Tag Archives: cannabis

Monopolistic Competition: Napa Valley Wine Industry As A Model For California Cannabis Cultivation

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In response to Ohio’s new recreational marijuana ballot initiative Keith Stroup, founder of NORML recently wrote, “Big money has entered the [marijuana legalization] picture, and we will have to deal with that. I prefer to keep the focus on personal freedom and stopping the arrests, but in some states we may have to swallow hard and accept legalization that is profit driven.” He said this in reply to Ohio’s new marijuana bill ResponsibleOhio. While I agree that big money will drive legalization, it is my opinion that Mr. Stroup is overstating the inevitability of the oligopoly market structure. I advocate for a middle ground that has been successful in other agricultural markets similar to cannabis, the Napa valley model of monopolistic competition. Monopolistic competition allows the little guy to compete with the big guy so long as his or her product is valued and therefore marketable. An oligopoly that allows a few key players to both persuade with their financial contributions, and dictate market structure, is not setting good precedent. If the government insists upon a monopolistic competition structure, big money will flow and small growers will be able to compete with larger growers. This model also promotes economic stability by keeping small growers viable, therefore increasing participation in the legal market for current cannabis famers. There is an answer out there to these goals and the Ohio Oligopoly is not it. California cannabis legalization can adopt the Napa model being advocated by growers in the Emerald Triangle that will encourage big money to align with small sustainable growers in a market dictated by the government, not big money.

In monopolistic competition there are many sellers with differentiated products on the supply side and many buyers creating demand based on preference, letting the market determine price and quantity. This is different from a monopoly where there is only one supplier and the buyers are subject to price fixing. The wine industry is an excellent example of monopolistic competition; the market is determined by many varieties, differentiated by growing regions, and consumer preference/demand for taste, price and advertising. There isn’t one market for wine, but many different ones depending on your price, tastes and brands. People select within reds or whites, or even within chardonnays or pinot noirs. This is why “wine” is a bundle of monopolistic markets, not a single undifferentiated market.

In contrast, ogopolistic markets are less competitive because several large firms have disproportionate control of the market. The cell phone industry is an example of an oligopolistic market in the U.S. where AT&T, Verizon, Sprint and T-Mobile determine price and we the consumers do not have any meaningful choice. To quote T-Mobile “[t]his is an industry filled with ridiculously confusing contracts, limits on how much data you can use or when you can upgrade, and monthly bills that make little sense,” and yet over 91% of American adults own a cell phone.

ResponsibleOhio would establish an oligopolistic market. According to the ResponsibleOhio website:

“There are ten initial commercial growing sites. They will be operated by separate companies and have to compete with each other on price and quality, which is the exact opposite of a monopoly. There is no coordination between them, they will be trying to make money by selling the best goods at the best prices to stores, dispensaries and manufacturers.”

Although ten cultivation licenses would not qualify as a monopoly, the amendment was introduced and paid for by the ten companies who will receive the ten cultivation licenses, making it look a lot like an oligopoly. We do not know enough about the marijuana market to be sure, but based on the fact that Colorado has approximately 800 cultivation licenses, it would stand to reason that 10 competitors, compared to 800, would have disproportionate control of the market and therefore the upper hand on cannabis price determination in Ohio.

After substantial pushback, the ResponsibleOhio Amendment added adult at home, non-commercial cultivation of four plants so long as that adult obtained a license. In short, if you are an adult marijuana user in Ohio, you can obtain a license to grow four plants that may or may not produce the amount of cannabis you need, or be at the mercy of the ten companies who proposed, paid for, and now own the cannabis cultivation market. Based on the above discussion of oligopolies, you can see why citizens of Ohio may not want this Amendment to pass.

On the other hand, if this is the only way to obtain access for medical marijuana users in some states and protect them from being criminalized for using medicine, we may have to accept “big money” and oligopolies as the lesser of two evils.

California is not Ohio, however. It is a progressive state when it comes to medical marijuana as demonstrated by being the first state to decriminalize and legalize medical marijuana all the way back in 1996. Because of this, California already has a cannabis cultivation industry supplying both medical marijuana retailers and illegal dealers. Some say that the lack of strict regulation on cultivation and other aspects of the medical marijuana market in California is genius; some say it is the worst medical marijuana legislation in the country. Irrespective of these opinions, California is known for its high quality and locally produced cannabis.

Recent polls in California show support for legal recreational marijuana use at 53%. Transitioning illegal growers into legal growers will be a determining factor in the success of any legislation with the goal of stamping out the black market. Trying to bring black market growers into a legal market is better because you’ll discourage other forms of crime that may happen if these people are simply pushed out. For California, the real question becomes what kind of legal recreational marijuana market can legislators, big money, and growers agree upon to ensure compliance and promote legality. One way to do this is to ask the growers.

As I talked about in my last blog post, at least 25% of Humboldt County’s economy is based on dollars from the illegal cannabis market. Because of that fact, this region faces a disparate impact with the predicted 2016 legalization of their illegal cash crop. However, the black market notoriety Humboldt has for its ability to produce large quantities of high value cannabis could provide a mutual benefit for local growers and state legislators. Both want to maintain their respective constituencies and to create rational and effective cannabis policies. The great news is California Cannabis Voices- Humboldt (CCVH) and Emerald Growers Association (EGA) have a solution- protect small cannabis farmers.

Cultivation and policies that provide a pathway to regulation for the states robust network of diverse cannabis farms was the focus of last month’s State of Cannabis Growing in 2015 conference hosted by the EGA. Simultaneously, EGA and the Mendocino Cannabis Policy Council (MCPC) are collaborating and working with Jeremy Daw of ForteFive Consulting to produce an economic white paper to highlight the importance of the cannabis market in Mendocino County. Mr. Daw is in the middle of his research but has already come to some important conclusions. According to Willits News, Mr. Daw believes marijuana has “low cross price elasticity and is fungible and that this quality will make it difficult for boutique growers competing in a market where large central valley farms are producing the product very cheaply.” Most products in monopolistic competition markets share these qualities. “However, if the state enforces regulations concerning regional and appellation, as with wine, it would create a way for growers to clearly signal the value-added nature of their product to consumers. Then small boutique cannabis growers, like Napa valley wineries, could be competitive.”

