Author: hburkelegalgmail-com


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

2020 Enforcement (PART 2): Origin Group Law LLP’s Statement on Enforcement Related Services

Community,

Sarah and I have decided to handle the enforcement season differently this year, in that we are referring all administrative enforcement matters to outside attorneys and will not be taking on any new non-emergency enforcement matters this season. While we reserve our right to make exceptions for former cannabis prisoners,  people of color, women and others who have not  had access to the regulated market, we believe our firm’s unique talents are better focused on rebuilding a workable regulated marketplace for California’s legacy producing regions, most notably Nevada County and the Emerald Triangle. 

The last few months allowed us the clarity to realize that neither Sarah or I enjoy working in front-lines enforcement any longer. As there is no shortage of exceptional attorneys who are excited to take on the novel areas of enforcement law in this New World regime, we’re confident this decision does not harm our community due to lack of legal support, and it offers the best allocation of our firm’s talents.  

We will, however, continue to work on enforcement related policy however and wherever we can, which includes supporting CalNORML, the International Cannabis Farmers Association, and our local trade organizations, such as Nevada County Cannabis Alliance and Humboldt County Growers Alliance, if and when we are asked. 

Legacy-producing regions are in the midst of a culture crisis, exacerbated by prohibitionist land-use policies, fire danger, and a pandemic. Some see these as insurmountable barriers to success (for those with access to the market in the first place). However, Sarah and I choose to see this as an opportunity to figuratively burn down the hyper-regulated and environmentally degenerative model of regulated cannabis production enacted by MMRSA in 2015 and to instead demand the enactment of a system that values family farming, radical inclusivity, and regenerative production models. 

We must recognize and admit our industry (and more specifically, California cannabis agriculture) is dominated by white males, many of whom I love dearly and will forever respect as highly ethical businessmen. However, white privilege is often on grotesque display in enforcement work, as the very rules that allow predominantly white males to “blow it up” in the hills (often using undocumented and other marginalized communities as underpaid laborers) are the same rules by which California’s black and brown communities have been criminalized. The indisputable presence of tired economic tropes imposes upon our community a duty to identify and reform or eliminate policies which have historically excluded most of California’s cannabis community from creating meaningful wealth via California’s cannabis industry

Thus, our firm is renewing its aggressive support of a regenerative cannabis ecosystem that includes people of color, women, cannabis warriors, and others who have historically been excluded from the regulated system. More concretely, Sarah and I will continue to provide pro bono and affordable legal services to businesses and organizations that support these missions. We will also increase our free/low cost community education resources where we focus on best business practices and–my favorite–transactions (i.e “deals”). 

Transactions, in my mind, are each unique opportunities to create and maintain long term sustainable wealth for my clients and for our communities. Supporting those who–to date–have not had the opportunity to achieve economic freedom in the infancy of their new enterprises is one of our highest honors. We take our role seriously because we understand the importance of their success in the greater scheme of creating generational wealth where it has not previously existed. 

The importance of transactions to the long term viability of the cannabis farming community becomes even more critical when we consider that these specific transactions are for cannabis, a plant which heals the human who consumes it and heals the earth it was grown in. The plant itself will no doubt be an effective tool in healing the broken economic system in which the plant is currently produced and distributed. 

In closing, we are grateful to have a community that supports our good work over the years, and values our authenticity in how Sarah and I choose to perform it.  

Much respect and please be safe out there. 

Heather and Sarah

#protectourfarmers 

The Importance of Terroir-Based Cannabis Appellations (VIDEO!)

California Cannabis Folks,

We’re happy that CDFA’s comment period for the cannabis appellation program is drawing to a close next Wednesday, May 6th. In honor of the impending deadline, I thought a quick refresher on the importance of a terroir-based program might be helpful to close out these last few days of the comment period.

