Author: hburkelegalgmail-com


Origin Group Law LLP’s Statement re Appellation Petition Support Services

Community, 

In anticipation of the coming opening of CDFA’s appellations program, Sarah and I wanted to publish the limited appellation-related services we are offering in an effort to make the process of selecting legal support as streamlined and transparent as possible. 

Our firm is breaking the work into two categories: (1) entity and business development (i.e. “the legal stuff”) and (2) project management (i.e. drafting the petition and collaborating with consultants and soil/water/geological scientists). Not all of that work needs to be done by an attorney, so here’s more detail about our available services, as well as a few suggestions to best manage the appellation petition preparation process: 

Entity Formation and Contract Drafting Services (The “Legal Stuff”)

For simple liability reasons, our firm is likely to advise hopeful appellation groups to structure their appellations as business entities (LLCs, corporations, b corps, etc.) with appropriate arm’s length agreements between the appellation business entity and the farmer-members’ entities. This is true legal work that should be performed by an attorney.

Formation documents often form the basis of ownership disputes in the future, so thoughtful entity formation and governance is often critical to the sustained success of a new business venture, especially in light of the legacy (i.e. long game) strategy of the appellations program. 

Project Management Services 

As we’ve done for clients many times in the past, we will likely prepare a “Project Management Task List” and use that document to delegate tasks and to calendar deadlines for task deliverables. In that document, we will name a project manager, identify team member roles/responsibilities, and track assigned consultant or scientific reports (including due dates). 

Our Project Management Task Lists ensure all tasks are being handled, that everyone has clear responsibilities, and that communications are efficient. 

Petition Drafting Services

Appellations petitions require two different types of reports: (1) technical (i.e. scientific) reports and (2) non-technical (i.e. not scientific) reports. Due to the significant time it takes to draft these reports, preparation of these documents is the most expensive and time consuming piece of any application process. Taking the time to delegate each writing task in a cost-effective manner can save THOUSANDS of dollars. No joke.   

For example, it may be more cost-effective to assign the bulk of the non-technical drafting work if someone in the appellation’s core team is proficient in writing narrative-style reports for the various regulatory agencies (CDFA, CDFW, water board, etc.) since those reports require a similar skill set. Another way we keep our clients’ drafting costs down is the use of template and sample documents, which we prepare based on the regulations and usually include writing prompts. That way, folks can fill the narrative reports themselves (and save $$ on drafting costs).  

In any event, we will support our clients in non-technical drafting in whatever way makes sense.

Regulatory and Land-Use Support Services

As with any new venture in California cannabis agriculture, the application of commercial standards to what would otherwise amount to pure agricultural activity leads to intensive regulatory and land-use issues. Just as with local land-use permits and state licensing, this type of work can be performed by any competent consultant and oftentimes by the appellation groups themselves. We can, however, provide oversight and guidance when needed. 

Attorney’s Fees

As with all our services, our fees for appellation development and petition support are negotiable and, to ensure our rates are fair, we intend to graduate our billable rates based on the complexity of the services required. For example, petition drafting services will be billed at a lower rate than legal and entity structuring tasks. 

CONCLUSION 

Sarah and I are committed to seeing California’s appellations through to a new era of business transactions where the craft cannabis produced in our hills fetches the highest price in the regulated marketplace. We understand the importance of this program to our shared community and are hopeful for the honor in assisting in this historic endeavor. 

~hb 

*This post is subject to Rule 7.1-7.3 of the Rules of Professional Conduct. This communication (1) is an advertisement, (2) may not contain any untrue statement, and (3) is directed to the general public via a website. Our firm’s name and address is Origin Group Law LLP: 431 Uren Street, Suite C, Nevada City, CA 95959.

Products Liability Insurance Issues for California’s Regulated Cannabis Farmers

When it comes to minimizing risk for farmers, products liability insurance is probably the most important thing no one forces a cannabis farmer to obtain. While products liability insurance gets overlooked because no agency demands proof of coverage, this type of insurance coverage is necessary to protect against consumer claims. It only takes one products liability lawsuit to bankrupt a new business.

Products Liability Overview

Sick or injured consumers regularly file products liability lawsuits claiming a product caused their sickness or their injury. These claims take many forms, including injuries caused by (1) contamination, (2) design defects, (3) improper warnings, and (4) mislabeling, among others. Product liability claims in the cannabis industry are perhaps inevitable, especially given cannabis’ recent arrival to the regulated marketplace and residual notions of reefer madness. 

Suing the Supply Chain

Some (but not all) of these types of claims are subject to “strict liability” which means a farmer (or manufacturer or distributor or retailer)’s intent and their regulatory compliance do not matter. Indeed, everyone who participated in bringing the product to market can be held responsible under a strict liability theory, from the farmer all the way through the supply chain to the retailer. Even worse, folks in the supply chain can be held liable under a strict liability theory, even when they took reasonable steps to prevent the product defect that is alleged to have caused the consumer (aka the plaintiff) sickness or injury.

Even if strict liability isn’t in play, it may be hard for a consumer to prove exactly when the product was supposedly contaminated so everyone in the supply chain is usually named as a defendant. For example, just yesterday a Southern California law firm announced a products liability lawsuit against Kushy Punch, an edibles company, claiming the cannabis edible caused the death of a young woman named Le’Sharia Bre’Aun Steele. Notably, the lawsuit names the grower (an indoor producer in Adelanto or Cathedral City), the manufacturer (Kushy Punch), the retailer (Urbn Leaf in San Diego), in addition to several others which we presume are the distribution company, perhaps a transport company, and/or any parent companies. 

The scariest part about product liability is that some unlucky cultivators will get dragged in to these types of lawsuits even if the harm had nothing to do with the cannabis or if the cannabis became harmful after it left the farm. Mounting a legal defense is extremely expensive in these cases. 

Fortunately, a product liability insurance policy can help.