Perhaps in response to Mr. Daw’s call for state support of small cannabis farmers, Mendocino County CEO Carmel Angelo, 3rd District Supervisor Tom Woodhouse, and 2nd District Supervisor John McCowen participated in the first Northern California Regional Summit on the Economic Impacts of Legalized Cannabis on March 5, 2015. Representatives from the California State Association of Counties (CSAC) and the Rural County Representatives of California (RCRC) also attended the Summit. The goal of the Summit was to develop a regional and unified position statement to help shape state legislation. While the primary focus of the Summit was on the potential economic impacts on the region, additional critical topics included environmental impacts, regulatory framework and other local government issues.

CSAC provides a variety of lobbying and advocacy services for all 58 California counties. With regard to cannabis, CSAC’s medical marijuana policy supports the right of individual counties and their supervisory bodies to determine how to enact regulations, prohibitions and guidelines regarding all aspects of the cannabis industry.

The RCRC is a 34-county membership organization which also provides advocacy and services, but with a more focused mission of addressing issues that pertain to rural areas. The RCRC supports a statewide regulatory program which would include licenses to grow, transport, distribute and sell cannabis products, uniform standards for cannabis potency, proper labeling and an allowance for “appellation” or branding. It strongly supports environmental enforcement and believes that the composition of a state cannabis oversight board should include several rural county supervisors or representatives.

The Napa model is the height of the monopolistic competition market structure coupled with state enforced regulation. The Napa model creates an environmentally friendly as well as economically salient world-renowned smaller growers market. Both CCVH and the EGA are advocating making regions of the Emerald Triangle the next Napa Valley. Monopolistic competition is necessary to create the Napa Valley model. In order to create competition between smaller cannabis farms, the state will have to protect and enforce regulations concerning region and appellation of cannabis. The current California law regarding wine labeling could act as a model. Wine labeled “Napa” or “Napa Valley” must be made from 75% grapes from Napa and be produced within the state of California. (Bus. & Prof. Code §25241, Bronco Wine Co. v. Jolly). Napa Valley wines sell for between $50-$100 a bottle. California law prohibits wine companies like Charles Shaw from labeling their two dollar wine as being “from the Napa Valley” without meeting the above criteria.

CCVH proposed legislation mirrors Napa land use ordinance in three ways. First, the ordinance recognizes the unique appellation of Humboldt County cannabis and recognizes rural agriculture of the plant as cultural heritage. Second, it proposes a local commission to regulate the quality and environmental impact in order to hold the label “Humboldt Grown” cannabis in the same esteem as Napa’s registry. And third, it designates four different types of farms based on square footage and the regulation and licensing needed for those farms. The smaller the farm the less regulation is needed, which incentives smaller farms over larger farms. It appears as if the authors of CCVH land-use ordinance are teeing up to be the next Napa Valley.

In conclusion, a big money and oligopolistic model of cannabis legalization is not a foregone conclusion. By utilizing the framework of regulation and competition in the highly successful wine market in California, our legislators have a road map to follow which can lead to economic stability in the Emerald Triangle. A mode of legalization that promotes small business, encourages healthy competition, and keeps small farmers afloat is low hanging fruit well within our reach.

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State Registered Cannabis Trademarks: (An) Amoral Dilemma

I called my mother the other day. I figured that, as an adult, it was time we had the talk; I asked her what she thought a trademark was. “It means,” she said, “that nobody else can use the same thing.” Sure, but why would we have laws about that? “Because… oh I don’t know, because somebody cares.” After some discussion, it became clear that my mother had both a normal level of interest in Intellectual Property law and held a common misconception. My mother was under the impression that trademark law is for the benefit of corporations.

Because our government is “for the people,” it follows naturally that trademarks are also for the people. In a previous post I wrote that the government grants exclusive rights if some important public good is served. The exclusive use of a mark is not protected for the sake of business but for the sake of the consumer. This information is invaluable to consumers because it allows us to choose between spending our dollars on local, sustainable, organic, humane farmers and butchers and more affordable alternatives with a glance at a package. Thus, when you go out and purchase some first-rate dance gear the branding lets you know the source. When you’re stuck in the middle of Nowhere, Oklahoma, you can rest assured that your can with the familiar Coca-Cola trademark is still a Coke™ because of trademark law.

A corporation can build goodwill and leverage its reputation to add value to its products. If a consumer knows nothing about watches, it’s possible they may be led to believe a Rolex is a good watch because of Rolex’s reputation. While trademarks may serve a corporation’s financial interest, keep in mind that a bad reputation is equally protected. What we, the people, get out of enforcing marks is clear identification of the source of goods. The quality of that source, or its “branding,” is not part of the deal. There are a number of reasons that the USPTO might deny a trademark, but the “morality clause” is most pertinent to marks related to cannabis.

The Lanham Act, the federal level statutory scheme for trademarks, has a “morality clause.”  In the language of section 1052(a), any mark that is “immoral, deceptive, or scandalous matter” can be denied registration. A deceptive mark clearly undermines the goal of keeping the consumer properly informed as to source. This means marks that misrepresent not only the company name but also geographic source, material composition, or sponsorship of some individual, etc. would be considered deceptive and denied registration.

