Speaking at a major cannabis conference in Toronto last month gave me a window into the current Canada-California cannabis connection that will likely prove useful in representing clients from both locations in the months ahead. The bottom line is, at the moment, the Canada and California cannabis industries can help each other in more ways than one.

Most know that in 2018 Canada became just the second nation to legalize commercial cannabis (Uruguay was the first). And, much has been written about Canadian investment funds seeking cannabis opportunities around the world, and especially in California, which is expected to be North America’s largest cannabis market by far.

Given this context, my colleague Karen Balderama and I traveled to Toronto to speak at the O’Cannabiz conference specifically to explain the due diligence steps that Canadian investors should undertake before deciding to put their money into a California cannabis company. We have represented both Canadian and U.S. companies on both sides of financing and M&A transactions. As a result, we have a good sense of the upsides and pitfalls.

We know that California companies need capital and that Canadians have it and are looking for deals. What we didn’t fully appreciate was the great extent to which Canada can use help from California (and other states and countries) to make their industry flourish. That’s mostly because product supply and advertising is so extraordinarily limited in Canada.

The restrictions are central to the origins of Canadian legalization, which Prime Minister Justin Trudeau promoted as a way to keep marijuana away from underage users and curb cannabis-related crime. Those goals were key to getting both houses of Parliament to approve legalization and have directly informed the national approach.

In years to come, Canada may loosen its tight regulations and the U.S. likely will modify or end the federal cannabis prohibition. That might decrease the need for cross-border collaboration. But for now, the Canadian and California cannabis industries can help each other out in big ways.

In light of that background, here are our top three takeaways about the current Canada-California cannabis connection.

1)  Canadian cannabis operators (as opposed to investors) who want to expand need open markets like California because Canada’s industry is so constrained. An example from Toronto makes this point. At 2.9 million, Toronto’s population is the largest in Canada. So far, Toronto has allowed five cannabis dispensaries. Oakland, California’s population is 425,000. Oakland has eight operating dispensaries and nine that are conditionally approved, according to the City’s website. While visiting Toronto, I observed lines at cannabis dispensaries measuring full city blocks. Toronto is not unique. Cannabis retail is constrained nationwide.

2)  Canadians are scouring the world (not just California) for opportunities. One conference session I attended was entitled Cannabis Deploys Stage 3: Global strategy in an Accelerating Market. Speakers at the session emphasized that in the near future cannabis companies will emerge that have an international reach, including in Europe, Central America and Asia. The recent news about the Canada pot giant Canopy Growth agreeing to purchase U.S.-based Acreage Holdings, fed into this narrative. “All of the large Canadian companies will have a presence in the U.S.,” said Hamish Sutherland, the President of White Sheep Corp., which focuses on international cannabinoid production. “It’s not a matter of ‘if,’ it’s ‘when.’” Speakers agreed that global cannabis companies would have a significant presence in California.

3)   California provides an opportunity for Canadian operators to create brand identities not available at home. Canada’s restrictive marketing rules mean that their cannabis packaging looks like the U.S. generic food labels from the 1980s. The labels are mostly black or white, except for a red stop sign sticker that includes a marijuana leaf and the letters “THC” and a bright yellow label warning that cannabis can be addictive. The limited branding is a manifestation of the original mission of limiting underage use, but it makes it very hard for entrepreneurs to differentiate their products from others.

In other words, effective product branding is not currently possible in Canada. In contrast, California’s history of a longstanding semi-legal cannabis industry has built-in cultural cache that is perpetuated by innovators creating some of the most clever and creative cannabis marketing in the world, which is generally allowed under state regulations (other than obvious attempts to attract children).

Governor Jerry Brown recently signed a bill that allows thousands of cannabis operators surviving on expiring temporary licenses to stay open for an additional year without new approval from local authorities.