The Duty to Defend

I spent the first half of my career as a civil litigator and represented lots of small businesses that got sued because they touched a project that went bad. Oftentimes it wasn’t their fault, but proving that takes time and (expensive) expert witnesses. My clients couldn’t afford that, but my legal bills were sent to the insurance company because insurance policies often contain a “duty to defend.” The product liability policy’s “duty to defend” requirement means the insurance company has to provide a legal defense if you get sued for something your policy would cover. 

Subrogation

Subrogation is when an insurance company goes after a third-party to recover amounts paid on behalf of their own policy-holder. For instance, if a consumer is hurt and their insurance is paying millions of dollars in medical bill, the consumer may be required to cooperate with their insurance company’s efforts to recover those losses by suing the supply chain. 

Additional Insureds 

If the buyer of the farmer’s cannabis is willing/able to list the farmer as an “additional insured,” farmers might be able to get around buying products liability insurance. However, a buyer’s product liability policy holder (aka the insurance company) may not be willing to add the farmer as an additional insured where the buyer is acting as a mere middleman to packaged products, though it is likely the insurance company will have any problems adding a farmer in a bulk wholesale situation.  

When the one party is added to the other’s product liability policy, the insurance company will defend the farmer too. Additionally, the insurance company can’t force their policy holder to sue the additionally insured party because insurance companies can’t pursue subrogation against people covered under the same policy.

We expect to see the use of additional insured increase in the coming years, both by the farmer and by buyers in the regulated marketplace. 

Understanding the Policy Exclusions

Cannabis farmers must be savvy insurance shoppers, meaning a farmer should not assume a product liability claim will be covered just because they paid for product liability insurance. All of the policies need to be reviewed for “federally unlawful conduct” exclusions. Additionally, product liability policies can also exclude intoxicants, carcinogens, and hardware, which is critically important if the product is going to a manufacturer. 

Cannabis farmers must disclose to the insurance agent that the farmer is a cannabis business, and then the farmer must ask about exclusions and policy types. Some policies only cover claims that are made during the policy period, while others focus on when the injury itself occurred. Look for insurance agencies that cater to cannabis companies – a cannabis farmer might pay a little more, but they are better equipped to address coverage issues unique to cannabis.

Conclusion

Products liability claims are scary, and no one wants to be accused of producing a product that harms another human. But this is how business is in the United States whether we like it or not, so products liability lawsuits are a risk that go hand in hand with putting products into the market. There’s simply no possible way to prevent all potential claims. 

Notably, however, products liability insurance should be able to protect the policyholder and any additional insured, so we sincerely hope folks take this protection seriously and get a meaningful policy in place before putting their cannabis into the marketplace.

Authored by Sarah Smale

Edited by Heather Burke

Gettin’ Paid: A 2020 Debt Collection Primer for California Cannabis Farmers

In the first few years of regulated cannabis activity in California, many (if not most) cannabis farmers did not get paid for their product on time and, in some cases, they didn’t get paid at all. Debt collection quickly became a hot topic, as unpaid farmers waded through their legal options, from selling the debt to full tilt civil litigation. In those situations, a written contract almost always helps the farmer, which means oral agreements often hurt the producer (aka the farmer) more than the buyer (aka the distributor or manufacturer). To be sure, the best defense is a good offense (just sayin’).

While we are hoping to see more on-time payments this year, here’s a quick reminder of the debt-collection issues in play for the 2020 harvest season just in case:

1.  Private Debt Collectors

There are a few private companies who will buy or assume a farmer’s outstanding debt, oftentimes at pennies on the dollar. Although there are lots of ads for these companies on the internet, we’ve not yet heard of a debt collection company actually getting a farmer their money in the California cannabis farming context, but our fingers are crossed that this method becomes more viable in the future.

If a farmer decides to go with a private debt collection company, it’s important to keep the statute of limitation in mind, so it’s wise to check with an attorney regarding how much time to give the debt collector to collect.

2.   A Demand Letter

A “demand letter” is a letter demanding that someone pay a debt as agreed, and this is often the first step in more aggressively going after an unpaid debt. A demand letter does not necessarily need to be written by an attorney, though a formal demand is often a legal requirement before suing someone, yet they also might used as evidence down the road. That’s why demand letters should be prepared with the nuanced case-specific legal issues in mind.

Demand letters can do more harm than good if they are sloppy, admit a weakness in the case, or disclose a legal strategy too soon. Be wary of sending out demand letters without properly vetting the legal issues and the legal strategy, including avoiding making any damaging admissions. Consider sending the demand letter confidentially, pursuant to California’s strong public policy in favor of private settlements of disputes. See California Evidence Code Section 1152 and consider adding this statement to the beginning of your demand letter: “The following is a confidential settlement communication pursuant to California Evidence Code Section 1152. Offers of compromise in settlement negotiations are inadmissible to prove liability for loss or damage.”

3 . Alternative Dispute Resolution

Sometimes folks who are disputing a debt are willing to go to mediation or arbitration to keep the dispute out of court. Alternative dispute resolution (ADR) procedures such as mediation and arbitration are most helpful where there is some disagreement about the outstanding payment, such as who is responsible for a product that fails testing after a distributor fails to quarantine the product appropriately. Mediation is never binding; it is simply the use of an experienced neutral to help the parties reach a compromise. Arbitration can be binding or non-binding and takes the place of a court trial. In both mediation and arbitration, both parties have to agree to participate (though in certain cases with respect to arbitration, a party could be compelled to arbitrate based on a contract clause, for example).

However, ADR is less helpful if the buyer is simply ignoring the seller (aka “radio silence”) or is going out of business (which is unfortunately common in California cannabis), since ADR is most effective when both parties are engaged in the process.

4.  Breach of Contract Lawsuit

If a demand goes unanswered, the next step may be to institute a legal case, a.k.a. litigation. If the farmer takes the buyer to court, the primary “causes of action” or “claims” would likely be related to breach of the agreement to pay money to the farmer for their product and that buyer’s unjust enrichment off of the farmer’s product.

