Los Angeles: Phase 3 Update

By Michael Chernis, December 17, 2019

The path towards a legal adult-use cannabis market in Los Angeles has been littered with obstacles and challenges, and in November 2019, another roadblock emerged, as the City announced an audit to its commercial cannabis program and suspended further licensing pending that audit.

After processing license application for certain pre-existing cannabis operators in Phases I and II, on a priority basis in 2018, for both retail and non-retail, Los Angeles first opened applications for new cannabis retailers with Phase III in September 2019. The Phase III round 1 application window started at 10 a.m., September 3, 2019 and ended September 17, 2019. 100 licenses were available in Round 1 to verified social equity applicants, first-come first-serve to those who were first able to submit a complete application on DCR’s Accela portal for a compliant location. The application was extremely competitive; 300 applications were received within 93 seconds of the Accela portal’s opening. 802 total applications were received for 100 available licenses.

After the close of the Phase III round 1 application window, stakeholders raised concerns about the fairness of the application process, specifically about alleged early access to the Accela portal and DCR’s response to these deficiencies. On October 24, 2019, DCR Director Cat Packer presented at the Cannabis Regulation Commission meeting about this issue, and reported that while all applicant access to Accela was supposed to have been disabled from August 28, 2019 until 10 a.m. on September 3, 2019, two applicants obtained several minutes’ early access to the Accela portal by resetting their passwords and were able to submit applications before 10 a.m.

Because these applicants received early access, DCR apparently adjusted their submission timestamps by adding the amount of time taken to submit their applications to a 10:00 a.m. baseline and reviewing those applications in the order they would have been reviewed after making the adjustment.

After the discovery that some applicants received early access, stakeholders became distrustful of DCR because DCR did not admit the early access or its adjustments. Concerns were raised that other applicants received early access, that timestamps were given arbitrarily, and that automated systems were used to submit applications. Demands were made for a do-over.

On November 18, 2019, DCR Director Cat Packer released a press statement about this issue, and reported that Mayor Eric Garcetti had called for an audit of Phase 3 Round 1’s application process and suspended future Phase 3 processing until the audit had been completed. According to the release, DCR will continue to review and process Phase 3 round 1 applicants in the released Review Order for eligibility to receive an annual license (e.g. whether the proposed location is acceptable for undue concentration and sensitive use), but will not move on to the annual application process until the audit is complete.

Then yesterday, on December 16, 2019, the Los Angeles Times printed an article https://www.latimes.com/california/story/2019-12-16/cannabis-activists-marijuana-licensing-applications-los-angeles  documenting at least a dozen other applicants who were able to access Acela early.  There is renewed outrage over the fact the DCR did not disclose this information sooner, and renewed demands for a “do-over.”

What this means for those persons seeking to apply for retail licenses, delivery-only licenses, and even non-retail licenses in Phase 3, is that the timing for those processes to begin are on an indefinite hold.  According to Ms. Packer, “the Department will not continue to the next phase of licensing until the audit process is complete.” The timing for completion of the audit is unknown, and then once the audit results are released there likely will be further delays while the results of the audit are processed and reviewed both by the City Council and the public.  There is also the possibility of lawsuits challenging the City Council decision, whichever way it goes.  Unfortunately, unless the City Council makes changes to the ordinance to allow non-retail aspects of Phase 3 to proceed, the whole process could be delayed at least 6 months, or longer should litigation ensue.

You are invited, however, to share your frustrations, and concerns, with the DCR by emailing them at cannabis@lacity.org.   In addition, the DCR ostensibly is exploring ways to make legislative changes to the application system and welcomes that feedback as well.

Obviously, this delay is a real setback, especially for those of you with real estate locked up.  One possible alternative is to seek licensing opportunities in other jurisdictions.

If we can help with this, or in answering any questions about Phase III, please let us know.

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Important Information for Los Angeles Phase II Licenses

By Michael Chernis, December 12, 2019.

Upcoming Deadline Extended for Phase II Applicants:

All Phase II applicants: rest easy for the holidays, but plan and prepare big for the new year.

