CalCannabis Harming CCA’s

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AUTHOR:  “Jordan Zoot.  “aBIZinaBOX Inc., CPA’s
PUBLISHER:  CANNABIS LAW REPORT

CalCannabis Harming CCA’s

CalCannabis Harming CCA’s – By now, anyone that reads our articles is certainly aware that we like the cannabis cooperative association [“CCA”] structure, its an amazing vehicle for small craft cannabis cultivators to pool their resources, save money and remain competitive in a market that is quickly filling up with large vertically integrated businesses. We have become incredibly frustrated with the reticence of CalCannabis to issue a license to a CCA other than one that is fo4Redacted RParrottLetter (2) engaged in cultivation or processing. One of the professionals we know that is active in seeking to get CCA’s licensed wrote a letter to Mr. George Parrott, the Director of CalCannabis.

We are sharing a redacted version of that letter with everyone so that everyone becomes aware of where this situation stands. We intend to distribute this broadly in the hope that we can resolve this without litigation.

———————————————————————————————————————————————————

Richard Parrott Director,

CalCannabis

Re:      Growers Cooperative Association; Application for Licensure

Dear Director Parrott:

We are writing to formally demand the issuance of a license by CalCannabis to XXXX, a cannabis cooperative association duly organized pursuant to Division 10, Chapter 22, of the California Business and Professions Code (“B&P”).  We hereby demand CalCannabis issue a license pursuant to the authority granted to CalCannabis pursuant to B&P §26012(a)(2) based on the application heretofore submitted to CalCannabis, which shall authorize XXXX, as a specially defined corporation under California law, to engage in “commercial cannabis activity” as defined in B&P §26001(k).

This demand is based on the information and analysis hereinafter set forth.  In the event that CalCannabis declines to immediately issue a license to XXXX authorizing the corporation to engage in commercial cannabis activity as a cannabis cooperative association owned and controlled by licensed cultivators and engaged in business for the benefit of said cultivators, we demand CalCannabis provide us with a written statement of the reasons CalCannabis refuses to issue such a license to XXXX with a citation to the authorities on which CalCannabis relies.

LICENSING OF COMMERCIAL CANNABIS ACTIVITY

The Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”) was enacted by the Legislature to establish a comprehensive system to control and regulate the cultivation, distribution, transport, storage, manufacturing, processing, and sale of medicinal and adult-use cannabis and cannabis products.  B&P §26000(b).

CalCannabis Harming CCA’s

B&P §26000(c) provides: “In the furtherance of subdivision (b), this division [Division 10] sets forth the power and duties of the state agencies responsible for controlling and regulating the commercial medicinal and adult-use cannabis industry.”

B&P §26053(a) requires any “person,” which is broadly defined in B&P §26001(an), that engages in commercial cannabis activity in California to be licensed.  The definition of “commercial cannabis activity” is set forth in B&P §26001(k).  B&P §26001(k) states such activity “includes the cultivation, possession, manufacture, distribution, processing, storing, laboratory testing, packaging, labeling, transportation, delivery, or sale of cannabis and cannabis products as provided for in this division.”

Section 26010 creates within the Department of Consumer Affairs the Bureau of Cannabis Control (“BCC”).  BCC is vested with overarching supervisory responsibility for the regulation of California’s cannabis industry in B&P §26010.5(d) and (e) which provide:

“(d) The bureau [BCC] has the power, duty, purpose, responsibility, and jurisdiction to regulate commercial cannabis activity as provided in this division.

“(e) The bureau and the director shall succeed to and are vested with all the duties, powers, purposes, responsibilities, and jurisdiction formerly vested in the Bureau of Marijuana Control, also formerly known as the Bureau of Medical Cannabis Regulation and the Bureau of Medical Marijuana Regulation, under the former Medical Cannabis Regulation and Safety Act (former Chapter 3.5 (commencing with Section 19300) of Division 8).”

