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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)

Make sure you’re on the email lists!

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

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

*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.

The Momma Blog: The Rules About Children on a “Licensed Premise”

By Heather Burke

I’ve been asked several times about the ability to have children at one’s regulated commercial cannabis business, and the question always reminds me of those days when my girlfriends would strap their babies onto their back and get to work out in the garden. Sadly, those days are long gone and the new rule is clear:

No one under 21 is allowed on a “licensed premises” at any time.

No Rules Under the Collective/Co-op Resulted in Discriminatory Application of Child Welfare Rules.

Under the old rules, commercial cannabis activity was “unregulated,” meaning there were no rules except (1) the cannabis had to be cultivated, processed, or distributed to patient-members of a (2) collective or cooperative that (3) was not engaged in a profit making enterprise. Without rules for children, the primary consideration  was whether the child would suffer physical harm as a result of the parent’s inability to physically care for the child. (Check out the brilliant Jen Ani’s overview HERE.)

In most cannabis cases, the child was not at risk of harm unless the child had easy access to cannabis, or where there was inherent danger in the cannabis activity itself, such as with BHO manufacturing. However, due to the lack of certainty in the rules and cannabis discrimination by child welfare workers, application of the standard was often dependent upon the particular CPS’ worker’s view on cannabis. Unsurprisingly, I observed wealthy white parents treated with far more deference than African American and Latino parents for identical conduct, which is unacceptable on every level.

The New Rules are Clear: No Kids On the “Licensed Premises”.

California statutory law now clearly restricts a licensee from allowing anyone under 21 years of age from entering “its premises,” except that someone over 18 can enter a medical dispensary if-and-only-if they have a physician’s recommendation. (Cal. Business & Professions Code § 26140 (a)(2), (c)(1)-(2).)

Interestingly though, the regulations are less clear. Indeed, the regulations only address minors being on a retailer’s licensed premise, though none of the three regulatory packages address the effect of a child being on a farm, a manufacturing site, a distributor, testing lab, or microbusiness’ “licensed premise.” Nor do any of the three regulation packages set out a penalty for violating this statute

Thus, while it is not yet clear to me what a violation of the statute would look like for a licensee, we can presume it is a serious violation with severe consequences for the license holder.

When the Property is the Same as the “Licensed Premise”

Keep in mind that when you submitted your annual or temporary license application to the state, you had to submit a Property and/or Premises Diagram. If the Property and the Premises in those diagrams is the same, then your entire property is considered the “licensed premises.”

The legal effect of not carving out any non-cannabis areas in your Property Diagram is:

  1. Children are now arguably excluded from the entire property; and

  2. Law enforcement can arguably search an entire “licensed premises” without cause. (*This  is a whole other topic I won’t get into here.)

Thus, for those folks with children on site, it is imperative they re-define their licensed premises to exclude the home and the places children will be. For sites with homes on them, it is as simple as drawing the “premises boundary” around the home. For industrial or commercial sites, a break area or other safe space for a nursing mother to bring her child can sometimes be carved out of the “licensed premises” floor-plans.

Child Welfare Rules are Still in Effect

Although this blog focuses on the rules regarding children in “licensed premise,” note that child welfare rules relating to use of cannabis in the home or around children are still in effect. As such, child welfare workers will continue to hold preconceived notions about cannabis use, so wise parents will continue to ensure their children do not have access to the parents’ personal-use cannabis and that parents don’t consume cannabis near the children.

Final Analysis/Conclusion

Gone are the days of carrying babies in slings while mama and papa work the garden.

However, as CAMP-style raids and law enforcement actions against unregulated operators are already at a feverish peak this summer, regulated farmers and other licensees with young children can rest in the peace of knowing their business (and their family) will make it through the season unscathed by deputies arriving at 7:00 a.m. with a warrant.

For most families, that trade off will be worth it.

Much respect,

~hb
#protectourfarmers

PART 2 of 5: The Business Fundamentals Every California Cannabis Company Needs to Know: CLEANING YOUR OWN HOUSE, Regulatory Compliance & Entity Governance  

By Heather Burke and Virginia Ryan

As Virginia Ryan and I discussed in the first of our 5-part business blog series, “The Business Fundamentals Every California Cannabis Business Needs to Know,” one of the first steps to doing business is to ensure you have your own house in order. Sorry to tell you this, but people in business get sued and, yes, someone may try to take what you spent your lifetime to build. A successful business will be prepared for those situations before they arise.  In order to gauge the cleanliness of our clients’ houses, we often ask the following questions of potential clients:

1. Are your cannabis business operations strictly compliant with all state and local regulations?

Compliance includes recordkeeping for any sale of your product, maintaining those records in a particular way, and reporting certain information to the state regarding sales, and so on. If you do not know the recordkeeping rules, you may be compliant in certain ways, i.e. your farm operations could be set up in a compliant manner, but you’re not compliant with your records (and the records are one of the primary issues the CDFA will be most concerned about).

2. Are your entity’s governance documents in order, including appropriate resolutions and a workable procedure for making resolutions?

This article presumes the reader is strictly compliant with local and state laws, which require you to have a valid license, a Seller’s Permit, and an EIN. But many farms don’t have those documents organized on the farm in an easily accessible place, which they’re required to be for regulatory purpose.

Equally as important, if the farm got sued for some aspect of a potential sale, would the entity protect you or would the entity’s “veil” be pierced? In other words, can someone sue the farm and get the personal assets of the owners (such as the land)? Here’s what courts will be looking for to determine whether someone can take your personal assets:

  • Does the corporation have executed bylaws and minutes of the Board of Directors and Shareholders (for LLCs: does the LLC have an executed operating agreement?)?

