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Commercial cultivation, retail and marketing
Business licensing requirements
What licensing requirements apply to businesses seeking to cultivate, distribute, produce and sell cannabis products in your jurisdiction? What procedures, timeframes and fees apply in this regard, and on what grounds can a licence be revoked?
The Bureau of Cannabis Control is responsible for licensing retailers, distributors, testing labs, microbusinesses, and temporary cannabis events, while the Manufactured Cannabis Safety Branch of the Department of Public Health is responsible for licensing cannabis manufacturers and CalCannabis Cultivation Licensing, a division of the Department of Food and Agriculture, is responsible for licensing cultivators. Each licensing type is available for adult (A-License) or medicinal (M-License) use or both.
Before applicants can apply for commercial cannabis licensure with the applicable state agency, they must have authorization from the local jurisdiction in which the proposed commercial cannabis business will operate. Operators may hold multiple license types, with the exception of licensed testing laboratories, which must remain independent of all other license types.
In general, all commercial cannabis licensees must:
- be 21 years of age or older;
- submit fingerprints and authorization for a criminal background check for all owners and financial interest holders;
- prove that they have obtained a $5,000 surety bond payable to the state;
- obtain landowner approval for the proposed premises; and
- obtain attestation that the applicant has entered, or will enter, into a labor peace agreement and will abide by its terms if and/or when the applicant has 20 or more employees.
Complete annual licensee application requirements can be found in Section 5002, Title 16 (for license types issued by the Bureau of Cannabis Control), Sections 40128 to 40131, Title 17 (for manufacturers), and Section 8000, Title 3 (for cultivation) of the California Code of Regulations.
Annual license fees for operators licensed by the Bureau of Cannabis Control are determined according to their estimated gross revenue for the 12-month license period and range from $1,500 to $300,000.
CalCannabis Cultivation Licensing sets fees based on license type, ranging from $1,205 to $77,905.
The California Department of Public Health’s Manufactured Cannabis Safety Branch calculates annual commercial cannabis manufacturing license fees based on the licensed premise’s annual gross revenue, ranging from $2,000 to $75,000.
A license may be revoked if:
- an owner or interest holder is convicted of a controlled substance felony subsequent to licensure;
- the licensee abandons, quits or closes the licensed premises for a period exceeding 30 consecutive calendar days (except if in compliance with regulations); or
- the licensed business violates any of the regulations governing commercial cannabis operations.
Are any businesses specifically prohibited from selling cannabis products?
Yes. Only businesses holding a valid Type 9 (non-storefront delivery) or 10 (storefront) retailer license from the Bureau of Cannabis Control may sell cannabis products to consumers.
Businesses where any of the following individuals have a direct or indirect ownership interest may not hold a commercial cannabis license of any type:
- Persons who hold office in, or are employed by, an agency of the State of California or any of its political subdivisions when the duties of such persons have to do with enforcement of the commercial cannabis regulations or any other penal provisions of law of California regulating cannabis goods (Section 5005, Title 16 of the California Code of Regulations).
- Persons with convictions that are substantially related to the qualifications, functions, or duties of the business for which the application is made, including:
- “violent” or “serious” felonies;
- felony conviction involving fraud, deceit, or embezzlement;
- felony conviction for hiring, employing or using a minor related to controlled substances; or
- felony convictions for drug trafficking with enhancements (Section 5017, Title 16 of the California Code of Regulations).
Zoning and real estate considerations
Are there any zoning restrictions on where businesses can cultivate, produce and sell cannabis products?
Premises must not be located:
- within a 600-foot radius of a school for kindergarten to 12th grade, a nursery, or youth center;
- where persons must pass through a business selling alcohol or tobacco or a private residence to access the licensed premises or in order to access any of the above;
- in a private residence; or
- in any structure that is not permanently affixed to the land (Section 5026, Title 16 of the California Code of Regulations).
Local jurisdictions often have additional zoning regulations that must be taken into consideration.
Are there any other notable real estate issues pertinent to cannabis businesses, including with regard to landlord/tenant relationships and real estate market activity?
In California, and most local jurisdictions, both the local permit and state commercial cannabis license are tied to the property and are non-transferable. In general, California prohibits commercial cannabis operator tenants from subleasing all or part of a licensed premises with the exception of a Type S manufacturing license.
As with any contract involving cannabis, the current illegality under federal law means that the federal government could seize property being used for commercial cannabis operations in a federal civil asset forfeiture action.
In California, land is typically transferred by means of a grant deed with title insurance. At present, where there is even a hypothetical possibility of federal expropriation, title insurance companies are reluctant to offer meaningful policies. In addition, because title insurance companies typically operate escrow companies as an ancillary service, they are particularly sensitive to source of funds and know-your-customer rules. The end result is that many title companies will not insure conveyances if they learn that the subject property is to be used for any business that touches cannabis products.
