(1)The Control, Regulate and Tax Adult Use of Marijuana Act of 2016 (AUMA), an initiative statute approved as Proposition 64 at the November 8, 2016, statewide general election, authorizes a person who obtains a state license under AUMA to engage in commercial adult-use cannabis activity pursuant to that license and applicable local ordinances. AUMA authorizes legislative amendment of its provisions with a ²/₃ vote of both houses, without submission to the voters, to further its purposes and intent.

Existing law, as part of AUMA, requires all advertisements and marketing relating to the sale of cannabis or cannabis products, as specified, to accurately and legibly identify the licensee responsible for its content, by adding, at a minimum, the licensees license number.

This bill would make a violation of that provision requirement by a cannabis-related business licensee, or by a licensed or unlicensed cannabis-related business using a fictitious license number, subject to a civil penalty of $10,000 per incident. incident, but would require a business to be provided 48 hours to correct its first violation prior to being subject to the civil penalty. The bill would continuously appropriate the funds from these civil penalties to the Department of Justice Board of State and Community Corrections to provide grants to cities, counties, and cities and counties to fund cannabis control officers, as provided, thereby making an appropriation. The bill would declare that these provisions further the purposes and intent of AUMA.

(2)Existing law prohibits a person who has under his or her management or control any building, room, space, or enclosure, either as an owner, lessee, agent, employee, or mortgagee, from knowingly renting, leasing, or making available for use, with or without compensation, the building, room, space, or enclosure for the purpose of unlawfully manufacturing, storing, or distributing any controlled substance for sale or distribution, punishable by imprisonment in a county jail for not more than one year, or by imprisonment in a county jail for 16 months, or 2 or 3 years. Under existing law, cannabis is a Schedule I controlled substance.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

(1)The Control, Regulate and Tax Adult Use of Marijuana Act of 2016 (AUMA), an initiative statute approved as Proposition 64 at the November 8, 2016, statewide general election, authorizes a person who obtains a state license under AUMA to engage in commercial adult-use cannabis activity pursuant to that license and applicable local ordinances. AUMA authorizes legislative amendment of its provisions with a ²/₃ vote of both houses, without submission to the voters, to further its purposes and intent.

Existing law, as part of AUMA, requires all advertisements and marketing relating to the sale of cannabis or cannabis products, as specified, to accurately and legibly identify the licensee responsible for its content, by adding, at a minimum, the licensees license number.

This bill would make a violation of that provision by a cannabis-related business licensee, or by a licensed or unlicensed cannabis-related business using a fictitious license number, subject to a civil penalty of $10,000 per incident. The bill would continuously appropriate the funds from these civil penalties to the Department of Justice to provide grants to cities, counties, and cities and counties to fund cannabis control officers, as provided, thereby making an appropriation. The bill would declare that this provision furthers these provisions further the purposes and intent of AUMA.

(2)Existing law prohibits a person who has under his or her management or control any building, room, space, or enclosure, either as an owner, lessee, agent, employee, or mortgagee, from knowingly renting, leasing, or making available for use, with or without compensation, the building, room, space, or enclosure for the purpose of unlawfully manufacturing, storing, or distributing any controlled substance for sale or distribution, punishable by imprisonment in a county jail for not more than one year, or by imprisonment in a county jail for 16 months, or 2 or 3 years. Under existing law, cannabis is a Schedule I controlled substance.

This bill would require, in the case of cannabis, a person who commits the above-described offense and who obtains excessive profits, as defined, from the use of the building, room, space, or enclosure to be punished by imprisonment in a county jail for 2, 3, or 4 years. By creating a new crime, the bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

Under existing law, as added by Proposition 7 of the November 7, 1978, statewide general election, and further amended by initiative statutes, the penalty for a defendant found guilty of murder in the first degree is death or imprisonment in the state prison for life without the possibility of parole, if one or more enumerated special circumstances have been found to be true.

