2016 LEGISLATIVE UPDATES: Part IV

In this final installment in our legislative updates series, we turn to medical marijuana (medical cannabis or MMJ) in 2016.  Hopefully you’ve stuck with us, because we’ve reached the end… or is it just the beginning?

OPTIONAL PAIRING: Medical Marijuana

In a move that’s been anticipated with bated breath by the medical marijuana/cannabis industry since 1996’s Compassionate Use Act, the California legislature finally adopted laws to regulate medical cannabis with the Medical Marijuana Regulation and Safety Act (“MMRSA”).  This is only the authorizing act to lay the groundwork for further statutes and regulations that will make up the larger code eventually governing the cannabis industry – but it is a big step forward to getting a murky area of the law codified.

For those not following medical and recreational cannabis developments closely, the medical cannabis industry has remained relatively unregulated in California since the voters enacted the groundbreaking Prop 215 initiative in 1996, which prescribed limited protocols for patients, cooperatives and collectives, leaving the cultivators, manufacturers, testing facilities and modern-day dispensaries without much guidance or legal protection.  The limited state-wide regulations have resulted in two compliance trends that have plagued this industry: strong local control over the operations of these businesses and inconsistent federal enforcement actions, with a lot of court cases interpreting these permitting and enforcement actions.  Many hope that MMRSA will protect businesses producing and selling medical cannabis from local interference and federal prosecution by giving businesses clear state-wide laws and regulations to follow, and by providing the strong and effective regulatory and enforcement systems required by the Department of Justice (“DOJ”) to minimize the threat to federal enforcement priorities per the Cole Memoranda (available here and here).  

Early on in the legislative process, it was rumored that ABC might be called upon to regulate medical marijuana, a move that the alcohol industry leaders generally seemed wary of (and in some cases loudly opposed) out of fear it would divert resources from regulating the alcohol industry. The ABC already faces significant employee turnover and enforcement challenges.  We generally supported the ABC regulation of medical cannabis because we believe ABC understands how to regulate another controlled substance in a way that generally meets similar enforcement priorities as identified by the DOJ memos.  Instead, MMRSA goes in a different direction by giving oversight to numerous agencies and creating a new agency under the Department of Consumer Affairs, the Bureau of Medical Marijuana Regulation, to draft and enforce law and regulation in compliance with MMRSA.  Here are the most interesting parts of the MMRSA licensing scheme from our perspective:

• License Types: There are seventeen different license types. Ten of them are cultivation licenses, dividing into size (specialty small, small, medium and nursery) and type of light (outdoor sun, indoor lighting or mixed lighting).  Two licenses are manufacturing licenses (which includes edible manufacturers who mix cannabis with food ingredients).  Two licenses are for dispensaries (one limits ownership to three retail locations), and one each is for testing, distribution and transportation.  While there are overall more licenses in alcohol (because of importing licenses, various types of on- and off-premises licenses and different alcohol categories), this licensing scheme starts off with a lot of different license types for cultivation, without clear guidance about what to expect for taxing and permitting distinctions between the license types.  We note also that there are no licenses yet for on-premises MMJ consumption.

• Mandatory Distribution and Testing: The licensing scheme features a mandatory distribution tier, just like the original three-tier system in alcohol, which over the years since the end of Prohibition has been affected by a slew of state-by-state exceptions for small producers and specific venues, creating an intricate alcohol beverage attorney right to work act.  In addition to the product quality assurance and sales that alcohol distributors are responsible for, MMJ distributors are also responsible for getting every batch randomly tested by a licensed testing lab.  This process obviously favors larger operations that can make larger batches and differs significantly from the alcohol industry’s testing standards.  The TTB, the federal alcohol agency, only tests imported products, products submitted by manufacturers themselves to receive a tax credit, products receiving consumer complaints and post-market products tested as part of an ongoing audit of the marketplace.

• “Tied House”: The licensing scheme features a tied house provision (for lack of a cannabis-specific term), as in alcohol to prevent vertical and horizontal integration, with some key exceptions.  First, the limited dispensary license with three or fewer retail locations may have manufacturing and/or cultivation interests.  This exception provides allowances for smaller dispensaries to create and sell private/control label products, which will likely be an important advantage in the competitive regulated market.  Second, small cultivators may also have small manufacturing licenses, which will allow them to create edibles, oils and other manufactured goods in addition to producing flower cannabis.  These are important exceptions, and we expect more to come as the industry and regulations develop.