When it comes to scandalous material, an examiner might “know it” simply when they “see it,” in the manner of Justice Stewart’s famous intuitive approach. A morality judgment is treacherous territory, doubly so with the weight of law behind it. It is no surprise that courts have, as the trademark manual of examining procedure puts it, “included immoral matter in the same category as scandalous matter.” Inevitably, scandalousness and immorality judgments will lead to disagreement, and such a subjective standard is not, in my opinion, useful legislative drafting. Retooling the language is probably best, but that is a legislative prerogative, not the purview of lawyers or courts. For a thorough examination of scandalousness and the caprice of the USPTO, I recommend an excellent (and often amusing) journal article by Anne Gilson LaLonde and Jerome Gilson (for those in the know, yes, those Gilsons). Generally, drug-related marks are denied for scandalousness because of the promotion or association with illegal substances under the Controlled Substances Act. There are some cases, like Cocaine Anonymous (note the circled R indicating a registered mark – not “™” which is for unregistered marks) or Marijuana Symposium, where the context specific use is considered within the gamut of federal drug policy. There are ways around USPTO difficulties with trademarking cannabis products, but I think the apparent contradictions in whether a mark is granted or not can be resolved in a different way, without upsetting the status quo.

See, you can also register a trademark at the state level. The Lanham Act, as mentioned, is the federal scheme. Each state has its own version of the Lanham Act that will give statewide trademark protection. Given the patchwork legal status of cannabis in the United States, a state-by-state approach makes a lot of sense. Unfortunately, the statutory language of 47 of those states replicates the morality clause from the Lanham Act verbatim (for a full list check out footnote 3 in the Gilson article). It’s easier to list the outlying states Colorado, Maine, and Wisconsin — than the majority. Of these, Maine comes the closest to a morality clause, denying any mark that “[c]onsists of or comprises language that is obscene, contemptuous, profane or prejudicial… [or i]nappropriately promotes abusive or unlawful activity” (emphasis added). Setting aside Maine’s oddly detailed trademark legislation on potatoes, oils, and sardines, could a mark for a company whose product is cannabis be an “appropriate” promotion of a federally unlawful activity? I think so.

In a state with a morality clause in its trademark statute (like California), is it scandalous to identify a good that is legal in that state but remains illegal under federal law? My answer looks to the late, great, Judge Traynor. In one of his more famous opinions, Reich v. Purcell, Judge Traynor discusses how the “forum must search to find the proper law to apply based upon the interests of the litigants and the involved states.” Judge Traynor was deciding a conflict of laws problem in torts, but his reasoning can be applied here. More succinctly, scandalousness and morality rejections should be based on the weighed interests of the state and federal governments, not a subjective interpretation of those words as applied to a “substantial composite of the general public.”

In a state where cannabis is totally decriminalized, regulated by the state or where the state participates in the market, the public view about offensiveness of a mark is difficult to ascertain.  While some groups will surely find no moral/scandal objection to cannabis marks, other groups may find cannabis use scandalous but consider regulation a better solution than outright prohibition.  Additionally, the minority may still prefer prohibition and retain scandalousness objections to any cannabis related mark. While scandalousness objections to trademark registration perhaps cannot be resolved, there remain amoral public interest considerations.  A given state’s interests and the effects of granting a trademark in that state should be weighed against the interest of the federal government, especially noting that whole supremacy thing. If a state grants cannabis trademarks and, by extension, allows for companies to potentially build goodwill and brand loyalty, will that promote the use of cannabis?  Will branding push companies to cultivate a more positive reputation through higher quality products, or safer products and safer use environments?

Further, while the public’s subjective reasoning cannot be ascertained, the codified policy (in this hypothetical) would be one that does not criminalize cannabis. Examiners and their supervisors could decide trademark eligibility by looking to established interests instead of subjective review of “scandal.” Admittedly, changing from “scandal” to “public interest” analysis sounds like jumping out of the bog and into the mire. I think that however scandalized someone feels (or doesn’t) about the Redskins trademark, he or she can concede that our public interest has long proscribed racism, prioritized eliminating discrimination, and promoted equality. Revoking the Redskins trademark arguably serves those ends. This approach also clears up how the USPTO ultimately granted a trademark to an apparently scandalous mark. An image that may scandalize the public by depicting our nation’s flag as a condom was acceptable because of the goal of characterizing the fight against AIDS as patriotic.

Luckily, the interests of the federal government have been clearly set forth in the somewhat notorious Cole memo. The eight priorities listed in that memo can easily be satisfied while serving state interests. A state can serve its own decriminalization regime without subverting these priorities, which explains how a mark can be “scandalous” on a federal level but not in a particular state. Further, the federal government has an interest in allowing states to establish their own unique priorities and policies. This “laboratory of democracy” that respects the individualized needs of specific regions is part of why we have a federal system in the first place. The real question then becomes whether granting trademarks serves a given state’s interest.

Among many details I have glossed over, there is a third option for trademarking: simple use of a mark in commerce grants common law protections without any registration at all, state or federal. This protection is limited to the geographic region of use and depends on common law, which varies by state. California is geographically large and if the consumer is to develop some sense of cannabis products, simple common law protection is assumed not to suffice because a northern California company could use the same mark as a company elsewhere in the state and potentially confuse consumers in between, especially if the market expands rapidly, as it has in Colorado.

If a company cannot build goodwill with its brand it can only really market objectively measurable characteristics like potency and price, not quality. Research indicates that price increases discourage kids from using cannabis more than adults. Granting trademarks would allow corporations to more fully leverage their brand, which would increase pricing of their products – and might decrease potential youth possession and use (which would assuredly remain illegal, just as it is for tobacco or alcohol). There are, of course, risks associated with allowing marks that may be targeted at or appealing to children. An interest analysis supports denial of those types of marks as well, since protecting children is an established interest of both the states and the federal government.

California’s interest might best be served with a model like that of wine, where users of cannabis can pay top dollar for some renowned brand rather than merely finding the cheapest and strongest “high” on the market. Trademark granting should not be based on ambiguous ideas like moral and scandal but on the purposes behind trademarks, which rest on the interests of the individual consumers and states involved.

