Traditional Medicine Making in the Regulated Market (+ Sample Contracts!!!)

I want to deeply thank the Emerald Cup for naming me a judge in the legacy medicine-making (aka “Tincture”) category! What an honor to support the Emerald Cup in this critically important category, and CONGRATS to the winners (located online HERE)!

If folks aren’t aware of the history of cannabis tinctures, here’s the rundown:

Cannabis tinctures are one of the earliest forms of cannabis preparation, dating back centuries, though it was popularized in the 1800s by Dr. Walter O’Shaughnessy, for whom the legendary cannabis journal “O’Shaughnessy’s” is named. In California, cannabis farmers prepared cannabis tinctures to give to the seriously ill long before the Compassionate Use Act (“CUA”) was passed in 1996, but the CUA bolstered the legitimacy of cannabis’ medicinal value, which in turn bolstered its preparation in tincture and edible forms because those were most easily delivered to the seriously ill.

Tincture-making was a task often (but not always) assumed by the mom in a “mom-and-pop” farm, and tincture makers are colloquially referred to as the “medicine makers” within California’s legacy-producing communities. The title came with significant respect. Rightly so: medicine makers put their freedom and safety on the line to create these products, which were often passed (often for free) through clandestine channels to the seriously ill when our broken health care system failed another of us.

One of the great tragedies of regulation (which I blame on MCRSA in 2015, rather than Prop 64 in 2016) was the loss of the medicine makers from the California cannabis economy in favor of venture capital-backed, vertically-integrated, multi-state operators who could afford the often millions of dollars to obtain a manufacturing license from the state of California. Manufacturing licenses are actually not that expensive, but the land-use costs imposed by local governments were often too much for a “mom-and-pop” to surmount. The initial state regulations which accidentally (but firmly) excluded tinctures from the first year of the regulated market did not help.

Three years into regulation, we still do not have a fraction of the legacy tincture producers in the regulated market, but there are a small number of wonderful tincture companies who did make it and who bring that legacy to life in their products every day. Those are the brands I was so excited to see in this year’s Emerald Cup!

For those who haven’t yet made it into the regulated market, alternatives to seeking a manufacturing license on one’s own have become a bit easier. In addition to obtaining one’s own license, two other models are becoming more common: (1) obtaining a Type S (“shared use”) license, or (2) contracting a licensed manufacturer to produce a “brand” owned by a non-licensee (such as the mom and pop).

Here’s a quick overview of these two types of business models:

A Type S Licensee

A Type S license is a separate license which is allowed to use a licensed manufacturer’s “Registered Shared-Use Facility” to prepare and package the medicine maker’s own brand pursuant to a Use Agreement, which is really just a special type of lease. The benefits of a Type S license are that the medicine maker is its own company with its own set of books and track-and-trace records. It is autonomous from the primary licensee’s company. The drawbacks are that the medicine maker has to start a company, hire an attorney to draft a lease, and protect her or his intellectual property (the preparation itself, but also the tincture’s brand).

Hiring a Manufacturer to Produce the Brand

Secondly, a medicine maker can also lawfully contract with a licensed manufacturer to prepare the tincture according to the medicine makers’ specifications and send the tincture out to the market under the medicine maker’s own brand. In this scenario, the medicine maker can require the manufacturer hire the medicine maker to prepare the tincture at the manufacturer’s facility. In essence, both parties would be hiring each other in two related but not identical service agreements.

The upside to this situation is that the medicine maker’s startup costs may be lower and they can get on the market far more quickly than a Type S. The downsides to this structure are pretty heavy and include:

  1. The medicine maker is inextricably linked to the manufacturer’s business and is subject to their books and their track-and-trace records. This is the biggest and sometimes insurmountable downside.
  2. This scenario often requires two separate contracts, so its far more complex.
  3. It requires disclosures to the state as a financial interest holder or owner, depending on the deal structure.
  4. In this scenario too, the medicine maker needs to start a company, hire an attorney to draft a lease, and protect her or his intellectual property. The intellectual property protections in this scenario are slightly more complex because the medicine maker does not have its own cannabis license. Also, labor laws and tax issues need to be addressed head-on in this scenario.

Both scenarios are complicated and should not be entered into without legal counsel and in consultation with a CPA or financial advisor. There is just too much on the line, particularly because medicine makers are legacy producers who can be taken advantage of if not properly represented. For instance, an unrepresented medicine maker might be inclined to give a manufacturer a cut of the profits (which is imho a pernicious business practice in light of the policy behind the Type S license in the first place) or be bound into some other term that harms the medicine maker’s ability to take a meaningful attempt at success in the regulated industry.

In an effort for medicine makers to reduce their legal fees when they do move forward, I’m attaching two sample contracts: (1) a Type S license “Sublease and Use Agreement,” and (2) a contract to hire a manufacturer to produce a tincture according to a medicine maker’s specifications. Please note that, under no circumstances, should these contracts be signed without discussing each and every term with an attorney, but usually the attorney’s billable time will not be as significant if the template is laid out for them here, which may reduce medicine maker’s barriers to market. My hope is that folks see the market is well within their reach and that we have more legacy producers on our retail shelves.

With love and respect, ~hb

SAMPLE TYPE S SUBLEASE AND USE AGREEMENT

SAMPLE MANUFACTURING, PACKAGING, AND LICENSING AGREEMENT

*As noted above, this deal may require a second contract which I am not providing because there are too many possible scenarios. Please seek the advice of an attorney for this complex business ????????‍???? structure.

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