This bill would make technical, nonsubstantive changes to those provisions.

Date of Hearing:

Counsel: Matthew Fleming

ASSEMBLY COMMITTEE ON PUBLIC SAFETY

Reginald Byron Jones-Sawyer, Sr., Chair

ABPCA Bill Id:AB 2866

Author:(Cooper) – As Amended Ver:April 19, 2018

SUMMARY: Subjects cannabis businesses to a $10,000 civil penalty for using a fictitious license number in advertising or marketing and allows for asset forfeiture of excessive profits derived from knowingly renting space for unlawful cannabis distribution. Appropriates the revenue obtained from the fines and excessive profits to the Board of State and Community Corrections (BSCC) to fund grant programs for local cannabis control officers. Specifically, this bill:

1. Specifies that the cannabis license number required to be included in all advertisements and marketing must be legitimate.
2. Subjects cannabis businesses to a $10,000 civil penalty for using a fictitious license number in any advertising or marketing where there is an agreement for advertising or marketing.
3. Provides cannabis businesses the opportunity to correct their first violation within 48 hours without being subjected to the $10,000 penalty.
   
4. Provides for the seizure of any excessive profits derived from knowingly renting a building, room or space to someone who is unlawfully manufacturing, storing, or distributing cannabis.
   
5. Appropriates penalty revenue obtained from fines and the excessive profits seized pursuant to these provisions to the BSCC to fund grant programs for local cannabis control officers under the following parameters:
   1. The city, county, or city and county shall have an ordinance allowing cannabis businesses to operate within its jurisdiction;
   2. There shall be an active cannabis business either operating within the jurisdiction or a cannabis business with a license application currently pending within the jurisdiction. The department may approve a grant before a cannabis business is active, but shall not release the funding until the cannabis business is operating; and,
   3. Cities, counties, or cities and counties that enact an ordinance allowing cannabis businesses after January 1, 2019, shall have priority for funding.

EXISTING LAW:

1. Makes it an alternate felony misdemeanor to knowingly rent or make available any building, room, space, or enclosure to someone who uses it for the purposes of unlawfully manufacturing, storing or distributing a controlled substance. (Health & Saf., § 11366.5, subd. (a).)
   
2. Makes a second conviction for to knowingly rent or make available any building, room, space, or enclosure to someone who uses it for the purposes of unlawfully manufacturing, storing or distributing a controlled substance a felony. (Health & Saf., § 11366.5, subd. (c).)
   
3. Makes it a felony to knowingly rent or make available any building, room, space, or enclosure to someone who uses it for the purposes of unlawfully manufacturing, storing or distributing certain controlled substances such as cocaine, heroin, methamphetamine if the person obtained “excessive profits” from renting or making the space available. (Health & Saf., § 11366.5, subd. (b).)
   
4. Defines “excessive profits” as substantially higher than fair market value. (Health & Saf. Code, § 11366.5, subd. (d).)
   
5. Establishes an asset-forfeiture procedure for drug-related cases. (Health & Saf. Code, §§ 11469-11495.)
   
6. Describes the items and property that are subject to drug asset forfeiture. (Health & Saf. Code, § 11470.)
   
7. Provides for the forfeiture of real property that is knowingly rented or made available any building, room, space, or enclosure to someone who uses it for the purposes of unlawfully manufacturing, storing or distributing a controlled substance. (Health & Saf. Code, § 11470, subd. (g).)
   
8. Provides for the forfeiture of money that is traceable to, or used to facilitate any offense that involves manufacture, sale, possession for sale, offer for sale, or offer to manufacture a controlled substance, or conspiracy to commit at least one of those offenses. (Health & Saf. Code, § 11470, subd. (f).)
   
9. Provides a scheme for the distribution of funds from forfeitures and seizures; specifically, after distribution to any bona fide innocent owners and reimbursement of expenses, 65% of proceeds go to participating law enforcement agencies, 10% to the prosecutorial agency, 24% to the General Fund, and 1% to nonprofit group of prosecutors to provide forfeiture education. (Health & Saf. Code § 11489.)
   