Brown signed Senate Bill 1459 amid a flurry of legislation on September 27. The bill addresses a problem faced by much of the California commercial cannabis industry: the state cannot issue licenses to operators who have completed state applications until the relevant city or county provides approval, but that local approval has been very slow to come.

In response to the slow local process, the state provided applicants with the option of operating on a 120-day temporary license (and three 90-day extensions) until they were issued a standard state license. The state required some form local authorization to issue the temporary license, but not a finalized local permit. However, the temporary license program was only meant to be a short-term fix and is scheduled to expire on December 31, 2018. After that, a cannabis business could only operate if it obtained a standard license. Yet, many local governments are still moving at a snail’s pace.

Making matters worse, some local jurisdictions announced that they would not provide applicants with local approval for their standard state license unless the applicant had obtained a finalized local permit. In one example, The City of Oakland sent applicants a letter in April refusing to provide local approval for a standard (non-temporary) state license until the applicant had obtained a city permit. Meanwhile, permit-seekers who had filed complete applications more than six months prior were still awaiting inspections from Oakland’s Building and Fire departments, placing applicants in a Catch-22.
Recognizing the protracted delays at the local level, AB 1459 wrests some control from the hands of city and county agencies and gives the state “sole discretion” to decide whether to issue the new a 12-month “provisional” license. The state does not plan to hand out provisional licenses casually however, and has included its own criteria that applicants must meet. In order to be eligible for the provisional license, applicants must have met the following list of conditions:

• Submitted a completed a standard (non-temp) state license application
• Filed and signed a provisional license application under penalty of perjury
• Held or currently holding a temporary license
• Provided evidence that compliance with the California Environmental Quality Act is underway

The bill represents a lifeline for the vast majority of cannabis permit applicants in counties and cities facing long permitting backlogs that have occurred by no fault of their own.

In Oakland, hundreds of applicants are awaiting sign-off from the City’s Building and Fire Departments before their final permits can be issued. The departments’ staffs have been overwhelmed by the volume of applications and the new complexities that cannabis infrastructure presents.

John Oram, CEO of Oakland-based Bloom Innovations, which owns the popular NUG brand said, “99.9 percent of Oakland cannabis businesses would have had to shut down” while waiting for their local permit to be issued had the Governor not signed SB 1459.

“If the bill had not passed The City of Oakland could have chosen to deny local authorization, which would have forced us to close,” Oram said.

[Special thank you to guest contributor Ana Orozco for this post.]

Three weeks have passed since the three agencies overseeing the implementation of California’s new cannabis laws introduced their Proposed Permanent Cannabis Regulations and kicked off a 45-day public comment period. This means that Californians have roughly three weeks left to submit comments in writing, or at public hearings held throughout the state, that could modify the draft permanent regulations. The public review and comment period invites input from the general public and cannabis operators, as well as local governments.

One new and notable draft regulation strongly opposed by local governments and their representatives in Sacramento is the proposed expansion of delivery services to all cities and counties. When voters approved Proposition 64, local jurisdictions understood that the regulations implementing the proposition would give them broad discretion to regulate recreational cannabis, including prohibiting it altogether. However, when state agencies adopted the initial “emergency” regulations they did not address whether local jurisdictions could restrict the delivery of cannabis in their jurisdiction. The Proposed Permanent Cannabis Regulations clarify this ambiguity by stating “A delivery employee may deliver to any jurisdiction within the State of California.”

Not surprisingly, a vocal opponent of the draft permanent regulations is the League of California Cities, which deems protecting local authority in the state’s new cannabis laws a priority under its 2018 Strategic Goals. On July 26, 2018, the League of California Cities submitted a letter to the Bureau of Cannabis Control stating its opposition to the draft and concerns about maintaining local control. Specifically, the letter emphasizes Proposition 64’s stated intent to give cities authority over all commercial cannabis activity, highlights the financial costs cities face in protecting public safety, and questions the Bureau of Cannabis Control’s regulatory power to alter the statutory provisions.

