royalty agreements. Amended section 5032(b) of the draft permanent rules says:
(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.
On its face, this provision will mean that no one or entity who is not a California licensee can create the manufacturing, packaging or labeling standards for a cannabis product. In other words, simple IP licensing agreements will not be allowed in California under these proposed rules. Sean McAllister attended a talk of the lead regulatory, Lori Ajax, after these rules were proposed and Ms. Ajax has indicated that her agency will provide clarifying explanations of this and other provisions to attempt to put the industry at ease. Until then, there may be potential solutions to this prohibition on simple licensing agreements, including making the branding company obtain some kind of California license or making the branding company a part owner of the company that intends to produce the product. There are several compliant work arounds that McAllister Garfield, P.C. is considering at this time.
In addition to this major changes, there were other changes that may have a significant impact on cannabis businesses, including: (1) changes to the ownership definitions in rule 5003 that now encompass people receiving a percentage of profits in the business or controlling the business in any way (including by controlling branding or marketing); (2) broader requirements for disclosure of parties providing direct or indirect financial assistance to companies in rule 5004 including consultants, brokers, and salespeople who earn a commission; (3) allowing distributors to roll pre-rolls in rule 5303; (4) Cal OSHA approved training requirements, (4) a clarification of how multiple licensees can share one space in rule 5025; (5) distributor to distributor transfers in rule 5307.2; and (6) new child-resistant packaging requirements in rule 5413.
It is imperative that those effected by these rules make public comments to the agencies by November 5, 2018. McAllister Garfield, P.C. continues to be active in the California cannabis industry with clients all across the state. The Firm has grown to 6 lawyers across California, with its main base in Los Angeles.
If you have any questions about these important changes, do not hesitate to contact Sean McAllister or Navid Brewster.
Sean T. McAllister, Esq.