10. Specifies detailed procedures for a drug forfeiture action, including: the filing of a petition for forfeiture within one year of seizure, notice of seizure, publication of notice, the right to a jury trial, and a motion for return of property. (Health & Saf. Code, § 11488.4.)
11. Specifies that forfeiture does not require a conviction on an underlying drug offense where the property sought to be forfeited is cash or negotiable securities under $40,000, and allows forfeiture upon a burden of proof of “clear and convincing evidence” under these circumstances. (Health & Saf. Code, § 11488.4, subd. (i)(4).)
    
12. Punishes an aider and abettor of a crime as a principal if the aider and abettor is aware of the perpetrator’s criminal purpose and offers aid or encouragement with the intent of facilitating the commission of the crime. (Pen. Code, § 31; People v. Beekman (1984) 35 Cal. 3d 547, 560-61.)
    
13. Enacts the Medicinal and Adult-Use Cannabis Regulation and Safety Act to provide for a comprehensive regulatory framework for the cultivation, distribution, transport, storage, manufacturing, processing, and sale of medicinal and adult-use cannabis. (Business and Professions Code (Bus. And Prof. Code, §§ 26000 et al.)
14. Defines an “A-license” as a state license issued for cannabis or cannabis products intended for adults 21 years of age and older and “M-license” as a state license for commercial cannabis activity involving medicinal cannabis. (Bus. And Prof. Code, § 26001.)
15. Provides for twenty total types of cannabis licenses including subtypes for cultivation, manufacturing, testing, retail, distribution, and microbusiness; requires each licensee except for testing laboratories to clearly designate whether their license is for adult-use or medicinal cannabis. (Bus. And Prof. Code, § 26050.)
16. Establishes the Bureau of Cannabis Control (BCC) within the Department of Consumer Affairs, previously named the Bureau of Marijuana Control, the Bureau of Medical Cannabis Regulation, and the Bureau of Medical Marijuana Regulation, for purposes of regulating microbusinesses, transportation, storage, distribution, testing, and sale of cannabis and cannabis products within the state. (Bus. And Prof. Code, § 26010.)
17. Establishes grounds for disciplinary action against cannabis licensees, including failures to comply with state licensing requirements as well as local laws and ordinances. (Bus. And Prof. Code, § 26030.)
18. Subjects cannabis businesses operating without a license to civil penalties of up to three times the amount of the license fee for each violation in addition to any criminal penalties. (Bus. And Prof. Code, § 26038.)
19. Requires that all advertisements and marketing accurately and legibly identify the licensee responsible for its content, by adding, at a minimum, the licensee’s license number, and prohibits a technology platform from displaying an advertisement by a licensee on an Internet Web page unless the advertisement displays the license number. (Bus. And Prof. Code, § 26151.)
20. Authorizes the Legislature to, by majority vote, enact laws to implement the state’s regulatory scheme for cannabis, provided those laws are consistent with the purposes and intent of the Control, Regulate and Tax Adult Use of Marijuana Act (Proposition 64). (Bus. And Prof. Code, § 26000.)

FISCAL EFFECT:

Unknown

COMMENTS:

1. Author's Statement: According to the author, “The marijuana black market is already having a devastating impact on responsible cannabis business owners who are doing the right thing and are playing by the rules. These legitimate businesses are already under strict guidelines and paying fees and taxes to make sure their businesses are above board. These businesses should not have to also bear the burden of the black market undercutting them on the prices of cannabis products and intentionally skipping over the law for profit. This bill will hold black market operators accountable by setting civil and criminal penalties for violating the rules of advertisement and manufacturing.”
   
