• Team Highroad

Highroad delivers response to proposed California cannabis rules changes

Updated: Jan 17, 2019

At the end of October 2018, the California state cannabis regulatory agencies proposed new permanent rules for the industry.


Highroad sprang into action to formulate a response that would protect operators from undue burdens. When it comes to policy, Highroad serves as an advocate for rules that allow cannabis operators to achieve profitable compliance.


Compliance Director Simone Sandoval delivered the Highroad response on Monday, November 5, 2018.


Read the full text of the Highroad response to those proposed rules below, and learn more about licensing, compliance and audits at Highroad.




November 5, 2018


Via Email to [email protected]

Bureau of Cannabis Control

2920 Kilgore Road

Rancho Cordova, CA 95670


CC: Via Email to [email protected]

California Department of Food and Agriculture

CalCannabis Cultivation Licensing Division

P.O. Box 942871

Sacramento, CA 94271

RE: HIGHROAD COMMENT LETTER ON PROPOSED MODIFICATIONS TO REGULATIONS


Dear State Regulators:


Highroad Consulting Group (HIGHROAD) is a cannabis consulting company whose Clients and professional industry Contacts consist of cannabis cultivators, manufacturers, distributors, retailers, and ancillary business representatives who collectively control millions of square feet of existing and to be built indoor cannabis cultivation, manufacturing, distribution, and retail facilities. These businesses represent the creation of several hundred jobs and a projected annual tax revenue to the City of Desert Hot Springs of millions of dollars.


HIGHROAD has reviewed the proposed permanent regulations put forth by the Bureau of Cannabis Control (BCC), the Manufactured Cannabis Safety Branch Division of the California Department of Public Health (CDPH), and the California Department of Food & Agriculture (CDFA) in depth.


After considerable analysis on the impacts of the industry we propose the enclosed revisions of the October 2018 proposed permanent state regulations we believe to place an unnecessary and avoidable burden on the industry. Drawing from existing California legislation specific to cannabis and in analogous industries we believe out suggested revisions meet the goal of the legislature’s intent, while minimizing the impacts these regulations create for the state regulators and legal cannabis businesses. The regulations, the impacts and proposed revisions are enclosed.


Thank you for your consideration. Please feel free to contact us with any question.


Respectfully,

Simone Sandoval

Compliance Director | Highroad Consulting Group

[email protected] | 760.671.5647



Bureau of Cannabis Control

New language presented in the following sections warrant concern and requires reconsideration to explore the potential impact on current affected operators and to ensure the future of success of the industry. We respectfully urge state regulators to consider possible alternative language that can achieve the same objectives without placing undue burden on operators or restricting the normal course of business. Those sections include: § 5003, § 5004, § 5032(b), and § 5311(f).


§ 5003; §5004 – Owners and Financial Interest Disclosures

Sections 5003 and 5004 attempts to identify all parties profiting from any contractual relationship with a licensee. Highroad agrees and recognizes the importance of owner and financial interest disclosures, however the language as drafted is far too broad to the extent that it requires a licensee to disclose strategic business relationships, such as partner contacts and key employee lists. When read with Section 5002(c)(18), this regulation could potentially disclose this information to competitors if the information becomes public record. The legislative intent of the language seeks to ensure transparency of those profiting or potentially exerting control over a licensee but imposes an unfair administrative burden on the licensees as well as places potential exposure to interested parties who do not want their information to become public record. An extreme example of this is the threat to Canadian residents who may implicate themselves from entering the Untied States for life, based on recent actions by the federal U.S. Customs and Border Protection.


Recommendation:

(1) Consider a minimum dollar amount threshold above which the disclosure is required.

(2) Provide examples and clear definition of where to draw the line between arm’s length relationships versus truly interested parties.

(3) Protect financial asset and interest disclosures from being available via public record requests or from being provided to federal agencies.


§ 5032(b) - New proposed restrictions on third party contracts with non-licensees

New proposed language in § 5032(b) is problematic for a vast number of licensed operators in that it expressly prohibits very common and necessary business activities, such as third-party contracts for consulting or management services as well as brand licensing agreements. While the new language is intended to protect against non-licensed businesses influencing or controlling licensees or the market, it inadvertently disrupts the normal course of business for a significant portion of operators, normal activities that are standard in many other industries as well.


Overbroad

The proposed regulation as drafted is overbroad on its face. The language would prohibit activities “pursuant to a contract” with all individuals who are non-licensees, including development agreements with municipalities and leases with property owners. It would also prohibit legitimate intellectual property (IP) licensing agreements between licensees and intellectual property rightsholders. The industry is rife with such legitimate IP agreements because the state has never once indicated that its legality would ever be in question. To prohibit these legal agreements now would substantially disrupt the industry through industry wide product recalls, and the elimination of a large number of planned products in the pipeline. In addition to severely dismantling the product pipeline, it will also remove crucial revenue from licensed entities struggling to carve out market share in the industry’s infancy. All these effects would work contrary to Prop 64’s express policy goal of growing the regulated market to dismantle the illegal black market.


