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.


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

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