When we started our cannabis practice, we did not know where our clients would necessarily come from, but we knew we had to be a part of the end of prohibition, having missed the last one that shaped so much of our current alcohol practice. While we work with many independent cannabis cultivators, manufacturers, distributors, and retailers, much of our cannabis work also comes from our existing client base of winemakers and vineyard owners, brewers, distillers, restaurants, hotels, venues, private clubs, caterers, service providers, and investors, who want to diversify their investments. All eyes are on California cannabis; if it can be added onto existing alcohol and hospitality operations to serve the newly legalized consumer base, all the better.
While many different sources have discussed the interplay between cannabis and alcohol to varying degrees and the California ABC recently came out with some guidance for alcohol licensees, we wanted to provide our top five legal considerations from what we’re seeing on the ground, related to federal law, licensing, special events, mixed products, and brand marketing deals. Also, look out for our upcoming presentations on these issues:
- Alana Joyce is speaking in Portland at the American Distilling Institute’s Craft Spirits Conference Wednesday, March 28 on “Cannabis Cocktails: The Good, the Bad and the Buzz on ‘Drinkables’”
- Also find Barbara Snider at ADI’s conference Tuesday, March 27thspeaking on FDA Inspections
- Rebecca Stamey-White is speaking at the Golden Gate Restaurant Association’s Industry Conference Tuesday, April 10th on the “420 on Cannabis & Restaurants”
- Rebecca Stamey-White is speaking at the Wine & Weed Symposium on “Keeping it Legal; What you can and can’t do”
Remember this is a blog for educational purposes, it does not constitute legal advice and is not specific to your situation, so always consult your own legal counsel!
1. Cannabis Is Still Illegal under Federal Law
We take every opportunity possible to remind our clients, prospective clients, really anyone in earshot, that cannabis is still federally illegal and remains a Controlled Substance Act Schedule I drug. People are still being raided, having their assets seized and getting arrested, and yet you’d be surprised by how many folks we talk to are shocked to hear it. Only four days after California began issuing its first state licenses, Attorney General Jeff Sessions released a memo rescinding the Obama-era Department of Justice memos on federal enforcement priorities that have guided the development of state laws to create robust regulatory environments to hopefully avoid federal scrutiny, although he has indicated the DOJ won’t take on small cannabis cases. The other side of the federal coin is the Rohrabacher-Blumenauer Amendment/Leahy Amendment, which prevents the DOJ from using government funds on cannabis enforcement efforts in states that have legalized medical marijuana (you read that right – this provides no protection for adult use operations). This Amendment has so far been temporarily extended eleven times with the federal budget (most recently last week, extending the protection through the remainder of FY2018, which ends September 30). Other big federal issues worth discussing with your lawyer and accountant are a lack of reliable access to banking and a high federal tax on operations due to IRS Code Section 280e, and of course, staying clear of those pesky money laundering, conspiracy and aiding and abetting allegations!
Having the President and Sessions outrageously call for the death penalty for “drug dealers” doesn’t make anyone feel any safer either. While we think Trump would have a tough time enforcing this policy against non-violent, state-licensed business operators, no blog is long enough to make sense of the current policies of the Administration in Washington. Rather, all that we and our clients can do is stick to state law and continue the push for de-scheduling at the federal level.
What this means is that cannabis businesses are still subject to the risk of federal enforcement, so anyone looking for a get rich quick investment should look elsewhere, and those with a lot to lose should evaluate whether they have the risk tolerance to play in this space. Serious applicants only need apply. And yet, as is always the case in a regulated industry, enforcement is often inconsistent, and, we hope, focused on the priority issues of tax collection (never forget Al Capone's fate!), eliminating the black market, and public health and safety.
2. State and Local Licenses Are Required to Produce, Distribute and Sell Cannabis
In January 2018, California started issuing licenses for both medical and adult use cannabis cultivation, manufacturing, testing, distribution, and retail in accordance with the Medical and Adult Use Cannabis Regulation and Safety Act (“MAUCRSA”), but to get these licenses, prospective licensees need local approval and/or licensure. Much like with alcohol, licenses are required to make, distribute and sell products, which means if you want to get involved in the green rush, you'll need licenses to participate and should require them of anyone you're considering working with for co-marketing opportunities. Unlike alcohol, tied house laws don’t exist in California cannabis licensing, with the exception of the testing facilities, which can’t also hold other cannabis licenses, so licensees can be vertically integrated, but are not required to be so.
Having an alcohol license is currently not a bar to having a cannabis license (although there are legislative efforts underway to prevent alcohol retailers from holding cannabis licenses), but the two cannot share the same premises. Practically speaking, separate entrances have worked well for strip clubs without alcohol licenses operating next to licensed bars for years and should work for alcohol and cannabis operations operating as neighbors, provided local zoning officials will permit the project.
Alcohol producers and distributors interested in cannabis should think about their TTB permits, landlord approval and whether their insurance would cover both products or premises. Landlords must approve of cannabis use if licenses are to be approved (BCC Emergency Regs. § 5007). Landlords are also opening themselves up to risks of aiding and abetting and money laundering claims, along with risks of asset forfeiture, so expect higher rents for the privilege.
Also note that last week, the California Department of Public Health (CDPH) expanded cannabis licensing options to include shared-use facilities for manufacturers, a familiar concept to alternating proprietorships (APs) in the alcohol industry. Just as in the alcohol industry, this type S license should help smaller manufacturers participate in the legal market without having to purchase all their own equipment, pursuant to lease terms from the primary licensee. We expect our clients with AP experience to find yet another leg up translating those skills and agreements to the cannabis industry.