Control and Liability

Licensed operators working with third-parties, either in the capacity of licensing a third-party’s trademark and intellectual property (such as production methods) or in the capacity of receiving management and consulting services from a third-party, should be held accountable for all commercial cannabis activities and regulatory requirements which impact the licensee’s business. New language should clarify that a licensee will be held accountable for a third-party’s actions if that third-party is an interested party in the licensee’s business and conducts activities that are inconsistent with regulations which the licensee is held to. Holding the licensee accountable for activities of those it contracts with will provide teeth to the regulatory authority as well as force licensed operators to maintain control and accountability to the regulations.


Recommendation:

1. Revise § 5032(b) to read as follows:

(b) Only licensees may hold title to commercial cannabis or cannabis products. Licensees shall not on behalf of any person that is not licensed under the Act:

1. Procure or purchase cannabis goods from a licensed cultivator or licensed manufacturer; or

2. Distribute cannabis goods.


2. Revise § 5030 to add a subsection (b) that reads:

(b) In construing and enforcing the provisions of the Act and the regulations in this division, the act, omission, or failure of a non-licensed person who by contract or agreement provides management, consulting or other services to the licensee or licenses the rights to intellectual property not owned by the licensee shall in every case be deemed the act, omission, or failure of the licensee.


§ 5311(f) - Enclosed box or cage within distribution vehicles

Although the legislative intent behind the proposed regulation is to increase security within vehicles transporting cannabis goods, this regulation as proposed does not actually make vehicles any more secure and presents a commercially difficult requirement. Several manufacturers of secured transport vehicles in CA use industry-standard armoring and additional security measures, but utilize parts of the vehicle, like the walls or floor, as components of a secured vehicle. The proposed language would disallow the use of walls, floors, and ceilings as part of the enclosed area. Without defining the security level required to qualify as a “cage” or “box”, there is nothing that prevents an operator from using a locked cardboard box. Not only is this new language unnecessary, it may also not be commercially viable given the additional expense and turn-around time.

Additionally, this added requirement would take up usable space in each vehicle, reducing capacity per transport. Many operators have invested significant capital on their fleet, upwards of $50,000-$100,000 per vehicle, each of which takes several weeks to fabricate to the existing requirements. Distributors have an economic incentive to protect the assets in their vehicles; this new proposed language adds no additional security to protect the assets, rather it only adds cost while reducing capacity.


Recommendation:

(1) This new language should be removed from § 5311(f) and the previous language reinstated.

(2) Increased standards, if required, should be phased in over time with a grandfather clause and/or transition period to allow time for existing distributors to continue to serve the market.

(3) Before instituting this requirement, we recommend an analysis of current vehicles which meet commercially reasonable security standards before imposing a possibly unnecessary expense on operators. Consider looking at the DEA’s specific measures required for the storage of controlled substances, which consider time required to breach and the gauge of steel.


California Department of Food & Agriculture

§ 8106 – Cultivation Plan and Shared Spaces

The proposed regulation as is warrants further review on its operational impacts. We respectfully disagree with the drafted language since its ban on shared spaces would be inconsistent with the provisions of state law, specifically AB 133 in which the legislature clearly intended to remove the provision that licensed premises be separate and distinct. The Legislature specifically states that “MAUCRSA authorizes a person to apply for and be issued more than one license provided the licensed premises are separate and distinct. This bill [AB 133] would remove the condition that the licensed premises be separate and distinct.” {Emphasis Added.}


Further, many affected Cannabis cultivators detrimentally relied on the Emergency cannabis regulations and AB 133 when designing their facilities and have invested large amount of capital, resources, labor, and time in creating their business models to maximize their limited space while also ensure they are in compliance with all required state rules. To force cultivators to redo the business layout is unreasonable and not in the interest of fundamental fairness/justice. Moreover, if the businesses were forced to remove one or more of their several licenses in order to comply with the proposed changes, it would force operators to delay or remove harvested lots ready for sale.


While we understand the Department’s intent in ensuring that cannabis goods grown, treated with pesticides, and stored within shared spaces are properly tracked in accordance with the applicable license, we believe this intent is already achieved in other ways. Such common-sense policies could include ensuring that tables, pesticides storage shelves, and storage bins are clearly marked with labels designated with the applicable licensee number. We believe that once METRC is live, all cannabis within the cultivation facility will be tracked from seed to sale through scannable RFID tags, eliminating any concern that cannabis goods won’t be able to be tracked to the applicable licensee.


Recommendation:

(1) Remove the language prohibiting shared spaces and instead require cannabis goods within shared spaces to be marked with the applicable licensee’s information.






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