The “Big Fix” For Los Angeles Cannabis Laws

As written, proposed draft regulations for Los Angeles’s cannabis industry are unsustainable, but a handful of common-sense improvements would make them ready for prime time.

When California voters approved recreational use of cannabis in November 2016, there was much rejoicing in the industry. AUMA and MMRSA, passed a year earlier by the Legislature and Governor, authorized for the first time permitting of both medical and adult-use commercial cannabis activities. For local governments, however, the new laws (since reconciled into one piece of legislation known as MAUCRSA), initiated a long and tedious process of drafting regulations to govern production, sale, and licensing of commercial activities. This is because local municipalities are given the authority to essentially opt in or out of the State’s commercial cannabis industry, and to regulate how local permits and licenses are granted. A local permit or license is a pre-condition to seeking a State permit for any commercial cannabis activity taking place in the respective local jurisdiction.

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Like other jurisdictions, the City of Los Angeles found itself blazing its own path through the wilderness. But the stakes were seen as much greater in Los Angeles given the scope of the market, both from a consumer and production standpoint. Los Angeles is generally viewed as the largest cannabis marketplace in California, and the County rivals the size of the entire state of Colorado. Thus, what Los Angeles does could have a significant impact on how the fledgling commercial cannabis industry, and the State-created system, succeeds overall.

The City’s historical hostile relationship towards cannabis was cause for concern. Since 2007, the City has generally had an antagonistic relationship with cannabis businesses, with the City Attorney’s Office championing efforts to completely ban all activities, and prosecute countless businesses and property owners for asserted illegal activities. Proposition D, passed in 2013 by voters, and banning all businesses but giving “limited immunity” to a small subset of dispensaries in existence since 2007, is universally viewed as an epic failure, having done nothing to stem the growth of illegal businesses, and instead creating tremendous confusion and needless prosecutions over who qualified for “Limited Immunity.”

Yet, there was also reason for optimism. Last November the City Council sponsored a voter initiative, known as Measure M, to replace Proposition D and vest the City Council with authority to create a comprehensive regulatory framework that would comply with the new State framework and ostensibly offer licenses for retail, cultivation, manufacturing, distribution and lab testing – all of the business types to be permitted under State law. Measure M passed in March with more than 80% voter support. And since late last year, representatives of the City Council have met with various stakeholders and trade associations to better understand the industry and different business types and collaborate on crafting the new regulations. This generated a sense of partnership between the City and the local cannabis industry, and an apparent appreciation by the City of how the industry could generate tremendous tax revenues and job growth. Indeed, some in the City Council expressed concern that too much regulation could drive businesses away from Los Angeles into neighboring cities.

Consequently, when the City released its draft regulations on June 8, there was tremendous disappointment and confusion, and a sense of déjà vu. Many believe the proposed regulations would create a system that would be unsustainable for both the industry and enforcement authorities, almost certainly lead to costly litigation, and impose unnecessary and insurmountable start-up costs and barriers for new market entrants except perhaps the most capitalized.

My firm, Chernis Law Group P.C., believes the draft regulations are seriously flawed, unfair, unduly restrictive, and impractical. What follows is an extremely condensed version of the comments we submitted to the City on July 12, which are fairly representative of comments being submitted by a wide spectrum of stakeholders and advocates. Our complete submission can be found here.

“Limited Immunity” and “Certificates of Compliance”

Instead of issuing licenses or permits to businesses, and legalizing cannabis businesses in the City that obtain permits, the proposed regulations contemplate maintaining the illegality of such businesses, and granting “limited immunity” to approved businesses, which will receive “certificates of compliance.” No other municipality in the entire State of California has charted such a confusing course, which is reminiscent of what Proposition D offered.

Thus far, the City has not publicly defended this policy, which has triggered tremendous upset and outcry across the City’s cannabis industry. It is widely suspected that the City Attorney’s Office is responsible, likely having convinced some in the City Council that issuing permits to cannabis businesses could subject municipal workers or the City itself to federal liability. Regardless, the “limited immunity” path is impractical, out of step with the will of Sacramento, ignorant of the current realities of federal law and policy, and strikingly oblivious to the epic failure of “limited immunity” enforcement under Proposition D.

The State’s legislative framework contemplates permitting and licensing by local municipalities, as numerous other cities and counties have already done. While a “certificate of compliance” may suffice for State licensing, it could leave property owners at risk, since the State law confers property owners with immunity when leasing property to licensed businesses, but says nothing about “certificates of compliance.” Moreover, the August 29, 2013, “Cole Memo,” and the Farr-Rohrabacher appropriations rider, as interpreted last year by the Ninth Circuit in United States v. McIntosh, taken together, offer protection to medical and recreational cannabis businesses despite federal prohibitions if the businesses can demonstrate “strict compliance” with local regulatory controls. A license or a permit does just that, and anything less leaves the business vulnerable.

