Author Archives: julianlacasse

From the MMRSA to the Adult Use of Marijuana Act: the Distributor License

There are two adult use cannabis legalization initiatives – proposed laws – that had been gaining supporters over the past few months in preparation for the 2016 vote. First is the Adult Use of Marijuana Act, (AUMA) which boasts backing by Sean Parker[1], former president of Facebook and current Silicon Valley billionaire, and Lieutenant Governor Gavin Newsom. Second is The Control, Regulate and Tax Cannabis Act of 2016 (CRTCA), an initiative put forth by Reform CA, backed by co-proponents Dale Sky-Jones, chancellor of Oaksterdam University, and Alice Huffman, president of the California NAACP and board member for the national sector of the organization.

ReformCA has suspended its initiative. A majority of ReformCA’s board members endorsed the AUMA after its drafters amended their initiative to bridge the gaps between it and the ReformCA initiative[2]. One of the problematic differences[3] between the two is that the AUMA provides for a three-tier structure, adding a “distributor” license to reflect the recently enacted MMRSA[4] provisions. This article’s focus will be the AUMA’s adoption of the Medical Marijuana Regulation and Safety Act’s (MMRSA) three-tier system and the public policy considerations surrounding the decision to keep it, followed by policy recommendations aimed at (1) streamlining the supply chain, (2) keeping product quality high, and (3) ensuring a fair market throughout the supply chain[5], namely among the distributor class.

Where We’ve Been

On October 9th, 2015, the California legislature passed[6] and Governor Brown signed the MMRSA as written.

Instead of maintaining the status quo ante – cultivators (farmers) selling directly to retailers (dispensaries) – the MMRSA mandates that licensed manufacturers and cultivators send their product to a licensed “distributor,”[7] who then gets to collect a fee for, essentially, recording the harvest, production, or sale. Curiously, licenses for distributors (Type 11) are not the same as licenses for transporters (Type 12). Type 11 licensees are required to also become transporters; they “shall apply for a Type 12 license, but shall not apply for any other type of state license.”[8] Type 12 licensees “may” also apply to be distributors. That is confusing because Section 19326(a) of the B& P Code mandates that the only licensees who can transport cannabis are licensed transporters, which begs the question: what is the distributor for, then?

Subsection (b) attempts an answer: “All licensees holding cultivation or manufacturing licenses shall send all medical cannabis and medical cannabis products to a distributor . . . for quality assurance and inspection.” It also requires that those goods go to a Type 8 tester before sale to a dispensary[9]. Subsection (c)(1) explains that it also falls upon the distributor to “inspect the product to ensure the identity and quantity of the product” and make sure that a sample is tested for quality. Subsection (c)(2) explains that after a product has been tested for quality, it must go back to the distributor for a “quality assurance review,” to ensure “quantity and content” of the cannabis.

It is reasonable to assume that the MMRSA established a comprehensive regulatory structure – including creating a government agency[10] – that would also be the regulatory framework when it came time to legalize cannabis for adult use[11]. Thus, the MMRSA’s provisions would likely be translated into whatever bill legalized adult use. Indeed, the licensing section of the AUMA references Chapter 3.5 of Division 8 of the Business and Professions Code, which is the MMRSA. One of the main legalization pushes – in states that are looking to legalize adult use cannabis – advocates regulating cannabis like alcohol, which is already widely regulated at the state level. That policy is appealing from the state’s perspective because of the easy transition – states already regulate liquor sales. Further, it accomplishes the government’s financial objective: collecting taxes.

However, it puts strain on smaller firms either looking to break into or expand within the distribution market. The medical cannabis industry moves a lot of money, but clearly the adult population of the ninth biggest economy in the world is a more significant market than only the Californians that have prescriptions for medical cannabis. Established distributors in other markets – alcohol, for example – already have the infrastructure, technology, and capital to fill the distributor level in states that opt to regulate cannabis like alcohol. In concrete terms, this infrastructure includes inventory and accounting resources, which translates to lower level personnel (those whose job it would be to keep tabs on inventory), accounting staff (or an outside CPA on contract), and the technology that accompanies both of those positions.

The Argument for, and Problems With, the Type 11 License

The argument for inserting the distributor level is that the cannabis industry needs a “choke point” in order to limit supply. The government has two interests here: prevent diversion of (1) either cannabis itself, or (2) taxes that should have been paid on cannabis by failing to declare the correct amount harvested and sold. Those are legitimate objectives to be sure, but the means don’t justify the end – a small number of firms dictate supply for the whole market simply by virtue of their preexistence.

