Key Issues for the California Cannabis Industry
In the wake of the legalization of cannabis in the state of California following last week’s election, it is important for businesses to take stock of several legal issues as opportunities within this burgeoning market continue to grow. Outlined below are just a few of the areas cannabis businesses in California need to be aware of to avoid legal problems down the road.
Real Estate & Land Use
- Zoning and Permitting: With a number of California cities looking to tighten local land use and zoning controls, cannabis cultivators and dispensaries are likely to face an increasingly complex set of compliance and regulatory challenges. Navigating the political and legal landscape to reach successful business outcomes will likely depend on active outreach and an integrated approach to build community support.
- Sustainability: California’s historic drought and global climate change have increased the need for private sector innovation and sparked aggressive sustainability reform at the local level. Green building and sustainable design is now the norm in California. With legalization, the cannabis industry should anticipate a need to respond with creative sustainability solutions and agricultural best practices to manage water and energy resources efficiently.
- Environmental Impacts and Outreach: Legalization will raise the stakes for environmental interest and other stakeholder groups concerned about the environmental effects of cannabis cultivation. The legalization and expansion of existing grow operations will trigger new and complex questions regarding environmental review and permitting. It will also require creative thinking and community outreach to develop a win-win solution for both the industry and the environment.
- The US Patent and Trademark Office will NOT register trademarks for use on cannabis and any other goods and services that violate the Controlled Substances Act.
- Some states permit state trademark registration for cannabis and related products, but those trademarks are limited geographically to the state of registration.
- California does NOT allow registration of cannabis related trademarks due to Section 14272 of the California Business and Professions Code, which states that California trademark law is to be “substantially consistent” with US trademark law.
- A cannabis company should register their trademark on legal but related goods (as much as possible) to preserve trademark rights pending straightforward US registrability of trademarks on cannabis.
Corporate & Securities / Litigation
- So long as cannabis-related contract terms comply with state marijuana usage laws, such contracts will likely be enforceable in California state court. Not so, should any federal issues arise, but since contract law is a creature of state law, pure contract claims will likely be enforced.
- Investors interested in now-legal cannabis operations should conduct in-depth due diligence to ensure that the company complies with all marijuana-related state laws and regulations. Historically, pursuant to the Cole Memo, such compliance has immunized companies from federal oversight despite cannabis continuing to be a Schedule I, federally illegal drug.
- For funding and investment, the market is still very selective about private funding for cannabis businesses. There is a huge demand for private investment, however investors remain skeptical given the uncertainty regarding the legal aspects.
- One of the biggest obstacles is the extreme difficulty in obtaining and maintaining access to banking. Federal legislation has taken minor steps to address this issue, but there is still a lot of uncertainty leading banks to revoke or reject clients (even ancillary companies) who derive revenues from cannabis, even if tangentially.
- Patient privacy rights under California law are extended to include information disclosed to the state for purposes of obtaining or renewing a medical marijuana card.
- The Compassionate Use Act of 1996 essentially remains in place as a parallel regulatory scheme; dispensaries that sell marijuana for nonmedical as well as medical use may have challenges determining which requirements apply for a given transaction.
- By January 2018, all patients will need to obtain a new physician recommendation that meets specific, new eligibility standards and comply with protocols adopted by the county health department to ensure that the identification cards issued to them are supported by an acceptable physician recommendation.
- Dispensaries of medical marijuana will be required to collect the new excise tax on all sales unless the purchaser produces a valid personal identification and valid medical marijuana card.
- There has been bipartisan support in the House and in the Senate to amend the CSA and ease federal obstacles for medical research to conduct clinical studies on the medical benefits of marijuana. In addition to this congressional support, four states (Arkansas, North Dakota, Florida, and Montana) had ballot initiatives on Election Day to regulate the production and use of medical marijuana. Voters in Florida, North Dakota, and Arkansas – who had previously rejected such measures – approved medical marijuana initiatives, while voters in Montana approved a measure to loosen restrictions on an existing medical marijuana law.
- However, the election of Donald Trump could undermine the federal support for the use and production of medical marijuana. The Obama Administration largely took a hands-off approach to state-level legalization efforts. It is unclear how the incoming Administration would approach the issue.
To read our comprehensive post-Election 2016 policy analysis, click here.
Labor & Employment
- The passage of Proposition 64 in California does not affect employers’ rights to implement policies to ensure a drug-free workplace. Proposition 64 expressly preserves employers’ right to “enact and enforce workplace policies pertaining to marijuana.” Thus, employers can continue to prohibit possession or use on their premises or while an employee is on duty, as well as prohibit employees from being under the influence. California law on drug testing remains unchanged; employers may still require suspicionless pre-employment drug testing as a condition of hiring, but testing during employment generally still requires reasonable suspicion.
- Proposition 64 explicitly states that a California employer is not required to permit or accommodate the use of marijuana in the workplace. The California Supreme Court’s holding in Ross v. Ragingwire Telecommunications, Inc. 42 Cal. 4th 920, 174 P.3d 200 (2008) remains good law, and an employer is not required to allow the use of marijuana as a reasonable accommodation.
- Employers should update their alcohol and drug policies to specifically address marijuana.
To read our more in-depth alert about the passage of Proposition 64 and what it means for employers in California, please click here.
Arent Fox will continue to monitor the developments in the California cannabis industry. If you have any questions about the subject matter, please contact JD Harriman, Thomas Jeffry, Kirsten Hart, Tricia Lee, John Malone, Frank Petrilli, or Sonja Nesbit.