Three different agencies are assigned responsibility for the licensing of the persons that engage in commercial cannabis activity.  The licensing authority under MAUCRSA is set forth in B&P §26012(a) which provides in relevant part:

“(a) It is a matter of statewide concern, except as otherwise authorized in this division:

“(1) The bureau [BCC] shall have the sole authority to create, issue, deny, renew, discipline, suspend, or revoke licenses for microbusinesses, transportation, storage unrelated to manufacturing activities, distribution, testing, and sale of cannabis and cannabis products within the state.

“(2) The Department of Food and Agriculture [CalCannabis] shall administer the provisions of this division related to and associated with the cultivation of cannabis. The Department of Food and Agriculture shall have the authority to create, issue, deny, and suspend or revoke cultivation licenses for violations of this division.

“(3) The State Department of Public Health shall administer the provisions of this division related to and associated with the manufacturing of cannabis products. . . . .”

As CalCannabis are already aware, one of the issues that arise from the requirement that all commercial cannabis activity be conducted between licensees flows from the division of the responsibility for licensing among three separate agencies.  Another issue arises from the lack of specificity that flows from the use of the word “includes” in the enumeration of the specific activities that constitute commercial cannabis activity.  Another issue arises from the fact the range and variety of the business activities involved in the movement of cannabis as a commodity from cultivator to consumer cannot be easily compartmentalized into a series of neatly defined boxes.  Sales and transfers of cannabis occur on multiple occasions in connection with every movement of a cannabis product from a cultivator to a consumer in some sense of the meaning of the words “sales” and “transfers.”’

CalCannabis Harming CCA’s

An additional complication flows from the definition of “sale” in B&P 26001(as) which provides:

“‘Sell,’ ‘sale,’ and  ‘to sell’ include any transaction whereby, for any consideration, title to cannabis or cannabis products is transferred from one person to another, and includes the delivery of cannabis or cannabis products pursuant to an order placed for the purchase of the same and soliciting or receiving an order for the same, but does not include the return of cannabis or cannabis products by a licensee to the licensee from whom the cannabis or cannabis product was purchased.”

There is one additional definition that must be mentioned.  B&P §26001(ak) provides, “‘Operation’ means any act for which licensure is required under the provisions of this division, or any commercial transfer of cannabis or cannabis products.”  We have included the definition of “operation” on account of the apparent requirement for a cannabis “sale” that a transfer of title occur, or be contracted for, whereas a commercial transfer of cannabis requires both the transferor and the transferee to be licensed even if no transfer of title to the cannabis material. The express provisions of MAUCRSA expressly so state.

ENABLING LEGISLATION FOR CANNABIS COOPERATIVE ASSOCIATIONS

The Legislature adopted the enabling legislation for Cannabis Cooperative Association (“CCAs”) effective in June of 2017.  This legislation is codified in B&P Division 10, Chapter 22.  We will not repeat the analysis of Chapter 22 which we earlier provided to CalCannabis.

It cannot be doubted the Legislature created CCAs in order to provide small cannabis cultivators with the benefits of agricultural cooperatives.  The Legislature expressly stated that this was the purpose of this legislation.  This legislation was required because cannabis has not been treated as an agricultural crop for a number of years under California law.  The reason agriculture was not treated as an agricultural crop is irrelevant, although the failure to treat cannabis as an agricultural crop prevented cannabis growers from utilizing the corporate laws relating to agricultural cooperatives that are available to growers of other crops.

It also cannot be doubted that the sole purpose of organizing a CCA is to engage in commercial cannabis activities.  Membership in a CCA is limited to cannabis cultivators.  At least 50% of the business activities of a CCA must be with or on behalf of the members of the CCA.

CalCannabis Harming CCA’s

B&P §26223 (a) provides:

“Three or more natural persons, who are engaged in the cultivation of any cannabis product, may form an association pursuant to this chapter [Chapter22] for the purpose of engaging in any activity in connection with any of the following:

“(1) The cultivation, marketing, or selling of the cannabis products of its members.

“(2) . . . .

“. . . .”  [Emphasis added.]

We have highlighted marketing and selling because these activities are specifically identified by the Legislature as activities it contemplated would be undertaken by a CCA in furtherance of the cannabis cultivation of the CCA’s members.  “Sale” is one of the commercial cannabis activities specifically identified in B&P 26001(k).  A number of activities that may be associated with or supportive of marketing and selling are also specifically identified in the definition of commercial cannabis activity in B&P §26012(k).  Further, B&P §26001(as) includes within the definition of a sale the solicitation or procuring of a transfer of cannabis or a cannabis product.