This hurts consumers in several key ways. First, prices will be higher: the distributors will be charging a fee, which either consumers or cultivators (or both) will have to absorb some or all of. Every time cannabis is harvested or “manufactured” (e.g., processed into edibles or concentrate), there is another fee, which gets passed down the supply chain. Second, quality will be lower. Liquor is distilled and therefore non-perishable, but cannabis is a crop that is better fresh – quality goes down the longer it sits. Third, selection will be slimmer. Large firms[12] will lack incentives to work with the mom-and-pop cultivators; it will be the same amount of work and fee collecting for a smaller product. There are huge barriers to entry for businesses that want to become distributors – established firms already have the necessary structure in place, dominate the market and will push out competitors because it means more profit for them.

It is worth clarifying that cultivators are not required to sell their product to distributors under the MMRSA, and they are allowed to keep direct relationships with retailers. However, they must still send their harvested or manufactured products to a distributor to insure identification, weight and content. Thus, the effect is the same – all of the fees and cannabis in the state go through the few companies that have readymade operations and therefore no interest in preserving the diverse, grassroots industry that cannabis has made itself into.

Policy Recommendations

There are two areas of public policy that deserve attention with regard to the Type 11 distribution license: (1) damage to consumers, and (2) waste – namely, of consumers’ money. The stated purpose of the distributor is to, first, ensure the identity and quantity and, second, ensure the quantity and content of cannabis or cannabis products. It seems that they will function as sort of a cannabis mailroom, where everything is sent, weighed and sorted both before and after testing. It is mysterious, then, why those three[13] aspects of a cannabis harvest (or manufacture) cannot be recorded by the cultivator, the tester or the transporter.

  1. Damage to Consumers

The Type 11 license hurts consumers in two significant ways, as mentioned above: pricing and selection. The resolutions to each of those negative effects on consumers chiefly hinge on the elimination of the Type 11 license. Taking that as the general thesis of this post, the analysis continues regarding alternate ways to resolve each of those issues.

Price Increase:

If the enacted regulatory scheme includes the Type 11 distributor license, then the price increase is unavoidable[14]. A distribution fee is the only method by which Type 11 licensees can make money. However, they are not making money for ‘distributing’ – they are making money for inventory management; i.e., recording the quantity cultivated or manufactured. The requirement that a Type 11 licensee apply for a Type 12 license abates this problem slightly: the cost of transporting cannabis – which, alone, a Type 11 licensee is disallowed from doing – is easily incorporated into normal costs that a Type 12 licensee would encounter: trucks, gasoline, and records of both transactions and travel, for example. Thus, the Type 11 and Type 12 licenses can, and should, be combined in the AUMA to avoid this extra charge being passed down to consumers.

Transporters can be charged with handling records of quantity and content, as could testers. Both will already be charging a fee, and however many people it was going to take to run a distribution company – here I am speaking to the notion that Type 11 licenses are an instrument of job-creation – will be employed by either of the licensee business types (8 or 12) that absorbs it.

Selection:

Distributors are charged with handling all of the cannabis in the state, which is a considerable load. Since distributors will have a full plate, some cultivators and manufacturers will be pushed to the fringe. Most likely, those will be cultivators and manufacturers with a smaller yield of cannabis or cannabis products because they will be finishing products for distribution less frequently, which means fewer fees, which means less money. Cultivators and manufacturers can enter into contracts with individual retailers, but they can also choose to sell to other licensees – distributors or transporters, for example. Distributors will be incentivized to deal with businesses that bring them more money, which leaves smaller firms out, thereby decreasing selection for consumers. The AUMA attempts to give smaller companies a chance through the licensing scheme for cultivators, but if the distributors have their way, that provision may be in vain. Large-scale grows (those with “medium” licenses) will tend to grow a smaller variety of strains

The other possibility is that distributors will buy the yield from smaller companies and store it, which runs the risk of decreasing quality. Unlike liquor, which is distilled and can sit, cannabis flower is sensitive to improper storage.

The fix for this problem is simple: grant different levels of permits as in the cultivation provisions[15], and establish regulations to ensure freshness of products.

