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Graceful Transition, or Not? Current California Cannabis Laws Cast Doubt

Previous Laws Introduced Multiple “Grace Period” Measures for Transitioning to a State-Legal Market

When California enacted the Medical Cannabis Regulation and Safety Act (“MCRSA”) in 2015, laying out a system of licensing for medical cannabis businesses, it did so within the context of an already-existing “gray” market. That market, which still continues today while the state prepares to roll out its licensing program in 2018, relies in part on the Medical Marijuana Program Act (“MMPA”). The MMPA added section 11362.775 to the Health and Safety Code. That section provides a defense to criminal prosecution for cannabis collectives that (a) operate on a not-for-profit basis and (b) limit their operations to the medical needs of their patients.

Against this backdrop, one change that MCRSA introduced was a “sunset” provision for section 11362.775. Under the revised statute, MMPA’s immunity from prosecution

“shall remain in effect only until one year after the Bureau [of Cannabis Control]… posts a notice on its Internet Web site that the licensing authorities have commenced issuing licenses…”

On its face, this provision appeared to give future MCRSA licensees, who have long operated in reliance on section 11362.775, at least one year of breathing room. This change to section 11362.775 led many to believe that there would not be an immediate urgency in getting a license as soon as they became available: getting a license sometime in 2018, or even sometime in 2019 (depending on when licensing actually became available) would be sufficient to avoid major legal obstacles.

That attitude found further support in another MCRSA provision, codified at Business and Professions Code 19321, that created a more formal grace period. Section 19321 would have allowed cannabis businesses to continue operating while their state license applications remained pending, as long as they operated in compliance with local regulations. In 2016, SB 837 (see section 25)  clarified that this provision would apply to operations even before they submitted their applications, provided they submitted one before a deadline to be determined by the licensing agencies.

MAUCRSA Did not Retain MCRSA’s Grace Period Measures

Section 19321’s grace period, unfortunately, does not live on in the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”), which California enacted in June 2017 to consolidate California laws regarding medical and recreational cannabis.

Nor does MAUCRSA contain an analog of section 19321. So, MAUCRSA has no exemption to allow cannabis businesses to continue their operations for a limited time without a license. This means that all unlicensed cannabis commercial activity—for example, cultivating cannabis and selling to a licensed dispensary—will violate MAUCRSA. Even a licensee that assists in such a violation—for example, by purchasing cannabis from an unlicensed business—will also technically violate MAUCRSA restrictions . Moreover, while the protections of Prop 215 and MMPA remain in place at least through 2018 for not-for-profit collectives, those protections only apply to criminal prosecution, not violations of the Business & Professions Code. It remains possible that the Bureau of Cannabis Control can effectively resurrect MCRSA’s grace period through regulations that decline to penalize certain violations, but for now businesses face the prospect of a much more restrictive transition than originally set forth by MCRSA.

Saving Grace? MAUCRSA’s Temporary License Program

To be sure, MAUCRSA does include one measure to address licensing during the marketplace’s transition: temporary licenses under Business and Professions code 26050.1. On September 22, the Bureau released information about its temporary license program, under which anyone currently possessing a local permit may apply for a 120-day license from the Bureau. The Bureau intends to begin issuing temporary licenses January 1, 2018, with applications being accepted in advance of that date.

The temporary license program, as the only stand-in for MCRSA’s now-repealed grace period, is crucial for the viability of the initial medical cannabis market. But, even if 100% of eligible businesses obtain temporary licenses, will that be enough? While temporary licenses are seemingly simple to obtain by businesses once they have local permits, innumerable cannabis operators that are still seeking local permits will not be able to participate in the new legal market, at least on day 1. This raises the specter of a market with enormous demand but a shortage of licensed suppliers. In that scenario, compliance-minded businesses that obtain licenses right away—and therefore have strong incentive not to do business with any unlicensed operators—may find themselves in an untenable position.

A complete shutdown of California’s multibillion dollar cannabis industry is unlikely. But, regulators have yet to signal what specific measures, if any, they will take to help the fledgling market meet the anticipated demand. In this environment, it may be necessary for operators seeking temporary licenses to secure supply agreements with other applicants to ensure they can comply with MAUCRSA and be economically viable when they open for (licensed) business.

 

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