APPLICATION OF XXXX FOR LICENSURE

As CalCannabis is aware, XXXX has now applied to CalCannabis for the issuance of a license as a Cannabis Cooperative Association on multiple occasions.  Each of these applications was submitted in order to secure a License Identification from CalCannabis in order to establish that XXXX is fully authorized and licensed to engage in commercial cannabis activity on behalf of its members as a legally recognized person independent of its constituent members.  Each of these applications was preceded by one or more conversations with representatives of CalCannabis regarding the proper form and procedure for the submission of an application for licensure for a CCA.  The first such application was submitted several months ago.  The applications subsequent to the first application were submitted when we were advised a different form and procedure must be followed in connection with the licensure of a CCA by CalCannabis.

It is our understanding based on our discussion at our most recent meeting that CalCannabis now contends it lacks the authority to issue a license to a CCA except in an instance in which the CCA is engaged in the cultivation of cannabis independently from any member, or in an instance in which the CCA is engaged in processing as a separate activity from cultivation.  The conclusion of CalCannabis that it lacks authority to issue a license to a CCA except in the two specifically referenced circumstances is erroneous for the reasons described below.

ANALYSIS

    1. All California Cannabis Businesses Must Be Licensed.

B&P §26053(a) unequivocally states that all commercial cannabis activity must be conducted between licensees except as otherwise provided in Division 10.  B&P §26001(k) defines commercial cannabis activity as “includes cultivation, possession, manufacture, distribution, processing, storing, laboratory testing, packaging, labeling, transportation, delivery, or sale of cannabis and cannabis products . . . .”

As a consequence of the use of the word “includes” in the definition of commercial cannabis activity, a business activity that is not one of the specifically identified activities may constitute commercial cannabis activity.  Any such an activity, of course, would require licensure.  Further, a business function that is merely supportive of or associated with a specified cannabis business activity, if undertaken in close enough a connection with a specifically identified cannabis business activity, may well fall within the definition of commercial cannabis activity.  Any such an activity, of course, would require licensure.

CalCannabis Harming CCA’s

It is, however, the use of the word “sale” in B&P26001(k) coupled with other definitions in B&P §26001that establish CalCannabis is required to grant licensure to CCAs.  As is described above, B&P §26001(as) broadly defines “sale, sell and to sell” to include any transaction involving a transfer of title whether or not a physical movement of the cannabis material occurs.  Further, B&P §26001(ak) defines “operation” as including any commercial transfer of cannabis or cannabis products as well as any activity for which a cannabis license is required.

As is described above, the Legislature authorized the establishment of CCAs for the express purpose of engaging in any activity in connection with the cultivation, marketing, or selling of the cannabis or cannabis products of the members of such CCAs.  As soon as the organization of a CCA is completed, the CCA is fully authorized under California law to engage in business on behalf of its members.  However, for the reasons described above, in order to engage in any commercial cannabis activity, which is the purpose for which CCAs were created, such a corporation must be licensed.

      1. CalCannabis Is the Proper Agency for the Licensing of CCAs.

B&P §26223 authorizes three cannabis cultivators to organize a CCA for the purpose of engaging in any activity in furtherance of cultivating, marketing or selling the cannabis or cannabis products of the members of the CCA.  As is described in detail above, B&P §26010.5(d) vests in BCC the “power, duty, purpose, responsibility, and jurisdiction to regulate commercial cannabis activity” as provided in Division 10.  This language places the exercise of regulatory authority over all cannabis business activities in California under the supervision of BCC.

Licensing of cannabis businesses is addressed elsewhere in Division 10.  Licensing authority for all commercial cannabis activities is allocated among BCC, CalCannabis and the California Department of Public Health (“CDPH”).  One of these three agencies has the authority to license CCAs under MAUCRSA.

