Uncertainty Abounds in Defining “Commercial Cannabis Activity” under California’s New Rules

Last month, California’s regulatory agencies charged with writing commercial cannabis rules released new modifications to the final rules proposed in July. The Bureau of Cannabis Control’s (BCC) proposed modifications contained some of the most dramatic changes, including what would effectively be an outright ban on intellectual property licensing for cannabis products—something we are still trying to wrap our heads around due to the seismic effect it would have throughout the industry. The comment period is now closed on the proposed modifications, so now we must wait and see what the BCC decides to do with its final rules in the next few weeks. (To see at our law firm’s comments to BCC on this, go here.)

The proposed rule banning IP licensing agreements is the result of the BCC’s attempt to redefine what constitutes “commercial cannabis activity.” Existing California statutes—which allow the BCC to create and modify cannabis rules—already require that “all commercial cannabis activity shall be conducted between licensees.” So, if you are conducting “commercial cannabis activity” you must have a license to do so. But what truly is “commercial cannabis activity,” and where should the state draw the line?

Current state law defines “commercial cannabis activity” as “includ[ing] the cultivation, possession, manufacture, distribution, processing, storing, laboratory testing, packaging, labeling, transportation, delivery or sale of cannabis and cannabis products.” That much makes sense—activities that touch the plant or its products fall squarely within a common sense understanding of what activities should require a license from the state. But under the BCC’s new proposed rules, the following would now also constitute commercial cannabis activity:

• Procuring or purchasing cannabis goods from a licensed cultivator or licensed manufacturer on behalf of, at the request of, or pursuant to a contract with a non-licensed person;
• Manufacturing cannabis goods according to the specifications of a non-licensee;
• Packaging and labeling cannabis goods under a non-licensee’s brand or according to the specifications of a non-licensee; and
• Distributing cannabis goods for a non-licensee.

Distributing cannabis goods for an unlicensed operator seems straightforward. But for the other additions, such a broad reading of the statute would undoubtedly sweep many activities within this prohibition that in fact have little or nothing to do with actual cannabis activity. For example:

• Some types of cannabis licensees are not prohibited from conducting certain types of non-cannabis activity (e.g. manufacturing, distributing, and selling cannabis accessories). To prohibit any of those non-cannabis contracts from having any interaction with cannabis contracts would add an unnecessary restraint on trade. Perhaps a non-licensee makes vape batteries and as part of its distribution agreement wants to require its licensed retailer partner to only purchase cannabis oil from a certain licensed manufacturer to preserve its brand integrity. Under the new rules, that would be prohibited.
• Imagine that same battery manufacturer wanted to require that same manufacturer by contract to produce vape oil to certain specifications, to ensure the device functions as designed. Under the new rules, that would be prohibited.
• The third point is perhaps the most concerning, as we have already discussed previously and written directly to the BCC. It means that anyone with a brand, whether they already associate it with cannabis products or not, would now be prohibited from selling licensees the right to use that brand on packaging or labels for cannabis goods. This would mean that if you want to have a brand you also have to have a license, which means you also have to be a cannabis operator of some kind. And the entity that holds the license to operate must also own the rights to the brand – holding the intellectual property in a separate entity for liability purposes would not be allowed. Such an arbitrary barrier to the use of intellectual property is an unnecessary restraint on trade.

It’s not clear exactly why the BCC believes these rule modifications are necessary or justified; it only states in its notice of modifications that it had been made aware “that licensees may be engaging in such conduct” as would now be prohibited by the new rules. It’s also unclear whether the BCC will stick with these changes or discard them based on feedback received during the comment period—only time will tell.