A terroir-based program is simply a program that requires there be an essential link between the quality or characteristic of the cannabis and its source. No causation (or essential link) is required for California’s “County of Origin” cannabis marketing program, for example, which allows cannabis to be marketed as produced within a County if the product was produced within the County boundaries.  A terroir-based appellations of origin program, on the other hand, requires cannabis farmers to substantiate that the quality of the cannabis is essentially due to the unique biophysical or cultural factors applied during production. The heightened controls result in a increased consumer trust, and thus fetch a higher value in the market, returning that value to the farm and supporting a vibrant cannabis agricultural ecosystem.  

To be sure, terrior-based appellations are a complicated concept, but they are CRITICAL to the future of California cannabis farming. We’re fighting for our life here. So if you want to know more about what a terroir-based program can do for the cannabis farmers, check out the video or the slides below.

Finally, if you are just gaining interest in the program, yay! Please get in touch with your local trade or policy organization who have been working on this program for years. Considering the historic nature of this program, it is imperative folks do not submit comments to CDFA that have not been vetted by stakeholders in legacy producing regions, so please reach out to the following organizations ASAP and get involved:

Please stay safe and healthy out there. With the utmost respect,

~Heather Burke

ALERT! CDFA Issues Draft Cannabis Appellation Regulations: 45-day Comment Period Begins

By Heather Burke and Anne Kelson

Yay! CDFA’s cannabis appellation-related regulations were finally released on February 20, 2020, and at first glance it appears CDFA understands the critical importance of this program to cannabis farmers throughout the state, but the agency still needs further education to shape a meaningful program. Here’s a quick overview: 

1.  Appellation petitions are slated to cost about $20,000. Since fees can not exceed the costs to run the program, the higher-than expected price tag likely means CDFA is anticipating a rigorous petition review process and/or significant program oversight.

2.  Petitions must be filed by a minimum of at least three (3) or more unique businesses, meaning one business with three licenses cannot file a petition. Collaboration with at least two other businesses is required, which we would love if it were clear the three business could not be owned by a single parent company. CDFA indicated that they came up with the requirement of three or more business members in order to be compatible with statutory co-ops, which have the same requirement of 3 or more members.

3.  Petitions will be reviewed by CDFA and potentially a seven-person panel. Panelists must have experience in cannabis cultivation, intellectual property, sustainable agriculture, or community-based research, which we find encouraging. 

4.  The CDFA rejected using either the AVA model (used for wines in the U.S.) or the AOC model (used in France), and instead has proposed a new appellation standard for California cannabis. The petition requirements are vast, so here are a few of the biggies which must be included: 

a.  A description of the quality, characteristic, or reputation of the cannabis produced within the appellation which is caused by a distinctive geographical feature. Geographical features affecting cannabis cultivation will likely require significant biophysical data, such as climate information (temperature, precipitation, wind, fog, and solar orientation), geological information (underlying formations, earthquake fault lines, flood lines, etc.), physical features of the land (bodies of water, watersheds, mountain ranges, etc.).

b.  A definition of the standards, practices, and cultivars to be mandated within an appellation area, and identification of at least one which acts to preserve the distinctiveness of a geographical feature and maintain its relevance to cannabis cultivation.

c.  Evidence of the legacy, history, and economic importance of cannabis cultivation for the appellation area. 

d.  A list of license types which are prohibited from using the appellation of origin (i.e. Indoor, Mixed-light Tier 1, etc.). In other words, the CDFA effectively punted the controversial issue of who is included by requiring petitioning groups to explicitly state which license types are excluded. 

e.  Evidence of historical name use, including a detailed explanation of how the name has been used in the geographical area of the proposed appellation, evidence of name use from sources independent to the petitioner, and evidence that the proposed name is “directly’ associated with an area in which cannabis cultivation exists. Name evidence can include historical, government or commercial maps, books, newspapers, tourism promotional materials, local business or school names, and road names, among others.

f.  Maps and boundary description, including a depiction of the proposed boundary on USGS topographical maps, with a scale large enough to show adequate detail of the proposed boundary line, as well as an exact boundary of the appellation of origin featured clearly on the map without obscuring the maps underlying features.