Many farmers “eat” their losses and instead choose not to sue because litigation is costly, stressful, and time consuming, but keep in mind that attorneys’ fees are often in play in breach of contract actions, meaning the party that wins the lawsuit may be able to have their attorneys’ fees added to the other side’s bill. In oral agreements, there is almost never an enforceable agreement for attorneys’ fees- another point in favor of always using a professionally written contract.

5.  Foreclosing on a Security Interest or Producer’s Lien

A security interest is simply collateral from one party to another for an unpaid debt. Security interests can take many forms but the main point is that the farmer (who holds the security interest) may be able to get paid out on a priority basis if the buyer goes out of business and ends up selling off its assets.  We often recommend security interests wherever the sells their entire season in a single transaction under an agreement to pay the farmer at some later date.

In addition to security interests granted in a written purchase agreement, California law thankfully offers farmers an “producer’s lien,” which is a special type of security interest that farmers keep in their product after a buyer takes possession of the product before paying. A producer’s lien is an implied security interest, meaning the parties do not need to have a written contract in place for the lien to exist: it is automatic, provided they do not waive the producer’s lien in any written agreement.

While CDFA does offer an administrative avenue for foreclosing on a producer’s lien, cannabis farmers are not yet eligible to use that option. This means that cannabis farmers can only foreclose their producer’s lien in a civil court at this time. There is no precedent (as far as we’re aware) applying the producer’s lien in the cannabis context, though the law is fairly clear, so we assume this lien will be applied in the cannabis context at some point in the future.

Additionally, the producer’s lien may be extinguished if the buyer sells the product to a third-party, as is often the case with cannabis distributors who are acting as an intermediary (aka middle-man/broker). In such a case, the farmer may want to consider filing an injunction to stop the distributor from selling the cannabis to another party.

Moving forward, we hope written security interests become more common in California’s cannabis purchase agreements, since they offer the farmer the most protection. If a distro or manufacturer is taking the farmer’s entire season in a single transaction without paying at the time of delivery, security interests are a fair request.

CLOSING

In closing, these are worst case scenarios that generally only come into play when the farmer is already under financial stress due to the lack of payment. So the processes for going after an unpaid debt are often shrouded in a cloud of negativity and are not utilized. However, these formal processes are designed to protect sellers from unscrupulous buyers, meaning these systems may suck, but they can be powerful tools to protect farmers from getting ripped off.

Use of a written contract with an attorneys’ fees clause will provide the most protection in the event of non-payment, as the attorneys’ fees clause makes it harder for the buyer to justify the cost of the fight if the case were to proceed through trial and result in a prevailing party attorneys’ fee award. If all of this information is making your head spin, reach out to an attorney knowledgeable about the California cannabis industry and breach of contract actions.

Massive gratitude to Katy M. Young of Ad Astra Law Group LPP in San Francisco, one of Sarah and my favorite civil litigators of all time, for co-authoring this blog with me. Stay safe please!

Heather Burke (Origin Group Law LLP)

To sign up for Origin Group Law LLP’s blog list, please go HERE.

Katy M. Young, Ad Astra Law Group LLP

For Ad Astra Law Group LLP’s blog, please go HERE.

The Humboldt County Cannabis Marketing Assessment: An Overview

Community,

While many of us in the world of cannabis agriculture were scurrying about to get our appellation comments in to CDFA last week, Humboldt County also closed its open comment period on a critically important document relating to the future of region-based cannabis marketing within the County: the Humboldt County Cannabis Marketing Assessment.

The marketing assessment is a brilliant document prepared by the Humboldt County Growers Alliance that (1) compares and contrasts various regional-based marketing programs utilized by agricultural-producing communities in other regions, and (2) makes recommendations to Humboldt County to begin the process to identify and implement a formal regional marketing strategy. Notably, the marketing assessment recommends that Humboldt County’s regional marketing strategy be framed as a public-private venture between the County and the local cannabis industry, that a marketing committee be empaneled to ensure tax funds are used appropriately, and the County implement a County-wide stamp/certification mark program, among numerous other recommendations.

Sarah and I submitted lengthy comments in support, which can be found online HERE. Here is an overview of our comments:

Regional and Supply Chain Dynamics: A Farmer-First Approach

Our primary request was that the County employ a “farmer-first” approach in these policy developments. Since a agricultural marketing strategy starts with the farmer, its critical Humboldt County’s cannabis farmers have a strong voice in the shaping of these policies. While everyone in the supply chain (manufacturers, distro, retail, labs) and related stakeholders (the County government, local environmental groups, etc.) must have a meaningful place in these discussion, the economic health of the agricultural origins of the supply chain is critical to a successful regional marketing program.

In addition to the supply chain dynamics, Humboldt County is a massive County with disparate growing regions. Regional dynamics are an asset rather than a liability and, as such, the interplay among the various producing-enclaves in a Countywide program must be addressed head on at the outset.

More Procedural Clarity Needed

Despite attending two of the County’s public input meetings, I’m still unclear as to what the next steps are. Is the County going to approve the marketing strategy as-is or will further public input be taken? We’ve asked the County for more insight and look forward to the County’s response to our procedural questions in the coming weeks.

In any event, the Humboldt County cannabis industry must look closely at the different examples (Kona and Colombian coffee, Napa Valley and Bordeaux wine) and see what fits and what does not. For instance, we need further input from the community as to (1) what level of government-private partnership is appropriate for Humboldt County GIs, i.e. determining the best organizational structure based on the industry’s unique history and its desired roles/responsibilities, and the related issue regarding (2) who owns and who enforces the intellectual property that is the Humboldt County name and the local appellation name, including any related certification marks.

These are not easy questions but thankfully the marketing assessment’s compare and contrast approach offers Humboldt County the opportunity to develop a thoughtful and sophisticated regional marketing strategy based on our unique history and our goals.

The Marketing Assessment as a Baseline  

We believe the marketing assessment is the right first step forward for Humboldt County cannabis to assume its place as a global industry leader, and we asked that the document serve as the baseline from which the County works to enact a robust marketing strategy.