B&P §26012(a)(1) provides that the BCC has the “sole authority to create, issue, deny, renew, discipline, suspend, or revoke licenses for microbusinesses, transportation, storage unrelated to manufacturing activities, distribution, testing, and sale of cannabis and cannabis products” within California..  B&P §26012(a)(1) is not a model of legislative clarity.

Except for the reference to the “sale of cannabis and cannabis products” there is nothing in the language of B&P §26012(a)(1) that suggests BCC is the appropriate licensing agency for CCAs.  Further, BCC has taken no action relating to the licensing of CCAs.  For the reason discussed in Item 3 below, the reference to the licensing of the “sale of cannabis and cannabis products” is not a sufficient foundation to conclude BCC is the proper agency to license CCAs.

CalCannabis Harming CCA’s

The regulatory authority of CDPH is expressly limited to the administration of the provisions of Division 10 relating to the manufacture of cannabis products.  The narrow limitation on the regulatory authority of CDPH makes this agency clearly not the appropriate agency to license CCAs.  The elimination of CDPH leaves solely BCC and CalCannabis.  CalCannabis is clearly the more appropriate licensing agency for multiple reasons including the requirement that a CCA be organized by licensees of CalCannabis.

CalCannabis is undoubtedly the most appropriate agency of the three to license CCAs.  CalCannabis has the authority to license CCAs.  B&P §26012(a)(2) describes the administrative authority of CalCannabis as well as its licensing authority.  B&P §26012(a)(2) provides that CalCannabis shall administer the provisions of Division 10 associated with and related to the cultivation of cannabis. The second sentence of B&P §26012(a)(2), which is similar to the language of B&P §26012(a)(1), states that CalCannabis “shall have the authority to create, issue, deny, and suspend or revoke cultivation licenses for violations of this division.”

This provision of MAUCRSA is also inelegantly drafted.  This provision must be read as CalCannabis “shall have the authority to create, issue, [and] deny . . . cultivation licenses . . . .”  CalCannabis has the authority under any reasonable construction of B&P §26012(a)(2) to create and issue a license to a CCA if such an organization is viewed as an agricultural cooperative created by the Legislature for the benefit of cannabis cultivators.

CalCannabis has disregarded the clear intent of the Legislature with its position that it lacks authority to license CCAs.  CCAs were created because cannabis cultivators cannot avail themselves of the provisions of California law available to every other agricultural producer.  It defies logic to insist CalCannabis has exclusive authority to license individual cannabis cultivators but lacks authority to license an organization the Legislature created for the express purpose of allowing these same growers to collectively engage in commercial cannabis activity.  We also note that in Article 11 the Legislature clearly indicated it intended for CCAs to become the successor organizations to the many different forms of collectives and cooperatives utilized in California’s cannabis industry over the past 25 years.

    1. CalCannabis Has Statutory Authority to License CCAs.

CalCannabis acknowledges it is the appropriate licensing agency in an instance in which a CCA engages in cultivation independently from the cultivation activities of its members.  Further, CalCannabis acknowledges it is the appropriate licensing agency in an instance in which a CCA acts as a processor.  CalCannabis has, however, advanced multiple reasons that it cannot license a CCA except in the two above described circumstances.

The reasons CalCannabis has advanced for its failure and refusal to issue a license to XXXX include the following: the failure of the Legislature to instruct CalCannabis to license CCAs; the failure of the Legislature to specify the license that a CCA must be issued; and a lack of a grant of authority to issue a license to a CCA.  These reasons are poppycock.  These reasons equally apply to BCC and CDPH.  One of these three agencies must license CCAs to engage in commercial cannabis activity.  CalCannabis is the most appropriate of the three agencies to license CCAs.  Title 10 of the B&P mandates that CalCannabis provide licensure to CCAs.  CalCannabis has the statutory authority to issue a license to XXXX as a CCA.

CalCannabis Harming CCA’s

The express grant of authority to BCC to license the “sale of cannabis and cannabis products” in B&P §26012(a)(1) must be construed to be susceptible to the delegation as distinguished from a grant of the exclusive licensing authority.  If the express grant to license the “sale of cannabis and cannabis products” in B&P §26012(a)(1) could not be delegated by BCC, a licensed manufacturer or cultivator would be required to secure two licenses in order to conduct business.  By virtue of the express definitions in B&P §26001, all transfers of cannabis and cannabis products, whether or not the transfers are sales, must be made between licensees.  If the licensing of the sale of the cannabis of a manufacturer or cultivator is not a function authorized by the license granted by CDPH or CalCannabis, respectively, such a licensee would be required to secure a second license from BCC in order to conduct business.