5.  As expected, trademarks that conflict with appellation names will need to be phased out within 3 years of the date an appellation with a conflicting name is approved by the state, as appellation names will trump existing trademarks (after the 3-year sunset period). After that, use of conflicting trademarks will be considered false advertising. 

Big Picture Takeaways 

Based on the draft language, the regulations impose a rigorous evidentiary burden on appellation petitioners, potentially requiring significant historical, scientific, engineering/mapping, and related support. Petitions could take months or years to prepare, and could be voluminous.

Importantly, the petition process could be far more effective and long-lasting if done in collaboration with other farmers in the same region, as numerous appellations could be mapped out, defined, and petitioned for in one fell swoop. The importance of mapping the major and minor appellations with the broader community prior to submitting petitions cannot be overstated. 

We strongly encourage licensees to include unregulated farmers in community discussions about mapping the legacy regions, as it is more-likely-than-not that an increasing number of farms will come online in the coming years. The decisions we make about these petitions will affect the cannabis communities in legacy-producing regions for generations to come, so they have a right to have a seat at the table while we’re figuring it out. The authors of this blog believe this component is a moral imperative. 

Call to Action

The public has 45 calendar days in which to submit comments on these draft rules. However, rather than submitting comments in a vacuum, we strongly encourage all interested parties to reach out to their various trade and/or policy organizations and submit comments in a coordinated manner. 

Here’s a non-exhaustive list of the organizations who we expect to be submitting comments. If we missed your group, please let us know and we’ll add you to this list STAT. 

We also encourage any lawyers who are interested in this issue of critical importance to join the International Cannabis Bar Association

Based on the language in the draft regulations, CDFA understands this program has the potential to set global precedent, but it is up to cannabis farmers to define what that looks like in practice. If done right, we can hand the cannabis appellation program down to our children and future generations, so please engage! 

Co-authored by:

Heather Burke, Nevada City, CA 

Anne Kelson, Oakland, CA

California Cannabis Appellation Presentation: Tuesday, January 21st, noon-1 p.m., Nevada City

Community:

I’m giving my first presentation on California’s new cannabis appellation program tomorrow in Nevada City. I’m pretty excited about the program and about this presentation, so I hope you can come out!

Tuesday, January 21, 2020 Noon to 1:00 p.m.

Location: Nevada County Superior Court, Law Library, 201 Church Street, Nevada City. **Arrive by 11:45 a.m. to complete registration and payment. Cost: $15 Public or $30 for Attorneys (MCLE credit).

Here’s an overview of the presentation to get you interested in this historic issue. Enjoy!

An Epidemic of Farmers Going Unpaid: Strategies for Going After Your Money

By: Heather L. Burke

Many of California’s licensed cannabis farmers recently transferred their cannabis to distributors on terms the distributors did not meet. As if the licensing game wasn’t hard enough, many of the 2019 cultivation licensees were in year 1 or 2 of a three-year plan to recoup costs and get out of the red. Failure to get paid not only hurts the family farm’s ability to survive, but when farms can’t afford to invest in their businesses, it hurts their ability to thrive.

I’ll be honest. Due to the volatility in California’s cannabis market, some of those farmers ain’t never gettin’ paid. The farmer can take the most aggressive measures legally available and sometimes ya just can’t squeeze blood out of a turnip. The only way to guarantee payment is to get paid up front, cash on delivery (“COD”), or in most cases, upon pickup from a licensed transport distributor. But holding out for a COD sale means waiting to get paid, and that’s risky too, as the market ebbs may bring an earlier round of light deprivations (deps) next spring, keeping prices lower than usual in the spring and early summer. It’s the California cannabis market, so anything can–and usually will–happen.

Due to the risk inherent in holding out, many farms front their product to distributors or manufacturers with an agreement, whether written or oral, that the farmer will be paid at some point, usually within 30, 60 or 90 days. I’ve blogged extensively about what should be in those contracts (here , here, and here) so I won’t reiterate it here, but it’s important to note that oral agreements are binding in California. While a written (and signed) contract is advisable, a farmer can legally collect on an oral agreement.