• Transportation and Delivery: There are additional transporter licenses required for all delivery between licensees.  Transporter licensees may have distribution licenses, but distributors must have transporter licenses. There is a grandfather clause for existing businesses that are vertically integrated and that comply with local permitting restrictions, and a requirement that delivery companies must be dispensaries or dispensaries must do their own delivery.  For now, at least, it appears that the intention is to not allow an unlicensed tier for third party providers like many of the alcohol delivery companies, who deliver on behalf of licensees as their agents.

• No Alcohol Retailer Cross-Ownership: Alcohol retailers cannot also hold dispensary licenses, a restriction intended to prevent liquor stores, bars and restaurants from being able to sell medical cannabis in combination with alcohol.  Noticeably, the MMRSA is silent about any restrictions on other types of alcohol licensees, such as alcohol distributor and supplier licensees, many of whom we know are closely following the licensing scheme and preparing to enter the market.

• Local Licensing: In addition to state licenses, there is a requirement for local permits, a system that differs greatly from the alcohol regulation scheme in California. In alcohol, all licenses are issued by the state, but local cities, counties and districts must approve and often condition licenses and can implement their own restrictions or moratoriums on certain types of licenses. The ABC makes the final decision about whether a license issues. In the medical cannabis industry, on the other hand, businesses will need to get separate licenses from their local government, which could have its own system of requirements in order to operate in its community. This gives substantial control to local governments, many of which have been instituting outright bans of cannabis businesses with a tight deadline from MMRSA. A legislative fix is promised, but otherwise, it looks like the required local licensing scheme is already producing more limited patient access to medical cannabis.  

With our experience, it’s hard not to compare this time in the history of cannabis with the end of alcohol prohibition, especially with recreational legalization slated for the California ballot in 2016. Whereas with alcohol there was an established network of black market bootleggers and understaffed enforcement, in the pre-prohibition cannabis industry, we see strong local governments grabbing for more control over an industry that has been plagued by raids, lack of banking and incarceration. We also see many industry newcomers who may benefit from the kind of code that requires capital and counsel to navigate. The big difference between these two eras may be public perception and acceptance of the product: teetotalers did not have quite the same hold on the public imagination as the drug warriors have had.  

2016 LEGISLATIVE UPDATES: Part II

By Rebecca Stamey-White and Erin Kelleher

This is the second legislative update blog post we are doing to discuss all the fun new laws in store for 2016.  For this edition, we’ll get into the main course of advertising, events and tied house.

SECOND COURSE: ADVERTISING, EVENTS AND TIED HOUSE

Co-sponsoring charitable events with retailers now permitted (AB 776: 23355.3)

While there are a lot of changes to the laws around advertising, events and tied house (a particularly nuanced specialty of our firm’s marketing practice), the new law getting the most attention lately has been AB 776, which purports to provide an exception to the thing of value restrictions on supplier social media posts mentioning retailers.

This kind of social media activity (which is rampant in the industry) led to many ABC accusations against suppliers who advertised their participation in Sacramento’s 2014 Save Mart Grape Escape, which our firm defended in front of the ABC.  While the law does permit licensees sponsoring a charity event to mention retailers who are co-sponsors without it being deemed an unlawful thing of value to the retailer, this law does not permit broad advertising by suppliers of retail accounts, as many mistakenly believe.  

Under 23355.3, licensees (which means everybody – you too, virtual wineries!), can sponsor and participate in non-profit events that a permanent retailer is also sponsoring without giving this charitable retailer a thing of value through their sponsorship… BUT (you knew there was a but, right?):

• The money has to go to the charity (who must also get an ABC license)
• The supplier licensee can’t give the sponsoring retailer anything of value
• A retail licensee can’t sell alcohol to the charity licensee
• A licensee can advertise its participation in the event via social media and can share a retailer’s post about the event, as long as it doesn’t post prices, promote the retailer, or pay or reimburse the retailer for advertising
• Non-retail licensee sponsorships can’t involve exclusive products at the event
• Charity licensees can’t get a benefit from permanent retailers in connection with the sponsorship, and
• Permanent retailers can’t offer supplier advertising, sales or promotions in connection with the sponsorship

All of these conditions raise many questions, such as: How the ABC will interpret contracts between licensees and third-party event producers hired by charities? What kinds of lawful activities might be an impermissible thing of value when combined with an event co-sponsorship? Will retailer in-store promotions related to the event be permissible? And, will a retailer will be liable if the charity purchases alcohol for its event from its retail sponsor without the sponsor’s knowledge?