In closing, the Humboldt County Marketing Assessment is the most exciting policy development of the year, in our humble view. Everything cannabis farmers have ever asked for is on the table here (craft market boost, increased value for environmentally sustainable and regionally-based products, equity participation, long game strategy, a united supply chain, government protection/enforcement against interlopers, and so on). Let’s go get it.

~hb

#protectourfarmers

Contracts Overview: What Paper to Push? (+ a Sample Purchase Contract). PART 5 OF 5: THE BUSINESS FUNDAMENTALS EVERY CALIFORNIA CANNABIS COMPANY NEEDS TO KNOW.

This final blog in our 5-part series regarding California cannabis contracts focuses on the types of contracts to be used in different scenarios. Here’s a rundown of the most common agreements:

1.  PURCHASE OR SALES AGREEMENTS

 A purchase or a sale agreement is a contract to buy or sell something. These types of agreements are used most commonly when a distributor or a manufacturer buys a set quantity of cannabis flower, cannabis leaf, or fresh cannabis plant. Purchase agreements can be a one-time transaction, or folks will often style them as “master agreements,” which allow the parties to continue to buy and sell to each other multiple times using only “purchase orders” (which are issued by a buyer) and “invoices” (which are issued by a seller).

Here’s a sample master purchase agreement but BEWARE that this sample is pro-seller or, in other words, this contract includes farmer friendly terms.  Additionally, there is no one-size-fits-all type of contract, so this sample document must be vetted thoroughly before use. Please have your attorney review this document in full before deciding if the deal structure laid out in this agreement makes sense for any particular transaction. All use of the Sample Master Purchase Agreement (Pro-Farmer) is subject to the Terms and Conditions of Use.

SAMPLE MASTER PURCHASE AGREEMENT (PRO-FARMER)

2.  SERVICES AGREEMENTS

 A services agreement is a contract to provide a service or to hire a service. The most common services agreements we see in the California cannabis context are where the distributor or the manufacturer do not take title to the farmer’s cannabis and, instead, perform distribution services or manufacturing services. In such a scenario, the farmer is legally hiring the distributor (usually as an independent contractor) to perform services, such as pickup, storage, lab testing, and so on.

3.  HYBRID SALES AND SERVICE AGREEMENTS.

 Many transactions we encounter today are hybrids of a purchase and service agreement, in that the distributor will pick up the cannabis, store it, and perform lab testing, all as a “service” to the farmer (with resulting costs being deducted from the farmer’s sale price), with an additional agreement to buy the cannabis after the lab testing comes in.  Although this is common today, it is often wise to parse out the two agreements into separate documents, i.e. a services agreement and a purchase agreement, so that everyone’s roles remain clear.

The most common difficulty in these types of hybrid purchase/sale agreements is where the distro is hired to perform trimming services, but does not perform the trimming services to the farmer’s quality standards. In such a case, who pays for the loss to the value of the product caused by the distro’s terrible trim job? The way most of these types of deals are currently structured, the farmer has to accept that loss, which would be less likely if the two different relationships (i.e. the service relationship and the buy/sell relationship) were clearly laid out.

4.  LICENSING AGREEMENTS

 Any time a farmer’s name or logo is used on a jar or a subsequent product, intellectual property agreements are in play, whether the parties realize it or not. If the distro or manufacturer intends to use the farmer’s name or logo, the agreement between the parties (i.e. the purchase agreement or the services agreement) should address whether the buyer can use the farmer’s name or logo.

For more complicated agreements such as a co-branding type of arrangement, such as where the farmer’s name or logo will be prominently displayed, it may make sense to use a totally separate licensing agreement. However, if the use of the farmer’s name or logo will be less prominent, such as where the farmer’s name and license number will be printed on the back of the jar for attribution (i.e. giving credit), then these more simple agreements can be added to the underlying purchase or services agreement.

Don’t forget that use of a farmer’s name and logo can increase the value of a product. As such, additional consideration (i.e. money) to the farmer for use of their intellectual property is always on the table (in other words, it’s totally acceptable to ask for more money if the distro is going to use the farmer’s name or logo to sell the product).

5.  NONDISCLOSURE AGREEMENTS

Confidentiality agreements are common in business and can be used wherever two parties are beginning to engage in discussions regarding a potential sale. We often suggest adding a standard NDA to a party’s initial due diligence document review procedures when vetting a potential buyer or seller, so that this protective measure becomes more commonplace in the industry.  At minimum, every California cannabis company should have a standard NDA on hand.

CONCLUSION

Although there are as many types of contracts as there are ways to structure a transaction, these are the most common agreements California cannabis entrepreneurs will encounter on a regular basis, so it’s wise to be familiar with them.

Huge thank you to Virginia Ryan, my co-author in this blog series whose experience in transactions has been invaluable. I’m deeply grateful for all the knowledge you dropped.

Additional thanks to my business partner and legal guru, Sarah Smale, as well as Lauren Mendelsohn at the Law Offices of Omar Figueroa, Jeffrey Hamilton of Farella, Braun, and Martel, Shay Gilmore of The Law Office of Shay Aaron Gilmore, and Holly Carter of Oxalis Integrative Services all of whom reviewed the sample purchase agreement and gave valuable insight, in addition to Virginia Ryan. I’m deeply grateful.

Happy harvest all. Please stay safe. ~hb

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CANNABIS APPELLATIONS AND INTELLECTUAL PROPERTY: WHAT A HOPEFUL APPELLATION NEEDS TO KNOW NOW.

Intellectual property is a type of law that sets the rules for laying claim to the creations of your mind. Cannabis appellations, i.e. the program which communicates to a consumer that a product’s essence is due to its unique region of production, falls under the ambit of intellectual property.