Here’s a few things to think about when a distro (or other licensee) hasn’t paid up:

  1. Seeking an Attorney’s Advice Sooner, Rather than Later

Unless you are an experienced business person with a comprehensive understanding of causes of action and statutes of limitations (and many farmers are), those farmers who haven’t gotten paid should see an attorney as soon as you know the distro isn’t paying up. And not just any attorney, but a civil litigator with experience in litigating contract disputes.

In our law firm, I write the contracts to keep our clients out of disputes and our civil litigator, Sarah, tags in if a dispute arises. Sarah knows those rules better than I do, and it is critical that my clients meet with someone who has the depth of experience in litigation to properly analyze the facts and potential claims.

An attorney doesn’t necessarily need to be retained to fight the case, as many lawyers will consult with a farmer to go over their rights. In any case, when a farmer leaves the attorney’s office, they should know (1) the basic procedure for going after the money, (2) the potential causes of action against the party that didn’t pay up, and (3) the important statutes of limitations (i.e. how much time someone can take to decide whether to go after the party for the unpaid money or not, which is shorter for oral agreements).

Importantly, seeing an attorney can also help properly document the dispute, which could become critical evidence in the future. That way, if the farmer take six months or a year to see if the market changes and the distro can pay the full balance of what they owe, the farmer doesn’t lose the right to collect in the future.

  1. Demand For Payment Letters

The first step in moving towards litigation is usually talking to the other party and seeing what’s up. Sometimes they can’t pay and sometimes they won’t pay. There is a difference and that difference must be part of the strategy for how aggressively the farmer goes after the money.

If informal conversations go nowhere, the next step is to send a formal demand for payment, aka a “demand letter.”

Demand letters are all about strategy. Before sending one off, there should be a game plan based on the unique facts of each situation. For instance, some distributors have enough money to keep a few of their connections happy, yet let their other accounts go unpaid. There, the farmer may want to send a “we-want-to-continue-to-work-together” style of demand letter designed to maintain the relationship. A more aggressive demand letter might be the strategy where the distro is likely never going to pay, such as those cases where the distro makes an affirmative statement declining to pay, or where the distro is shutting their doors and may soon be “judgment proof.” In unusual cases, the strategy may be to skip the demand letter entirely and go right to litigation. It all depends on the particular facts of the situation.

However, before tossing out some hastily-drafted demand letters in fake legalese cobbled together by a friend who claims to have “paralegal experience,” farmers should know the weaknesses and strengths of their case, and they should tailor a letter with an eye towards a thoughtful plan. Sending a crappy demand letter can make the sender look like they aren’t taking it seriously, a tactic more likely to be ignored than be rushed into the debtor’s attorney’s office in a state of panic (which may be the goal in many instances).

Since a formal demand can tee up a potential legal challenge, invest in the letter. The initial legal research and strategy should happen before one starts making demands, rather than waste money fighting a losing challenge or defending an unforeseen counterclaim.

  1. Alternative Dispute Resolution

In written agreements, clauses requiring a party seek mediation or arbitration are often included as a mandatory component. This process is called “Alternative Dispute Resolution,” and it can be a powerful tool for farmers who are not getting paid per the terms of a written agreement.

For oral agreements, the parties have to agree to engage in ADR, which may be tough for a distro that is close to going out of business themselves (and is already planning on taking your money to the grave with their business losses).

However, they may be more (or less) willing to negotiate after a demand letter, so the strategy can change again with regards to negotiating or mediating a debt after sending a demand letter.

  1. Commencing Litigation

To be clear, going to court to recover an unpaid debt is usually the worst case scenario. Getting that far often means the distro didn’t keep their word to pay the farmer, and that is disappointing for a variety of reasons. Litigating (i.e. suing) can be stressful and the farmer has to spend money for the chance of getting paid.

Some companies keep attorneys on payroll to defend against these kinds of cases and will litigate the farmer to death as part of their strategy to bleed out the small guy. Additionally, the smaller (more often more values-based) law firms can’t cushion the litigation by taking the case on contingency, so litigating can be an expensive and time consuming loss, even when the farmer ultimately wins.