Let’s Go to the Cannabar: On-site Cannabis Consumption in California

Once only a distant dream of social activists and enthusiasts, the reality of completely legal marijuana in California now appears to be a distinct possibility with the upcoming 2016 election. (Recent polls here and here) If California goes the route of an increasing number of Western states, whose ranks swelled to four with the recent 2014 midterms (adding Alaska and Oregon to Colorado and Washington, who officially legalized in 2013), Californians will be able to legally purchase, grow, possess and consume marijuana without the doctor’s prescription currently required under Proposition 215.  Many important questions regarding the specifics of commercial marijuana cultivation and processing have been addressed by the legislatures of those previously enacting states, with more tweaking no doubt in store for California’s bill writers and legislators.

Fortunately for California, Colorado and Washington started their experiments with legalized marijuana markets first. This allows us glean important lessons and determine shortcomings within their regulatory schemes that California can improve upon if it votes to legalize. Specifically, the question of where to consume legal marijuana has dogged citizens and legislators alike in those first two enacting states. This presents an important opportunity for California to make its own mark on the progress of marijuana legalization, or more specifically, to determine the relationship California’s citizens want our state to have with legal marijuana consumption.

With this blog series, I will seek to shine light on the important issues behind that where question. I’ll detail the concept of what I call “retail point of sale consumption” (RPOSC), e.g. the consumption, smoking or otherwise, of cannabis on the site of a commercial venue created to socially enjoy marijuana. What potential forms those commercial entities eventually take is largely dependent upon how California crafts our regulatory schemes for marijuana, and what effects our current state and local anti-smoking ordinances will have on any potential RPOSC businesses; however, we can look to similar business entities (or the lack thereof) in Colorado, Washington (no longer operating as on site consumptions locations), and Amsterdam to gain a feel for what RPOSC could look like in California.

As mentioned, inherent to the where to consume legal marijuana question comes the important discussion of how California’s citizens envision their state’s relationship with marijuana. Do we see it as a “sin” product to be taxed and regulated similar to alcohol and tobacco? Or is there something socially or physically dangerous about marijuana consumption that warrants removal from the social/public sphere to a degree greater than alcohol or tobacco? While my classmates may dig deeper into those particular tax or moral questions, they are salient to addressing the utility versus social cost of allowing marijuana consumption to be brought out of the privacy of the home and into specific use lounges and social establishments.

If Californians decide that RPOSC is a good idea, what forms will it take? California could copy its current commercial marijuana entity, the medical dispensary, and perhaps expand currently existing exemptions for tobacco lounges (under state and local anti-smoking ordinances like AB13 enacted by the CA legislature in 1995) to allow marijuana consumption (via smoking, vaporizing, or eating) on those sites.

Marijuana businesses similar to actual cigar lounges could also be feasible, and do not depart far from currently existing business models. By age restricting access, and maintaining a closed venue with proper ventilation, marijuana enthusiasts could purchase marijuana buds or pre-rolled joints similar to a purchase made at a tobacco or cigar store, and stay to enjoy their purchase.

If Californians desire, they could embrace more commercially advanced forms of RPOSC. Marijuana “lounges” like “The Lazy Lion,” a lounge/social club in Colorado Springs, CO, sell daily or monthly “memberships” to access the private interior of the lounge. Inside, enthusiasts  have access to multiple video games systems and TV’s, an expansive selection of bongs and pipes, a DJ, different marijuana strains available for purchase, and a sophisticated concentrate (“dabs”) bar offering “happy hour” prices from four to five every day. Replace the marijuana sales with craft beer, and the above description could very well be about a well-appointed bar currently found in a California urban area where an individual may go to enjoy an alcoholic beverage.

To extend the bar example, the hypothetical California “cannabar”/ “budpub” could sell marijuana that they or those in their local area grew, noting to customers the particular flavors and production process for different strains in a similar manner as the vintner, brewer, or bartender may do for a wine, beer, or spirit. The “craft” model of beer in California and other states has created a lucrative and growing industry of breweries, gastro-pubs, and restaurants that has revitalized formerly undesirable areas in Oakland and San Diego, usually zoned for industrial/commercial uses; why can’t this same model be applied to marijuana production and sales, with a new generation of “bud-pubs” serving the same upscale, organic, locally-sourced food and marijuana from reputable local farmers and marijuana cultivators (or even the business’s personal grow) that current craft beer breweries and pubs tout?

Questions on the forms and functions that businesses offering RPOSC could take are important to answer if and before we legalize, as having a well-planned legalization scheme can benefit the state by providing firm rules for entrepreneurs and investors to rely on if they intend on investing any sums of money into RPOSC and other cannabis related businesses.

Finally, despite our state’s long social history with marijuana, including the aforementioned Prop. 215, California was not in the first group of states to fully legalize. While placing out of the top four is not ideal if looking for Olympic medals, in California’s case, slow and steady could indeed win the race. But how can California win the race when starting years behind? The answer: create business-savvy marijuana laws that provide the greatest benefit to our state and local communities, while identifying and minimizing social costs. If RPOSC is balanced correctly and intelligently, our regulatory model could serve as an example for states and communities around the country to allow the safe, effective and lucrative operation of retail point of sale marijuana consumption businesses.

-Philip Brody for the Drug Law and Policy Blog

The Ganjapreneur’s Road To Something Bigger

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Imagine – it’s 2025 in California. Marijuana has been recreationally legal for almost ten years. You leisurely walk into the local gas station and purchase a pack of Marley Natural Special Blend – a brand of marijuana cigarettes. While you stand outside and light up, people walk by you as they file in and out of the store. No one says anything to you. No one calls the police. No one cares what you are doing. Marijuana has taken root in the mainstream American culture. Big Marijuana has risen.

So what exactly is Big Marijuana? Is it the same as Big Tobacco? The answer to this question depends on how “Big Tobacco” is defined.

Generally, Big Tobacco is a derogatory term referring to the industry that consists of the largest tobacco companies in the United States. Big Tobacco reached the height of its power in the early 1960’s and was known for its enormous spending on political influence. Its lobby centered attention on the notion that the science of tobacco was uncertain, and it called into question each medical and scientific finding that was released to the public.