Intellectual property is one of the most complex, fascinating, and critical areas of law, particularly in today’s zoom-call driven world where internet and electronic connection rule the day.  Cannabis farmers looking to start a cannabis “appellation of origin” in their region must take the time to develop a thoughtful strategy for the ownership and use of their most precious intellectual property (“IP”) asset: the appellation name. Here’s a quick overview of the IP assets in play in cannabis appellations:

Ownership of Cannabis Appellation Intellectual Property

While no two situations are ever identical, it is likely that the appellation ownership will be structured as an entity (an LLC, a corporation, a Mutual Benefit Corporation, a B corporation, a Social Purpose Corporation, a state nonprofit, etc.).  The founding members of the appellation (the three or more unique businesses as dictated by the draft regulations) will likely be the owners of the appellation name. It is also likely that the ownership of the entity will be the respective farmers’ operating companies, though not necessarily.

There is an open question as to how newcomers to the appellation will be authorized to use the appellation name.  In any event, once compliance with the appellation’s standards is established in the appropriate manner, a seal or certification mark could be used, and/or the appellation name could simply be used on the label. These very important procedural question may be up to the appellations themselves depending on their goals.

Lack of Certification Marks

In a perfect world, an appellation entity would also seek a certification mark for the appellation’s standards and practices from the state or federal government. Certification marks, however, do not currently exist in state law, and cannabis farmers can’t access federal certification marks because of cannabis’s Schedule 1 status.

For now, farmers seeking to use an appellation name will need to establish that they meet the appellation standards. The specific process for proving that the farmer meets the appellation’s standards will depend on how the request to use the appellation name is made and whether meeting the appellation’s standards is acknowledged by contract or simply by use of a certification mark or seal.

While the lack of certification marks does present logistical issues for cannabis appellations, the example of Napa Valley may be helpful. Napa Valley is a different type of appellation that was granted by the government in 1980. However, Napa Valley did not seek a certification mark until 2011, over two decades later, and even then, the certification mark was not successfully granted until 2015. The implication is that, while certification marks are important, cannabis appellations will be able to build the appellation’s brand using the appellation name only, so cannabis appellations should not be substantially held back by the current lack of complimentary certification marks.

Thankfully, numerous appellation policy groups are working to include cannabis-certification marks in further statutory or regulatory cleanup packages, so we should see certification marks applied to cannabis far sooner than they were applied to wine, at least in the Napa Valley.

Use of the Intellectual Property

In any event, once the farmers meet the appellation’s standards of use, that farmer may use the appellation name on their products.  The farmers’ will presumably be tasked with protecting their own farm-specific name and logo through trademark or copyright protection, as applicable.

Due to the anticipated use of both an appellation name and a farm name on a product’s label, we can expect to see regulations or agreements arise regarding “conjunctive labeling,” which is labeling where the county, appellation, and any smaller appellation may or must also be listed in addition to the farm’s name.

Defining Other Terms Used in Labeling

Finally, it is unclear whether common labeling terms such as “regenerative” or “single batch” will be included in the name of the appellation, or will arise from certification marks, or from policy changes, but we can expect to see exciting developments in that area in the coming years.

What You Can Do

In closing, cannabis farmers seeking to start an appellation need to be thinking about the following IP assets, who owns them, and how they should be used in labeling or marketing the cannabis: (1) an appellation  name or the name of a geographic region that is likely to become an appellation, (2) the farmer’s farm-specific name or logo, and (3) labeling terms such as “regenerative,” or “estate grown.”

Wise farmers hoping to start an appellation should have a comprehensive plan to address each of these critical components of a successful intellectual property strategy before filing for their appellation petition.

As the state’s 15-day comment period for its current round of cannabis appellation regulations draws to a close today at midnight, please get involved! One of the biggest concerns seems to be the state’s favorable characterization of reputational-based appellations, which works against the terroir-baseline recently imposed by statute. We thank the following trade and/or policy organizations for taking a front seat in this quick-moving policy development and ask interested parties to reach to the following groups for further information and to assist with comments:

Thank you to Shabnam Malek, one of the best intellectual property lawyers in the cannabis space, for co-authoring this blog with me. Please stay safe all!

Heather Burke (Origin Group Law LLP)

To sign up for Origin Group Law LLP’s blog list, please go HERE.

Shabnam Malek (Brand & Branch LLP)

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Antitrust Issues in California Cannabis Purchase Agreements

Antitrust laws are a set of state and federal laws that prohibit business practices which impede competition on the theory that aggressive competition ultimately benefits the consumer. In other words, when businesses compete to sell something, the consumer wins, or so says the theory which underpins these laws anyway. 

Antitrust issues are predominantly applied to mergers and acquisitions, i.e. when a larger company purchases or assumes a smaller company. Thankfully, many smaller sized farmers in the Emerald Triangle and Nevada County have been able to resist selling their companies to bigger conglomerates or shaving off majority ownership to venture capitalists. Thus, the antitrust issues relating to cannabis-related mergers and acquisitions are less pressing in California’s cannabis agriculture industry, though antitrust issues still show up in cannabis-related transactions, such as purchase agreements and sales-related business activity. 

The biggest antitrust vulnerability in California cannabis agriculture is “price fixing,” or “an agreement among competitors that raises, lowers, or stabilizes prices or competitive terms.” In human terms, that means everyone has to determine their own prices without making any agreements with competitors. 

Price fixing most often occurs “horizontally,” where two or more competitors agree to sell their product for a set price. I always cringe whenever I hear someone say, “we should all hold at $1000 this year!”  because that statement is arguably an invitation to fix prices. While there are some exceptions to antitrust laws, the rule against horizontal price fixing is set in stone and is considered “per se” illegal. 

Price fixing can also occur “vertically,” such as where a producer agrees with someone further up the supply chain to fix a price. For example, because of this prohibition, producers and resellers were not allowed to agree to a mandatory minimum price floor for sale of the product to the consumer; hence, we got  the “manufacturer’s suggested retail price,” or “MSRP.” The rule prohibiting a mandatory minimum price floor was actually invalidated in 2007, meaning that a producer and reseller may agree to a price floor to the consumer if-and-only if the agreement would not be an unreasonable restraint on competition, which is determined on a case-by-case basis (READ: run it by your counsel). 