The League’s reasoning against the draft permanent regulations echoes its opposition to Senate Bill 1302 – which also would have allowed cannabis delivery in all jurisdictions – and likely previews the feedback cities and counties will provide during the public comment period. SB 1302 was ordered inactive by its author, Senator Ricardo Lara one month before the draft permanent regulations were introduced. However, the opposition to SB 1302 sheds light on the groups that would oppose the draft permanent regulations. To list a few, SB 1302 was opposed by the California Police Chiefs Association, Urban Counties of California, Rural County Representatives of California, and California State Association of Counties. In a joint letter to Senator Lara, these organizations expressed their concerns about losing local control and fears of “a race to the bottom” effect, in which cannabis sellers flock to jurisdictions with permissive cannabis regulations and low taxes, creating over-concentrated cannabis commerce and monopolies in those jurisdictions.

While no formal statements regarding the draft permanent regulations have been issued by local government organizations, it is expected that they will use the same reasoning as in SB 1302 to oppose the provisions in the draft permanent regulations allowing the delivery of cannabis in all jurisdictions. The contentious discussion will continue  at the upcoming public hearings.

A legislative proposal to create a limited-service banking system for the California cannabis industry crossed an important hurdle last week when the State Senate Bank and Financial Institutions Committee unanimously approved the bill.

Senate Bill 930’s author State Sen. Robert Hertzberg (D-Van Nuys) introduced the bill on Jan. 25, 2018 to address the fact that the federal prohibition on marijuana makes traditional banking difficult for most California cannabis businesses. It would provide for “cannabis limited charter banks,” that could issue certified checks to pay state and local taxes, rent and vendors serving cannabis businesses. The bill is fairly general and would likely change and become more detailed were it to be approved by the State Legislature.

U.S. Treasury Department guidelines allow federally-chartered banks to serve cannabis clients, but require such banks to maintain records and issue special reports specifically on cannabis accounts. As a result, most commercial cannabis operators have chosen to transact in cash. This causes numerous practical challenges, including the need to transport and store large amounts of cash and the inability to write checks or make direct electronic deposits.

SB 930 addresses some of the banking issues facing cannabis businesses, but not all. The bill notes that cannabis limited charter banks will not be prohibited by the state from “obtaining private insurance,” but does not create a state-backed financial insurance option that would replace the Federal Deposit Insurance Corporation. In addition, the bill would limit payment options to paper checks, because electronic fund transfers are regulated by the federal Electronic Fund Transfer Act, placing any electronic transfers under federal authority.

Under SB 930, the California Department of Business Oversight would oversee the new limited banking system, but the department has not taken a position on Hertzberg’s bill. Last year, the department discussed setting up a network of financial institutions that would guarantee to federal banking regulators that the accounts they hold are subject to special tracking, oversight and transparency, but nothing concrete has come of those discussions.

There may be a significant tax break on the horizon for California’s growing legal cannabis market. A bi-partisan group of Assemblymembers introduced a bill (AB 3157) that will temporarily cut the state excise tax from 15% to 11% and eliminate the cultivation tax, which is currently $9.25 per ounce ($2.75 per ounce of cannabis leaf and $1.29 per ounce of fresh cannabis plant) until June 1, 2021. The bill is intended give the legal cannabis industry a chance for a strong start, encourage black and gray market cannabis operators to make the transition to the legal marketplace and prevent the black market from successfully competing with legally compliant tax-paying businesses.

AB 3157 will be welcome news to California’s cannabis entrepreneurs, many of whom are concerned about the ability of their businesses to survive under the heavy tax burden imposed by state and local governments, while simultaneously having to compete with a sophisticated and experienced black market. Assemblymember Rob Bonta (D-Oakland), a supporter of the bill, noted “California cannabis businesses are making significant investments as they embrace the regulated marketplace while, at the same time, being undercut by unregulated competitors.” Currently, California imposes an excise tax, cultivation tax, and sales tax, not to mention the license application fees, the general cost of complying with various state and local rules and regulations, and the usual corporate taxes. Local governments are also joining in and imposing significant cannabis taxes on local cannabis businesses, including sales taxes, cultivation taxes and other operation-specific taxes. On top of these state and local taxes, cannabis businesses are unable to deduct business expenses other than cost of goods sold (COGS) from their federal taxes due to 280E.

