by Hilary Bricken, Principal Harris Bricken
On the 25th anniversary of Prop. 215, I was recently interviewed on KCRW to give my take on how California (and specifically the City of Los Angeles) has done when it comes to legalizing and licensing cannabis businesses. I’m a pretty tough critic of California in general if you read any of my writings on the topic. It just astounds me that California, for all intents and purposes, allowed itself to get into a stranglehold of local control bottlenecking while also failing to learn from the variety of licensing models and strategies that function much better other states. Not to mention the private interest groups holding political hostages in Sacramento. At the same time, in concluding my interview with KCRW, I said that I have hope for the Golden State to eventually “get it right,” and I think it will– just not for a while given the state’s many issues (see below).
First, a bit of history. From the beginning, California got it wrong when it comes to a regulatory framework for commercial cannabis activity (they’re not alone in that–I’m also looking at you Oregon and Washington). It’s a common misconception that Prop. 215 legalized medical cannabis in 1996–it didn’t. It only provides an affirmative defense for qualified patients and their caregivers to produce and distribute medical cannabis for enumerated illnesses in the statute. Prop. 215 wasn’t about legalizing, regulating, and taxing cannabis at all. It was about legitimately ill Californians finally getting access to cannabis to self-medicate, and it did an amazing job serving that end goal.
At the same time, Prop. 215 opened the door for a collective model (i.e., a “closed loop system”) for enterprising patients and caregivers to essentially commercialize medical cannabis through large scale grows and dispensaries (with no government oversight or regulation). With the passage of SB 420, this collective system was formalized and, with the advent of the 2008 Guidelines issued by the State Attorney General’s Office, more details around “compliance” and best practices were provided; but it was nothing like we have today under Prop. 64 and MAUCRSA.
As a result of the 2013 Cole Memo (and Washington and Colorado legalizing back in 2012), California finally got the picture that it needed to seriously clean up and get a hold of commercial medical cannabis if it wanted to avoid increased scrutiny and enforcement from the Department of Justice. So, in 2015, the Assembly passed the MMRSA (which it later renamed the MCRSA). Then in November 2016, Prop. 64 passed, and in the summer of 2017, MAUCRSA passed, which incorporates Prop. 64 and also repeals the MCRSA.
This is all to say that California’s first foray into a legalized medical cannabis system wasn’t until 2015, and that really didn’t even get going until January 1, 2018 under MAUCRSA (and 2018 is the first year in which California really regulated adult use cannabis). Stakeholders act like California has a ton of experience with oversight, regulation, etc. of cannabis businesses, but that’s not actually true in practice. So I give the state a little leeway there.
Here are the current issues though, as touted by multiple articles that came out on the 25th anniversary of Prop. 215:
High taxes
California isn’t alone in slapping a sin tax on cannabis products. What licensees have to understand is that these taxes are put on these products not because of state greed. They are, among other things, a public policy deterrent to habitual use by consumers. There is 100% a social cost to cannabis legalization, and a way to mitigate that is to make the product expensive (look at cigarettes and even some alcohol). Also, of course, the point is to get voters to vote in favor of cannabis initiatives, and tax revenue that will deliver on things like infrastructure, government programs, education, etc. is always a popular promise. Licensees that think taxes are going down anytime soon are sorely mistaken (although they will likely stabilize, just at a high rate). This is the cost of doing business in this industry, even if it means that more people stay in the illegal market for a longer period of time.
Local control
I honestly think this is the biggest killer and it doesn’t get enough criticism. Barriers to entry for state licensing in California are not out of this world. In fact, we’re pretty business friendly compared with certain other states (for example, we don’t have a residency requirement or a liquidity requirement to get started, and there’s no merit-based license award system). But it’s the cities and the counties that make life miserable and truly cost prohibitive with the endless amounts of red tape, onerous local control measures (like development agreements and voluminous permitting and licensing), and fees that go into local approval of a cannabis operation, which is required for state licensure.
Social equity
Righting the horrible wrongs of the war on drugs is an important and difficult task. There’s no other industry cannabis regulators can really look to for what the gold standard is when it comes to social equity and what’s right and fair while also allowing growth and competition. Just throwing money at the issue, without education and ongoing support for social equity stakeholders, is not going to work long term. And in California, that’s pretty much what the state has done. Not all cities have even signed up to try their hand at social equity programs, either (again, local control is the theme in California). L.A. takes a ton of heat for its social equity efforts (and some of it is legitimately warranted because the rollout of the program has had some disastrous turns), but I commend the City overall. I do think it’s really tried to think through almost every business, regulatory, governance, and social impact scenario with its social equity licensees and while issues have arisen along the way, it’s probably one of the most progressive social equity programs in the country at the end of the day.
Too much arbitrary red tape at the top
Even though California is pretty business friendly when it comes to cannabis (we have reduced barriers to entry at the state level and we allow delivery, “tech platform” integration, lounges, branded merch, etc.), it really needs to reform its regulations to cut down on much of its arbitrary reporting and compliance requirements. There are also way too many rules that are vague and ambiguous and that incentivize bad behavior (e.g., how changes of ownership are treated; reporting of the parties and their conduct under IP licensing agreements). California would do right by itself to simplify and/or eliminate when it comes to its many, many cannabis regulations that don’t make a ton of sense and serve to only frustrate and cost licensees time and money.
Enforcement
When I talk about enforcement, I’m not talking about throwing people in jail for violating MAUCRSA–that isn’t even really possible anymore under state law. The state has done a terrible job of going after “bad actor” licensees for basic and fundamental regulatory violations. By this time, everyone’s hear of these “burner licenses” in California, and it’s an incredible disappointment that no enforcement campaign has been formulated by the state around that particular open secret. Plus, you have all kinds of hidden ownership and financial interests, and the state just doesn’t seem all that interested in pursuing civil and/or administrative penalties with any consistency there. What’s the incentive to get licensed and remain in compliance if there’s no stick when the carrot doesn’t work? Having a license should actually mean something for consistently law-abiding licensees when it comes to the state’s enforcement efforts. Just busting obviously illegal, unlicensed operators on random occasion isn’t really enough.
I sincerely hope on the 26th anniversary of Prop. 215 we’re not all still discussing these issues and their potential fixes. I fear though that more of the same is down the road without a major change in business and regulatory priorities at the state level. Stay tuned.
Re-published with the permission of Harris Bricken and The Canna Law Blog
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