As an aside, it is insane to me that under the U.S.’s scorched-earth version of capitalism, our rural producers cannot band together to set a minimum price that would allow a modicum of economic and environmental sustainability, but that is the nation we live in and those are the rules under which our businesses operate. Despite antitrust laws purporting to protect the consumer, they have unsurprisingly benefited large corporations who can use antitrust laws to keep agricultural producers from organizing to mandate living wages. I am hopeful that at some point in the future, there will be a watershed moment in this nation where ridiculous laws that harm rural communities will be mitigated or negated, such as the prohibition on price fixing among rural producers, but we are not at that moment yet. Please vote, support your local trade and policy organizations, and elect candidates who take these issues as seriously as we must. Until the rules are changed, they must be followed. 

Must respect,

Heather Burke

#protectourfarmers

Contract Farming: the Good, the Bad, and the Ugly

Community,

I am honored to be quoted in Marijuana Business Daily’s article “Contract cannabis farming gaining popularity in California, but practice draws lawsuits,” discussing the various ways folks can lawfully structure their businesses to meet the needs of a volatile cannabis market. Since the topic appears to be hot, an overview of the legal logistics might be helpful. 

First, the article referenced “sharecropping,” a type of agreement popularized during the Reconstruction Era (i.e. post-slavery) where predominantly Black farmers were rent-owing tenants. The landowner was able to unilaterally demand “agreements” wherein farmers received a share of the crops rather than a share of the profits, and would become indebted to the landowner if the yield was less than the rent. In that way, sharecropping was an early and brutal form of ensuring the systemic oppression of Black farmers after slavery. 

Today, however, the “bargaining power” between landowner and a potential contract farmer are often quite the opposite. Indeed, farmers in the hills were first to run out of cash due to the exorbitant land-use costs associated with legalization, causing the downstream bankrupting of entire communities throughout rural California. Unlike land barons of the Reconstruction south, Northern California’s rural landowners were the first to be thrown to the land-use wolves while venture-capital backed conglomerates swept up swaths of land in the Central Coast and Central Valley where land-use quagmires were reduced or negated entirely.

Of course, market volatility and our industry’s dangerous penchant for handshake deals make these agreements inherently vulnerable to predation by the party with greater bargaining power. Thus, the deal MUST be in writing, and the compliance issues (regulatory, labor law, etc.) must be fully thought through. Here’s a few legal issues to keep in mind: 

1.  California Law Expressly Allows Cannabis to be a Lawful Subject of a Contract.

We start the analysis from the premise that cannabis is a lawful subject of a contract. (Cal. Civl. Code §1550.5.) This law opened the floodgates for cannabis businesses to engage in lawful business, including any number of relationships framed by the economics of a transaction. However, with great opportunity comes great responsibility, and these deals are now subjected to all applicable laws, most notably California’s stringent labor laws. More about that below.

2.  All Deals Must Be Strictly Compliant or the Deal Is Off

The regulatory analysis is simple: the deal is compliant or the deal doesn’t happen. Thankfully maintaining strict compliance is not rocket science, as the parties must simply disclose their relationship in whatever manner is required. In the recent Caliva v. Toast Holdings et al., trial court case out of Santa Clara (the first case that I am aware of that discusses the regulatory disclosure requirements in a civil action), the court relied on BCC “Guidance” to note that licensed cannabis businesses may contract with unlicensed businesses in certain circumstances. (P. 10.) However: 

“The unlicensed business is not permitted to share in any royalties or a percentage of profits or revenue of the licensee unless disclosed as an owner or financial interest holder of the license.”  (Caliva v. Toast Holdings Inc. et al., Order Granting Plaintiff’s Preliminary Injunction. March 5, 2020. Santa Clara Sup. Ct., No. 19CV343016.) 

This ruling is consistent with the white labeling analysis provided by the BCC in 2019, which states:

“The Bureau has learned that some licensees may be conducting commercial cannabis business at the direction of non-licensees who may be considered to have an ownership or financial interest in the commercial business and should thus be reported in accordance with sections 5003 and 5004 of the regulations.” (FSOR, p. 19.) 

Again, it’s not rocket science: just disclose and move on, or don’t do the deal. 

3.  These Deals Require Significant Due Diligence

As the litigation matters discussed in the MJ Biz Daily article make clear, pernicious (often venture-capital backed) license holders may prey on legacy farmers who did not have access to licensure. Check out our prior blog called “Snakes in the Grass: Due Diligence and the Proper Vetting of Potential Deals” for more about how to reduce risk by choosing someone trustworthy to do business with.  

At the risk of redundancy, if the other party refuses to disclose or be disclosed during your due diligence discussions, drop it like it’s hot and find another deal, or be at risk for the types of worst-case scenarios discussed in the MJ Biz article

4.  These Deals Are Subject to Labor and Employment Law.

In the Old World, a worker who was to be paid at the end of the season was vulnerable to getting ripped off by disgruntled property owners who could blame a low yield on the worker. Thankfully, this wage-theft is almost impossible in the New World, since non-owners are almost always considered employees entitled to the sweeping protections of California’s employee-friendly laws. We view this as a GOOD THING because it protects laborers from being preyed upon. 

The party performing the labor cannot be deemed an independent contractor unless the rules of AB-5 apply, and misclassification is grossly unwise. However, some folks prefer employee status for various reasons, including mitigating or negating “products liability” and “joint and several liability” which may apply to an independent contractor or sweat equity employee, depending on the circumstances. 

Thankfully the other half of our law firm is an employment law guru, Sarah Smale, so stay tuned for a detailed blog on Farm Labor Contractors (“FLCs”) in the cannabis farming context that is due out soon. 

5.  Thinking Through Insurance and Risk Allocation is Critical

An additional layer of complexity relates to insurance and workers comp issues, since an independent contract laborer hired by a licensee may have trouble getting cannabis-specific workers comp. However, while dual employer liability cannot be waived by contract, those risks and liabilities can be shifted via indemnity clauses and related risk allocations.  

Additionally, each party obtaining their own insurance policies could cause a battle of insurance companies, should third-party liability arise. Instead, the existing policy holder can usually add the other as an “additional insured” and reduce risk of contentious dispute.