The Adult Use of Marijuana Act (AUMA) called for the regulation of cannabis to “reduce barriers to entry into the legal, regulated market,” and “tax the growth and sale of marijuana in a way that drives out the illicit market for marijuana and discourages use by minors and abuse.” The disproportionately high tax rate imposed on cannabis companies presents an incredibly high barrier to entry for a new or transitioning cannabis business. Additionally, the high prices that compliant cannabis businesses need to charge consumers in order to afford California rents and California taxes only encourage diversion, abuse and the growth of the black market. By temporarily relieving a portion of the heavy tax burden on cannabis companies while the industry gets its bearings, AB 3157’s supporters hope to reduce the disparity in price between the black market and the legal market for consumers and other operators along the supply chain.

Just in time for the holidays and during the final countdown to California’s cannabis legalization, Secretary of State Alex Padilla launched Cannabizfile, an online portal that provides information regarding the nuts and bolts for the business side of setting up a canna-business.

Cannabizfile provides links for searching and reserving company names, trademark registration forms, tips for starting a cannabis business, a link to licensing and taxation information and even a FAQ with a checklist of steps to start a canna-business in California.

I previously wrote that as of January 1 (actually January 2), for the first time, California cannabis companies will be able to obtain trademarks and service marks for their goods and services. Now that the recreational cannabis industry is coming into the day light, canna-businesses need to put their ducks in a row, following the same business practices that non-canna-businesses follow.

Entity Creation

Cannabis entities must decide if they want to operate under a fictitious business name, i.e. Bob Smith doing business as Smith’s Olde Weed Shop, or as a limited liability company, a corporation, a cooperative or a limited liability partnership. The Cannabizfile allows businesses to search their potential company name against existing names and to register their names.

But there’s more to creating an entity than picking a name.  Your entity needs bylaws, operating agreements, buy-sell agreements and other documents that spell out who owns what, and how the company will be run.  Taking the time to identify the company owners’ rights and obligations up front will save endless debate, arguments and litigation down the road.

What’s In a (Trade) Name?

The Cannabizfile includes a link to information to how canna-businesses can register their trademark or service mark. Unlike registration with the United States Patent and Trademark Office, the California Secretary of State’s office only grants rights within the State of California.  Given the projected massive size of California’s cannabis industry, obtaining trademark protection within California still confers huge benefits, including the right to prevent others from selling goods or services that are similar to your registered marks and the right to collect damages from those infringing your registered marks. The Cannabizfile provides that beginning January 2 customers may register their cannabis-related trademark or service mark and that in case of a tie (two or more applicants seeking the same or confusingly similar marks) priority will be given to the first filed.  Applications received by mail will be labeled received at 5:00 p.m. on the date received and applications received in person over the counter in Sacramento will be labeled at the actual time and date received.

Just Like Buying Concert Tickets Before the Internet

So if there’s a trademark that is so good you absolutely positively must have it, I suggest that on January 2, you set your alarm clock, drive to Sacramento and get in line for when they open at 8:00 a.m. as there is no mail service January 1 and it’s a state holiday so the Secretary of State’s counter will also be closed.

So get on your bad motor scooter and ride.

Last week the California Assembly passed Assembly Bill 64 (AB 64), an omnibus bill regarding medical and recreational marijuana, sending it to the State Senate for review.

Federal cannabis trademark registration appears unlikely under the current administration. The California cannabis industry and intellectual property lawyers are anticipating a trademark filing frenzy on January 1, 2018, when the California Secretary of State is scheduled to begin accepting trademark applications for cannabis goods and services.