Now on the decline, Big Tobacco corporations such as Phillip Morris, R.J. Reynolds, and Lorillard are credited with a long history of lying to Americans about the dangers of smoking. Their exploits include having doctors promote cigarettes as medicine and deliberately targeting children as “tomorrow’s potential regular customers.” Although Big Tobacco’s glory days have passed, it still remains a powerful entity, and is being used as the model to explain what the rising marijuana industry could one day become.

Will Big Marijuana follow the same path? This question is difficult to answer. However, certain parallels between Big Tobacco and the rise of marijuana in the United States are striking. Take, for example, the strategy employed by Big Tobacco of having doctors promote cigarettes as medicine. Is marijuana currently being promoted as a medicine? The legalization of medical marijuana in 23 out of our 50 states says that it is. What about the strategy employed by Big Tobacco of questioning each medical and scientific finding that was released? There sure seems to be a large variance of opinions about marijuana throughout the scientific and medical communities. Do you see the pattern? Or it is too soon to tell where the marijuana industry is headed? Or maybe you don’t care about the ethics of Big Tobacco, but you smell a business opportunity in Big Marijuana. You might be in luck.

As each year passes, more and more states and municipalities across the country are choosing to decriminalize marijuana and some are going a step further in choosing to legalize and regulate it. Nationwide support to end prohibition is increasing every day and money that was once being lost by enforcing the ban against marijuana is now being found through tax revenue from the regulation of marijuana’s distribution. In states like Colorado and Washington, millions of dollars are flowing from consumer pockets and into the hands of state governments and bold businessmen. In states where marijuana remains illegal, the black market continues to generate an exorbitant amount of untaxed profit for the opportunistic outlaw.

Whatever shape the marijuana industry may take in the future, it is clear that it is not going away. For a country that prides itself on its capitalist foundations, there is simply too much potential profit and opportunity for the marijuana industry to stagnate. As time moves forward, Big Marijuana will inevitably show its face, however beautiful or ugly it may be. If I – the entrepreneur, businessman, visionary – wanted to be that face, how would I get there?

In the hostile and dynamic legal environment that surrounds the marijuana industry, how would I advertise and market my company’s product or service to consumers? How would I expand my business across state boundaries? How would I protect my brand? How would I take on investments and stay on good terms with the IRS? And for all of this, is it even possible to build Big Marijuana?

These questions are daunting, and as the law changes daily the answers to these questions follow suit. But all hope is not lost. There are companies out there that have formed their own answers to these questions. Take Marley Natural, for example: the company that is planning on being the “Marlboro of Marijuana” plans to launch its first product in “Late 2015.”

If they can do it, so can I. In this multi-part series I will envision a potential framework of how a company might overcome some of these obstacles. Stay tuned for more.

Jeff Madrak for Drug Law and Policy – Follow us on Twitter @DrugLawPolicy

Are High Drivers High Risk?

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The danger of driving under the influence of alcohol (DUI) has been solidified for some time. The development of DUI laws and enforcement has been grounded in scientific research about crash risks and the effects of alcohol are easy to measure. However, driving under the influence of marijuana (DUIM1) presents an entirely different issue. It may not be wise to assume that similar laws, tests, and enforcement methods should apply. If there is anything to take away from the body of DUI policy, it is that it was developed to decrease accidents rather than indirectly prohibit alcohol. If marijuana is to be legalized, there is likely to be an increased level of enforcement to prevent the dangers of DUIM. However, such enforcement is only necessary if these dangers actually do exist.

DUIM is a criminal offense in California and will continue to be even if marijuana is legalized.2 A California roadside survey conducted in 2012 found that 7.4% of drivers tested positive for some amount of THC, a psychoactive component found in marijuana. To put that into perspective, 7.3% of drivers tested positive for alcohol. Although the occurrence of intoxicated drivers may be almost identical for alcohol and marijuana, the similarities quickly diverge when it comes to the crash risk these drivers present. DUIM after legalization is only an issue if high drivers actually present a danger to themselves and society.

The National Highway Traffic Safety Administration (NHTSA) recently released the results of a study that was “the largest and most comprehensive study to address alcohol and drug crash risk in the United States.” This study was conducted in 2012 over a 20-month period in Virginia and tested thousands of drivers using blood, urine, and saliva for the presence of THC. The NHTSA took care to match characteristics of control drivers with those of crash-involved drivers as closely as possible. These characteristics included age, gender, ethnicity, and alcohol use. When the variables of age, gender, ethnicity, and alcohol use were not accounted for, the results showed an increase in crash risk for those who tested positive for THC. However, when the analysis accounted for these variables, the correlation vanished – the NHTSA study did not find an increased crash risk associated with THC use. In contrast, drivers at a .08% blood alcohol level (the legal limit in every state) had about four times the chance of crashing.

The NHTSA study is the first large-scale study of its kind conducted in the United States, and so it stands to be the best indicator of an actual, observable crash risk for DUIM in California. The study found no increased risk, and it calls into question whether increased enforcement is actually necessary. This leads one to wonder how these results are even possible. Marijuana is a psychoactive drug, and an analysis of numerous studies (Sewell) “concluded that marijuana causes impairment in every performance area that can reasonably be connected with safe driving of a vehicle, such as tracking, motor coordination, visual functions, and particularly complex tasks that require divided attention[.]” Despite these effects, the Sewell analysis found that most marijuana intoxicated drivers show only small impairments on actual road tests while more experienced marijuana users showed almost no functional impairment.