2. Background on Cannabis Laws in California:
   
   1. Early Cannabis Laws: Consumption of cannabis was first made lawful in California when voters approved Proposition 215 in 1996. Prop 215 was known as the Compassionate Use Act. Prop 215 protected qualified patients and caregivers from prosecution related to the possession and cultivation of cannabis for medicinal purposes, if recommended by a physician. The initiative prohibited physicians from being punished or denied any right or privilege for making a medicinal cannabis recommendation to a patient. Prop 215 also included findings and declarations, including encouragement of the federal and state government to implement a plan to provide for the safe and affordable distribution of cannabis to patients with medical needs.

The regulatory scheme for medicinal cannabis was further refined by SB 420 (Vasconcellos) in 2003, which established the state’s Medical Marijuana Program (MMP.) Under the MMP, qualified patients were eligible to obtain a voluntary medical marijuana patient card, which could be used to verify that the patient or a caregiver had authorization to cultivate, possess, transport, or use medicinal cannabis. Under the MMP, a patient would obtain a recommendation for medicinal cannabis from a physician and submit proof to their county of residence to receive a card. The MPP’s identification cards were intended to help law enforcement officers identify and verify that cardholders were allowed to cultivate, possess, and/or transport limited amounts of cannabis without being subject to arrest. The MMP also created protections for qualified patients and primary caregivers from prosecution for the formation of collectives and cooperatives for medicinal cannabis cultivation.

• 1. Medical Cannabis Regulation and Safety Act: After several attempts to improve the state’s regulation of cannabis, the Legislature passed the Medical Cannabis Regulation and Safety Act (MCRSA) in 2015. MCRSA consisted of a package of legislation: AB 243 (Wood); AB 266 (Bonta, Cooley, Jones-Sawyer, Lackey, and Wood); and SB 643 (McGuire). MCRSA established, for the first time, a comprehensive statewide licensing and regulatory framework for the cultivation, manufacture, transportation, testing, distribution, and sale of medicinal cannabis to be administered by the newly established BCC within Department of Consumer Affairs, the Department of Public Health, and the Department of Food and Agriculture, with implementation relying on each agency’s area of expertise.

MCRSA vested authority for:

• The BSCC to issue licenses and regulate dispensaries, distributors, and transporters, and to provide oversight for the state’s regulatory framework;
• The Department of Public Health to license and regulate testing laboratories and manufacturers; and,
  
• The Department of Food and Agriculture to license and regulate cultivators.

While entrusting state agencies to promulgate extensive regulations governing the implementation of the state’s cannabis laws, MCRSA fully preserved local control. Under MCRSA, local governments may establish their own ordinances to regulate medicinal cannabis activity. Local jurisdictions may also choose to ban cannabis altogether.

• 1. Proposition 64: Not long after the Legislature enacted MCRSA, California voters passed Proposition 64, the Adult Use of Marijuana Act (AUMA). The passage of the AUMA legalized cannabis for non-medicinal adult use in a private home or licensed business, allowed adults 21 and over to possess and give away up to approximately one ounce of cannabis and up to eight grams of concentrate, and permitted the personal cultivation of up to six plants. The law sustained prohibitions against smoking in or operating a vehicle while under the effects of cannabis, possessing cannabis at a school or other child oriented facility while kids are present, growing in an unlocked or public place, and providing cannabis to minors.
     

Under Proposition 64, counties and municipalities were given the authority to restrict where cannabis businesses could be located. In addition, local governments are permitted to ban the sale of cannabis in their jurisdiction entirely. According to a recent study cited by San Jose’s Mercury news, one in three California cities permit any kind of cannabis business. (https://www.mercurynews.com/2018/04/15/exclusive-analysis-only-one-in-seven-california-cities-allow-recreational-marijuana-sales/.)

In addition, Proposition 64 established two new excise taxes on cannabis. Both the cultivation and the retail sale of cannabis are taxed, and the money is deposited with one of several different agencies or organizations in order to promote drug research, treatment, and enforcement. Significantly, California universities receive $10 million annually for 11 years in order to research and evaluate the legalization of cannabis and in order to make policy change recommendations to the California Legislature and the Governor. In addition, the California Highway patrol receives $3 million annually to develop enforcement protocols.

