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California Cannabis Cultivators Face Legal Challenges as Temporary Licenses Expire

July 24, 2019 Articles
New Cannabis Ventures

California Cannabis Cultivators Stuck Without Licenses: Ab-97 Gives Some Relief, but Immediate Stop-Gap Measures Still Necessary

Over the past few months, thousands of California cannabis farms that had been operating legally with temporary state cultivation licenses have been forced to bring their operations to a grinding halt. While these farms generally continue to hold local approvals in their cities and counties, their temporary state cultivation licenses have expired and they are stuck waiting as the California Department of Food and Agriculture (CDFA) struggles to respond to a massive backlog of applications for permanent annual licenses. Farmers with limited resources, often through no fault of their own, are faced with the difficult decision of risking their livelihood or operating in the black market.

California law requires cannabis farms to obtain state licenses and comply with local cannabis regulatory ordinances. As this regulatory process has evolved over time, the government has offered three state license options:

https://www.newcannabisventures.com/wp-content/uploads/2019/07/California-license-graphic.jpg

The goal in granting temporary licenses was to allow cultivators to operate their farms legally while working toward obtaining a permanent annual license, which has more stringent requirements. The first part of the plan was successful—California issued 9,464 temporary licenses. Unfortunately, these temporary licenses are expiring faster than farms can obtain provisional or permanent annual licenses.

At the date of this publication, 97.8% of the temporary licenses have expired. By the end of July, all temporary licenses will expire. Under the current law, farms cannot renew or extend their temporary licenses. This means that after July, the only way to legally operate a cannabis farm is to operate under a permanent annual license or a provisional license.

CDFA is issuing provisional and permanent annual licenses at staggeringly slow pace. As of July 16, 2019, CDFA had only issued 2,053 provisional licenses and 230 permanent annual licensees to the original 9,464 farms that had temporary licenses. This means that 75.8% of California cannabis cultivators who received temporary licenses, and had been operating legally, have shuttered or are now stuck as they await provisional or permanent annual licenses.

The license backlog is partly explained by the complex license application process. The permanent annual farm license application is long and complicated, requiring prospective licensees to submit to background checks, provide surety bonds, real property documents, detailed farm management, waste management, security and pesticide protocols and site plans, as well as demonstrate compliance with the stringent California Environmental Quality Act (CEQA). The provisional license application is not materially less burdensome. The provisional license application has relaxed CEQA compliance requirements, but this only simplifies one small part of the licensing application. Thus, many farms continue to be frustrated by the other complexities in the provisional license application and CDFA’s slow response rate. Moreover, until recently, the only farms eligible for provisional licenses were farms that had previously obtained temporary licenses. Once farms successfully obtained a provisional license, they could only hold it for one year and had no option for renewal.

At the time of this writing we are unaware of state enforcement actions against farmers who have expired temporary licenses, but are otherwise operating in compliance with their local cannabis regulatory ordinances while they await provisional or permanent annual state licenses. However, state regulators have not made any official statements to give comfort to farmers in this position, and the penalties for conducting commercial cannabis activity without a license can be severe. California state licensing authorities can issue citations to unlicensed cannabis cultivators with fines up to $30,000 per violation. Moreover operating in the black market increases the farmer’s risk of federal enforcement.

Some good news for cannabis cultivators: On July 1, Governor Newsom signed Assembly Bill 97 into law, which will open the door for more provisional licenses. AB 97 removes the requirement that a farm must have previously held a temporary license in order to obtain a provisional license. This means that a whole new set of cannabis farms that want to enter the legal industry are now eligible for provisional licenses. AB 97 also allows farms that have obtained provisional licenses to renew their provisional license, giving them more time and flexibility before they achieve the CEQA compliance required for a permanent annual license. Lastly, when the CDFA issues or renews a provisional license, the CDFA must spell out the outstanding items that remain in order to qualify for a permanent annual license. This should help demystify the process in obtaining a permanent annual license. These new rules for provisional licenses will stay in effect until January of 2022.

The legislature is unlikely to extend temporary licenses: Although AB 97 offers some relief to cannabis farms, it does not solve the immediate problem for farms whose temporary licenses have expired. To help solve this problem, State Senator Mike McGuire sponsored Senate Bill 67. Under SB 67, as long as a farm obtained a temporary license and applied for a permanent annual license before the date of their temporary license expiration, SB 67 would reinstate and extend a farm’s temporary license until September 15, 2019. Thus, SB 67 proposed to buy farms a few extra months of time to operate legally while CDFA worked to clear its backlog. Unfortunately, the legislature is unlikely to move forward with SB 67. The deadline for SB 67 to move out of the Assembly agriculture committee has passed, and thus the bill has stalled. It appears that the legislators believe AB 97 largely addresses cannabis farm licensing concerns and they will be unlikely to pursue SB 67 any further. In the meantime, many cannabis farms must continue to sit and wait.

Jeffrey Hamilton is an attorney in Farella Braun + Martel’s San Francisco office, where he counsels companies of all sizes, from startups to publicly traded corporations, in a broad range of transactional matters. Hillary Mimnaugh is a summer associate at Farella and in her second year at Harvard Law School.

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