California State and Local Cannabis Rules Take Different Paths
Over the past month, California has been a veritable hotbed of activity regarding the regulation of cannabis for both medical and adult use. Most notably, on June 27, Governor Jerry Brown signed into law the Medicinal and Adult-Use Cannabis Regulation and Safety Act to harmonize and reconcile the state’s requirements for medical and adult use, which previously imposed different standards based on the cannabis’ use. Passage of MAUCRSA provides much-needed clarity and consistency for existing cannabis businesses and companies considering to enter the new cannabis market in the world 6th largest economy.
In addition to creating the Bureau of Cannabis Control and harmonizing the licensing regime (among other things), the MAUCRSA also reinforces the authority of local jurisdictions (cities and counties) to, subject to a few restrictions, regulate cannabis as they see fit. It is no surprise that cities like San Francisco, Los Angeles, and San Diego (just to name a few) are exercising their regulatory authority.
Just this week, the San Francisco Board of Supervisors voted unanimously to create an Office of Cannabis. The new regulators will be responsible for approving permits for recreational cannabis dispensaries in the city in anticipation of the recreational business applications. Meanwhile, other cities continue to deliberate about the types of cannabis activity to allow. As an example, in March, San Diego County banned all cannabis operations, with the exception of two medical dispensaries on the outer limits of the County. There is no indication that this ban will be lifted any time soon. In contrast, the City of San Diego is proceeding with conditional use permits for cannabis dispensaries, but does not yet allow cultivation, chemical extraction, or distribution. San Diego expects to make decision on these non-retail operations this summer.
Issues surrounding cultivation and distribution are important aspects of this industry, as evidenced by the recent state of emergency in Nevada due to supply shortages. Learning lessons from other states, California, led by Lori Ajax (currently Chief of the Bureau of Medical Cannabis Regulation and ultimately its successor, the newly-created Bureau of Cannabis Control), is looking to provide temporary licenses to support some businesses, including growers, to prevent a break in the supply chain prior to the full rollout of the state licensing.
Los Angeles also released its first draft of proposed regulations governing all aspects of cannabis operations, including cultivation, manufacturing/processing, testing, distribution, transportation, and dispensing, in the city. The draft is currently available for public comment. In addition, LA released a draft of proposed zoning regulations for cannabis operations, which have already had an impact on commercial real estate in the City.
Highlights From LA
The newly-formed Cannabis Department will take a stepwise approach, issuing “Commercial Cannabis Activity Certificates of Compliance” to entities wanting to do business in LA in four phases. The first certificates will be issued to retail applicants who are currently operating one of the City’s 135 cannabis collectives. The next round of certificates will be issued to entities engaged in non-retail activities, e.g., cultivation, distribution, and delivery. The next two phases will be executed very much at the discretion of the Department, beginning with a “restricted” phase and ultimately an unrestricted phase.
Given the priority status afforded to existing collectives, it’s unsurprising that there has been a lot of investment in these businesses as well as the creation of novel business models to capitalize on operational know-how and the changing legal landscape, both of which will help support the growth of these businesses. At this point in time, it’s unclear when, if at all, members of the general public may be eligible to apply for a certificate, creating a sort of oligopoly more typically seen in cannabis markets on the East Coast.
Developing and implementing a new regulatory paradigm after decades of prohibition is no small feat. As state and local regulators seek to clarify and refine their rules for the regulated cannabis industry, members of the industry should expect those rules to evolve for the foreseeable future. Companies incorporating best practices now will lead the industry forward and inform decisions made by state and local regulators in the future. Further, cities that currently prohibit commercialized cannabis in their towns may begin to change their tune when they realize how much tax revenue they are missing. As with any other highly regulated industry, government, industry and the general public can benefit from clear, consistent, and reasonable regulations.
Arent Fox's Cannabis group has substantial experience in the many regulatory issues facing the cannabis industry and will continue to follow and report on developments involving California's regulation of cannabis and related regulatory and safety issues. If you have any questions, please contact Aram Ordubegian, James Ravitz, Emily Leongini, John Malone, or the Arent Fox professional who usually handles your matters.