Summary of Los Angeles Draft Marijuana Regulations

This post summarizes the current status of cannabis regulations for the City of Los Angeles, California (the “City”), as of July 13, 2017. On June 7, 2017, the City released its proposed draft regulations under Measure M (the “Draft Regulations”). We are still within the 60-day public comment period (which expires August 6, 2017) following the release of the Draft Regulations. Detailed below is a summary of the Draft Regulations, challenges that the regulations pose, and relevant current events concerning the City’s attempts to regulate cannabis-related activities.

LA City Draft Regulations Summary

Measure M was the March 2017 ballot initiative, which voters in the City passed by an overwhelming margin (80.5%). Measure M gave the City the clear right to repeal and replace Proposition D (“Prop D”), and assert jurisdiction over all cannabis-related activity within the City. The City’s proposed regulations under Measure M were released on June 7, 2017. The Zoning & Planning Department (the “Department”) also simultaneously issued zoning regulations specifying exactly where cannabis businesses may operate legally.

1. Draft Regulations

   Under the Draft Regulations, this City will not issue formal cannabis business licenses. Instead, the City will issue operators of cannabis businesses certain Certificates of Compliance (“CC”), which will provide limited immunity from criminal prosecution. CCs will be issued in four (4) phases:

1. Phase 1 – priority eligible applicants
2. Phase 2 – non-retail registry eligible applicants
3. Phase 3 – Social Equity Program applicants**
4. Phase 4 – general public applicants

** Under the Draft Regulations, the number of CCs issued to the general public must not exceed those issued to those in the Social Equity Program.

CC applications will be available for the following cannabis-related activities: Retail, Delivery, Microbusiness, Indoor Cultivation, Manufacture, Testing, Distribution, and Transporter. The Draft Regulations also provide further categories within Retail, Delivery, and Indoor Cultivation. The remaining license types are defined according to state law. As described below, Outdoor Cultivation and Manufacturing using volatile substances are currently the only license types available at the state level, which will not be available at the City level.

• Phase 1 Summary – Priority Eligible Applicants (Retail)

  The issuance of CCs under Phase 1 is expected to commence on January 1, 2018 (consistent with the timing for the implementation of the state licensing scheme). Applications will be accepted for the first 60 days from when applications are first made available to the public. Phase 1 is limited to operators of existing medical marijuana businesses (“MMB”). To be eligible for Phase 1, a MMB must have received a 2016 or 2017 Business Tax Registrant Certificate (“BTRC”) from the City and have operated in “substantial compliance” with Proposition D. There will be a limit of three (3) CCs per owner. Also, on-site cultivation retailers will be permitted to apply for a CC if and only if such party can demonstrate that it has not expanded or otherwise increased the square footage of its property after January 1, 2017 (i.e., established through proof of lease and certificate of occupancy). Applicants that meet certain land use conditions shall be permitted to maintain their on-site cultivation operations. Those applicants that cannot satisfy these land use conditions will be permitted to maintain on-site cultivation activities only through December 31, 2024.

  With regard to the review process specifically, the Department will have 60 days to review and issue a decision upon receipt of a complete application (both for Phase 1 & 2). Applications are not considered “complete” if applicants receive notice by the Department of any deficiencies, which applicants have three (3) months to cure. If such deficiencies cannot be cured, applicants face the risk of losing priority status. Eligibility status is non-appealable, and if denied, you must stop operating immediately. If an applicant qualifies, the applicant will move to the second stage during which the applicant will be issued a provisional CC while its application is reviewed in its entirety. The Draft Regulations provide for an appeals process with regard to the issuance of final CCs, but not for provisional CCs.

• Phase 2 Summary – Non-Retail Registry Applicants

  Issuance of CCs under Phase 2 can be expected to commence as early as Fall 2018. Applications must be submitted within 30 days from when applications are first made available to the public. Applicants must be able to prove they were continuously conducting their manufacturing or indoor cultivation business prior to January 1, 2016, which can be demonstrated by submitting evidence such as articles of incorporation, certificates of stock, or past tax or business records. Unlike Phase 1 applicants whose certificates of compliance are capped at three (3), there is no such limit for Phase 2 applicants. However, applicants must apply for the same certificate for which they were already operating. Applicants also must meet certain land use requirements.

• Phase 3 Summary – Social Equity Program Applicants

  Phase 3 applicants will be subject to The Social Equity Program (the “Program”), which has yet to be developed and must first be approved by the City Council. It is unclear when exactly this approval will take place. However, issuance of CCs under Phase 3 will likely begin in 2019. The Program is aimed at “promoting equitable ownership and employment opportunities in the cannabis industry in order to decrease disparities in life outcomes for marginalized communities and to address the disproportionate impacts of the war on drugs in those communities.” The criteria for applicants applying under Phase 3 is currently unclear due to the fact that the Program has yet to be developed, but such any such criteria will be based on a “social equity analysis”.

• Phase 4 Summary – General Public Applicants

  Processing for Phase 4 will commence after the Program has been approved by the City Council. However, applications under Phase 4 will be restricted until the Program has been fully funded and implemented as determined by the City Council.

• Draft Zoning Regulations

  Detailed below are several draft zoning regulations worth noting:

  Retail (800 ft. radius) – at the state level, dispensaries (retail) cannot operate within a 600-foot radius of schools. However, the City has expanded this distance to 800 feet away from schools, drug and alcohol rehabilitation centers, and daycares.

  Cultivation – the City will not allow outdoor or mixed light cultivation. Also, while cultivation sites do not have to meet the 800-foot radius requirement required for dispensaries, such sites still must meet the 600-foot radius requirement under the state regulations.

  Volatile Solvents – the City will not allow any manufacturing operations that use volatile solvents in processing, which is allowed under the state regulations (Type 7- Manufacture 2 License).

2. Challenges With the Draft Regulations

   Overall, the consensus amongst industry and community members is one of disappointment. Specifically, the proposed regulations do not accomplish what Measure M called for, specifically a formal licensing program. Detailed below are some of the major problem areas with the current version of the draft regulations which should be commented on during the current 60-day public comment period, which expires on August 6, 2017.

   • No Licenses, Just Limited Immunity – Applicants (as stated above) will not receive a formal license, but instead will only receive limited immunity and certificates of compliance.
   • Registry – The Registry only contemplates cultivators and manufacturers, leaving out delivery services, labs, and distributors. There is no reason why the Draft Regulations should not address these parties given that the state regulations specifically contemplate these operations. Also, there are no criteria (including appeals process) set forth for determining how party qualifies for a provisional license through the Registry. Registrants are effectively being asked to admit to breaking the law for two years in the hopes that their applications will be approved. So should the provisional licensee be denied, there is nothing stopping an applicant from being criminally prosecuted. This will essentially place a target on the backs of these applicants. Also, applicants are required to have “substantially complied” with Prop D, however, it is unclear what this really means. For example, numerous operators were denied BTRCs for a multitude of reasons– what recourse do they have? Any appeal rights? This is not clear just yet. Last, with regard to the appeals process, parties will have the right to request an appeal, but nothing mandates that the party will actually receive a fair hearing.
   • Social Equity Program Timeline – The Program (Phase 3) has not even been developed. However, due to the competitive nature of this industry, applicants would likely need to begin securing property now. If certificates are not issued until January 1, 2019 at the earliest, applicants may be required to pay exorbitant “holding” costs (including potentially above-market lease prices) as they wait for their application for a CC is processed, thereby potentially costing these cannabis businesses owners fortunes, clearly against the spirit of the Program.
   • Measure M & LA City Land Use Conflict – Measure M states that existing MMBs can operate as long as they (i) meet the limited immunity requirements under Prop D, (ii) operate at the location identified in the BTRC (or amended BTRC), and (iii) apply within the first sixty (60) days applications are available. The Draft Regulations, however, include something Measure M did not: Currently operating MMBs will be removed from Phase 1 consideration (the Registry) if there was any increase in the square footage used for operations (i.e., increase square footage of building) after March 7, 2017. Measure M did not contain any such limitation, but rather allowed r businesses to scale their size to meet market demands. This is a clear conflict of law that still needs to be reconciled.

3. Relevant Current Events

   On June 29, 2017, the Department held a town hall meeting where community members were invited to ask questions and voice concerns during the 60-day public comment period. Hundreds of people showed to do just that. The chief complaint, among others, concerned the City’s failure to implement a cannabis business licensing program. Community members called upon the Department to “do their job” and implement Measure M as it was drafted, which called for a licensing scheme (not one of limited immunity and certificates of compliance). They reminded the Department that Prop D was a “failure” which had the same limited immunity component. “It didn’t work then, and it won’t work now,” said a concerned citizen. Community members also recalled Governor Jerry Brown’s 2016 letter to the City in which he rejected limited immunity as a means of defining compliant businesses in the City of LA.

   On June 30, 2017, Assembly member Reggie Jones-Sawyer, Lori Ajax (Chief of the Bureau of Medical Cannabis), and representatives from Go-Biz, the California Department of Public Health, and the California Department of Food & Agriculture spoke on behalf of the state with regard to state-level licensing. Those in attendance asked the speakers whether they were aware of the City’s plan to create a limited immunity cannabis program instead of a licensing program. Speakers unanimously commented that such a program has historically failed and will only encourage a black market, lost tax revenue, and employment problems. Despite these comments, these individuals reminded community members that local jurisdictions are free to create their own rules however they see fit.

   LA City Council will be on recess for the month of July, and as a result, we do not anticipate any further updates on this process until late in the summer. However, to the extent updates becomes available, we will let you know. Contact us if you have any questions.