General Conclusion

The distribution license, as written, discourages smaller businesses from joining the market, limits selection, and increases cost to consumers. Perhaps the biggest problem with the Type 11 license is that it is wholly unnecessary. It adds another layer of paper and processing in an industry where most cultivators (and manufacturers) would prefer direct contact – while still recording sales to ensure taxes are paid and checking quality – with the people who will be selling their products, instead of having to go through a middleman. The AUMA has undergone some good amendments, but they have not gone far enough. Before Californians enact the AUMA, the drafters should make sure that the Type 11 license won’t get in the way of adult use regulations in business while protecting consumers.

 

[1] He has reportedly contributed $500,000 to the initiative; see the Secretary of State’s list of donors here.

[2] The Los Angeles Weekly published a good account of this dramatic and fascinating story.

[3] Of course, this is either a problem or… not, depending on where you’re sitting.

[4] For full text see AB 243, AB 266 and SB 643, which together comprise the Act.

[5] As it stands, the supply chain mandated by the MMRSA typically goes: Cultivator à Distributor / Tester (either can be first but cannabis or cannabis products must go through both) à Retailer.

[6] Which requires a two-thirds affirmative vote in each chamber – Assembly and Senate.

[7] See AB 266, which added Business and Professions Code Sections 19326(b), (c)(1)-(3).

[8] See AB 266 or Business and Professions Code Section 19328(a)(7).

[9] For an explanation of the other licenses see either here (for this blog’s explanation), or here (for a shorter article brought to you by NORML).

[10] The Bureau of Medical Marijuana Regulation; see e.g., Section 19302 of AB 266.

[11] Evidenced by, among other things, both ReformCA’s initiative and the AUMA relying on the Department of Consumer Affairs to regulate production and distribution, as does the MMRSA.

[12] The AUMA notably does not limit the size or number of distribution firms to mirror the antitrust provisions elsewhere in the Act.

[13] Identity, weight, and content.

[14] The price may still be lower than it is now if production efficiencies increase (which they probably will), but the MMRSA’s provisions have not gone into effect yet, so that remains to be seen.

[15] As the ReformCA initiative made space for with the language, “the office shall establish different tiers of distribution licenses based on the annual gross revenue of the cannabis distribution licensee.” See Section 26028 of the CRTCA.

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Concentrated Cannabis: Why does it matter, and how legal is it?

Cannabis concentrates are one of the fastest growing medicinal cannabis products on the market; they have also become increasingly popular among recreational users. Cannabis concentrates are now taking up a larger part of the market for cannabis products overall, with percentage of (overall cannabis product) consumption reaching double-digits among tracked jurisdictions. However, cannabis concentrates have been, and remain, largely unregulated. Any regulatory scheme to be implemented with the new (potential) laws around adult use will have to include the rapidly expanding concentrate market.

This article seeks to: (1) clarify why cannabis concentrates are an essential part of any ballot initiative to regulate adult use while explaining the policy considerations that that initiative must consider, (2) track the sparse legislation that has touched cannabis concentrates, (3) explain the only case so far decided on the legal classification of concentrated cannabis, and finally, (4) assemble those findings to offer policy recommendations on the topic, or at least, to help guide the conversation. As consumption of concentrates rises, the once-niche product has begun to take center stage in the adult use cannabis legalization debate. Both advocates and those opposed feel strongly about the use of concentrated cannabis, and thus it should be a significant consideration in the regulation structure that could be voted into law in November 2016.

As has been adequately documented, the state of California recently passed three bills regarding the regulation of medical cannabis, reforming the long-untouched rules on standards and enforcement of the medical cannabis market. Most of the published reactions so far have centered on the very serious issues of legal regulation, including taxation among growers and retailers (dispensaries), consumer protection via uniform standards, and land and water use.

However, concentrated cannabis – as it is most recently referred to in the law – has remained largely untouched by those bills, despite recent public health concerns. This article will offer some guidance in considering how it may factor into a newly enacted regulatory structure.

Why Do Concentrates Matter?

In the past five to eight years, increasing numbers of patients have turned to using concentrated cannabis instead of the more traditional methods of either smoking the plant (or “flower”) or making/consuming edibles. The sheer volume of use is reason enough to consider legislation specifically aimed at regulating the growing market. However, popularity is not the only reason that California policy makers should consider the importance of concentrated cannabis. There are legitimate arguments both for and against its use, and it has been one of the more polarizing subcategories surrounding the legalization debate.