  • Are you current on your state filing requirements (i.e., Statement of Information with the California Secretary of State) and franchise taxes with the California Franchise Tax Board.

  • Is the type of business you want to conduct included in the “purpose” language in those documents (or in a resolution, which is where our firm often places the purpose language for access to banking). Note: purpose language can be important.

  • Do you and the company have separate “personalities,” meaning do you treat your company as a different and distinct entity from yourself? If you own the property, do you have a lease between yourself as the landowner and with your corporation or LLC? Do you keep separate financial records and separate bank accounts? Do you do business in the name of your entity or in your own name?  Do you personally offer to “guarantee” the debts of the company (:i.e. “I got you bro.”)?

All of those are factors California courts may look to in determining whether the relationship between you individually and you as an owner of the company are truly “arms-length,” i.e. strictly professional.

In addition, to these basic requirements, there are a host of other items that you should implement in your business, such as obtaining a state or federal trademark for your brand, obtaining commercial and product liability insurance, executing buy-sell agreements with the owners to protect the business in the event a partner wants to leave, implementing confidentiality agreements with all consultants and employees, implementing appropriate terms and conditions for your website presence, to name a few.

If you’re new to business, this may seem like a lot to think through, but these are the BASICS required in order to enter into a business transaction, particularly where the product is federally prohibited, carries stiff mandatory minimum penalties, and the only defense is strict compliance with local and state law.

This may sound like a lot, but no need to worry, we will discuss these items and more later in our blog series, including:

Blog 3 of 5: Snakes in the Grass: Due Diligence and Proper Vetting of Potential Deals 

Blog 4 of 5Contract Fundamentals: Dude, Where’s My Indemnity Clause and Other Super Fun Terms Every Cannabis Business Should Know

Blog 5 of 5: Contracts Overview: What Paper to Push? (+ Sample Contract Templates)

Much respect, ~hb

#protectourfarmers

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

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This email is a communication from a lawyer, but it does not constitute legal advice, nor does it create an attorney-client relationshipThis is intended for educational purposes only.

Please contact an attorney for specific legal advice. 

Cannabusiness Bosses: Labor & Employment Issues in the Regulated Era, Part 2: Hiring, Special Situations, and Wage & Hour Basics By Sarah Smale

Cannabusiness Bosses: Labor & Employment Issues in the Regulated Era

Part 2: Hiring, Special Situations, and Wage & Hour Basics

By Sarah Smale

This is part two of our Cannabusiness Bosses series, covering hiring, special situations, and wage & hour basics. 

Part 2: So, you’re an employer. Now what?

Employers must comply with employee reporting, tax withholdings, and wage and hour requirements. Front-end compliance is key because California does not play when it comes to employee protections.  Penalties add up fast and are often more expensive than the cost of paying overtime, giving mandated meal/rest breaks, and otherwise following the rules.

Hiring Basics

When you hire someone, you must report the employee to the Employment Development Department (“EDD”), gather multiple documents, and provide various brochures. You also have to display a labor poster (or binder) somewhere employees can easily access.

The required forms and brochures can be gathered online at the EDD’s website, which provides tons of great information. Read through the 2019 California Employer’s Guide to learn more than you ever wanted to know about being an employer.

Special Situations

I am often asked about non-traditional working relationships, such as employing family, casual labor, and volunteers. Don’t fall into the trap of believing these types of workers are categorically exempt from reporting and tax requirements. They are not!

While family members may be exempt from some (but not all) types of taxes, you still must report their employment. More importantly, family exemptions do not apply if the employer is a corporation, LLC, or other business entity.

Temporary or short-term workers are still employees. If the work is not in the course of your regular business, you must report casual laborers as employees if you pay them more than $50 and they worked at least 24 days in the preceding or current quarter.  If the work is in the course of your regular business (such as seasonal trimmers), these employees must be reported regardless of pay or how long they work.

As for “volunteers,” simply dubbing someone a volunteer is not a solution. True volunteers “perform work for a civic, charitable, or humanitarian reason” for public agencies or qualified corporations. Cal. Labor Code § 1720.4.

Wage and Hour Requirements

Employers must comply with wage and hour laws, including minimum wage, overtime, and meal/rest breaks.  Cultivation workers are not considered agricultural workers by the Department of Industrial Relations. Instead, MAUCRSA expressly places them under Industrial Welfare Commission (“IWC”) Wage Order 4-2001, so the overtime requirements are similar to office workers.

Employers must familiarize themselves with this wage order (and post it at the job site). It covers everything from overtime, tools of the trade, and lodging credits.  Read IWC Wage Order 4-2001 here. There are also tons of rules regarding when you have to pay an employee (you cannot wait until harvest), mandatory record keeping, and information wage statements must contain.

Termination

If you fire someone or they quit with more than 72 hours’ notice, you need to pay all wages owed on their last day.  Cal. Labor Code  §§ 201, 202.

Potential Fallout

Employees owed wages can file administrative wage claims relatively easily, and there are lots of attorneys who happily take these cases because they’re easy to win. Countless Labor Commissioner hearings have taught me these generally go in the employee’s favor, particularly when the employer did not maintain records.

The regulatory agencies take labor violations seriously. Violations in the past three years must be reported in your annual application, and post-licensure violations must be reported within 48 hours. 3 CCR §§ 8102(i)(15), 8204(c)(3).

Closing Notes

The best way to avoid headaches is to create an action plan before hiring.  Gather the documents you need. Pay the taxes you owe. Create a mechanism for workers to communicate concerns. Create  your system and stick to it. 

Next time—workers’ compensation: who needs it, who can be exempt, and what it will cost.

Sarah Smale
Founding Partner, Origin Group Law LLP