California Regulatory Impact – IP, Branding, Licensing
California Regulatory Impact – IP, Branding, Licensing BCC issued new language in the proposed regulations which seem to preclude out businesses which are
NOT licensed by a California regulatory agency from licensing their intellectual property to a California business which is licensed “to manufacture particular goods, often utilizing the licensor’s proprietary techniques, recipes or trade secrets.”
The language would preclude a California licensed business from “packaging and labeling cannabis goods under a non-licensee’s brand or according to the specifications of a non-licensee.”
The flush language of the revised statute appears below.
§ 5032 – Commercial Cannabis Activity
(a) All commercial cannabis activity shall be conducted between licensees. Licensed retailers and licensed microbusinesses authorized to engage in retail sales may conduct commercial cannabis activity with customers in accordance with Chapter 3 of this division.
(b) Licensees shall not conduct commercial cannabis activities on behalf of, at the request of, or pursuant to a contract with any person that is not licensed under the Act. Such prohibited commercial cannabis activities include, but are not limited to, the following:
(1) Procuring or purchasing cannabis goods from a licensed cultivator or licensed manufacturer.
(2) Manufacturing cannabis goods according to the specifications of a non-licensee
(3) Packaging and labeling cannabis goods under a non-licensee’s brand or according to the specifications of a non-licensee.
(4) Distributing cannabis goods for a non-licensee.
(c) Licensees may conduct business with other licensees irrespective of the M-designation or A-designation on their licenses. Bureau of Cannabis Control Regular Regulations Text 15-Day Notice October 2018
(d) Licensed distributors or licensed microbusinesses authorized to engage in distribution shall only transport and sell cannabis goods designated as “For Medical Use Only,” pursuant to the requirements prescribed by the State Department of Public Health in regulation, to M-designated retailers or M-designated microbusinesses authorized to engage in retail sales.;
(e) Products designated as “For Medical Use Only,” pursuant to requirements prescribed by the State Department of Public Health in regulation, shall only be sold to medicinal customers by M-designated retailers or M-designated microbusinesses authorized to engage in retail sales.
Authority: Section 26013, Business and Professions Code. Reference: Sections 26001, 26013, and 26053, Business and Professions Code.
A principal consequence of the proposed regulations would cause any deal structured by a licensed business with a non-licensed business to create a “financial interest” in the licensed for the non-licensed business which would have to be disclosed and registered with the California regulators.
The consequences of this proposed change include:
Prevention of out-of-state manufacturers from seeking contract licensees to produce their product in California without a direct presence with the state.
Restrictions on the ability of out-of-state licensees to create holding entities for intellectual property and create royalty arrangements that license the IP for use in California.
Exploitation of manufacturing technique, technology or brand identity by out-of-state enterprises without a direct presence and licensure in California.
California Regulatory Impact – IP Branding Licensing Proposed Regs
We think the immediate situation creates a compelling reason for cannabis businesses that seek to both protect and exploit their intellectual property review the article Why Cannabis Companies Should Properly Mark Their Intellectual Property. There are some interesting related thoughts in California Commands The Intellectual Property Landscape — High Taxes And China May Dethrone It.
The National Association of Cannabis Businesses [“NACB”] describes themselves as
We’re the first and only self-regulatory organization (SRO) in U.S. cannabis. Our members function as a self-governing community, focused on differentiating themselves to regulators, the public and others as the most legitimate, professional and trustworthy businesses in the industry. Members of the NACB recognize this is the best path to address the very real threat that the regulatory uncertainty facing cannabis poses to their future prosperity.
Self-governance works. SROs have proven to be very effective for member businesses in other highly regulated industries, including investing (FINRA), alcohol (DISCUS), real estate (National Realtors Association) and others.
The FINRA analogy is outrageous given FINRA’s actual role FINRA has REAL enforcement powers in the US securities industry. We are particularly concerned about what appears to be NACB’s apparent efforts to be “everything to everyone” rather than staking out a singular clear role with respect to the legal cannabis industry…they seem to have a “flavor” of membership for every interest. You can review all of the different “flavors” here. We would certainly be more comfortable with a two sentence “what do you stand for”. In contrast, there is interesting speculation in Venable LLP’s “Is the Groundwork Being Laid for New Federal Cannabis Regulation?”
Finally, we were moderately amused by the National Cannabis Bar Association’s news release entitled”Do the Proposed California Regs Fracture the National Licensing Market?” which seems to be more interested in promoting its memberships than it is in providing timely information to those that need it most. Our view is that we STRONGLY prefer to provide high-quality content to our peers in the advisory community [attorneys, professional accountants [CPA’s and CA’s] and compliance professionals]. We appreciate CannabisLaw.Report and its publisher, Sean Hocking for providing us a platform to do so. Over time, our belief is that by being a recognized provider of high-quality information, we attract potential clients and business partners that understand and appreciate our value proposition. [Our marketing people finally got to me :P].