Finally, lease agreements present a novel range of issues. A negative covenant not to use a premises for unlawful acts should be replaced with a positive covenant to use the property for “a lawful purpose.” Tenants who are selling cannabis products can anticipate complaints from both landlords and neighboring tenants, ranging from unpleasant odors to unruly customers to risk of robbery due to the lack of access to banking.
Product restrictions and specifications
Are any cannabis products and accessories prohibited from sale? Do any product specifications apply?
Licensed commercial cannabis retailers may only sell cannabis products that:
- have been received from a licensed distributor;
- have a verified expiration or sell-by date, if any;
- have undergone laboratory testing;
- are appropriately and accurately labeled; and
- comply with all applicable requirements found in the pertinent regulations (Section 5406, Title 16 of the California Code of Regulations).
Live, immature cannabis plants and seeds may be sold only if:
- the plant is not flowering;
- the plant originated from a licensed nursery or microbusiness authorized to engage in cultivation;
- the following label is affixed to the plant or package containing seeds: “This product has not been tested pursuant to the Medicinal and Adult-Use Cannabis Regulation and Safety Act” (Section 5408, Title 16 of the California Code of Regulations).
Manufactured cannabis productsEdible cannabis products must not be attractive to children or shaped like a human being, animal, insect or fruit. Section 23004 of the California Business and Professions Code further specifies product types that must not be sold as edible cannabis products.
Edible cannabis products must not contain more than 10 milligrams of tetrahydrocannabinol (THC) per serving and no more than 100 milligrams of THC per package.
Inedible cannabis products must not contain more than 1,000 mg of THC per package, unless the product is only available to medicinal-use customers and bears a label stating “FOR MEDICAL USE ONLY,” in which case it may contain more than 1,000 mg of THC but not more than 2,000 mg of THC per package.
Packaging and labelling
What packaging and labelling requirements apply to the sale and distribution of cannabis products and accessories?
Labelling requirements applicable to manufactured cannabis productsAll manufactured cannabis products must include a label that is unobstructed and conspicuously located on the outside of the wrapper or container of a finished product so that it can be read by consumers. The label must contain a primary panel and an informational panel with certain information as specified. Content designed to be attractive to individuals under 21 years old and information that is false or misleading, including any health-related statements that are untrue or misleading, must not be included on any cannabis product label.
Primary panelA primary panel label must be located on the part of a label that is most likely to be examined under customary conditions of display for retail sale. A primary panel label must include:
- the product’s identity in a font size reasonably in proportion to the most prominent printed matter on the panel;
- the net weight or volume of the package’s contents;
- the THC and cannabidiol (CBD) content for the package in its entirety, expressed in milligrams per package; and
- the California universal symbol for cannabis no smaller in size than half an inch by half an inch, printed legibly and conspicuously, in black ink.
Text must be in six point font or larger. The primary panel of edible cannabis products must also contain:
- the words “cannabis-infused” immediately above the identity of the product in bold type and a text size larger than that used to identity the product; and
- the THC and CBD content expressed in milligrams per serving.
Informational panelAn informational panel label should be placed on any part of the “label” that is not the primary panel, such as on the container, wrapper, or inserted material that accompanies the final product.
The informational panel must include:
- the name of the licensed manufacturer and its contact number or website address;
- the date of the product’s manufacture and packaging; and
- the following statement in bold print:
GOVERNMENT WARNING: THIS PRODUCT CONTAINS CANNABIS, A SCHEDULE I CONTROLLED SUBSTANCE. KEEP OUT OF REACH OF CHILDREN AND ANIMALS. CANNABIS PRODUCTS MAY ONLY BE POSSESSED OR CONSUMED BY PERSONS 21 YEARS OF AGE OR OLDER UNLESS THE PERSON IS A QUALIFIED PATIENT. THE INTOXICATING EFFECTS OF CANNABIS PRODUCTS MAY BE DELAYED UP TO TWO HOURS. CANNABIS USE WHILE PREGNANT OR BREASTFEEDING MAY BE HARMFUL. CONSUMPTION OF CANNABIS PRODUCTS IMPAIRS YOUR ABILITY TO DRIVE AND OPERATE MACHINERY. PLEASE USE EXTREME CAUTION.
- the statement “FOR MEDICAL USE ONLY” if the cannabis product is intended only for sale to medicinal-use customers or contains more than 1,000 mg of THC per package,
- a list of all product ingredients;
- instructions for use;
- the product expiration, “use by,” or “best by” date, if any; and
- the product’s unique identifier and batch number, if used.
Text must be at least six point font and in proportion to the size of the primary panel and container, unless there is insufficient area available on the container to print all of the required information in this text size. In such a case, the label must include all warning statements required above in bold (i.e., “GOVERNMENT WARNING…”) and be accompanied by supplemental labeling that includes the other required information in no less than eight point font.
The informational panel of edible cannabis products must also contain:
- any major food allergens;
- any artificial food colorings contained in the product; and
- the amount of sodium, sugar, carbohydrates, and total fat per serving contained therein (Sections 40403 to 40412, Title 17 of the California Code of Regulations and Sections 26120 and 26121 of the Business and Professions Code).