3. Special Events and Private Parties Are Harder to Pull Off than You’d Think
We advise on events across the state and beyond involving alcohol and cannabis compliance, and the available event options will crush any marketer’s dreams. Many a creative client has argued that events involving wine and weed are private parties or that alcohol licenses for the event premises will be surrendered, so they shouldn't be subject to regulation. We wish it were the case that selling consumers food and allowing them to BYOB or BYOC really resulted in a private party as far as the regulators are concerned, or that bringing in a caterer made it lawful, but alas, these events are commercial transactions and are regulated by both the ABC and the BCC, along with the local authorities.
While the cannabis laws and regulations do permit special events, these events are very limited in nature—they are intended for the cannabis cups and larger fairground affairs—require specific state licenses, and do not also permit consumption of alcohol on site. See Bus. & Prof. Code Section 26300; BCC Emergency Regs. § 5600-5603. There are currently no good options for cannabis licensees to host marketing events on or off their licensed premises unless they are lucky enough to be in localities and zoned locations that permit on-premises consumption at their retail premises (and again, you will not be able to permit alcohol at these locations).
The ABC has shut down the potential workaround of alcohol licensees surrendering their premises for a private event, be they private clubs, bars, restaurants or manufacturing facilities with retail privileges, interpreting these premises to be "public places" where one cannot smoke or ingest cannabis or cannabis products per Health and Safety Code Section 11362.3. If anyone wants to challenge this interpretation, we will take the case. Enforcement is likely to be low and subject to the individual licensee's risk tolerance (as music venues and plenty of other licensed locations have tolerated cannabis use for decades despite the risk).
Otherwise, until the law changes (and this should be a priority issue for the tourism and hospitality industries, apart from cannabis and alcohol licensees) the only real option for mixed use appears to be hosting events on private, unlicensed property, with the express authorization of the property owner, without any commercial transaction involved. That means no ticket sales or donations, no sale of alcohol or cannabis, no bartering, no membership fee, no marketing or other thing of value involved, and hope for no enforcement. Good luck controlling the social media influencers attending your event!
4. Products Containing Both Alcohol & Cannabis Are Even Harder to Do
The Department of Public Health’s emergency regulations prevent the infusion of alcoholic beverages with cannabis, but notably excludes “tinctures,” without defining the term. Public Health Rule § 40300. While there are some notable exceptions taking advantage of this “exception,” which is likely to be fixed with final rulemaking, most products marketed as containing alcohol and cannabis are not alcohol (such as de-alc’d wine) or not cannabis (such as terpenes derived from hemp). TTB also has some guidance on products containing hemp, but the long and short of it is that products containing cannabis or hemp and alcohol are a difficult pairing because to produce these products, you would need both alcohol and cannabis licenses (in the case of hemp, you'd need substantial records to prove it comes from a permitted source and lacks THC). You would also need both alcohol and cannabis licenses to sell these products from the same register, which isn't possible without overlapping alcohol and cannabis licenses in violation of Business and Professions Code § 26300.
CBD is a can of worms that should be the subject of its own blog post (and I’ll be speaking about it on July 25, 2018 at NCBA’s CLE at NCIA’s Cannabis Business & Summit Expo), but a quick tip is to hire counsel if you want to sell or make products with CBD, because the regulators disagree on CBD and hemp generally (this issue is currently being litigated in the 9th Circuit). It's a hornet's nest to produce these products legally (if possible at all), because of the many regulatory agencies involved (DEA, TTB, FDA, FTC, among your state and local agencies), so most products on the market are varying shades of gray and prepared to defend their legal position in court. That goes for alcohol retail locations that want to sell products containing CBD (I'm looking at you, hotels, restaurants and grocery stores!). And to pour more fuel on the fire, the pharmaceutical industry is also in the game, so it's possible the FDA will put these products in the category of drugs and not food or supplements, eliminating the entire over-the-counter market. You might have an easier time with products containing THC and CBD derived from cannabis (and it will probably help you sleep better too – anecdotal, not medical advice, please consult your doctor)!
5. Marketing & Brand Partnerships between Alcohol & Cannabis Licensees May Become More Common
The last mixed product topic getting a lot of play is the use of marketing partnerships to leverage alcohol-related brands in the cannabis industry. This runs the gambit, from co-marketing efforts and influencer campaigns on social media (fingers crossed your social media accounts don't get closed down!), to brand partnerships at events (see above), to IP licensing arrangements where marketers can focus on their brands built over the years in the alcohol industry or elsewhere, and the cannabis licensees handle production and sales entirely. These types of arrangements can be less risky alternatives for those alcohol-related brand owners with more to lose. However, if structured compliantly, the brand owner will have very little control over the production or sales of the product without holding their own cannabis licenses, and it's therefore essential to find the right partner who takes compliance seriously and is willing to jump through all the many regulatory hoops in this evolving industry.
In closing, we hope this post was informative. We are looking forward to the end of Prohibition and the beginning of a new era of rational regulation of mixed use substances. The risks are not going to go away soon so understanding your tolerance levels (or at least isolating the risk) should be the priority. As always, please consult your legal counsel if you're considering becoming involved in this space!
Rebecca Stamey-White
Partner and Practice Leader
415-362-1215, ext. 106
eMail Rebecca