Los Angeles Department of Cannabis Regulation (DCR) on December 11, 2019 has granted every Phase II applicant who has not yet received Temporary Approval for Non-Retailer Commercial Cannabis Activity an extension of the deadline to request a DCR inspection, from December 13, 2019 to March 01, 2020. Furthermore, the deadline to pass the inspection has been extended from December 31, 20to March 31, 2020.  The full release by DCR can be accessed here https://cannabis.lacity.org/blog/dcr-grants-extension-phase-2-applicants-regarding-pre-licensing-inspection

DCR granted this extension after recognizing challenges Phase II applicants faced to pass a DCR inspection by the end of 2019. However, this extra time likely means DCR will have higher expectations when conducting its inspections.

Inspection Details: How to Request and Next Steps After Inspection

To request a DCR inspection, email dcrlicensing@lacity.org with the subject line “Request for Pre-Licensing Inspection. Application No. LA-C-18-XXXXXX-APP.”

After requesting a DCR inspection, within 1-2 weeks DCR will email back with potential inspection dates, and requesting you provide DCR the following:

1. A current premises diagram reflecting the facility as it is built-out, and
2. A lease or purchase agreement for your premises.

After you reply with the requested information, DCR will send a final email confirming the date, time and address for your appointment (your premises address).

To move onto the next step of Phase II licensing, you must complete TWO inspections: DCR and Los Angeles Fire Department (LAFD). You must complete both by March 31, 2020. Each inspection has a different focus, detailed below.

After DCR’s inspection, a copy of your DCR inspection checklist will be uploaded to your Accela portal, informing you of any noted deficiencies. Whether those deficiencies will be correctable depends on their severity (see the sample checklist for examples). However, you must later correct these deficiencies and schedule a subsequent inspection to confirm their correction.

After your LAFD inspection, LAFD will notify DCR. Any LAFD deficiencies will also have to be corrected, and another inspection scheduled with LAFD to confirm their correction.

Once you have completed both the DCR and LAFD inspection, DCR will email you a request to send DCR a copy of your State license. After you send DCR a copy of your state license, DCR will issue your Temporary Approval, allowing you to apply for and receive a Phase II annual license.

DCR Inspection: DCR has circulated a checklist of items (see below) they will be examining during inspection. We suggest you review it carefully. DCR’s primary focus will be on potential for crime or diversion of cannabis, so ensure your facility is built-out as described in the premises diagram given to DCR and your security system is functional.

On inspection day, DCR requests that you prepare the following for convenience of the inspectors:

1. Have a hard copy of your current premises diagram on hand at the facility.
2. Have your designated Point of Contact be on the premises.
3. Have the security camera room and footage be available for viewing.
4. Give timely, unrestricted access to the business premises.

Fire Inspection: LAFD’s inspection will focus primarily for your premise’s safety for its inhabitants and risk for fire.

Information about LAFD’s inspection, including an inspection checklist, can be found at www.lafd.org/cannabis. Email lafdcannabis@lacity.org for information about LAFD’s inspection, or Johnny Gatlin, an LAFD inspector for the San Fernando Valley, Johnny.gatlin@lacity.org. If permits or fire approval is required (e.g. for a CO2 extraction system), email LAFDDSS@lacity.org.

If you would like assistance with this process, or have any questions about Phase II, please let us know

 

Michael Chernis

 

 

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Not Quite Legal In All 50 States, Part 1

By Michael Chernis, Esq., Chernis Law Group P.C., Santa Monica, California

Cannabidiol (CBD) is the new rage in the alternative treatment of various health conditions. It is increasingly associated with treating serious illnesses, and alleviating ordinary symptoms of illnesses, without creating the high or psychoactive effect of its cannabinoid sister THC. And, unlike THC products, which will practically always violate the Federal Controlled Substances Act (CSA) there is a colorable argument as to why CBD products derived from Industrial Hemp are federally legal. In fact, in this past year, CBD products have become pervasive on the shelves of national retail supermarket and drug store chains, and of course in wellness spas.

The visibility of these products on the shelves of national retail outlets and leading spas leads one to conclude they must be legal. And indeed, it is common for purveyors of CBD products to market them as legal in all 50 states. The legality of these products is far more complex.

Historically, the federal government treated CBD no differently then THC, and thus considered it to be a Schedule I controlled substance. This was based on the premise that CBD could only be derived from the flowering portions of the Marijuana plant, as opposed to portions of the plant not considered illegal, and thus constituted illegal Marijuana under the CSA.