Unfortunately, understanding the cruel realities of Big Business’ greedy practices is part of the educational experience here, and the pain of a few lost accounts may increase a farmer’s willingness to hold out for COD next time.

***

In conclusion, knowing what to do when an account doesn’t pay up on time is part of doing business in the no-holds-barred style of aggressive capitalism we practice in the United States. While I’d love for it to be different, its not. At least not right now.  That is why its beyond critical our state’s small and mid-sized farms maintain their valuable position in the regulated marketplace, so being aggressive about getting paid may be the difference in staying in business for those teetering on the brink of extinction. Please stay strong. We need you.

With your success in mind,

Heather L. Burke

#protectourfarmers

*Sorry we haven’t blogged in a while. I got carried away with the busy harvest season and have been spending a lot of time researching and writing about cannabis appellations, my current passion project. If you want to hear more about appellations, I’ll be giving an in-depth talk on California’s Cannabis Appellations Program (and related business issues for appellation farmers) for the Nevada County Law Library on January 21, 2020, from 12:00 noon to 1:00 p.m., at the Nevada City courthouse. (More about that HERE.)

I’ll release the presentation slides via social media in advance, so be sure you’re following us on Facebook or Instagram. See you there!

Heads up! CDFA Regulations Prohibit Transfers of Cannabis During Power Outages

Clients, Community, Friends, Family:

Please note that “transfers” of cannabis to a distributor are prohibited whenever access to the track-and-trace system is down. (See § 8402 copied below and online HERE.) If someone relies on grid power to access their METRC system, then they may not transfer any cannabis to a distributor, even if that distributor is their own self-distro transport license (Type 13). 

Of course, while access is down, folks are required to “prepare and maintain comprehensive records” detailing the movement of any cannabis on their site, such as moving immature plants to the canopy area, harvesting-related activity, and any cannabis waste. Additionally, folks must also document (1) the date and time when access to the track-and-trace system was lost, (2) when it was restored, and (3) the cause for each loss of access.  

Once back online, that information needs to be uploaded to METRC within 3 days after power is restored. 

If lack of power is causing an inability to comply with any of the regulations, including but not limited to track-and-trace, please note that “sudden and severe energy shortage” may qualify for disaster relief under CDFA’s regulations. If that applies to you, check out § 8207 HERE for your next steps.

Please be safe out there! At least this is great training for how to run a compliant cannabis farm during a zombie apocalypse, so there is an upside!

~hb

*Huge SHOUTOUT to the folks at Oxalis for putting this issue on all our radars, and to Law Offices of Omar Figueroa for reminding us of the potential for disaster relief.

#teamworkmakesthedreamwork #risetogether #protectourfarmers

8402. Track-and-Trace System.

(e) If a licensee loses access to the track-and-trace system for any reason, the licensee shall prepare and maintain comprehensive records detailing all required inventory tracking activities conducted during the loss of access. 

(1) Once access to the track-and-trace system is restored, all inventory tracking activities that occurred during the loss of access shall be entered into the track-and-trace system within three (3) calendar days. 

(2) A licensee shall document the date and time when access to the track-and-trace system was lost, when it was restored, and the cause for each loss of access.

(3) A licensee shall not transfer cannabis or nonmanufactured cannabis products to a distributor until such time as access to the system is restored and all information is recorded into the track-and-trace system.

El Dorado County Opens for Cultivation Permits Up to Two Acres and All Other License Types (GO SIERRA NEVADAS!)

