Cannabis: Higher Education

Moderator:

Rebecca Stamey-White, Partner, Hinman & Carmichael LLP

Panelists:

Rick Garza, Director, Washington State Liquor & Cannabis Board

Steve Marks, Executive Director, Oregon Liquor Control Commission

Lori Ajax, Chief, California Bureau of Cannabis Control

 

This was a great panel that talked about a lot of wide ranging issues in the cannabis industry from the difficulties in setting up a state regulatory system to dealing with unclear federal policies on cannabis.

 

What the state regulatory systems look like
Washington

Rick Garza spoke about the fact that cannabis was legalized 7 years ago in Washington and there have been 3 generations of different regulatory system.

He mentioned the interesting nexus between alcohol and cannabis. The Washington ACLU Executive Director looked at Washington’s liquor system, and the weakness with the system is one agency controls everything. Rick would have loved to been like Colorado where they passed a Constitutional Amendment and the governor, legislature, and the stakeholders got in a room together and decided what the law would look like. What that meant is every agency that would be involved was at the table.

When he is looking at Cannabis 2.0, what it will look like in 5 years from now, could be the federal prohibition will be lifted. He believes it will happen state by state, with some changes federally.

Washington started strictly knowing that they could get more permissive later on.

Rick discussed the great difficulty for Washington which had an unregulated medical market place that had been there for years. Totally unregulated since 1998, which made it difficult to merge this system with the regulated adult use system.

The industry has pushed back on some aspects of Washington’s enforcement, especially how hard it is to get a license, and the high tax rate.

Rick answered Rebecca’s question on whether there are tied-house violations in their cannabis system.

Rick indicated that Washington doesn’t allow vertical integration, which is very unique. A processor can’t have an interest in retailer. There are a lot of similarities to alcohol trade violations.

California

Lori discussed the complexities of starting the California system, between Prop 64 (which allowed recreational adult use cannabis) and the medical marijuana law, there were two different systems, and they merged them together to create one system for adult use cannabis.

It was a battle bringing people into a system when they are like hey, we have been operating without a system. Why do we have to follow?

California’s model is fully vertical integration with the exceptions of testing labs. Testing lab can’t hold interest in any other license, that is a challenge for the industry because they don’t understand full integration,

Funny but early for the industry it was taboo to treat cannabis like alcohol. Now the industry wants to be treated like alcohol. They are seeing dominance by retailers, they aren’t paying invoices on time, they want slotting fees and are dominating the industry.

But with full vertical integration, it is hard to put these statutes in place to combat these problems.

Oregon

Steve talked about Oregon’s regulatory system and how it is organized to produce a lot of cannabis, there are 2,200 licensees and half are producers. They had a flood of production, a lot of it went into oils. The market has changed this year, out-door flower prices went up and production is growing and expanding. There is currently a 2-year mortarium on production licenses. Further, there are a lot of business changes, including consolidation and changes in ownership.

Steve talked about how Oregon welcomes full integration, and there is no tied-house except for labs.

Regulating the Products

Rebecca talked about the difficulty to regulate product when there are so many different products in the marketplace. And then there are issues with smoking, vaping, edibles, topicals, and then you have issues with packaging and labeling with no federal agency like the TTB for guidance.

Steve first talked about how they leveraged the medical cannabis system for solutions and how they relied on the health authority for labs and labeling and testing. For Packaging, Oregon has extensive labeling requirement, which they approve labels.

When they setup the sales tax system, each product is taxed individually, they have the ability to target tax if something becomes a problem.

Lori talked about in California how cannabis has so many different products, the biggest issues are strict labeling and packaging. It just keeps getting harder to regulate because the magnitude of different products coming at regulators. Cannabis tooth picks, what category do you put them in? So, they work closely with public health.

Rebecca asked Lori if there is the ability for the state to say no to these products?

Lori indicated that they say no, however, there is a lot of political pleasure to interpret California regs to allow it, that gets difficult.