This changed in 2014 when Congress in the 2014 Farm Bill gave federal protection to “Industrial Hemp.” While Industrial Hemp is still a cannabis plant, it refers to strains of the plant that only produce .3% of THC or less, and thus do not tend to create any psychoactive effect. In 2014, it thus became federally legal to grow Industrial Hemp through a State approved program, known as a “pilot program.”

The 2014 Farm Bill, however, did not expressly provide federal protection for derivatives of State-approved Industrial Hemp, such as CBD or extracts containing CBD, as distinguished from the plant material itself. In the 2018 Farm Bill, Congress expressly made all derivatives and extracts of Industrial Hemp federally legal. While the 2018 Farm Bill still leaves it up to individual states to permit or prohibit the cultivation of Industrial Hemp, all states are prohibited from interfering with the transport across that State of Industrial Hemp or derivative products. However, to be clear, that does not mean it is legal to sell CBD products in every state, as an individual State may still prohibit cultivation and sale of CBD and Industrial Hemp products within its borders, even if it must allow the transport of the products across State lines. And a handful of states, including Idaho, still treat CBD no different from illegal marijuana and prohibit its sale.

Thus, the claim that a CBD product is legal in all 50 states is simply, untrue. It is thus incumbent on a retailer, including a spa owner, to ensure that the state they operate in does not regulate CBD products more stringently then the federal government. This is not difficult to ascertain, although it may require consultation with a lawyer.

There are two other points to be aware of regarding the legality of CBD products under the 2018 Farm Bill. First, the 2018 Farm Bill replaces State cultivation “Pilot Programs” with broader programs that must be approved by the US Department of Agriculture, and which must include among other things testing protocols for Industrial Hemp. However, the USDA is still in the process of passing its own regulations, and will not approve any State programs until federal regulations are in effect. Until then, 2014 Farm Bill Pilot Program Industrial Hemp is still legal federally. The distinction is not terribly important, except in those States, like Idaho, which take the position that while the 2018 Farm Bill mandates it must ultimately allow transport of Industrial Hemp across its border, Pilot Program Hemp does not merit the same protection. This is an uncommon position, is at odds with USDA’s own view of the law, and merely emphasizes the need to know the laws in place in your State.

The second and even more complicated nuance, is that the 2018 Farm Bill, while expanding federal protection for Industrial Hemp and derivatives, does not alter or pre-empt the FDA regulatory authority concerning CBD products. The FDA has taken the position that any ingestible product containing CBD is illegal. This issue will be addressed in Part 2 of this series

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Feds Keep Seizing Lawful Hemp Imports, CBD Co. Tells Court

Law360 (October 21, 2019, 6:07 PM EDT) — U.S. Customs and Border Protection will likely continue to seize lawful hemp shipped from foreign countries, a hemp importer said in a brief filed Monday in California federal court, giving renewed urgency to its proposed class action seeking an injunction against federal authorities.

California-based Innovative Nutraceuticals told that court that its putative class action should proceed as a single case because, among other reasons, the CBP continues to restrict the import of hemp nationwide, despite the passage of two federal farm bills that broadly legalized the crop.

The 2014 farm bill legalized the cultivation of hemp, defined as cannabis with less than 0.3% concentration of THC on a dry weight basis, for limited, industrial purposes. The 2018 farm bill kept the same legal limit of THC, while expanding legal protections for hemp by removing it from the Controlled Substances Act.

“The seizures are part of a pattern of officially sanctioned behavior violative of the federal rights of [Innovative] and the class members,” the filing said. “Since the defendants have repeatedly engaged in these injurious acts in the past, and have continued to do so, there is a sufficient possibility they again will engage in them.”

The brief is the latest volley in a suit initiated in July 2018 after federal authorities seized four shipments of foreign hemp bound for Innovative at airports in California, New Jersey and Kentucky between 2015 and 2018.

The hemp, which had been intended for the processing of CBD, was in violation of the Controlled Substances Act because it contained trace amounts of THC, the psychoactive component of cannabis, authorities said at the time. But the seized hemp had THC levels that were within legal limits as dictated by the 2014 farm bill, Innovative said in court documents.