CONCLUSION 

If structured appropriately, contract farming arrangements can provide a lifeline to struggling farmers by allowing landowners to meet the overwhelming demands of the regulated system, and by allowing a legacy farmer to get their foot in the regulated door. And our industry needs more legacy farmers in the marketplace, that is for damn sure, so creative (but strictly compliant) contracts should not be overlooked as a means to the ultimate end of rebuilding a thriving cannabis agricultural ecosystem for our rural regions. 

~hb 

#protectourfarmers 

PART 4 OF 5: THE BUSINESS FUNDAMENTALS EVERY CALIFORNIA CANNABIS COMPANY NEEDS TO KNOW: CONTRACT FUNDAMENTALS

PART 4 Of 5:

The Business Fundamentals Every California Cannabis Business Should Know: CONTRACT FUNDAMENTALS

OR “Dude, Where’s My Indemnity Clause and Other Super Fun Terms Every Cannabis Business Should Know” 🙂 

As California cannabis entrepreneurs are increasingly relying on written agreements over handshake deals, a primer on common terms may be helpful. Notably, business owners/operators who have a working knowledge of these terms will be better able to negotiate deals, enter into agreements, and address contract disputes. Particularly in our volatile emergent industry, those businesses who fully understand the terms they are binding themselves to will be better protected in their business dealings and, as such, may be more likely to survive this difficult transition period. Here’s the rundown:

  1. THE ESSENTIAL TERMS
The essential terms (aka the “material terms”) form the crux of the agreement, usually money for product, or money for services. It often makes sense to begin the contract with a clear description of these agreements, because that’s the point of the contract in the first place, right? Importantly, however, a contract consisting only of these terms is nothing more than a “purchase order,” meaning the parties don’t have any agreements about what happens if one party can’t hold up their side of the bargain.

Thus, the essence of the agreement should also include, at minimum, (1) what happens if the money isn’t paid or comes late, (2) what happens if the product or service is delivered late or is unsatisfactory, (3) the “term” of the agreement (i.e. a recurring deal or one-time thing) and (4) how the contract can be terminated.

In our view, a delegation of the requisite  regulatory responsibilities is also an essential component of cannabis-related contracts to ensure strict compliance with applicable laws.

  1. THE RISK ALLOCATION TERMS
Written agreements commonly shift inherent risks from one party to another, depending on the economics of the deal. The most common risk allocation terms are (1) indemnity clauses, (2) limitations on liability, and (3) insurance requirements.

Indemnity Clauses
Indemnities are where one party assumes the risk (i.e. costs) of a loss potentially incurred by the other party. Indemnities are usually tethered to losses caused by the indemnifying party, but some folks sneak in broad language requiring one party to cover the other for unrelated losses, so be wary.

For example, some common distribution agreements ask farmers to indemnify the distributor for issues with the “composition” of cannabis flowers, which may make sense because the farmer grew the product. But if damage occurred after the product left the farm (such contamination caused by grading/sorting on the distributor’s dirty machines), then an indemnity makes less sense.

Another example is in the white-label manufacturing context.  A brand owner who contracts with a manufacturer for producing a product under the owner’s brand may reasonably require that the manufacturer indemnify the brand owner for product liability claims.  However, if the brand owner requires the manufacturer to use specific formulas or processing methodologies, the manufacturer may want to exclude from its indemnification obligation liabilities caused by compliance with the brand owner specifications where a COA was obtained.

Since an indemnity clause can have massive financial repercussions if a deal goes south, no one should sign off on an indemnity clause without understanding what the heck it actually means in the real world.

Limitations on Liability
Contracts often include a liability “cap,” meaning one party will “cap” the maximum damages the other party is entitled to, often irrespective of fault or the total actual damages. However, limitations on the types of damages are also common, as one party may agree to “direct damages” (arising as a direct result of nonperformance), while seeking to limit “consequential damages” (arising as an indirect result of the nonperformance).

The following example may be helpful:

A distributor agrees to pre-pay for $50,000 worth of cannabis, but the cannabis delivered is unusable. The “direct damages” consist of the $50,000, but the “consequential damages” would include the distributor’s lost profits (which at 100% markup would be an additional $50,000), for a total loss of $100,000.
Thus, if a farmer’s entire season is riding on a single deal, and nonperformance would result in the farmer’s inability to fund the next season, those folks may not want to agree to consequential damage limitations.

Also be careful when a limitation of liability clause attempts to cap the other party’s indemnification obligations.  For example, if a manufacturer in a white-label agreement promises to indemnify a brand owner for product liability claims, but then limits its indemnification obligations to the amount of fees the manufacturer was paid by the brand owner under the agreement, a brand owner could be significantly exposed to product liability claims that are the result of the manufacturer’s wrongdoing.

Insurance Requirements
Insurance is a great way to shift risk, as insurance can pay losses the parties may not be able to cover, which is extremely common in California cannabis. Particularly for products liability, the benefit of a contractual insurance requirement cannot be overstated.

Representations and Warranties
“Reps and warranties” are the factual assertions one party makes to the other, such as “Seller represents and warrants its operations strictly comply with all applicable law and regulations.” Although reps and warranties do far more than allocate risk, they are a great way to minimize risk by requiring the other party to declare basic assumptions.

In addition, representations and warranties can detail a receiving party’s expectations about a product or service, such that if the representations and warranties are not met, the receiving party can clearly reject the product or service and either not be liable for the contract price or be entitled to a refund.

  1. THE DISPUTE TERMS

Although no one wants to think about what happens if the deal falls through, wise business operators will include dispute terms in their agreements. Here’s a few of the most common:

Choice of Law and Venue
Most folks want to be governed by California law because no one wants to be defending a cannabis contract under federal rules. Locking down the venue (aka the County) is wise too, as farmers and distros/manufacturers are often in different locations. Getting a venue closer to home is often ideal, particularly if the home court is friendly to cannabis.