The passage of this law also served as an excuse for the ABC’s dismissal of a good decision in the Renwood case.  Had the decision been adopted, it would have restricted the ABC’s enforcement of the tied house laws more broadly when there is no evidence of an actual thing of value flowing to a retailer.

Alas, onward and upward… it’s a new year, with new social strategies, and we can’t wait to see how our clients will try to push the envelope in this area!

Retailers may purchase digital advertising on supplier sites and social accounts (AB 776: 25500)

AB 776 also calls out an exception that we’ve written about before (the retailer right to pay exception). This exception was already in the code, but with AB 776 is now expressly applied to digital advertising, and it permits retailers to pay fair market value for advertising in supplier publications and social media accounts. This means that if a retailer wants to promote a supplier product or campaign, it can now pay to do so!

You may be wondering: why is that a thing? This is a concept so foreign to other industries that it’s worth mentioning why an alcohol beverage retailer would have to pay a supplier for advertising when it’s already buying the supplier’s product (isn’t that included in the price?).  In the alcohol industry, a supplier can’t legally give a retail licensee (either on-premises or off-premises) anything of value, including a form of advertising common in other industries – the “retailer shout out.”  While the middle tier members may bemoan the gradual chipping away at these so-called tied house laws, until that happens, this is a decent fix for the current advertising predicament, in which rather than giving a retailer a thing of value, most suppliers just want to be able to let their fans know they’re doing an event.

Minimal changes made to retailer locator laws (AB 780: 25500.1)

Another bill getting a lot of attention is AB 780, which we wrote about in a previous post.  This law does not change the privileges available, but recodifies them into one statute that permits suppliers to advertise two or more unaffiliated retail accounts (sometimes referred to as retailer locators). We find it interesting that in its advisory, ABC makes a point of interpreting what constitutes a "direct communication" with consumers, requiring "some relationship between the non-retail licensee and the consumer(s) to whom the information is provided." Apparently "following" or affirmatively going to the supplier's website qualifies, but taking out an ad in a newspaper does not. While we think this distinction is likely irrelevant based on how suppliers are likely to use this exception, we note that we find little basis for the ABC's interpretation here to distinguish between a website retailer locator and a traditional advertising retailer locator. If anyone gets an accusation for this kind of activity, please give us a call - it would be a fun case to defend!

Napa gets a sponsorship money exception for Bottle Rock Festival (AB 527: 25503.40)

After the Bottle Rock cases we defended this past year and the continuing appeals we will argue this week in front of the ABC Appeals Board related to sponsorships paid for the Bottle Rock Festival 2014 in Napa, we had hoped for an overhaul of the special event provisions in California as an entire state. But alas, AB 1547, which would have created a major event license, didn’t make it out of committee this session. Instead we are left with AB 527, which is one more in a growing list of venue- and event-specific exceptions to the tied house laws rather than a larger fix, this time couched bizarrely as “earthquake relief” for Napa County.

The Bottle Rock cases centered on the allegation that a winery cannot pay an event producer sponsorship funds, meaning it’s on the supplier to conduct event-by-event vetting to determine whether that sponsorship money will somewhere down the line support any retail licensees or whether those event producers happen to have any investments – even distant ones – in retail licensees.  According to the ABC, a supplier can be subject to a $10,000 fine for sponsoring an event if it’s possible that those funds eventually made their way to a retail account—except in Napa under the exception in AB 527, and the dozen or more other venues in the state that have already been granted similar exceptions.

Throw another one onto the pile - Sonoma State Green Music Center and San Diego Del Mar Racetrack Exceptions (SB 462: 25503.6 and 25503.34)

We have long lamented the piecemeal approach to tied-house legislation in California, and this is just another example. SB 462 expands existing tied-house exceptions in 25503.6 of the code applicable to advertising arrangements between licensees at certain venues to include the Green Music Center at Sonoma State University, and fairgrounds with a horse racetrack and equestrian and sports facilities located in San Diego County.