Packaging requirements applicable to manufactured cannabis productsA package used for a cannabis product must:
- be tamper-evident; and
- not be attractive to children.
As of January 1, 2020, cannabis products must also be child resistant (Section 40415, Title 17 of the California Code of Regulations; Sections 26120 and 26121 of the Business and Professions Code).
All packaging and labels must also comply with the California Fair Packaging and Labeling Act (Sections 12601 et seq. of the Business and Professions Code). As of January 1, 2020, cannabis goods must comply with all packaging requirements and not leave a licensed retailer unless placed in an opaque exit package.
Advertising and marketing
What rules and restrictions govern the advertising and marketing of cannabis products and accessories (including online)?
The rules and restrictions governing advertising and marketing are defined in the commercial cannabis regulations under Section 26150 of the Business and Professions Code.
Advertising placed in broadcast, cable, radio, print, and digital communications must only be displayed after the licensee has obtained reliable up-to-date audience composition data demonstrating that at least 71.6% of the audience is reasonably expected to be 21 years old or older. Before engaging in any direct, individualized advertising communication or dialogue, including but not limited to having a potential customer added to a mailing list, or otherwise subscribe to communications, the licensee must use age affirmation to confirm the recipient is 21 years of age or older.
All advertising and marketing of manufactured cannabis products must accurately and legibly include the name and license number of the licensee and meet the requirements of Section 26150, Chapter 15, Division 10 of the California Business and Professions Code (Section 40525, Title 17 of the California Code of Regulations and Section 26150 of the California Business and Professions Code).
There are advertising and marketing prohibitions on:
- depictions or images of minors or anyone under 21 years of age;
- objects, such as toys, inflatables, movie or cartoon characters, or any other display likely to appeal to minors;
- ads for free cannabis goods or any type of giveaways, including giveaways of non-cannabis products; and
- ads or marketing within a 15-mile radius of the Californian border on an interstate highway or state highway which crosses the border of another state.
Outdoor advertising must be affixed to a building or permanent structure and comply with the Outdoor Advertising Act (Section 5040, Title 16 of the California Code of Regulations).
What rules and restrictions govern the branding and trademarking of cannabis products and accessories? Are there any other special branding considerations for cannabis businesses?
Generally speaking, businesses whose products or services involve the manufacture, distribution or consumption of cannabis—also known as “plant-touching” businesses—face an uphill battle to build and protect their brands through federal trademark registrations, which cover all 50 states. This is due to the fact that the US Patent and Trademark Office (USPTO) is vigilant about rejecting such businesses’ trademark applications, as all “plant-touching” products and services are still considered illegal at the federal level under the Controlled Substances Act. Accordingly, in order to maximize the opportunity for obtaining a brand-strengthening federal trademark registration, the mark itself must not suggest a connection to the cannabis industry, nor should the required proof of use of the trademark submitted to the USPTO contain any evidence that such goods or services are illegal under federal law. However, even then an applicant is not out of the woods, because the USPTO may independently investigate the mark and ask questions, which must be answered under oath, regarding whether the mark is used in relation to any federally illegal products or services. However, if a “plant touching” business engages in the sale of federally lawful goods and services, seeking federal trademark protection through the USPTO should always be strongly considered. In addition, CBD-related marks have been more successful in obtaining federal registrations than other cannabis-related marks.
The only alternatives to the above-described gauntlet of federal trademark registration are state-based registration and common law trademark protection. Common law trademark protection applies as soon as a mark is used on goods or services and extends as widely as such use of the mark is made. Under common law, the first party to use a mark in a particular area has superior rights over later users of similar marks in that area. State registrations are based on common law rights and may be obtained in states where common law use exists. Sometimes state registrations grant statewide rights regardless of the geographic scope of common law use in that state. A key benefit of state-based registration is placing other parties on constructive notice of the mark, as state registration databases are easily searchable and show up in most professionally commissioned trademark searches. Many states allow for the registration of cannabis related trademarks in all states where cannabis is legal recreationally, and in most states where medical use is permitted. In such sates, trademark owners may sue for infringement (but not in federal court and only under state law). Laws restricting the branding of cannabis products in such states typically include not allowing marks that are confusingly similar to brands known for non-cannabis products. Minnesota (which currently allows medicinal use only) also bans marks that refers to an “unlawful” substance (e.g., weed or pot).
When considering the adoption of a cannabis-related trademark, the more commonly associated the term is with the cannabis industry (e.g., weed), the less likely it is that any one user will be afforded exclusive rights over the term. Logos or trade dress (i.e., the “look and feel” of a product) can be as important to branding as a trademark composed of words (e.g., the Nike swoosh, the shape of a Coke bottle or Tiffany’s blue box). In the rapidly growing cannabis industry, it is recommended that businesses seek the advice of attorneys regarding these evolving brand protection strategies.