The study attributes these results to evidence that marijuana intoxicated drivers are are able to compensate for the effects of their intoxication. For example, they will drive slower, increase their distance from cars, and try to overtake less. On the other hand, alcohol intoxicated drivers will underestimate their impairment, and will even drive more aggressively compared to sober drivers. A year after the Sewell analysis, a study was completed that seems to agree with their findings. In 2010, a double-blind, placebo-controlled study of 21 heavy cannabis users was conducted, rating each individual’s performance on tasks that tested their ability to track, make quick decisions, multitask, and react to a stop. This study found that marijuana generally did not affect task performance, concluding that “heavy cannabis users develop tolerance to the impairing effects of THC on neurocognitive task performance.”

These studies help explain the surprising results of the NHTSA study, and together, they show that DUIM may not be the public safety hazard that it is often thought to be. However, there are concerns that legalization will change the landscape of marijuana use, causing both an overall increase in DUIM related crashes, along with an increased crash risk by creating new users who are unable to successfully compensate for their intoxication. This concern is not without merit, but it cannot be expressed with certainty either.

The DMV has found that out of fourteen states that have allowed access to medical marijuana, three of them showed an increase in DUIM crash rates from the time of access to 2009. California was one of these states, showing an increase in 2.1 percentage points for fatal crashes where a driver tested positive for marijuana intoxication. This may seem insignificant, but it was a 196% increase. However, this uptick occurred in 2004 when medical marijuana was initially decriminalized, and there was no significant growth for 6 years after. From these results, the DMV suggested that medical marijuana is simply providing more access to a stable population of patients rather than creating new users. If the effect of legalization is to follow the same pattern, it will not create an explosion of new, inexperienced users, but it will increase access for experienced users, the ones who have shown the ability to drive safely in experiments and studies.

More importantly, if the goal of DUIM policy is to reduce crash risk, an increase in the total number of DUIM related crashes does not show that there is an increased risk of crashing. The DMV study explicitly states that determining the crash risk of DUIM was neither the intent nor purpose of the study. Accident totals were not adjusted for the increased use of marijuana in states where medical marijuana was allowed. Greater access to marijuana increases the number of people who are intoxicated, and when those people get into accidents, there is an increase in accidents involving marijuana intoxicated drivers. Confused? Here is an analogy: If there is greater access to yellow shirts, then an increase in accidents involving drivers in yellow shirts is likely to occur (provided that people want to wear yellow shirts). It does not follow that wearing a yellow shirt causes accidents, and similarly, the DMV results establish nothing about the actual risk of crashing.

The NHTSA study, on the other hand, was purposefully designed to discover such risk, and it found that drivers intoxicated on marijuana do not have a heightened risk of accidents compared to sober drivers. If the goal of DUIM policy is to reduce accidents, there must be a heightened risk to reduce. Even if marijuana is legalized, it cannot be assumed that an increased crash risk will come along with it.

It would be a shame to make the trek through all this technical, scientific data for it to merely be an academic exercise. But it unfortunately is. Questioning the necessity of increased enforcement will likely be nothing but a philosophical pursuit. It is almost assured there will be an increased focus on DUIM enforcement whether it is useful or not. In reaction to marijuana legalization, Colorado and Seattle have enacted new DUIM laws, funded training programs for their officers, and instituted new field tests for discovering marijuana intoxicated drivers. While California still awaits legalization, counties such as Los Angeles have already taken similar steps in officer training and field-testing. With legalization comes enforcement, and the state will have to design policy and procedure to prevent DUIM in a fair and just way. Many of us will also have to find a way to forget that our tax dollars are being spent on a problem that may not exist.

1. I choose to use the term DUIM here instead of using the more common term of driving under the influence of drugs (DUID). DUID is often the term used for marijuana intoxicated driving under the California Penal Code. This is because the pertinent section of the code does not distinguish between drug types other than alcohol, so all non-alcohol intoxication can be referred to as DUID. For this reason, I choose to use DUIM in order to specify that I am only talking about marijuana intoxication and not the countless other drugs that DUID can refer to.
2. California Penal Code section 23152(e)

Diversion from the Black Market Also Involves People, not just Plants

Much of the focus in the coverage of state regulated marijuana has been on the plants, the product, and the money. Michelle Alexander, Associate Professor of law at Ohio State University and renowned author, has illuminated the irony of a movement where whites are now looking to marijuana with dollar signs while communities of color still suffer the consequences of the failed war on drugs. “Here are white men poised to run big marijuana businesses, dreaming of cashing in big—big money, big businesses selling weed—after 40 years of impoverished black kids getting prison time for selling weed, and their families and futures destroyed. Now, white men are planning to get rich doing precisely the same thing?” This highlights the importance of focusing on the people, especially those communities who have been affected most, in the rehabilitation of California’s relationship with marijuana.

No matter how you view marijuana reform, any chance of a successful rehabilitation of California’s drug policy must focus on people. Some see marijuana reform as a civil rights issue, citing the failed war on drugs and overcrowding of prisons as evidence that change is needed. If you view reform as a civil rights issue, how do you reconcile that belief with a system where the people who have been the most adversely affected by the war on drugs are now precluded from taking part in the state-regulated market? Others see drug use as something that isn’t going to change, so the government might as well collect additional tax revenue. If you are part of the group who sees dollar signs from tax revenue, the success of taxation depends on a shift from the black market to the legitimate market. This would depend on those currently operating in the shadows being able to operate, or get hired by, legitimate businesses. Regardless of the policy goal, the most important aspect of rehabilitating California’s relationship with marijuana is the shift from the black market to the legal market, which includes the people.

Black market marijuana is grown and sold by a black market labor force. What happens to that labor force when marijuana is legalized? The Cannabist recently published an article on black market growers in Colorado’s state regulated market. Titled “A divided weed world: Black market growers and legit industry jobs,” the article addresses the problems of merging the black market and the legitimate marijuana trade. First, there are the legal hurdles to overcome. If a person has a certain criminal record, he or she legally cannot receive a business license. Those looking for employment at a cannabusinesses must be of good moral character, meaning any criminal history will be considered. Additionally, black market growers aren’t financially incentivized to enter a legal market, where they will take a significant pay cut if they can even get a job. The competition for work is high and most available jobs are entry-level, paying $10 per hour.