Additionally, 25503.34 was added to the code, permitting alcoholic beverage licensees to make monetary or alcoholic beverage contributions to the Green Music Center under certain conditions.

Brewers can now have instructional tasting events at farmers' markets (AB 774: 23399.45, 24045.6 and 25607.5)

We have blogged before about brewers’ incremental parity with wineries with regard to tasting opportunities at farmers’ markets, and it seems as though they are closing the gap. Brewers who obtain a Type 84 Certified Farmers’ Market Beer Sales Permit may now also hold instructional events for consumers, brief outline of the parameters below:

• Existing off-sale privileges are unchanged;
• Eight ounces of beer can be provided per person, per day;
• The tasting area must be roped off in some way from the rest of the market and consumers may not leave the area with open containers;
• Only one licensed beer manufacturer may conduct an instructional event per farmers’ market;
• Type 84 permits may be issued for up to a year, but are not valid for more than one day a week at any particular farmers’ market, however more than one permit can be held at a time for multiple markets; and
• Annual sales at farmers’ markets cannot exceed 5,000 gallons annually.

Find our next post tomorrow for the third course of our legislative updates series!

2016 LEGISLATIVE UPDATES: Part I

By Rebecca Stamey-White and Erin Kelleher

In 2016, we’ll see a lot of changes to California’s laws regulating alcoholic beverages. As the state’s legal experts on alcohol, we’ve been answering a lot of questions from clients about how they can comply with these new laws and take advantage of the new exceptions, so we decided to compile our analysis of the legislative changes into a series of blog posts to ensure your compliance is off to a great start in the new year.

 In order to help our readers digest the information and understand the changes, we’ve grouped our legislative discussion into four courses:

• First Course: Promotional Activities

Pairing Suggestion: an H&C big bottle of wine; best served with your sweepstakes dinner prize.

• Second Course: Advertising, Events and Things of Value

Pairing Suggestion: Renwood 2014 Old Vine Zin, to be enjoyed while you check-in at our restaurant on social media.

• Third Course: Licensing, Qualification and Tied House Ownership

Pairing Suggestion: White Russian with craft coffee liqueur and locally-sourced vodka, because you can soon enjoy a cocktail when you visit your favorite craft distillery.

• Fourth Course: The Medical Marijuana Regulation and Safety Act from an alcohol industry perspective.

Pairing Suggestion: Cannabis-infused wine… as soon as we can legally get our hands on some! Rebecca will also be speaking on some of these issues at the Women Grow Bay Area chapter meeting this Thursday in Oakland if you can’t wait for this course.

If you get heartburn from any of these courses, please reach out to us for a legal remedy.  

FIRST COURSE: PROMOTIONAL ACTIVITIES

Alcohol may now be part of a prize for contests & sweepstakes (SB 796: 25600.1 & 25600.2)

In big news for a state that only rejoined the rest of the country in 2013 by even permitting alcohol supplier-sponsored sweepstakes and contests, alcohol may now also be given away as a prize in connection with a contest or sweepstakes, provided that it is an “incidental part of a prize package.”

This is a marked departure from California’s previous position of being strictly against the potentially "overly aggressive marketing" of alcoholic beverages in the form of sweepstakes and contests. The state now blazes a trail by permitting the beverages themselves to be a prize (but not without a gray area to interpret!).

What “incidental” means exactly is not clear. While it is still the case that alcohol cannot be the sole prize that is given away in a contest or sweepstakes, it is less clear how marginal the alcohol prize must be and whether it can be specifically advertised or highlighted in the official rules. In our view, while “incidental” likely includes alcohol poured in connection with trips to supplier premises or at hosted dinners that may involve pairing with the supplier’s products, it likely would not include things like prized bottles of wine or a free bottle of wine every month for a year in addition to such trips.

Bottle signing events are here to stay (SB 796: 25502.2)

The sunset provision of this statute was deleted, allowing celebrity bottle signings to occur indefinitely (click here for a link to the previous Booze Rules post on this topic, outlining the requirements).

Still hungry? Good, because there are three more courses to go…