On the advocacy side: doctors and patients who believe in concentrated cannabis’ medical use. It has been shown to help with epilepsy and related seizures, cancer, and (both chronic and temporary) pain and inflammation. While some of the data around medical use of concentrates is anecdotal, that should not prevent a regulation structure from taking advantage of the potential medical uses for concentrates, if they even suggest that there may be anti-carcinogenic effects, as well as generally beneficial effects for those who are suffering. Any new state law should provide for, at least, deeper medical research regarding the benefits of concentrates.

The opposition: some research professionals who are skeptical about its medical benefits outweighing the cost of regulation and the risks surrounding the potential danger of production (which I will address in a later article) of concentrates, buffeted by the classic Reefer Madness-style prohibitionists.

The very existence of such vehement advocacy on both sides of the issue is perhaps the most persuasive argument for making regulation of concentrates a central part of the conversation around cannabis regulation reform.

The policy problems that concentrates present are relatively few, when compared to the policy maelstrom of cannabis regulation writ large. The main fears around use of concentrates stem from their recent upsurge in popularity. Concentrates remain shrouded in mystery in a market that already struggles for transparency – doctors want to know whether they are medically beneficial; patients and recreational users want access to medication / high-quality concentrates that are of dependably consistent quality.

This article will now turn to an examination of legislation following the Compassionate Use Act (aka Prop. 215) to the present, to see how concentrates have been treated within the law thus far.

Recent Bills: AB 243, AB 266, SB 212, SB 643

Of the four recently enacted bills, only two of them even make mention of concentrated cannabis; they deal exclusively with the manufacture and classification of cannabis concentrates. They are Assembly Bill 266 and the less recent Senate Bill 212, the former of which simply defined the term “cannabis concentrate,” and the latter of which enhanced the sentencing guidelines for manufacturing cannabis concentrates close enough to people (300 feet) to cause harm.

AB 266 provides a definition of the term “cannabis concentrate.” It explains under section (g), “‘Cannabis concentrate’ means manufactured cannabis that has undergone a process to concentrate the cannabinoid active ingredient, thereby increasing the product’s potency.” The simple definition is intuitive, and provides little structure regarding the law’s influence on the regulation of concentrated cannabis. Luckily, the section’s second sentence provides perhaps the most helpful actual guidance in terms of concentrated cannabis regulation: “An edible medical cannabis product is not considered food, as defined by Section 109935 of the Health and Safety Code, or a drug, as defined by Section 109925 of the Health and Safety Code.” The law lumps together “concentrated cannabis” and “edible medical cannabis” in the same definition, which means that “edible medical cannabis product[s]” fall under the law(s) dealing with concentrated cannabis.

Food as it is defined in Section 109935 is similarly unhelpful. Food is either “(a) Any article used or intended for use for food, drink, confection, condiment, or chewing gum by man or other animal. [Or] (b) Any article used or intended for use as a component of any article designated in subdivision (a).” This article treats the two as the same for that reason, all the while recognizing that in reality what are referred to as “concentrates” are very different from what are referred to as “edibles.”[1]

Sometimes when we are working within the confines of vaguely worded laws, the most instructive information is in what the law is neglecting to say, or as here, what sections do not apply. Surely in this case that is the best thing to do since the only guidance as to concentrated cannabis’s legal treatment is in the negative – which is to say, the definition section makes no mention of any applicable section, but it does specifically mention two sections that do not apply.

The section concerning the definition of a “drug” – 109925 – is slightly more helpful, but again, only because concentrated cannabis does not fall within its domain. A “drug” is one of the following: “(a) Any article recognized in an official compendium. (b) Any article used or intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease in human beings or any other animal. (c) Any article other than food, that is used or intended to affect the structure or any function of the body of human beings or any other animal. (d) Any article used or intended for use as a component of any article designated in subdivision (a), (b), or (c) of this section.” The fact that concentrated cannabis is not classified as a drug means that it escapes the regulation of this section, too. Concentrated cannabis seems to fall under (c), which would make it a “drug” under California Law – it is indeed “used or intended to affect the structure or any function of the body of human beings.” However, there is one likely reason that the definitions are worded this way, which is that the definitions of food and drug follow federal law, which regulates both of those items on a baseline level, whereas cannabis is still illegal on a federal level. The fact that those sections are not applicable to the sale and regulation of concentrated cannabis means that concentrated cannabis is, yet, almost completely unregulated.