In their second amended complaint, filed in July, Innovative said that seizures of legal hemp and CBD have continued even after the passage of the 2018 bill.

Innovative is seeking injunctions granting the return of seized hemp and compensatory damages on behalf of any parties who had their hemp or CBD confiscated by CBP or its parent agency, the U.S. Department of Homeland Security, since July 2012. Innovative also sought an injunction barring the federal authorities from seizing shipments of hemp or CBD in the future.

The government moved in September to dismiss most of the claims in the second amended complaint, arguing that Innovative lacked standing or that the cases should be litigated separately in the jurisdictions where the seizures actually took place.

Michael Chernis, an attorney for Innovative, told Law360 in an email that the government’s assertions were flimsy “technical arguments, along the lines of our client failed to touch third base before heading home.”

“In this way, the government is advancing a policy of CBP being beyond legal review. Fortunately, we don’t believe any of their arguments have merit, and firmly believe that this case will proceed one way or another, despite the government’s stalling efforts,” Chernis said.

An attorney with the U.S. Department of Justice, representing the government entities, did not immediately respond to a request for comment Monday.

Innovative is represented by Michael S. Chernis of Chernis Law Group PC, Paul L. Gabbert of Paul L. Gabbert Law Offices and Eric Honig of the Law Office of Eric Honig PLC.

The government is represented by Jasmin Yang, David M. Harris and Joanne S. Osinoff of the U.S Attorney’s Office for the Central District of California

The case is Innovative Nutraceuticals LLC v. United States of America et al., case number 5:18-cv-01400, in the U.S. District Court for the Central District of California.

–Additional reporting by Diana Novak Jones. Editing by Alanna Weissman.

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End of an era: After Jan. 9, California’s unlicensed medical cannabis collectives/co-ops illegal


By John Schroyer

On Jan. 10, California’s legal cannabis industry is expected to get even smaller.

Medical marijuana collectives and cooperatives will become illegal without a state license that day, per guidance that the Bureau of Cannabis Control (BCC) issued in January 2018.

Cannabis industry experts have suggested the impact of the deadline has already made its mark on the California marijuana industry by forcing nonprofits to either get licenses or close up shop.

But in many cases, the collectives/co-ops might just keep selling, turning their back on the regulations in hopes of avoiding law enforcement as long as possible.

Technically, unlicensed MMJ collectives and co-ops were allowed to operate through 2018 without state permits, because they were given a legal defense from prosecution as medical collectives under state law.

But that grandfathering period ends Jan. 9, meaning any collective or co-op being run without a state permit on Jan. 10 could be raided by law enforcement and shut down, with employees and operators facing possible criminal charges or civil fines.

While it’s unclear how many collectives and co-ops may still be operating in California to date – neither the BCC nor the California Department of Tax and Fee Administration had any firm data on existing collectives/co-ops – industry insiders estimated the number could easily be in the hundreds.

“It’s significant because, at this point, if you don’t have a license, whatever legal protection you have goes away,” said Los Angeles cannabis attorney Michael Chernis.

“And the stark reality is that for many places in California, licenses are not available,” Chernis noted, a reference to the fact that roughly two-thirds of California’s cities and counties still have MJ business bans in effect.

The issue is perhaps most pronounced in Chernis’ home region, Los Angeles, because the city has been so slow to issue licenses for cannabis retailers, including many that operated through 2018 under the same collective/co-op model that’s about to end.

“The big losers,” Chernis said, “are the businesses that have been around as long as anyone who’s been licensed, and they have to face a really difficult choice right now:

“Do they completely cease operations because the city of L.A. hasn’t gotten around to offering them a legitimate pathway to license … or do they continue operating in the black market?”

‘Symbolic’ impact or uptick in raids?

The broadest impact of the disappearing collective/co-op model will probably be on medical patients, caregivers and small local collectives and co-ops that weren’t really focused on the business end of the industry, but rather, were actually operating as nonprofit medical charities, said Ellen Komp, deputy director of California NORML.

“There will be patients who will have their access interrupted, and some of them won’t be able to access or afford a licensed facility where they can find their medicine,” she said.

“And collective owners will get caught up in the laws, prosecuted civilly or criminally for not having a license.”

