The California Marijuana Gold Rush: a Review of the History and Future of Cannabis Regulation in California

• Publication year: 2017
• Author: Sean T. McAllister

The California Marijuana Gold Rush: A Review of the History and Future of Cannabis Regulation in California

Sean T. McAllister

Sean T. McAllister, Esq. specializes in cannabis business law, including regulatory compliance, business transaction, licensing, and administrative law. He is licensed as an attorney in California and Colorado. His firm, McAllister Garfield, P.C., has twenty-one lawyers working in Colorado, California, Oregon, and Florida. The firm has lawyers and offices in San Diego, Los Angeles, and San Francisco. For more information on Sean, visit www.mcallistergarfield.com.

This article provides an overview of the history of cannabis (more commonly known as marijuana) legalization in California, along with a summary of the new statutory scheme regulating medical and adult use (recreational) of cannabis. First, the article discusses the history of cannabis legalization leading up to full regulation, which begins in 2018. Next, the article discusses the new Medical and Adult Use Cannabis Regulation and Safety Act, which is the unified law now regulating medical and adult use cannabis. Finally, this article discusses some of the difficulties that operators will face in transi-tioning to full regulation in 2018.

I. A Brief History of Cannabis in California Prior to Full Regulation

A. 1996: Proposition 215, The Compassionate Use Act

In 1996, California became the first state in the nation to legalize the medical use of cannabis, with the passage of Proposition 215, also known as the "Compassionate Use Act" ("CUA").¹ The CUA allowed patients and their designated primary caregivers to possess and cultivate cannabis for personal medical use, subject to a doctor's recommendation.² There were no clear provisions for the distribution of cannabis in the CUA, and certainly no discussion of retail dispensaries or business licenses.³ In effect, CUA merely decriminalized the cultivation and possession of cannabis by providing a defense for certain seriously ill patients and their primary caregivers from criminal liability under state law.⁴ The quantities allowed for possession and cultivation were not clearly defined.

B. 2004: Senate Bill 420

In 2004, Senate Bill 420, also known as the "Medical Marijuana Program Act" ("MMPA"), became law.⁵ Senate Bill 420 expanded the limited criminal defense protections under CUA, which merely included possession and cultivation, to include offenses related to transportation, possession for sale, sale, giving away, furnishing, and providing or leasing a premise for the distribution of a controlled substance.⁶ In addition, Senate Bill 420 allowed cannabis distribution by patients and caregivers joining together "collectively or cooperatively" to cultivate cannabis.⁷ Collectives could grow, distribute, and receive reimbursement for their services in the provision of medical cannabis on a nonprofit basis to their members.⁸

Senate Bill 420 also set the first clear limits on the amount of cannabis patients and caregivers could cultivate and possess: six mature or twelve immature plants, and eight ounces of finished cannabis product (including hash products).⁹ Later court decisions, including the seminal 2008 People v. Kelly case, clarified that Senate Bill 420's possession and cultivation limits were the presumptively legal amounts, but that patients and caregivers could argue additional amounts were still defensible under the CUA if it could be shown that increased amounts were reasonable based on medical need.¹⁰ Under Senate Bill 420, local governments (i.e., counties and cities) had discretion to set higher possession or cultivation limits.¹¹

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C. 2008: California Attorney General's Guidelines

In 2008, California's Attorney General set out guidelines intended to assist law enforcement in determining if collectives or cooperatives complied with state law.¹² The four factors were whether the collectives:

1. Formed a non-profit collective or statutory cooperative;
2. Obtained a seller's permit and paid sales tax to the Board of Equalization;
3. Served only verified patients; and
4. If city- or county-required, obtained a local business license.¹³

The guidelines explained the proper entity could be either a statutory cooperative under California Corporations Code section 12201 or some other form of entity that operates in a collective manner on a nonprofit basis.¹⁴ The most common entity operators have selected to fulfill this requirement to date is a mutual benefit nonprofit corporation.¹⁵

D. Limitations on Federal Enforcement i. The Cole Memo

In 2013, the Department of Justice (DOJ) released a detailed memo, known as the Cole Memo, outlining federal priorities with regard to state-licensed cannabis businesses.¹⁶ The Cole Memo outlined eight priorities that should guide the DOJ's enforcement of the Controlled Substance Abuse ("CSA").¹⁷ Among the priorities were common concerns, including: whether the business was engaged in black market activity; whether gangs or cartels were involved; whether the businesses were being used to launder money derived from other illegal sources, such as sales of other illegal drugs; whether children were getting access to cannabis; whether cannabis was being grown, distributed, or possessed on federal property and land; and whether the operation of dispensaries was causing an increase in driving under the influence of cannabis.¹⁸The Cole Memo explained that it was not enough that a state adopt a robust regulatory regime in concept, but that in practice the state's regulatory regime prevent cannabis businesses from undermining one of the eight priorities.¹⁹

ii. Rohrabacher-Farr Amendment

Each year since 2015, Congress has passed the Rohrabacher-Hinchey Amendment (now known as Rohrabacher-Farr Amendment).²⁰ The amendment prohibits the DOJ from spending any resources to enforce federal cannabis laws against individuals or businesses operating in compliance with state medical cannabis laws.²¹ The amendment has been used to dismiss several criminal prosecutions in California, and the dismissals have been upheld by the 9th Circuit Court of Appeals. The amendment does not extend to businesses for adult or recreational use of marijuana.²² Similarly, it does not extend to Native American tribes.²³ At the time of this writing, the Amendment is currently in effect through December 2017 and must be renewed each year.²⁴ Generally, the Amendment has been passed as a rider to a budget bill. House Speaker Paul Ryan has indicated that this amendment will need to go through the regular committee process in the future, making its passage more difficult than as a rider on an appropriations bill.

State law enforcement handles the vast majority of all criminal prosecutions in the country. The DOJ simply does not have adequate resources to prosecute every cannabis case violating federal law.²⁵ Therefore, if the Rohrabacher-Farr Amendment is in effect, any cannabis law enforcement is likely to take place strictly under California state law.

II. MCRSA and AUMA

After nearly twenty years of living under the gray market of the CUA, in September 2015, the California state legislature passed a trio of bills (Assembly Bill 266, Assembly Bill 242, and Senate Bill 643), collectively known as the Medical Marijuana Regulation and Safety Act ("MMRSA").²⁶ Together, these bills created an entirely new regulatory framework by creating clear rules, for the very first time, on state and local licensing for medical cannabis businesses. Since its passage, all references in California law to marijuana have been replaced by the word "cannabis." Therefore, these bills are now collectively known as MCRSA. MCRSA gave the state until January 2018 to develop regulations and implement the program.²⁷

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Following the passage of MCSRA, reform advocates gathered signatures and placed the Adult Use Marijuana Act ("AUMA") on the November 8, 2016, ballot. The initiative passed in November 2016, with a statewide majority of 57%.²⁸ AUMA instructs the state to craft regulations to govern the sale and distribution of non-medical (also known as adult use or recreational) cannabis.²⁹ AUMA was set to take effect on the same time line as MCRSA, with the state beginning to issue licenses after January 1, 2018.³⁰

In April 2017, the Bureau of Cannabis Control ("Bureau"), the main state agency in charge of regulating dispensaries, distributors, microbusinesses, and testing laboratories, released a first draft of regulations for MCRSA.³¹ At that time, the Bureau intended to release a draft of the AUMA regulations in August 2017. However, shortly thereafter, on June 15, 2017, the California Legislature passed Governor Jerry Brown's Budget Trailer Bill, which effectively repealed portions of MCRSA and added portions to AUMA to form one regulatory framework for both medicinal and adult use, now known as the Medical and Adult-Use Cannabis Regulation and Safety Act ("MAUCRSA").³² MAUCRSA harmonizes the MCRSA and AUMA rules and regulations. Therefore, to some extent MCRSA and AUMA are now mere historical footnotes, and MAUCRSA is the governing law for both medical and adult use cannabis in California.

III. MAUCRSA

MAUCRSA becomes effective January 1, 2018.³³ MAUCRSA's harmonization of the two regulatory frameworks makes it much more industry-friendly. As this article was being prepared for publication, regulations were expected to be released in mid- to late November 2017, with applications for licensing beginning to be accepted by the state in January of 2018.³⁴ While no regulations have been promulgated yet by the regulatory agencies, the following summary includes some of the concepts from the MCRSA draft regulations released in April 2017, to project some of the likely regulatory provisions under MAUCRSA. Given the fluid nature of these rules, it is critical to consult with an attorney prior to engaging in any project under MAUCRSA to ensure full understanding of the most up-to-date rules. All the rules below apply...