Current Status: California Follows Federal Lead — No Cannabis Trademarks

Currently, the California Secretary of State will only register marks that are “substantially consistent with the federal system of trademark registration and protection under the Trademark Act of 1946 (15 U.S.C. §1051 et seq.) as amended. To that end, the construction given the federal act should be examined as non-binding authority for interpreting and construing this chapter.” Cal. Bus. & Prof. Code §14272.

The United States Patent and Trademark Office (USPTO) will only register trademarks relating to commerce “which may lawfully be regulated by Congress.” 15 U.S.C. §1127, and specifically the USPTO, requires that “use of a mark in commerce must be lawful use to be the basis for federal registration of the mark.” Trademark Manual of Examining Procedure §907.

AB 64 Untethers California from the USPTO Limitations

The Legislative Analyst’s Digest for AB 64 identifies the conflict between California and Federal law relating to marijuana’s legality and clarifies AB 64’s intended effect on marijuana trademarks:

(6) Existing law, the Model State Trademark Law, provides for the registration of trademarks and service marks with the Secretary of State and requires the classification of goods and services for those purposes to conform to the classifications adopted by the United States Patent and Trademark Office.

This bill, for purposes of marks for which a certificate of registration is issued on or after January 1, 2018, would, notwithstanding those provisions, authorize the use of specified classifications for marks related to medical cannabis and nonmedical cannabis goods and services that are lawfully in commerce under state law in the State of California. (Emphasis added).

Specifically, Section 2(a) of AB 64 adds Section 14235.5 to the Business and Professions Code, which will establish two new cannabis trademark and service mark classifications:

Classification “500 for goods that are medical cannabis, medical cannabis products, nonmedical cannabis, or nonmedical cannabis products;” and

Classification “501 for services related to medical cannabis, medical cannabis products, nonmedical cannabis, or nonmedical cannabis products.”

Countdown to January 1, 2018

In plain English, on January 1, 2018, cannabis businesses will finally be able to register trademarks and service marks for cannabis goods and services, including trademarks for specific cannabis strains, assuming the proposed marks satisfy the other registration requirements (i.e., distinctiveness, lack of likelihood of confusion with existing registered marks, etc.).

Given that California is the most populous state, that the California cannabis market is projected to reach $6.5 billion by 2020, and that it is currently impossible to obtain a nationwide trademark for cannabis products, the California Secretary of State may be overwhelmed with cannabis related trademark applications on January 2, 2018 (January 1 is an official  State holiday).

Unlike the USPTO, which does not require an applicant’s prior use of a mark to file an application (though proof of use is eventually needed for registration), California requires proof of actual use in commerce to file and register a trademark. Cal. Bus. & Prof. Code 14202(h). While existing cannabis trademarks already used in California may currently have common law trademark protection, registration with the Secretary of State will confer statewide rights and additional remedies.

Smart cannabusinesses should begin finding and using marks that will ultimately qualify for trademark registration well in advance of the January registration date.

* A Californian cannabusiness would have zero chance of obtaining Acapulco Gold trademark because it would be geographically misleading and because the strain is already widely used.

In 1996, Californians passed Proposition 215, the first medical marijuana initiative in the United States.  Since then, the California Legislature has enacted various laws relating to the medical marijuana industry, but there hasn’t been a comprehensive regulatory system. Until now.

Last week three California agencies issued a tangled web of proposed regulations regarding medical marijuana. The California Department of Food and Agriculture (CDFA), the California Department of Public Health (CDPH) and the California Bureau of Medical Cannabis Regulation (BMCR) each released proposed regulations. The agencies have scheduled public hearings and are inviting public comment on the proposed regulations.

The CDFA explains: “Because regulations are intended to transition California cannabis cultivation to a legitimate industry, cultivators will be provided the opportunity to operate in compliance with state laws and regulations applicable specifically to cannabis and California business requirements in general.”

