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Compliance Enforcement in California - Ready?

On 1st January 2018, California joined seven other U.S. states and the District of Columbia in legalizing the sale and use of recreational marijuana. In doing so, the state not only opened the doors to America’s largest recreational marijuana market, but ushered in a new era of legal and regulatory oversight. And while California has a long, proud, and elaborate history of cannabis cultivation and distribution (including a massive medical marijuana industry), dispensaries and retailers have found the recent transition daunting to say the least.

Today, just six months after the official implementation of the Adult Use of Marijuana Act, the pitfalls of regulatory compliance are leaving more and more cannabis professionals vulnerable to targeted enforcement operations by the state’s Bureau of Cannabis Control (i.e., the BCC). Both the international and domestic press have noted a recent rise in enforcement operations, with close to 1,000 cease-and-desist orders issued since the start of January. And while many cannabis professionals may find this increase in enforcement unnerving, it is important to remember that the majority of cases focus on one single issue:

Licensing. As retailers have been forced to address the bureaucratic complexities of state regulation and compliance for the first time, it is no surprise that a large majority of the state’s dispensaries remain unlicensed. To survive and thrive in this rapidly shifting regulatory and enforcement landscape, dispensaries and retailers must evolve - and quickly. They must not only understand the required elements for proper licensing, but the methods and consequences of targeted legal enforcement as well.

Let’s take a deeper look at both.

Licensing Issues: A Brief Legislative History

As highlighted above, non-licensed retailers have (by a wide margin) been the main focus of BCC enforcement operations. This is no surprise given the complex, confusing, and often nuanced history of cannabis regulation in California.

Before passing Proposition 64, California was already home to one of the largest medicinal marijuana markets in the United States. In 2015, citing the need for increased regulation of the $2 billion medicinal industry, Gov. Jerry Brown signed a series of bills mandating the first set of comprehensive rules for the sale and use of medicinal marijuana in California (i.e.,the Medical Cannabis Regulation and Safety Act). Shortly thereafter, Proposition 64 was passed, calling for a regulatory/compliance implementation deadline of January 1, 2018. The plan going forward was for legislators to complete a draft version of the regulations governing medicinal marijuana (which they did), collect comments from the public (which they started to), and then use the public’s feedback to shape and issue a separate, but similar, body of laws governing the recreational sale and use of cannabis.

Confused? Hold on, it gets worse.

In June 2017, legislators decided to attach a new bill, Senate Bill 94 (i.e., the Medicinal and Adult-Use Cannabis Regulation and Safety Act), to the state budget. This bill called for the merging of the recreational and medicinal cannabis proposals into one comprehensive and unified system. The California legislature subsequently withdrew the previously proposed regulations for the medicinal sale and use of cannabis, and, in November 2017, the state’s three cannabis regulatory agencies (i.e., the Bureau of Cannabis Control, the CA Department of Food and Agriculture, and the CA Department of Public Health) released 276 pages of new rules.

These rules, adopted under the legislature’s “emergency procedure” provisions, are the most current regulations governing cannabis licensing in California, and apply to both the medicinal and recreational sectors. Final regulations on the topic are expected to be released within the next two months.

Protection From Enforcement: Proper Licensing

As our brief legislative history suggests, the process of developing the rules and regulations for legal cannabis in California was both confusing and chaotic.

Not only were many of the state’s properly licensed dispensaries left scrambling to adjust to the new regulations, but unlicensed retailers in the state’s “gray market” (i.e., the loosely regulated underground economy of non-collective, non-cooperative dispensaries) were for the first time forced to address the challenges of navigating legal compliance. And while some previously licensed retailers were given priority under the new regulations, many thousands of gray market retailers were not. For those dispensaries stuck in cannabis limbo, licensing compliance has evolved into an arduous and multi-pronged endeavor. And yet, it is quite obvious that the easiest way to avoid the legal consequences of BCC enforcement is to ensure compliance. Dispensaries must therefore look to acquire the following:

  1. A local permit
  2. A seller’s permit
  3. A state license to operate (temporary/annual)

The first and most immediate challenge for unlicensed retailers is local governance. Before any retailer can obtain a seller’s permit or a license to operate from the state, they must first get approval from a local city or county government (i.e., land permits, building permits, operator permits, etc.). This is easier said than done, as most cities in California have not approved recreational marijuana sales. In fact, the San Diego Union-Tribune places the number of cities and counties that have outright banned the sale or cultivation of cannabis at more than 70%.