In addition, the “limited immunity” provisions will create numerous practical difficulties to cannabis business seeking to operate in the City. Below are just a few illustrations:

• For years, the City Attorney has told landlords it is illegal to lease property to cannabis businesses. Some have been prosecuted for leasing property to dispensaries that have claimed “limited immunity” under Proposition D. Thus, many landlords will be unwilling to lease property to businesses unable to demonstrate they possess an actual local permit.

• Banks will be deterred from offering financial services to unlicensed businesses, given the advice issued by the Departments of Treasury and Justice in February 2014.

• Lack of local licensing will deter insurance companies from offering coverage to cannabis businesses and deter investors from providing capital since neither can rely on the permanence of “limited immunity” to secure their investment.

• According to the draft regulations, “The burden of proof in any enforcement proceeding to establish Limited Immunity shall be upon the persons engaging in the Commercial Cannabis Activity.” Why should a business invest up to millions of dollars to acquire the privilege of asserting a defense in a criminal prosecution?

Barriers to Entry

The draft regulations establish no timeframe for when applicants may seek local permission, in whatever form that takes. Neither do they allow applicants to commence operations until they obtain state licensure. Putting aside the issue of whether the State will accept “certificates of compliance” as local authorization, the requirement that a local business obtain state licensure before commencing operations exceeds what is required under state law.

Moreover, the likely significant backlog in state applications through 2018 may mean businesses could wait six months to receive state approval. All the while, the businesses would pay a lease or carry costs on a real estate purchase. That creates an absolute barrier to entry for any but the most highly funded applicants.

Therefore, the city should dispense with the requirement businesses must obtain a state license in order to qualify for a local license and establish a finite timetable and a mechanism for new applicants to seek licensure.

Application and Appeals Processes

The application processes created by the draft regulations lack clarity in terms of the amount of discretion to be exercised by the City of Los Angeles Cannabis Commission and Cannabis Department, and denies applicants basic due process rights to hearings and appeals. For example:

• The draft regulations state, “the [Cannabis] Department will consider the equitable dispersion of businesses throughout the City of Los Angeles prior to the issuance of a Certificate of Compliance, to the extent practicable.” This type of vagueness, broad discretion, and uncertainty is ripe for abuse.

• The appeals process contemplated by the draft regulations does not make clear under what circumstances a person denied a certificate of compliance will be granted a hearing, let alone the criteria or standard of review applied during the appeal. Basic due process requires all applicants denied a permit or opportunity to operate a business be afforded a hearing.

• The draft regulations indicate dispensaries that hold specific certifications and are able to show “substantial compliance” with limited immunity and tax provisions will be eligible for priority processing. But nowhere do the regulations explain what “substantial compliance” means.

Onerous Operational requirements

The draft regulations – spanning 50 pages — contain extensive and sometimes absurd operational restrictions on businesses, often merely echoing requirements already imposed by state law or rendered inapplicable by SB 94. For example, they prohibit retailers from allowing “entertainment of any type,” and banning any “disc jockey, karaoke, dancing or performing activity,” or on “pool/billiard tables, dart games, [and] video games…” Otherwise what will result will be too onerous and either lead to enforcement problems or, more likely, deter innovation.

Failures of registry

In an effort to provide a pathway for previously illegal businesses that have operated in the Los Angeles to obtaining priority licensure (sorry, I mean, priority limited immunity), the draft regulations would create a non-retail registry process for such businesses who can demonstrate operations in the City since before 2016. The registry, too, has its flaws, including the following:

• The process fails to include all non-retail license types, such as delivery services.

• There is no clearly articulated standard businesses must meet to get on the registry

• Businesses applying for the registry are not afforded any immunity from prosecution, and yet are expected to admit prior violations of relevant regulations. Businesses should be immune from prosecution for any activities admitted to during application or registration. And no right of appeal is provided for businesses denied access to the registry.

• To qualify for the registry, businesses must demonstrate operations as of January 1, 2016. There is no logical reason to set the cut-off date prior to January 1, 2017.

Land Use and Zoning Restrictions

• The 800-foot radius from sensitive uses is excessive, given the already limited lack of available property for cannabis businesses, and exceeds the 600 foot buffer imposed by State law

• The draft regulations do not allow manufacturing businesses to operate in “Commercial Manufacturing” zones, again shrinking available real estate.

• There is no allowance for volatile cultivation (even though the same technology is pervasive in other industries across the City), and no allowance for mixed-light cultivation projects, even in agricultural zones.

If what is currently drafted can be revised to address these concerns, it will help create a better model that will serve both the city and the industry for years to come.

Santa Monica, California-based Chernis Law Group P.C. has represented collectives, dispensaries, deliveries, cultivators, manufacturers, landlords, patients, and other cannabis-related clients since 2009.

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