Author: hburkelegalgmail-com


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/

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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.