California regulators have wrapped up their third and final version of new regulations governing the state’s multibillion-dollar cannabis market, drawing mixed reviews from industry experts who’ve been closely watching the rulemaking process since it began over the summer.
“There were wins, there were losses and there’s more ambiguity,” said Pamela Epstein, founder and CEO of Los Angeles-based Green Wise Companies. “But what we have is a final game board for regulation.”
Regulators made only minor changes to the proposed rules they issued in October. They released their first draft of the rules in July and then rewrote them in the months that followed.
Now, the state’s Office of Administrative Law (OAL) must give its stamp of approval before this final batch of regulations can be made permanent.
Here are four key takeaways from the final regulations:
1. Delivery is the big winner.
Epstein, along with longtime marijuana attorney Khurshid Khoja of Sacramento-based Greenbridge Corporate Counsel and Jackie McGowan of K Street Consulting, also in Sacramento, said delivery operators are the obvious winners in the final regulations.
That’s because the Bureau of Cannabis Control (BCC) decided to stick with its policy of allowing MJ deliveries anywhere in the state, regardless of local municipalities’ bans.
“Definitely delivery is the biggest winner. However, we’re reluctant to celebrate that win,” McGowan said, noting the OAL must give its final approval.
“The OAL could take into consideration all the threats of lawsuits and remove that section. That’s still extremely concerning,” McGowan said, referring to the possibility that some municipalities may file suit against the state over its delivery policy.
Khoja said it’s possible opponents of statewide delivery – including the League of California Cities, which helped launch a website dedicated to combating delivery policies – may seek to undercut the policy.
“To the extent there is an ability for them to petition the OAL to argue this regulation is inconsistent with state law, they will, and it’s not unlikely they’ll carry through with the threat of litigation,” Khoja said.
2. White labeling is permitted.
Another significant win for the marijuana industry is that contract manufacturing, also known as white labeling, may be allowed.
Contract manufacturing allows a licensed maker of edibles or concentrates to produce and package products on behalf of an unlicensed business, such as a celebrity brand or out-of-state company. However, the process can be tricky to navigate.
“It really depends on the nature of the contract and whether the unlicensed brand is participating in day-to-day operations,” said Khoja, who was looking for possible changes to that portion of the rules.
The BCC removed previous examples from the regulations on what was prohibited to avoid confusion, he said. But he noted it appears that such licensing agreements will be allowed, provided that the unlicensed brands aren’t calling the shots for license-holding California manufacturers.
“The BCC still has grounds to scrutinize licensing agreements with unlicensed parties. The devil’s in the details,” Khoja said.
“They’re going after big brands from other states that are coming into California and saying, ‘We don’t want to get a license, but … because you’re our exclusive licensee, we need to have control'” over the production process, he said, adding that any non-licensee “directing commercial cannabis activity is a problem.”
What would be allowed, Khoja said, is for unlicensed brands to contract out their intellectual property to licensed firms, as long as they’re not directly involved in production or other day-to-day logistics.
McGowan and Epstein also said contract manufacturing will likely be fine with regulators, as long as the required disclosures are made by the relevant parties.
“If you’re white labeling, all you need to do is disclose that, and there’s a simple way to do that with each agency,” McGowan said, referring to the BCC, the state Department of Food and Agriculture and the state Department of Public Health.
“If you are touching the plant, then you do need to be licensed, and every agency is consistent with that rule,” she said.
Epstein added this area still has a lot of ambiguity and will likely have to be clarified or evaluated on a “case-by-case basis.”
3. Packaging regulations changed – again.
Epstein said there’s going to be more “regulatory whiplash” as well with packaging, because the regulations again switched who is responsible for child-resistant packaging.
“We’re going back to pre-July 1, where there is exit packaging at the retail level,” Epstein said, referring to disposable resealable bags in which retail shops place consumer purchases before they “exit” shops. The bags double as childproof containers.
“Once these regulations take effect, manufacturers and cultivators will have the ability to have the retailer issue the (child-resistant package) through exit packaging until Jan. 1 of 2020,” Epstein said.
Once 2020 hits, manufacturers and growers must have each product ready in child-resistant packaging before shipping their goods to retailers. But for 2019, that mandate will be an “either/or situation,” Epstein said.
“If I were advising a retailer… it would be to invest in resealable exit bags. It will provide the most protection to retailers as the various products throughout the year may or may not have child-resistant packaging at the product level,” she said, adding retailers can also brand exit bags and encourage customers to reuse such bags.
That will likely be a huge money-saver for manufacturers and growers, who have been spending enormous sums on child-resistant packaging and now won’t necessarily have to do so, at least until the end of next year.
4. Track-and-trace, ownership disclosures and MJ sample collection challenges exist.
Epstein, Khoja and McGowan also highlighted the following issues:
- Ambiguity remains over what will happen if the state’s track-and-trace system, Metrc, goes down or is unavailable. McGowan said the way the regs are written, a loss of access to Metrc could mean delivery operators would be unable to conduct business until service is restored.
- Khoja said that new ownership-disclosure rules are still “problematic” because, if a separate company has an ownership stake in a licensed cannabis company, it’s possible each owner of that separate company would be deemed an owner of the California licensee and be forced to go through the application process.
- McGowan added the “biggest loser” in the regulations, in her opinion, is testing labs because they’ll have to own every vehicle used to collect MJ samples for testing. That may not be a new portion of the rules, she said, but it’s going to be expensive for labs.
John Schroyer can be reached at email@example.com