1. Asset Forfeiture: This bill would create a special provision in the law allowing the seizure of excessive profits obtained as a result of knowingly renting a space to an unlawful cannabis distributor in violation of Penal Code Section 11366.5. This bill does not refer to this directly as “asset forfeiture,” but it does endeavor to channel any seized proceeds into a special grant to fund cannabis enforcement and/or regulation.
   

The law typically uses the term “seizure” to refer to the taking and holding of evidence that may be associated with a crime in order to use those items as proof in a later criminal trial. Cash proceeds from a drug deal, for example, may be “seized” at the time of an arrest. Forfeiture, by contrast, is typically done after the trial has resulted in a conviction. Forfeiture refers to the process by which the cash proceeds are distributed to law enforcement and other entities within the jurisdiction. The Institute of Justice has published an explanation of these related, but distinct, legal terms. (See http://ij.org/seizure-vs-forfeiture-crucial-distinction/.)

Civil asset forfeiture has allowed the government to seize and keep cash, cars, real estate, and any other property suspected of being connected to criminal activity even if the owner is never convicted of a crime. “For this reason, “[s]tatutes imposing forfeitures are not favored and are to be strictly construed in favor of the persons against whom they are sought to be imposed. This disfavor applies notwithstanding the strong governmental interest in stemming illegal drug transactions.” (People v. $10,153.38 in United States Currency (2009) 179 Cal.App.4th 1520, 1525-1526.)

In California, the legislature has established a clear process for how civil forfeiture must be executed. (Health & Saf. Code, § 11488.4.) There is also a clear formula for how the proceeds of asset forfeiture must be distributed. (See Health & Saf. Code § 11489.) Just two years ago, SB 443 (Mitchell) Chapter revised and curtailed California’s drug asset forfeiture laws. In doing so, significant protections were put in place to avoid unseemly use of the civil asset forfeiture system that has drawn sharp criticism from various media outlets. (See e.g. Freidsdorf, “The Injustice of Civil-Asset Forfeiture,” The Atlantic, May 12, 2015, [https://www.theatlantic.com/politics/archive/2015/05/the-glaring-injustice-of-civil-asset-forfeiture/392999/]; Ungar “A New IRS Horror Story that Makes Past Scandals Pale in Comparison,” Forbes, Oct. 27, 2015, [https://www.forbes.com/sites/rickungar/2014/10/27/a-new-irs-horror-story-that-makes-past-scandals-pale-in-comparison/#35952b2d12c8]; Wing, “Feds Swiped $11,000 from an Innocent Student. Now, they’re Paying Him Back” The Huffington Post, Nov. 30, 2016, [https://www.huffingtonpost.com/entry/charles-clarke-civil-forfeiture_us_583f2470e4b0c68e047e52ec.])

This bill would add a unique asset forfeiture provision that would apply to the excessive profits derived from knowingly renting a building, room or space to someone who is unlawfully manufacturing, storing, or distributing cannabis. This creates three potential policy concerns. First, because this bill would amend the criminal statute, rather than the asset forfeiture statute, it may be susceptible to an interpretation that the protections put in place by SB 443 and other legislative efforts do not apply.

Second, this bill would ignore the current system of distribution of forfeiture assets which requires 65% to go to participating law enforcement entities, 10% to participating prosecution entities, and 24% to be placed in the State’s general fund. The bill would cut those entities out of sharing in the proceeds in favor of more cannabis enforcement and/or regulation. It should be noted that the excessive profits this bill targets are already subject to asset forfeiture as money that was “intended to facilitate” the unlawful possession of marijuana for sale. (Health & Saf. Code, § 11470, subd. (f).)