This is an industry that is not used to dealing with regulators. The industry wants to get the products out there and does not look at regulations beforehand.

Rick stated that, remember they were making products before they were regulated. This shows it is nothing like alcohol. There is no TTB/FDA, we have packaging, labeling, pesticides, quality assurance, medical versus adult use etc. He indicated that within 5 years Washington have had to separate liquor and cannabis. He noted that alcohol has been around for 80 years of alcohol and the industry is mature. Cannabis is different. Washington separated licensing and they needed separate licensing.

He indicated that there is way more regulation involved for inspecting a cannabis retailer vs an alcohol retailer and then there is also the traceability system. It made sense to treat it like other drugs, little did he know that he would need other agencies for help.

Rebecca asked the panel how many agencies are working on cannabis in your state?

Steve indicated several agencies were, a myriad of natural resources agencies, land base and water use issues and then there are primary agencies, like health, revenue, liquor and agriculture.

Rick stated that the Department of Agriculture receives federal funds so initially they didn’t want to get in.

Rebecca wanted to know how the federal prohibition and federal policy in general affects regulation?

Steve mentioned that his agency is a converting equity and licensing agency and consumer protection agency. Doing fair play and equity without definition.

Rick mentioned that it has been problematic. Now there are no fears that the Administration would move against the states, they have not. The safe harbor banking issue has unfortunately not been dealt with and until banking has been dealt with, it makes it harder to track the industry.

Lori noted that California. is getting hit on cost of compliance, she wondered where can the state make it less burdensome for our licensees? Fees range from $500-300,000 a year and does not change on renewal. You pay the same every year. California can’t lower this amount until it gets more licensees into the system, the problem will remain.

Rebecca ask whether it would change the regulatory burden if the federal government loosens its burden?

Steve stated that it started with the fed prohibitions and went into the realm of states allowing cannabis, it really makes it hard to regulate. But you see states that don’t like cannabis but legalize hemp. You are backing into legalized cannabis because it is hard to prosecute the difference between them. Hemp and cannabis are from the same plant. How does law enforcement know whether it is cannabis or hemp, it is very hard and challenging!

Rebecca ask the panel about predications for federal legalization

What will it look like, a states’ Act or a robust federal regulatory scheme like TTB?

Rick doesn’t think we will see it soon. If we can’t get even banking, he is not optimistic.

Lori doesn’t see it either, there is no incentive for federal government to do it.

Rebecca indicated that maybe a recession will make it legal.

Steve stated we haven’t introduced in 80 years a new legalized drug. Rockefeller funded a study and we made standards. Make a commission to have recommendations and follow the states lead.

Rebecca asked about the interaction with alcohol, product perspective, how do cannabis and alcohol deal with cross pollination? How does licensee with alcohol deal with that?

Lori noted we are dealing with more on the retail end. You can’t have alcohol on a cannabis premises. We don’t allow separate facilities in one place, one side cannabis, the other side liquor. For 1-day cannabis events, California separates cannabis and alcohol premises.

Manufacturers sometimes want to label cannabis like alcohol which is a problem.

Rick indicated that Washington has taken had conservative approach to separating cannabis and alcohol.

Steve noted that Oregon’s policy is to keep alcohol and cannabis separate, there are a few products in market place with CBD that should not be in the marketplace. For hospitality license, he thinks that Oregon needs to rethink boutique licenses, they license the whole hotel premises, they could potentially license part of it for a cannabis retailer. How they look at structuring their licenses should be more precise.  Oregon allows cannabis where smoking is allowed.

In the end, regulating cannabis is a vague adventure

Clearly, the three regulators face challenges in regulating cannabis. An industry that was not used to regulation is now being regulated. And sometimes regulations are ignored when the industry is developing their products or the regulations are behind the industry.

This is not a mature industry which makes the path very unclear.  What makes it more difficult is there is no TTB or FDA for guidance. The states are on their own and make the rules for their own jurisdictions.

In the end that is why the words of state regulators are so important and why this panel is so crucial!