Komp also noted the BCC was originally slated to perform a study on nonprofit MMJ collectives before the regulated market launched in January 2018, but that deadline was pushed back to January 2020, leaving any still-existing medical collectives in “legal limbo” for another year.

Komp and several other industry sources said it’s possible that after the collectives and co-ops become illegal there may be an uptick in enforcement efforts against unlicensed MJ shops.

“You’re still going to have a pretty robust illicit market, and what we’ve seen over the course of this past year is cities that are choosing to crack down on the illicit market … will continue to do so in the manner they have this past year, which is through code enforcement violations,” San Diego attorney Kimberly Simms said.

“I don’t think you’re going to see this huge uptick in raids,” Simms added, saying she doesn’t believe most communities have extra resources to devote to combating unlicensed cannabis shops.

“It is the sort of symbolic end to what people felt like has governed the industry for the last 20 years,” Simms said.

Hard-to-quantify impact

Another longtime MJ attorney, Oakland-based Bill Panzer, said many of the dispensaries that will face the choice Chernis referred to were never nonprofit collectives or co-ops.

Panzer said that before 2018, when all MMJ businesses were required to be nonprofits, “if you looked at the shops that were operating in California under the collective model under a magnifying glass, at least 90% would not pass muster.”

The ones that would, he added, have either already transitioned to the for-profit market and obtained state licenses, or have already exited the market.

“They’ve already been impacted,” Panzer said. “I don’t think there’s going to be many more … because the state has taken the position that nonprofits still have to get licenses. And a lot of these places can’t afford it, so they’ve been being shut down over the last year.

“I personally don’t know any (collectives) that have gotten a license and have still continued to operate as a nonprofit.”

Enforcement mostly falls to local authorities

Others aren’t as optimistic that law enforcement will turn a blind eye to unlicensed cannabis collectives and co-ops.

“Enforcement is likely to increase, because that (collective) defense isn’t there anymore,” stressed Omar Figueroa, another longtime MJ industry lawyer.

BCC spokesman Alex Traverso wrote in an email to Marijuana Business Daily that his agency will continue to use a carrot-over-stick approach and try to coax illegally operating collectives/co-ops into getting state licenses, instead of coming down hard on those without permits.

Traverso noted that, in the past month, the BCC issued more than 1,300 temporary cannabis business licenses, including to many currently operating as collectives or cooperatives.

For those companies to become fully legal and sustainable, however, they’re going to have to obtain full annual permits – a much harder threshold.

That also doesn’t exempt unlicensed collectives and co-ops from prosecution by local authorities, which have largely been running point in combating California’s illicit market over 2018.

In many of those cases, however, misdemeanors, not felonies, have been the only charges filed.

John Schroyer can be reached at johns@mjbizdaily.com.

https://mjbizdaily.com/

 

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Michael Chernis named by MG Magazine as one of “30 Powerful Cannabis Attorneys You Should Know”

Broadly defined, litigation is the process of resolving a dispute between opposing parties through the court system. In business, any relationship–with vendors, suppliers, employees, customers, or competitors–is subject to misunderstanding and miscommunication that can result in litigation. In the burgeoning legal cannabis industry, the opportunity for such occurrences is greatly pronounced.

Matters most often turning up in litigation involve issues such as ownership or partnership disputes, commercial contracts, employment disputes, trademarks and patents, real estate and landlord disputes, product liability, taxes, insurance, and even appellate advocacy, though more rarely than the aforementioned. For each such concern, there are litigating attorneys who specialize in the intricacies.


MICHAEL CHERNIS

Chernis Law Group PC, California
Practice areas: Criminal defense, regulatory law, corporate law, civil litigation
Alma mater: Fordham University Law School
Hard facts: Demonstrating his clients’ compliance with the “collective defense” created by SB420, Chernis has obtained dismissals, reductions of charges, agreements not to file charges, and returns of confiscated goods in a variety of cases. Among the most noteworthy: dismissal of Los Angeles District Attorney charges against a Berkeley manufacturer and return of its cannabis oil cartridges in 2016 and the non-filing and return of goods in a 2014 CO2 manufacturing lab raid and seizure in Riverside County. (ChernisLaw.com)

Michael Chernis

See the full list here: www.mgretailer.com

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