Mediation and Arbitration (“ADR”)
Mediation/arbitration clauses are designed to keep folks out of court. Mediation is generally non-binding, meaning the mediator facilitates a discussion but the parties are not bound. Arbitration, on the other hand, is a more formalized process the parties usually agree to be bound by.

Particularly in cannabis, where there is no shortage of odd or novel disputes, alternative dispute resolution (“ADR”) requirements can be helpful.

Force Majeure
A “force majeure” event is something beyond everyone’s control, such as  fire, pandemic, and riots, all hot button issues in today’s world. This term excuses the parties from performance when something truly unexpected happens. In light of volatility in our market, wise entrepreneurs will not leave this clause out of their written agreements.

CLOSING THOUGHTS
In closing, courts look to the “intent of the parties” as reflected in the language of the contract in adjudicating contract disputes, meaning the company’s owners and/or operators themselves must understand what they are binding themselves to. While attorneys are helpful to negotiate and prepare the contract, the onus is on industry, i.e. the businesses themselves, to have a working knowledge of these terms and how they affect later disputes.

Stay tuned for the final piece of this series, “Contracts Overview: What Paper to Push?” which will include a sample Purchase Agreement! Make sure you’re on our email lists:

To sign up for Virginia Ryan’s blog list, go here: https://virgielaw.com/contact/

To sign up for Origin Group LLP’s blog list, go here: http://hburkelegal.com/blog/

2020 Enforcement (PART 1): An Overview of Anticipated Cultivation Enforcement Issues

Community,

Although enforcement of unregulated cultivation will likely shake down under the same set of laws as last year, this blog is intended to offer an updated overview of the issues in play this season. To be clear at the outset, it’s likely to be ugly. 

First “abatement letters” will likely continue to be the primary avenue for enforcement this season. Notably, while one can mitigate the possibility of neighbor complaints by being a good neighbor, the abatement letters more often arise from the use of intensive satellite surveillance, sometimes imperfectly

Second, we can expect the National Guard to return to support various local task forces, which often include the Sheriff, agents from the Department of Fish and Wildlife and from the State and Regional Water Boards, and usually flanked by local Code officers. As with the past few seasons, the raids will likely continue to focus on specific watersheds and work their way out using powerful satellite imagery.

OPENING AN ADMINISTRATIVE “CASE”

Any of the agencies involved in a raid can and often will institute their own “case,” meaning one raid can result in several “cases.” For example, the property owner or onsite worker may end up with a criminal case, a DFW case, a Water Board case, and a local Code case. 

Keep in mind that a “case” can be opened by simply mailing or even posting abatement-related notices. Thus, while raids are undeniably scary, this new brand of multi agency raids often result in the same or similar consequences as with abatement letters, i.e. the property will be thrown into environmental compliance and code compliance (“red tagging”), a process which requires engineers, biologists and other environmental consultants, often with costs in the several tens of thousands. 

It is important to note that environmental and code cases are generally considered “administrative,” as opposed to criminal, meaning fines or penalties are often withheld to assess whether a property owner is willing to come into compliance, though they’re all a little different depending on the agency. Here’s a snapshot of the primary agencies’ procedures: 

  • DFW/Water Boards: The environmental agencies will often EACH open a separate “case,” meaning there are three separate agencies coordinating various aspects of the compliance (in addition to local agencies). The environmental agencies usually hold off on imposing fees until they’ve determined whether the property owner is going to “get in compliance” or not. The process of satiating three environmental agencies can be costly and time consuming, but they are also authorized to impose astronomical penalties for noncompliance, so getting in compliance is often the least expensive alternative. 
  • County Code Officers: Code officers will usually “red tag” or “cite” the property for building and related violations of the local code. Counties are authorized to immediately impose fees under a new state statute (Govt. Code 53069.4) that I discussed in last year’s enforcement blog HERE, though many jurisdictions wisely do not and allow 3-10 days for an initial statement of compliance. Instead, most jurisdictions send “warning letters” that threaten massive fines if someone does not come into compliance within the time period. 

The sad result of the current code-related enforcement regime is that it penalizes small family farms while allowing those who are more risk-tolerant to game the system by treating these fines as a mere “cost of doing business.” This inequitable application of the same set of enforcement rules is the primary reason Sarah and I chose to discontinue our administrative defense practice at this time. Please check out Part 2 of this 2-part blog series for more about that decision. 

  • The Sheriff: Sheriff’s deputies evaluate the situation for potential filing of a misdemeanor/felony case, and will be asking questions relating to sales, interstate shipping, and so on. Remember the collective/cooperative law is DEAD, meaning the primary defense for unregulated legacy farmers will be personal use, a defense not available to demonstrably commercial unregulated grows. 
  • National Guard: The National Guard will likely be present this year, offering military-grade surveillance, helicopters, and related support. Keep in mind the National Guard is the only military force allowed to enact war-like response on our nation’s own citizens, and they were most recently deployed to squelch protestors’ First Amendment rights. I am not sure if these issues will bleed over into cannabis, but I do believe the unprecedented use of the National Guard in the last few years is notable and concerning. 

CLOSING THOUGHTS 

Due to the new application of these laws, there is little legal precedent, meaning we can expect significant litigation where individual liberties and unregulated cannabis cultivation intersect. Although we will certainly see new and exciting legal defenses to these types of cases, most folks do not want to be a test case. It is expensive, cumbersome, and is oftentimes a losing battle. 

As always, outdoor/sungrower family farms will take the brunt of seasonal enforcement measures because they are immobile, their lives inextricably linked to the earth on which their farms sit, sometimes for more than one generation. Enforcing on legacy farms is particularly troublesome in light of the state’s three-year eligibility prohibition for anyone who gets cited for unregulated commercial cannabis activity. While I’ve heard tales that the governor and several legacy-producing Counties are developing various grant programs to help bring legacy farms into the regulated fold, these programs won’t be in effect during this growing season.

We are grateful so many trade and policy organizations have made access to the market a primary policy objective because the penalties for unregulated activities are heavy and ever-increasing. If you want to see change in these rules, please support your local trade and policy organizations. Here’s a few of our favorite: 

Stay safe. ~hb