Additionally, the legitimate marijuana business is wary about including those who previously operated in the shadows. Being “in any way connected to black market growers (or any type of crime) is the kiss of death in this business.” Not only is it a legal issue, legitimate marijuana businesses are split on the benefit of including black market growers in their operations. Some business owners cited applicable knowledge and experience as the positives of a black market background, but applicants are “better off never mentioning he or she has experience growing and selling their own.” Even in the absence of a criminal record, there is a “stigma that comes with being a black market grower.” There is the concern about bad habits that would be carried over and the sometimes-rocky transition of going from being your own boss to integrating into an already established and functioning business.

While the Cannabist article explored some the problems faced by a small segment of the black market in Colorado, it provides a lens with which to view the broader problem of integration into the legal market in California. Not only will there be growers needing to transition to the legitimate market, there will be trimmers, processors, and dealers. Street level dealers and trimmers do not have the same level of specialized skill and knowledge as growers. Dealers may arguably have more of a tendency to flout laws, for example by selling to minors. Each different area of employment will bring to light different problems and policy considerations.

There is also the criminal history of black market workers to consider. A criminal record makes it difficult to find any gainful employment, but this will be exacerbated in the legitimate marijuana market by regulations that exclude the justice involved from receiving licenses or being hired. The effect of criminal records for both licensing and employment purposes will have a greater impact on communities of color in California, where Latinos are arrested at higher rates than whites, and Blacks are arrested at an even higher rate. While there will be disparate impacts from barriers based on criminal history in California, there are also race-neutral reasons for excluding the justice-involved in the state regulated market that require consideration. For example, it would be reasonable to refuse a business license to an individual convicted of financial crimes to prevent money laundering. Also, because legitimate marijuana is still a cash-only business, barring convicted tax evaders or embezzlers would be sensible policy.

Furthermore, economic requirements, wages, and competition will be a contributing factor to keeping black market workers from turning legit. The licensing structure and any vertical integration requirements could prevent individuals from opening their own businesses. Like in Colorado, those making money in the black market will not be incentivized to transition to the legal market at a significant pay cut, where their wages will also be taxed. In California, where we have one of the nation’s highest wealth gaps and where Black and Latino communities have much higher poverty rates than whites, economic barriers also adversely affect communities of color. This reinforces Michelle Alexander’s point that those with the money and the privilege will be the people profiting off of marijuana reform.

My future posts for the Drug Law and Policy Blog will delve into the barriers to entry into the future state-regulated market for black market workers in California, with a focus on policy that will best serve to bring them into the fold. Ultimately, there is a general lack of information in about the black market in California, including the racial make up of the labor force, so there are questions that will go unanswered. This fact remains true – without transitioning the black market workforce to the legitimate market, marijuana reform will not succeed in the way we hope. Stay tuned for more information as I wade through the murky waters of black market industries and the ever-evolving arena of state-regulated marijuana.

Cannabis: Patently Useless?

Not too long ago I was at a party where an acquaintance, upon hearing that I was studying intellectual property in law school, addressed me with a slightly tipsy and decidedly confrontational “you can’t own ideas, man!”  At the time, I just smiled and prevaricated.  It is true, though.  You cannot own ideas.  Intellectual property law is built on that very concept.  There are some fine distinctions and clarifications, and certainly some gray area, but that’s the lawyer’s bread and butter.  Intellectual property is like a contract with the government, and all contracts require both sides to gain something (‘consideration’).  The commonwealth has generally concluded that there are certain protections worth granting for the greater public good and this is where a debate on the merits of intellectual property finds footing.  We should ask what, exactly, do the rest of us get out of affording some entity protection of their copyright, trademark, trade secret, or patent?

A patent, for example, gives the inventor a few temporary rights, essentially to exclude others from making, using, selling, and importing the invention in the United States.  Thomas Jefferson wrote that “the exclusive right to invention [i]s given not of natural right, but for the benefit of society” and highlighted “the difficulty of drawing a line between the things which are worth to the public the embarrassment of an exclusive patent, and those which are not.”  Exclusive rights grant a monopoly of sorts, and a government-protected monopoly without a very important public interest being served would be embarrassing.  For example, the Post Office is a monopoly that serves the commonwealth’s need for delivery of mail.  But what concomitant need does granting a patent serve?

The United States Patent Office (USPTO) has been receiving applications for patents on strains of cannabis. This could be because a few states have legalized recreational use of cannabis or because the majority now supports legalization.  Certainly, the projections of tens of millions of dollars of potential revenue will interest businesses and investors.  But cannabis is federally illegal under the Controlled Substances Act.  Can the USPTO even grant a patent on something illegal?  More importantly, why should the USPTO grant these patents?  There are valid arguments for both sides, but ultimately the USPTO should grant these patents because whether or not those patents can be enforced is a separate question for a separate agency.

In order to patent something the inventor must provide a description of the invention that would give someone familiar with the material the ability to actually make the invention.  This “enabling” for a “person skilled in the art” is part of what the public gets.  When your temporary exclusive rights run out, we can all take advantage of your clever new invention.  Money made during the exclusive period works as a reward for your inventive mind as well as incentive for the rest of us to get out there and innovate.

Among other requirements, an invention must be “useful” to be eligible for a patent.  Just about anything can be “useful” in one application or another, but what about uses that society would not want?  Imagine Ted Kaczynski comes up with a cunning new way to disguise, package, and deliver explosive devices.  It seems patent, so to speak, that there is little “useful” about this invention.  Justice Story, better known for the Amistad case, posited that “a new invention to poison people, or to promote debauchery, or to facilitate private assassination, is not a patentable invention.”  Further, Justice Story indicated that “whether [the invention] be more or less useful is a circumstance very material to the interests of the patentee, but of no importance to the public.”  An invention can be “useful” for patentability purposes but have very little practical use. This doesn’t matter much to the rest of us because, as Justice Story put it, it “will silently sink into contempt and disregard.”

