United States: California's Countdown To Legal Cannabis: Facing Regulatory And Permitting Uncertainty

As of January 1, 2018, it will be legal for adults in California to buy and sell cannabis for recreational purposes.  That's the simple version.  But as is true for virtually every other "legal" enterprise in the state, the regulatory landscape will make things much more complicated—and not just because cannabis remains illegal at the federal level.  A patchwork of state and local regulations are emerging at a breakneck pace, raising a host of novel legal issues—relating to consumer product safety and labeling, tax, patent, commercial real estate, corporate disclosures, etc.—and creating a minefield for investors, cultivators, manufacturers, distributors, retailers, and others starting or continuing to operate in the legalized industry. 

This alert highlights several of the most important things cannabis industry stakeholders need to know now about state licensing, local permitting, and avoiding pitfalls under the California Environmental Quality Act (CEQA).

Medical Cannabis Regulations Up In Smoke

In 2015, the California Legislature took the first steps toward creating a comprehensive licensing scheme for the almost twenty-year-old legalized medical cannabis industry.  Three state agencies were tasked with developing licensing programs for commercial cannabis operations—the Department of Food and Agriculture for cultivators, the Department of Public Health for manufacturers, and the Bureau of Cannabis Control (Bureau) for retailers, distributors, testing labs, and microbusinesses.1  Each of these agencies introduced draft regulations for medical cannabis in April of this year, seemingly in plenty of time to meet the legislative deadline of January 1, 2018 to begin issuing licenses.  However, after the state's voters adopted Proposition 64 to legalize "adult use" (recreational) cannabis, in June the Legislature attempted to create a coordinated, overarching set of rules for both medical and adult-use cannabis:  the Medical and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA).

Now, with less than three months to spare, the state licensing authorities officially withdrew the draft medical regulations on October 6, and plan to release new emergency regulations compliant with MAUCRSA in November2 —leaving only a short window until the agencies are directed to begin issuing the first State licenses.  Although California will be in the dark for several more weeks, the regulations are likely to track closely with the previously proposed medical framework and incorporate feedback from the first round of public review.  From a land use and regulatory perspective, here are three particularly important things to keep in mind.

1.  Location, Location, Location

Because applicants for any commercial cannabis license must have local authorization before obtaining a state license, it is critically important for cannabis businesses to understand the zoning, environmental, operational, and other requirements imposed by the local jurisdiction.  MAUCRSA retains the discretion of cities and counties to more strictly regulate commercial cannabis, or to prohibit it entirely, and thus the ability to operate legally hinges on whether the local jurisdiction permits the specific activity in a specific location.  (The only thing local jurisdictions cannot prohibit, as mandated by the state's voters, is the cultivation of up to six cannabis plants indoors for personal use by adults.)

At the moment, regulations at the local level are very much in flux, and that will continue beyond January 1, 2018.  As just one example, while a Los Angeles City Council committee recently passed draft rules for licensing cannabis businesses, it still appears unlikely that a permit program will be in place by January 1.  Other local officials have stated they are waiting for the state to issue the new regulations in November, or waiting to learn from others' mistakes before opening the door to cannabis processing or sales.  In fact, it appears that no major city in the state has yet issued a local land use permit for an adult-use retail operation. 

In short, while much attention has been paid to the state's licensing efforts, it is every bit as important for potential businesses and investors to carefully vet not only the general location of a proposed business (i.e., whether commercial cannabis is allowed at all within the jurisdiction), but the specific location to ensure there are no prohibitive zoning restrictions, to understand the local permitting requirements, which may be costly and time-consuming in their own right, and to get a sense for the political viability of the proposal.  Especially for potential adult-use retailers, it may take time before many cities and counties get comfortable with the idea of permitting them. 

2.  Cannabis, Meet CEQA

All state licenses under MAUCRSA will be issued on a discretionary basis, and therefore likely trigger requirements to comply with CEQA.  CEQA review brings risk; as many developers, landowners and businesses throughout the state are painfully aware, CEQA litigation is a favorite tool for those trying to delay or stop new projects.

Both the Bureau and the Department of Food and Agriculture are engaging in programmatic CEQA review in an attempt to minimize the level of additional analysis needed.  However, it is safe to say that not all CEQA review will be addressed at the programmatic level.  The licensing authorities have specifically pushed some aspects of CEQA compliance to the local level where site-specific impacts can be more appropriately evaluated.  For instance, the Bureau delegated to local land use authorities topics like aesthetics, land use, noise, odor, and connections to public utilities.

Additionally, while many local governments have conducted programmatic environmental analysis for their own commercial cannabis ordinances, in many cases further CEQA compliance could be required for individual projects, especially where there are site-specific impacts (e.g., effects on a particular species, watershed, or neighboring community from a cultivation project).  It is important for new cannabis businesses to develop a proactive CEQA compliance strategy, as the cumbersome CEQA process could add significant time and costs, particularly if litigation ensues or the state licensing agency is not satisfied with the level of environmental analysis performed at the local level.

3.  Eleventh Hour (Temporary) Licensing

Technically, any cannabis business operating without a state license will be operating illegally as of January 1.  Unlike the earlier medical-only legislation, MAUCRSA did not provide any grace period for existing medical cannabis operations to come into compliance with the licensing law.  Obtaining a temporary license will allow a business to engage in commercial cannabis activity for a period of four months, with the possibility of three-month extensions. 

Top Bureau regulator Lori Ajax recently announced that the three state licensing authorities are aiming to accept applications for temporary licenses sometime in December.3  Given the short turnaround time to issue these licenses by January 1, businesses interested in quickly entering the cannabis market should begin preparing application components.  To apply for a temporary state license issued by the Bureau, applicants must show (among other things) that they have a local license, permit, or other form of local authorization.  However, this authorization will be difficult to obtain in many jurisdictions, particularly for adult-use businesses, as discussed above. 

Until the emergency licensing rules—and the subsequent permanent rules—become finalized, the outlook will remain unclear for cannabis businesses, but they will need to tread carefully to dodge the regulatory obstacles that lay ahead.

Footnotes

1 More information about these three state licensing authorities, as well as updates about the state regulatory process generally, is available at the Bureau's Cannabis Portal, https://cannabis.ca.gov/.

2 Bureau of Cannabis Control, Licensing Authorities Announce Withdrawal of Proposed Medical Cannabis Regulations, California Cannabis Portal (Sept. 27, 2017), http://cannabis.ca.gov/2017/09/29/licensing-authorities-announce-withdrawal-of-proposed-medical-cannabis-regulations/.

3 See Bureau of Cannabis Control, Temporary License Application Information, https://cannabis.ca.gov/licensing/.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions