These proposed BCC rules could be a mistake.

As we’ve been running a blog about for the final couple of weeks, the Bureau of Hashish Management (BCC) not too long ago launched modifications to the proposed rules for hashish licensees, considered one of which successfully prohibits all licensing, white labeling and manufacturing agreements between two events the place a type of events isn’t a licensed hashish enterprise. In our submit on this modification, we urged stakeholders to submit written feedback to the BCC expressing their opposition to the rule change. We additionally famous that we’d be submitting formal feedback as a agency on behalf of our shoppers and are publishing these feedback right here. Our hope is that the BCC understands the damaging implications this rule change could have on the trade right here in California, and we shall be following the rule adoption course of intently to see how this shakes out.

Beneath is the total textual content of our November 2 letter to BCC, minus the letterhead and signatures. We’ll proceed to dialogue with affected events and regulators on this significant concern as alternatives allow. Please proceed to hitch us in making your voices heard!


Lori Ajax, Chief
Bureau of Hashish Management
P.O. Field 419106
Rancho Cordova, CA 95741

Re:       Feedback Concerning Modifications to Textual content of Proposed Laws for All Bureau Licensees §5032-Industrial Hashish Exercise

Expensive Ms. Ajax,

On behalf of Harris Bricken McVay Sliwoski, LLP and our shoppers collaborating in California’s hashish trade, we submit our feedback to the Bureau of Hashish Management’s Modifications to the Textual content of the Proposed Laws for All Bureau Licensees.

Our feedback are restricted to Part 5032 pertaining to “industrial hashish exercise.” This part proposes to increase the definition of “industrial hashish exercise,” which can be performed solely between licensees, as follows:

  • 5032. Industrial Hashish Exercise

(a) All industrial hashish exercise shall be performed between licensees. Retail licensees, licensed retailers and licensed microbusinesses licensed to have interaction in retail gross sales could conduct industrial hashish exercise with clients in accordance with Chapter three of this division.

(b) Licensees shall not conduct industrial hashish actions on behalf of, on the request of, or pursuant to a contract with any particular person that isn’t licensed beneath the Act. Such prohibited industrial hashish actions embrace, however will not be restricted to, the next:

(1) Procuring or buying hashish items from a licensed cultivator or licensed producer.

(2) Manufacturing hashish items based on the specs of a non-licensee.

(three) Packaging and labeling hashish items beneath a non-licensee’s model or based on the specs of a non-licensee.

(four) Distributing hashish items for a non-licensee.

Particularly, we take concern with the growth of the definition of “industrial hashish exercise” to incorporate “Manufacturing hashish items based on the specs of a non-licensee” and “Packaging and labeling hashish items beneath a non-licensee’s model or based on the specs of a non-licensee,” as this modification will successfully prohibit all mental property licensing agreements between licensees and non-licensees. We now have not encountered such a prohibition in another state wherein hashish is legalized and controlled, and we imagine that this modification would stifle the trade and remove many, if not most, of the manufacturers presently on dispensary cabinets in California.

Mental property licensing agreements are utilized extensively all through nearly each trade. We now have assisted shoppers with many licensing offers all through the state, none of which have been meant to avoid hashish rules or conceal possession or monetary pursuits. In truth, our interpretation of the “monetary curiosity holder” rule has been that the licensor in every of those licensing offers together with a royalty element the place the licensor receives a share of income or income from the licensee should already be disclosed to the suitable state regulatory company as a “monetary curiosity holder” in a licensee.

There are numerous explanation why mental property licensing agreements make sense for a licensed operator, and why entry to mental property past that owned by licensed operators advantages shoppers:

  • Many licensed operators should not have the sources to develop new applied sciences, merchandise, or model identities and mental property licensing can present a mechanism for increasing and enhancing their product choices.
  • Many corporations and people that personal mental property, resembling recipes, strategies, processes, and model identities should not have the sources to acquire native and state permits or are based mostly in jurisdictions that don’t enable industrial hashish exercise. Mental property licensing can present a mechanism for these corporations to supply their mental property to licensed operators and change into totally disclosed monetary curiosity holders in these licensed operators by taking a royalty based mostly on product gross sales.
  • For entities that personal a number of operations, it typically additionally makes authorized sense to make the most of an IP holding firm (that isn’t a licensed entity) to carry and handle the group’s IP portfolio for the avoidance of IP possession disputes and liabilities, amongst different causes.
  • Licensed mental property expands the flexibility of licensed operators to supply a higher number of manufacturers and merchandise to shoppers.

Eliminating the flexibility of licensees to enter into mental property licensing offers with non-licensees harms each licensees and shoppers by limiting the variety of manufacturers and merchandise accessible. It additionally appears that the Bureau’s targets might not be well-served by this proposed rule modification as a consequence of overbreadth of its scope. The intent of Sections 5032(b)(1) and (b)(2) seems to be stopping licensed entities from conducting hashish enterprise operations on the behest or on the course of unlicensed entities. The primary goal of mental property licensing offers is to not direct an entity learn how to conduct its enterprise, however to limit the methods wherein the mental property could also be used, and to make sure compensation to the proprietor for these restricted makes use of. The proposed modification to Part 5032 casts an unnecessarily huge internet that will prohibit all manufacturing, packaging, and labeling operations by a licensed operator that occur to make use of mental property owned by a non-licensed entity—a end result that doesn’t serve shoppers, licensed entities, or public security. Simply as a landlord mustn’t must be licensed with the intention to lease its property to a licensed hashish operator in change for hire, an proprietor of a model or a recipe mustn’t must be licensed with the intention to license its mental property to a licensed operator in change for compensation.

Somewhat than turning into the primary state to ban IP licensing in its hashish rules, we advocate that the Bureau as an alternative amend the next rule pertaining to monetary curiosity holder disclosure necessities to explicitly embrace mental property and manufacturing agreements the place the licensor receives a royalty as disclosable to the state (proposed language emphasised):

  • 5004. Monetary Curiosity in a Industrial Hashish Enterprise

(a) A monetary curiosity means an settlement to obtain a portion of the income of a industrial hashish enterprise, an funding right into a industrial hashish enterprise, a mortgage supplied to a industrial hashish enterprise, or another fairness curiosity in a industrial hashish enterprise besides as supplied in subsection (c) (d) of this part. For the aim of this part, an curiosity in a diversified mutual fund, blind belief, or comparable instrument isn’t a monetary curiosity. For functions of this division, an settlement to obtain a portion of the income contains, however isn’t restricted to, the next people:

(1) An worker who has entered right into a revenue share plan with the industrial hashish enterprise.

(2) A landlord who has entered right into a lease settlement with the industrial hashish enterprise for a share of the income.

(three) A marketing consultant who’s offering companies to the industrial hashish enterprise for a share of the income.

(four) An individual performing as an agent, resembling an accountant or lawyer, for the industrial hashish enterprise for a share of the income.

(5) A dealer who’s participating in actions for the industrial hashish enterprise for a share of the income.

(6) A salesman who earns a fee.

(7) A non-licensed entity that has entered into an mental property licensing settlement or manufacturing settlement with a industrial hashish enterprise for a share of the income.

From an possession and monetary curiosity holder perspective, mental property and manufacturing agreements aren’t any completely different than any of the preparations already referenced in Part 5004 the place a non-licensee receives a share of income from a licensed entity. Mental property and manufacturing agreements that stipulate that every one industrial hashish exercise shall be carried out solely by a licensed operator and that the non-licensee shall don’t have any management over the licensed entity shouldn’t be handled any in a different way than leases, consulting agreements or another settlement wherein a non-licensee receives a royalty.

If the Bureau is as an alternative involved with the contents of those mental property licensing and manufacturing agreements, we advocate requiring disclosure of the agreements to the state, somewhat than prohibiting them altogether or requiring the licensor to safe onerous native approval and eventual state licensing for a industrial hashish license they by no means intend to really use. Washington State, for instance, which has a few of the strictest rules pertaining to possession and monetary pursuits in hashish companies within the nation, requires that licensors entitled to a royalty in a licensing settlement be disclosed to and vetted by the Washington State Liquor and Hashish Board (WSLCB), and that the licensing settlement itself be disclosed to and reviewed by the WSLCB.[1]

We respect the chance to supply these feedback to the Bureau’s proposed modifications to the textual content of the proposed rules for all Bureau licensees and could be blissful to have interaction in a dialogue to establish a way for regulating these kinds of enterprise offers with out inflicting vital hurt to the trade and to shoppers. You probably have any questions, please contact Alison Malsbury at alison@harrisbricken.com or Hilary Bricken at hilary@harrisbricken.com.

[1]RCW 69.50.395.

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Let’s hope that the Bureau considers these and different feedback thoughtfully and significantly as California continues to construct out its hashish program structure. We’ll preserve you posted.

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