Senate Bill 212, later codified at CA Health and Safety Code section 11379.6, was introduced by state Senator Mendoza following several accidents involving people who were attempting to manufacture concentrated cannabis in their homes [discussion of the accidents is in the next installment]. The bill amended the version of section 11379.6 that already existed, which provided that, “(a) Except as otherwise provided by law, every person who manufactures, compounds, converts, produces, derives, processes, or prepares, either directly or indirectly by chemical extraction or independently by means of chemical synthesis, any controlled substance specified in [sections 11054-11058] shall be punished by imprisonment . . . for three, five, or seven years . . . and by a fine not exceeding $50,000.” Subdivision (a) as listed already existed in the old version of the statute, but is important for foundation.

The amendment provides for a new subsection (d), which reads: “The fact that a violation of this section involving the use of a volatile solvent to chemically extract concentrated cannabis occurred within 300 feet of an occupied residence or any structure where another person was present at the time the offense was committed may be considered a factor in aggravation by the sentencing court.” The amendment came on the heels of several reports of explosions in residences that started when the cannabis concentrator was careless with the “volatile solvent,” which is usually butane, a highly flammable gas. Butane is used to “chemically extract” the tetrahydrocannabinol (THC) from the cannabis plant, but if there is any spark or open flame near the gas, it will explode. This amendment was shaped by public health concerns surrounding collateral damage. In the court decision explained below, the concern was not public safety as here, but the definition of (medical) concentrated cannabis itself.

Concentrated Cannabis in the Court:

At the end of last year, a unanimous panel at the California state appellate court for the third district ruled in People v. Mulcrevy that concentrated cannabis qualifies as medical marijuana. The court was considering the question in the context of 22 year-old Sean Mulcrevy’s probation violation for possession of concentrated cannabis. Mulcrevy, the government alleged, had violated his probation by failing to “obey all laws,” as he was bound to, per the terms of probation. Mulcrevy is a medical marijuana patient who was charged with unlawful possession of concentrated cannabis – a misdemeanor – in 2013.

The Sacramento Bee reported that despite “review[ing] existing legal authority indicating that concentrated cannabis is covered by California’s Compassionate Use Act,” Superior Court Judge James R. Wagoner decided that concentrated cannabis was not covered. He rejected the authority as “unsound,” instead ruling against Mulcrevy, explaining that “‘the (CUA) does not apply to concentrated cannabis’ because the act does not define marijuana, refer to concentrated cannabis or incorporate statutory definitions of either term.” Why that would prevent a judge from ruling that concentrated cannabis was in fact included within the Act’s reach is a mystery. Medical cannabis in plant form contains the same active ingredient as concentrated cannabis; one can commonly purchase cannabis concentrates at medical cannabis dispensaries. Regardless, this court decision helped to shape one of the new amendments, AB 266, and undoubtedly informed the drafters that they needed to, at the very least, define the term to preclude further confusion in the courts. And that is just what they did.

Policy Considerations Going Forward

As is probably obvious, regulation of concentrated cannabis has remained largely stagnant. Concentrates have been flying under the radar, but their growing popularity and the surrounding debate necessitates regulation. As mentioned above, there are several key interests here that should be addressed: doctors want to know whether they are medically beneficial; patients and recreational users want access to medication / high-quality concentrates that are of dependably consistent quality.

Thus, any regulatory scheme should account for further medical research into concentrates. There are several sources, including the newest chief of the DEA, that have argued for concentrates’ medicinal value, and at the very least, it should be explored so that the scientific and healthcare communities can reach a consensus. Production should be limited to approved, safe (and possibly butane-free) facilities where experienced staff process the cannabis to concentrate it, but those facilities should be allowed to maximize output, which will minimize the draw for private actors to (dangerously) attempt to manufacture concentrates at home.

Making sure that the manufacturing process is safe and consistent will in turn lead to a higher quality product because assuring those aspects of concentrate regulation will naturally lead to an increase in purity, with fewer additives. When regulation of production is coupled with medical research, both medical cannabis patients and recreational users will be able to get safely processed, consistently high-quality concentrates, while cutting down on (and eventually eliminating) the dangerous private manufacturing processes that has left concentrates as the stigmatized cannabis outsider in a burgeoning market.

 

[1] Edibles are, in fact, made with concentrated cannabis, but the concentrate is infused into cooking oil or butter, as opposed to being processed to reap wax or hash, which are largely inedible substances designed to be inhaled.