By: Heather Burke

The County of El Dorado recently enacted an ordinance authorizing all commercial cannabis license types, including cultivation, manufacturing, distribution, testing, and retail, which is super exciting for the Sierra Nevadas. This blog focuses on the process for cultivators, who can obtain up to two (2) acres of commercial cannabis permits, depending on their parcel size and zoning. Here’s the lowdown: 

CULTIVATION LICENSE SIZE/ZONING OVERVIEW

  • There are 150 total permits, 75 of which are reserved for outdoor and mixed light operations that are less than 10,000 sq ft of canopy.
  • 40 of the 75 smaller cultivation licenses are reserved for 3,000 sq ft gardens that is “grown exclusively with natural light and meets organic certification standards or the substantial equivalent.”
  • The zones in which cultivation may occur are (1) Rural Lands (“RL”), Planned Agricultural (“PA”), Limited Agricultural (“LA”) and Agricultural Grazing (“AG”).
    • RL properties are eligible to use up to 1.5% of their parcel for cultivation, but may not exceed 10,000 sq ft of canopy.
    • AG, LA, and PA properties between 10-15 acres are eligible to use up to 1.5% of their parcel for cultivation, but may not exceed .45 acres of canopy.
    • AG, LA, and PA properties between 15-25 acres are eligible to use up to 1.5% of their parcel for cultivation, but may not exceed 1.5 acres of canopy.
    • AG, LA and PA properties greater than 25 acres are eligible to use up to 5% of their parcel for cultivation, but may not exceed 2 acres of canopy.
  • The setback is 800 feet from the property line and 1500 feet from schools, which may knock out a bunch of properties. Folks can get around this setback in some instances if they owned or leased the property before November 1, 2018.
  • Parcels under 10 acres are not eligible for permitting.

APPLICATION REQUIREMENTS 

The application is a full Conditional Use Permit [“CUP”] process, meaning there will be a public hearing on the application. More about CUPs generally HERE. The main thing to know about CUPs is that they are “land use” determinations, which is great in that the permits will “run with the land,” thus increasing the value of the land. However, they are complex, time consuming, costly, and decisions are made on a case-by-case basis depending on the site particulars.

Secondly, El Dorado’s “pre-application” is not yet available, but is expected to be released on September 30. While the Code gives us some insight into what will be required, there are likely to be additional requirements standard in any CUP process, such as an NCIC letter or biological summary, that are not mentioned in the cannabis code. Here’s the rundown of the basic applications requirements:

  • Entity applicant information, including articles of organization/incorporation, operating agreement/bylaws, stock agreements, and “any other funding sources for the applicant.”
  • Written consent of the owner of the parcel (which may be you as an individual leasing the property to your LLC or corporation), which must be signed in wet ink and notarized within 30 days of the day the application is submitted.
  • A Site Plan showing the entire parcel, including (1) easements, (2) streams, springs, ponds, and other surface water features, (3) the area for cultivation in dimensions, (4) setbacks from property lines, (5) all areas of ground disturbance and surface water disturbance, and (6) any areas where cannabis will be stored, handled, or displayed.
  • A detailed diagram of the premises, including buildings, structures, fences, gates, parking, lighting and signage;
  • Various written plans, including (1) a Theft Prevention/Access to Minor Plan, (2) an Operating Plan, (3) an Organic Certification or Equivalent Plan, (4) a Security Plan;
  • For any hoophouses/greenhouses/proposed structures, all applicable building permit applications, which may include commercial plans that show ADA access
  • Most land use applications require an archaeological and biological inquiry. Expect that to be part of the application;
  • A copy of the entire state license application, which for some will be copies of multiple state license applications for different “small” licenses because the large (i.e. one acre+) licenses are not available from the state at this time. Each state license application includes the following, as well as a surety bond for each license type:
    • A Water Board permit;
    • A Waiver Letter or Lake & Streambed Alteration Agreement from the Dept of Fish and Wildlife (which can take months);
    • A Property and Premise Diagrams for each separate license;
    • A Well Completion Report from the Department of Water Resources;
    • The EIN/Seller’s Permit Info for the applicant entity;
    • A Lease/Rental Agreement and Landowner Authorization.

Notably, all applicants will have to indemnify the County, consent to a background check, and agree to inspections without a warrant, in addition to a host of other attestations/waivers/agreements.  