The regulations cover everything from an annual license fees ($560 to $38,350), mandatory video surveillance systems, hours of operation (6:00 a.m. to 9:00 pm.) to the maximum quantity of THC per cannabis edible serving (10 milligrams).

The CDFA regulations require that applicants and licensees waive their privacy rights in effect, agreeing to immediately turn over any requested records and allow site inspections. The CDFA further mandates a “track-and-trace” system, which will allow the agency to monitor all plants and non-manufactured cannabis products.

The BMCR regulations require that delivery employees carry no more than $3,000 worth of cannabis goods at a time and also describe the logistics for BMCR’s quality assurance testing. Bringing a new definition to the term “drug testing.”

The CDPH regulations dictate packaging and labeling requirements, as well as manufacturing practices that are “substantially similar to the [Federal] Sherman Food and Drug Act and FDA requirements.”

Altogether, the three sets of regulations total over 200 pages of pretty dense reading, but various cannabis trade groups and stake holders have already drilled down into the regulations and begun weighing in on some of the pros and cons. It will  be interesting to see what kind of feedback the agencies receive and to what extent the agencies are willing to listen and actually make significant changes to the proposed regulations.

In November, Californians passed Proposition 64, allowing for recreational marijuana use. The state will begin issuing cultivation and dispensary licenses in January 2018. In January Governor Brown proposed a Budget Trailer Bill, seeking to “preserve the integrity and separation of the medicinal and adult use industry by maintaining these as two separate categories of license types with the same regulatory requirements for each.”

Many believe the recently proposed medical marijuana regulations will provide a blue print  for recreational marijuana regulations.

Yesterday, right on the cusp of 420, the California Supreme Court Committee on Judicial Ethics issued an opinion regarding “Extrajudicial Involvement in Marijuana Enterprises,” stating that judges should refrain from owning an interest in enterprises that sell or manufacture medical or recreational marijuana.

The Committee explained that California’s Proposition 215 (Compassionate Use Act (1996)) and Proposition 64 (Adult Use of Marijuana Act (2016)) did “not legalize medical or recreational marijuana” but rather that “they decriminalize certain marijuana offenses under California law.” However, “[d]espite the rapid decriminalization and new regulation of marijuana across the states, it remains a schedule I drug pursuant to the Controlled Substances Act. (21 U.S.C. §§ 801-904).”

The Opinion cited various canons proscribing judicial activities, including those requiring a judge to “respect and comply with the law” and “avoid impropriety and the appearance of impropriety…” and noted that Maryland, Washington and Colorado, three states that have decriminalized marijuana, have issued opinions prohibiting their state judges from participating in marijuana businesses.

The Committee suggested that a “reasonable person could conclude that a judge who disregards applicable marijuana laws for his or her own personal benefit is unable to act impartially anytime the judge rules on a marijuana-related matter” and that such lack of impartially could equally apply if the judge’s spouse participated in marijuana-related businesses.

The Committee concluded that a judge with “an interest in a marijuana-related business creates an appearance of impropriety, casts doubt on a judge’s ability to act impartially, and is incompatible with a judge’s obligations under canon 2 [impropriety] and canon 4A(1) [impartiality].”

However, the Opinion failed to address the hazier issue of whether California judges must also refrain from partaking of marijuana for medicinal or recreational use?  To date, there is no published ethics opinion on this issue.

The Committee appears to allude to that issue in its footnote: “The relatively recent enactment of state medical and recreational marijuana laws, and the conflict with federal law, presents a myriad of issues related to marijuana. However for purposes of this opinion, the committee addresses only the question presented [the ethics of judge having interest in marijuana enterprise].” In short, the Committee, and thus the California judiciary, face the same challenges faced by California residents; seeking to walk the tightrope between California law which permits medicinal and recreational cultivation, distribution and use and Federal law which forbids it.