CalCannabis has exercised its specific grant of authority issue to create licenses in B&P §26012(a)(2) in connection with its decision to issue “processor” licenses to cultivators.  CalCannabis has exercised the authority it is granted in B&P §26012(a)(2) to create a license that is not specifically identified in B&P §26050(a).  Of course,  B&P §26050(a) includes the phrase “at a minimum” in connection with its specification of the types of authorized licenses.  Further, it should be noted that processing is generally associated with the function of a distributor for which the BCC has licensing authority pursuant to B&P §26012(a)(1).

CalCannabis Harming CCA’s

CalCannabis has stated its licensing authority is limited to licensing the cultivation of cannabis.  The statutory grant of licensing authority to CalCannabis is not so narrow.  B&P §26012(a)(2) expressly states CalCannabis has administrative authority over the provisions of Division 10 “related to and associated with the cultivation of cannabis.”  B&P §26012(a)(2) expressly grants CalCannabis authority to license CCAs.  A CCA is a special form of a corporation organized by cultivators for the express purpose of engaging in activities “related to and associated with” cannabis cultivation.  CalCannabis has failed to exercise proper administrative judgment in not recognizing the need for the licensing of CCAs as well as the need for CalCannabis to establish a process for licensing such corporations as cooperative associations of cultivators.

    1. Initial Licensure of a CCA Solely Requires Registration.

As we have pointed out on multiple occasions to CalCannabis, the initial licensing of a CCA should involve nothing more than the registration of the CCA with CalCannabis upon the completion of the organization of a CCA.  The Legislature contemplated the organization of a CCA should be completed within 30 days following the filing of Articles of Incorporation with the Secretary of State, although there is no obvious consequence if the process takes longer.  A CCA is fully authorized to engage in business in California upon its completion of the details that flesh out the organization of a corporation.  Such a corporation is fully authorized to engage in commercial cannabis activity upon the completion of these organizational details save for the lack of a license issued by CalCannabis, BCC or CDPH authorizing the CCA to engage in commercial cannabis activity.

CalCannabis Harming CCA’s

    1. The Refusal of CalCannabis To License XXXX Is Arbitrary and Capricious.

All persons engaged in commercial cannabis activities in California are required to be licensed.  The sole purpose for the organization of XXXX is to engage in commercial cannabis activity.  XXXX is duly organized as a CCA.  CalCannabis, BCC and CDPH are the three agencies empowered to license persons to engage in commercial cannabis activity.  CalCannabis is the most appropriate of the three agencies to license CCAs.  CalCannabis is empowered by statute to license XXXX as a cannabis cooperative association to engage in commercial cannabis activity.  The failure and refusal of CalCannabis to grant licensure to XXXX as a CCA is arbitrary and capricious.

CONCLUSION

XXXX hereby demands CalCannabis issue a License to XXXX Growers Cooperative Association as a Cannabis Cooperative Association duly organized pursuant to Chapter 22 of Division 10 of the California Business and Professions that authorizes the corporation to engage in all of those commercial cannabis activities that do not require an additional separate license from CalCannabis, the Bureau of Cannabis Control or the California Department of Public Health.

In the event that CalCannabis fails and refuses to immediately issue a license to XXXX Growers Cooperative Association authorizing the corporation to engage in commercial cannabis activity as a cooperative association owned and controlled by licensed cultivators and engaged in business for the benefit of said cultivators, we demand CalCannabis provide a written statement of each reason that supports the failure and refusal of CalCannabis to issue such a license with a citation to the authorities on which CalCannabis relies for its failure and refusal to issue a license  to XXXX Growers Cooperative Association.

Very truly yours,

We welcome comments, and are particularly interested if anyone has had an different experience with a CCA.

CalCannabis Harming CCA’s

 

Sean Hocking

Sean Hocking


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