THE CALIFORNIA ENVIRONMENTAL QUALITY ACT [CEQA]

The County has deferred the required environmental impact analysis to the farmer, which is a huge cost, but will likely allow them to get up and running far sooner than if the County had performed a full Environmental Impact Report.

If someone does not have a CEQA consultant already on retainer, be prepared for a shocking price tag. One can usually expect the CEQA consultants to get overburdened and for projects to get put on a wait list if not at the front of the line. Additionally, both the state and County mandate that CEQA be complete before operations can begin, so I fully expect more than a few licenses to get held up next season because of the lack of a completed CEQA document.

CONCLUSION

In summary, the list of requirements will be far longer and more cumbersome than what anyone expect. While the applications may scramble once the pre-application is released, those who are working on their diagrams, CEQA/environmental compliance requirements, and have an operating company ready to go will likely be at the front of the line.

I’ll be at the El Dorado Growers Association meeting next Friday, October 3, 2019, at 6:30 p.m. discussing the application, with a focus on entity startup considerations. Hope to see you there. 🙂

Now go get ‘em, Sierra Nevada farmers!
~hb

ALERT! CA Governor Newsom signs new law TODAY making it harder to use independent contractors


By Sarah Smale

Just hours ago, Governor Gavin Newsom signed AB-5 into law, which is designed to: 

“[E]nsure workers who are currently exploited by being misclassified as independent contractors instead of recognized as employees have the basic rights and protections they deserve under the law, including a minimum wage, workers’ compensation if they are injured on the job, unemployment insurance, paid sick leave, and paid family leave.” 

This new law makes crystal clear that California will NOT tolerate misclassification of employees as independent workers. The new law goes so far as to say the ”misclassification of workers as independent contractors has been a significant factor in the erosion of the middle class and the rise in income inequality.” Wow!

To be sure, the State of California via AB 5 has made a clear declaration of public policy–the state intends to protect workers who miss out on basic protections as a result of improper classification.

The ABC Test

As a quick refresher on the rule, Dynamex v. Superior Court, a 2018 court case, already established the three-factor “ABC” test for claims arising under the wage orders and Labor Codes. The ABC test assumes the worker is an employee. To show the relationship was actually that of an independent contractor, the hirer must prove the worker:

  • If free from the control and direction of the hirer as to performing the work (both under the contract and in fact);
  • Performs work outside the usual course of the hirer’s business; and
  • Is customarily engaged in an independently established trade or business of the same nature as that involved in the work performed.

In other words, most true independent contractors will be folks like a bookkeeper, the company who is hired to construct a building, or others providing a service different from what the farmer or cannabis operator does, which is something the contractor also does for others.

For farmers looking to bring in temporary help for the upcoming harvest–this distinction is critical. Even if someone will only be at the farm a few weeks, if they are engaging in work central to the cultivation operation, this is arguably an employment relationship, particularly if the farmer is overseeing the work.

Put ‘Em on Payroll

Wage claims are not claims a small business can afford to lose–there are multiple penalties for worker misclassification, ranging from a straight-up first-offense penalty of $5k-$15k for willful misclassification, to paying all the taxes that should have been withheld. Misclassification almost always means the hirer failed to maintain records required for all employees, and frequently results in a failure to ensure proper meal/rest periods and overtime policies.

The fallout from worker misclassification is a real and serious business risk–a risk no wise operator should take. And as of today, the State of California has made it abundantly clear that misclassifications are going to be taken more seriously than ever before.

~Sarah Smale
Co-Founding Partner
Origin Group Law LLP

PART 3 of 5: The Business Fundamentals Every California Cannabis Business Needs to Know: VETTING DEALS

Snakes in the Grass: Due Diligence and Proper Vetting of Potential Deals

By Heather Burke and Virginia Ryan

Considering the collective/cooperative model did not always allow sellers to vet buyers by anything more than word-of-mouth, today’s operators have a greater ability to vet those with whom they do business. Although business deals can and will still go sideways in the regulated era, licensees undoubtedly have more options in choosing business partners who give the deal a greater chance at success. When vetting a potential deal partner, I usually ask:

(1) Who are the potential deal partners (like, really, who are they?); and

(2) Will the deal benefit our goals?