Courts have used Story’s reasoning to deny “useless” patents, usually of gambling devices or inventions to facilitate fraud.  Courts, over time, have shifted away from the sticky issue of morality and generally look toward “usefulness” with a pretty open mind.  In fact, the Federal Circuit explicitly stated that “years ago courts invalidated patents on gambling devices on the ground that they were immoral . . . but that is no longer the law.Juicy Whip, Inc. v. Orange Bang, 185 F.3d 1364 (Fed. Cir. 1999)  (Citations omitted, emphasis added).

In Juicy Whip, the invention was “designed to deceive customers by imitating another product and thereby increasing sales of a particular good.”  That court held that the “utility” requirement in the Patent Act of 1952 “[wa]s not a directive to the Patent and Trademark Office or the courts to serve as arbiters of deceptive trade practices.”  Further, the court pointed to 42 U.S.C. § 2181(a), which revokes all granted patents and denies patentability to anything “useful solely in the utilization of special nuclear material or atomic energy in an atomic weapon.”  Essentially, that court said potentially harmful uses of inventions are not the purview of the patent office and if Congress wants something specific barred from patentability, they will pass a law to that effect.

Now you’re probably thinking “wait a minute, what about our hypothetical patent application by Kazcynski?  Surely we, as a society, still draw the line somewhere?”  Of course we do, it’s just not the Patent Office’s job.  For example, the Federal Circuit in Juicy Whip cited to In re Watson, quoting “it is not the province of the Patent Office to determine, under section 101, whether drugs are safe.”  Other agencies are responsible for safety, the FDA in that case.  Cannabis is federally illegal, but enforcing that aspect of the plant is the purview of the DEA, not the Patent Office.

The Supreme Court has held that “Congress never intended that the patent laws should displace the police powers of the States, meaning by that term those powers by which the health, good order, peace and general welfare of the community are promoted.”  Generally, it seems that a patent on an invention with dubious merits will stand (at least with regard to ‘utility’) even if you might not be allowed to use (‘practice’) it in a given jurisdiction.  Individual states can -and do- determine for themselves how best to enforce cannabis possession, growth, distribution, sales, etc.  The Patent Office was not intended as an enforcer of federal laws.  Still, cannabis is federally illegal.

A plant can be patented.  Plant applications like this application for “Midnight,” a strain of cannabis with 1:1 ratio of Tetrahydrocannabinol (THC) to Cannabidiol (CBD), are curious because possessing one is almost always in violation of the Controlled Substances Act.  While many agree that both the courts and the USPTO have abandoned Justice Story’s observed limitations, the Federal Circuit in Juicy Whip does leave some room for denying a patent application if it could not be put to legal use.  Specifically, the Juicy Whip court cited Fuller v. Berger, 120 F. 274 (7th Cir. 1903) which would deny an invention “incapable of serving any beneficial end.”  Juicy Whip also quoted a much more recent case, clarifying that “the claimed device must be totally incapable of achieving a useful result” and the “test for utility” is “not merely that the device has been used for pernicious purposes, but that it is incapable of serving any beneficial end.”  Fuller referenced the Colt revolver and its inherently dangerous nature, then advocated that an invention is useful if it can be used “to accomplish a good result, though in fact it is oftener used (or is as well or even better adapted to be used) to accomplish a bad one.”  The question, then, is can a cannabis plant accomplish a good result in spite of its federal status?

There may be some plausible legal use for, say, handcuffs that administer electric shocks, even if torture is the first use that comes to mind.  That application has expired, but it’s an example of an invention with questionable “uses.”  Is an invention that has no legal use incapable of serving any beneficial end?  Granting a patent is not a guarantee from the government that you can use, or ‘practice,’ it.  A drug might be patented but be declared unsafe by the FDA, or the FTC might protect consumers from a deceptive invention.  Our laws are malleable, subject to review and change.  Cannabis being legal or not is also changeable.  In fact, legislators are currently working on changing cannabis’ legal status.

What if an inventor during alcohol prohibition created an efficient and safer process to isolate ethanol but was denied a patent?  One amendment to the Constitution later, that invention has legal applications.  Surely this is some injustice to the original inventor, society not upholding our end of the contract.  Also, if we legalize liquor, don’t we want more efficient and safer methods of production?  On the other hand, patent applications are public domain, so an application for an illegal invention by definition enables others to make it. (Though I think it is an unlikely criminal who peruses patent office materials in hopes of some improvement to their criminal empire).

If the USPTO does grant cannabis-related patents it will likely encourage more applications of this kind.  One of the effects of decriminalization is increased awareness and understanding of cannabis and cannabis products.  Cannabis consumers trying to create “butane hash oil” (BHO) have been increasingly blowing themselves up.  Presumably this is because more people are aware of BHO in the first place.  However, the public will subsequently become more aware of the dangers and perhaps less likely to engage in those methods.  Also, people may invent and patent safer and more reliable methods or machines to produce BHO.

An “illegal” invention could be safer than previous technologies, and could further public health concerns while ostensibly subverting federal law.  Consider a particular strain of cannabis with high CBD and low THC that, due to the differences in those active substances, may have medical uses without the psychoactive effects of cannabis.  We should encourage such limited uses and developments of a drug in the same way that we encourage it for other scheduled but better known drugs.  

Certain inventions, such as the physically impossible, provably lack use, but patents should not be denied for current illegality.  Certainly some patents have been granted for substances derived from cannabis plants, which means the inventor was working with those plants – a fact that was probably not overlooked by the Patent Office. Extending that to a patent on the plant itself is a small step. Also, cannabis has some utility, either in the present sense in states where cannabis has been decriminalized, or in the possible future of federal decriminalization.  If that isn’t enough, society can still benefit from increasing knowledge in the public domain while relying on other agencies, such as the DEA or, if legalized, the FDA, to enforce any application of a patented cannabis strain.