Gray market retailers should begin the licensing process by exploring local cannabis policies and determining where to set up shop. Once local approval is secured, prospective retailers must then apply for a seller’s permit. Any business that wants to sell cannabis products in California must receive a seller’s permit from the California Department of Tax and Fee Administration. Finally, once a seller’s permit is granted, retailers (along with distributors, lab testers, micro-businesses, event organizers, and others) must apply for a state license through the Bureau of Cannabis Control.

While there are many other considerations retailers should take into account for regulatory compliance (i.e., tax obligations, employee obligations, fees, product specifications, etc.), non-compliance with licensing is the easiest path to an unpleasant encounter with BCC enforcement.

Targeted Legal Enforcement: What to Expect in the Near Future

The California Bureau of Cannabis Control appears committed to enforcing its new regulations. As recent media reports have confirmed, this enforcement is likely to begin with an order to cease-and-desist. As the first step in a series of gradual enforcement protocols, letters are typically delivered to alleged violators by postal service or by an inspector during an onsite inspection. A non-compliant party has 15 days to return the letter and describe how the violation was cured, or, in the alternative, request an informal hearing to contest the allegation. Serious violators who fail to comply with cease-and-desist orders will soon find themselves subject to progressively harsher disciplinary actions, including citations (potentially in the hundreds of thousands of dollars), license suspensions (if applicable), and the involvement of local law enforcement.

To date, there have been no reports of cooperation with local law enforcement, but this does not mean that it’s not in the works. As reported by the OC Register, BCC chief Lori Ajax recently commented that her agency is looking to step up enforcement activities in the second half of 2018 as temporary permits expire and the final regulatory rules are approved. According to Ajax, this is likely to entail on-site compliance inspections (and potentially closures) by the BCC in cooperation with local law enforcement and the CA Department of Consumers. One could also easily imagine the involvement of federal law enforcement as well, given Attorney General Jeff Sessions’ recent rejection of the lenient Obama-era guidelines for “state-legal” marijuana retailers (i.e., the “Cole Memo”).

One of the major concerns of licensed cannabis retailers is the fairness of market conditions. As such, another interesting area of enforcement to monitor is industry self-policing. Licensed retailers have consistently expressed their fear of being priced out of the market by unlicensed dispensaries not subject to the same taxes and fees. Given their concern, it’s no surprise that many retailers are now taking advantage of the Bureau’s online complaint system to report the nefarious behavior of their unlicensed peers. In fact, according to Alex Traverso, Chief of Communications for the Bureau, the BCC has received hundreds of online complaints from licensed dispensaries since the start of January.

To close, one final and important aspect to emphasize is the state’s increased focus on third-party businesses and their dealings with unlicensed retailers. A good example is the state's ongoing battle with Weedmaps, the industry’s largest “Yelp-styled” online marijuana database. The BCC sent the popular company a cease-and-desist order in February, demanding that they immediately stop advertising non-licensed cannabis retailers on their app and website. While there is no clear resolution in sight, the state’s actions clearly demonstrate that regulators will not hesitate to pursue third-party enterprises for directly or indirectly assisting non-licensed operators. Consultants, attorneys, equipment providers, and property owners should all be on notice.

In Conclusion

As California’s legal cannabis market is still in its infancy, it would not be surprising if enforcement activities rapidly evolve in the coming months. While compliance confusion is likely to persist with the pending release of the industry’s final regulations, the surest way to avoid running afoul of the Bureau of Cannabis Control and law enforcement is to ensure compliance with the regulations governing licensing.

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SOURCES

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