Determining Who the Potential Deal Partners Are:

When figuring out who you’re about to do business with, I usually look at three areas: (1) regulatory vetting, (2) business vetting, and (3) the old school gut test.  Here’s a quick rundown of the first two:

1.  Regulatory Vetting

The law is clear that “all commercial cannabis activity shall be conducted between licensees.” 3 C.C.R. § 5032 (a). That means that a potential deal partner must have an active license from the State of California for the type of activity they will be providing to you.

For instance, if a manufacturer is offering to pick up your product, they will need both a manufacturing license and a distribution (Type 11) or transport (Type 13) license. Smart operators will utilize the BCC, DPH, and CDFA license search features to verify the validity of each license that will be involved in the deal and double check the validity of all relevant licenses prior to each transaction.

While each party has a duty to keep their licenses valid, and that representation or warranty should be included in any written agreement, that does NOT absolve the other party of the regulatory violation that would occur if they entered into a transaction with a party that did not have a license. As such, there is no substitute for double checking prior to each transaction.

2.  Business Vetting

Business vetting can also be called “due diligence,” both of which simply refer to the reasonable initial steps a wise operator will take in order to determine whether the company with whom they want to do business is trustworthy.  Here’s a non-exhaustive list of questions that you need answers to when determining whether they are worthy of your trust:
    • Is their entity filed properly on the Secretary of State website? Was the Statement of Information(s) filed timely?
    •  If they do business under a trade name, do they have a DBA on file in the County where their principal place of business is located?
    • Does the person you’re speaking with have “the capacity to bind the entity?”
    • Are written agreements acceptable?
    • Do they have references of people with whom they’ve done similar transactions?
    • Do they have an appropriate level of insurance based on the transaction?
    • Are they financially sound based on their financial statements or a due diligence call with the CFO?
    • What does an internet search or social media search tell you about the business and their founders or key personnel?
    • What do their facilities or operations look like?  Do guests go through a security protocol?  Is the facility organized with confidential documents appropriately safeguarded or does it look like a dorm room?

For some businesses, gathering this paperwork upon a request may be a struggle. If so, that is a strong indication the more complex negotiations required to engage in business at this level will make success almost impossible. Act accordingly.

Determining Whether the Deal Benefits Your Goals:

Desperation breeds lopsided contracts, meaning that a business desperate for a quick buck is more likely to accept unfavorable terms, which in turn increases the risk of a total loss. Instead, engage in the existential analysis regarding whether the other party shares your values and your vision, or can benefit your long term goals in the marketplace. Here are some examples:

  • Aligned Values: For example, if regenerative practices are important to your business model, do you want to do business with a company that does not value regenerative farming or does not employ sustainable practices themselves?
  • Longevity:  Is this a one-time event only, or are you setting up a longer term agreement? If it’s a one time thing, there is a greater chance of risk that it’s a cash grab by the other party.
  • Co-Branding: Is the other party open to having your logo and information on the final product, so that your company benefits from an increased brand identity? (*If building your own brand is your goal.)
Closing Thoughts
It is interesting to note that hyper-successful entrepreneurs invariably trust their intuition when vetting potential deals. Just as in the old world, sometimes you know a dud is a dud, so knowing when to walk away can be just as critical to one’s success as locating a potentially profitable deal. You got yourself to this point, which is historic in-and-of itself, so don’t be afraid to trust your instincts!
Much respect, ~hb
#protectourfarmers

**PS, keep a lookout for the final two blogs in this series:

PART 4: Contract Fundamentals: Dude, Where’s My Indemnity Clause and Other Super Fun Terms Every Cannabis Business Should Know

PART 5: Contracts Overview: What Paper to Push? (+ Sample Contracts)

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*This is a communication from a lawyer, but it does not constitute legal advice, nor does it create an attorney-client relationship. This is intended for educational purposes only. Please contact an attorney for specific legal advice.