Finally, this bill would divert all proceeds from forfeiture into a fund for more cannabis enforcement personnel. Therefore, the same people who are enforcing this bill’s provisions are going to be paid and outfitted by it. The legislature has specifically declared that revenue generated from asset forfeiture “must not be allowed to jeopardize … the integrity of ongoing investigations.” (Health & Saf. Code, § 11469, subd. (a).) This bill may create an appearance of impropriety if the same officers who enforce its provisions are being paid from a fund that it alone creates.

1. Related Legislation:
   
   1. AB 2520 (Cooper) would establish the Illegal Marijuana Task Force to analyze and make recommendations regarding he cultivation or distribution of marijuana. AB 2520 is pending in the Assembly Businesses and Professions Committee.
      
   2. AB 3208 (Cooper) would have authorized the City of Elk Grove to adopt an ordinance allowing the city to confiscate and seek an order of civil forfeiture of real or personal property for violations of the city’s ordinances. AB 3208 failed passage in the Assembly Public Safety Committee on April 17, 2018.
      
   3. AB 2899 (Rubio) would clarify that the license number required for advertising and marketing of cannabis businesses is an A-license or M-license issued by the state.
      
   4. AB 3261 (Committee on Business and Professions) would make various clarifying and technical changes to the state’s cannabis laws.
2. Prior Legislation: SB 443 (Mitchell) Chapter 831 Statutes of 2016 required a conviction prior to California law enforcement agencies sharing in the proceeds of drug asset forfeiture in joint federal-state task force cases, except for seizures of cash in excess of $40,000, prohibited “adoption” by federal authorities of California law enforcement drug asset seizures, and required additional data in the California Department of Justice report on California drug asset forfeiture.

REGISTERED SUPPORT / OPPOSITION:

Support

None

Opposition

American Civil Liberties Union

Analysis Prepared by:

Matthew Fleming / PUB. S. / (916) 319-3744

Date of Hearing: April 17, 2018

ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS

Evan Low, Chair

ABPCA Bill Id:AB 2866

Author:(Cooper) – As Amended Ver:April 4, 2018

SUBJECT: Cannabis regulation.

SUMMARY: Subjects cannabis businesses to a $10,000 civil penalty for failure to include their legitimate license number in any advertising or marketing, appropriating penalty revenue to the state Department of Justice to fund grant programs for local cannabis control officers. Additionally criminalizes landlords who derive excessive profits from knowingly renting, leasing, or making available for use a property used to sell or distribute cannabis.

EXISTING LAW:

1. Enacts the Medicinal and Adult-Use Cannabis Regulation and Safety Act to provide for a comprehensive regulatory framework for the cultivation, distribution, transport, storage, manufacturing, processing, and sale of medicinal and adult-use cannabis. (Business and Professions Code (BPC) §§ 26000 et al.)
2. Defines an “A-license” as a state license issued for cannabis or cannabis products intended for adults 21 years of age and older and “M-license” as a state license for commercial cannabis activity involving medicinal cannabis. (BPC § 26001)
3. Provides for twenty total types of cannabis licenses including subtypes for cultivation, manufacturing, testing, retail, distribution, and microbusiness; requires each licensee except for testing laboratories to clearly designate whether their license is for adult-use or medicinal cannabis. (BPC § 26050)
4. Establishes the Bureau of Cannabis Control (BCC) within the Department of Consumer Affairs, previously named the Bureau of Marijuana Control, the Bureau of Medical Cannabis Regulation, and the Bureau of Medical Marijuana Regulation, for purposes of regulating microbusinesses, transportation, storage, distribution, testing, and sale of cannabis and cannabis products within the state. (BPC § 26010)
5. Requires the BCC to convene an advisory committee to advise state licensing authorities on the development of standards and regulations for legal cannabis, including best practices and guidelines that protect public health and safety while ensuring a regulated environment for commercial cannabis activity that does not impose such barriers so as to perpetuate, rather than reduce and eliminate, the illicit market for cannabis. (BPC § 26014)
6. Provides the Department of Food and Agriculture with responsibility for regulating cannabis cultivators. (BPC § 26060)
7. Provides the Department of Public Health with responsibility for regulating cannabis manufacturers. (BPC § 26130)
8. Establishes grounds for disciplinary action against cannabis licensees, including failures to comply with state licensing requirements as well as local laws and ordinances. (BPC § 26030)
9. Subjects cannabis businesses operating without a license to civil penalties of up to three times the amount of the license fee for each violation in addition to any criminal penalties. (BPC § 26038)
10. Requires that all advertisements and marketing accurately and legibly identify the licensee responsible for its content, by adding, at a minimum, the licensee’s license number, and prohibits a technology platform from displaying an advertisement by a licensee on an Internet Web page unless the advertisement displays the license number. (BPC § 26151)
11. Expresses that state cannabis laws shall not be interpreted to supersede or limit the authority of a local jurisdiction to adopt and enforce local ordinances to regulate cannabis businesses. (BPC § 26200)
12. Authorizes the Legislature to, by majority vote, enact laws to implement the state’s regulatory scheme for cannabis, provided those laws are consistent with the purposes and intent of the Control, Regulate and Tax Adult Use of Marijuana Act (Proposition 64). (BPC § 26000)
13. Punishes any person who has under his or her management or control any building, room, space, or enclosure, either as an owner, lessee, agent, employee, or mortgagee, who knowingly rents, leases, or makes available for use, with or without compensation, the building, room, space, or enclosure for the purpose of unlawfully manufacturing, storing, or distributing any controlled substance for sale or distribution with imprisonment in the county jail for not more than one year. (Health and Safety Code § 11366.5)

THIS BILL:

1. Specifies that the cannabis license number required to be included in all advertisements and marketing must be legitimate.
2. Subjects cannabis businesses to a $10,000 civil penalty for failure to include their legitimate license number in any advertising or marketing, continuously appropriating penalty revenue to the state Department of Justice to fund grant programs for local cannabis control officers under the following parameters:
   1. The city, county, or city and county shall have an ordinance allowing cannabis businesses to operate within its jurisdiction.
   2. There shall be an active cannabis business either operating within the jurisdiction or a cannabis business with a license application currently pending within the jurisdiction. The department may approve a grant before a cannabis business is active, but shall not release the funding until the cannabis business is operating.
   3. Cities, counties, or cities and counties that enact an ordinance allowing cannabis businesses after January 1, 2019, shall have priority for funding.
3. Punishes landlords who derive excessive profits from renting, leasing, or making available for use a property used to sell or distribute cannabis with imprisonment for two to four years.

FISCAL EFFECT: Unknown; this bill is keyed fiscal by the Legislative Counsel.

COMMENTS:

Purpose. This bill is sponsored by the California Cannabis Manufacturers Association. According to the author:

The marijuana black market is already having a devastating impact on responsible cannabis business owners who are doing the right thing and are playing by the rules. These legitimate businesses are already under strict guidelines and paying fees and taxes to make sure their businesses are above board. These businesses should not have to also bear the burden of the black market undercutting them on the prices of cannabis products and intentionally skipping over the law for profit. This bill will hold black market operators accountable by setting civil and criminal penalties for violating the rules of advertisement and manufacturing.

Background.

Early History of Cannabis Regulation in California. Consumption of cannabis was first made lawful in California when voters approved Proposition 215 in 1996, or the Compassionate Use Act. Prop 215 protected qualified patients and caregivers from prosecution related to the possession and cultivation of cannabis for medicinal purposes, if recommended by a physician. The initiative prohibited physicians from being punished or denied any right or privilege for making a medicinal cannabis recommendation to a patient. Prop 215 also included findings and declarations, including encouragement of the federal and state government to implement a plan to provide for the safe and affordable distribution of cannabis to patients with medical needs.

The regulatory scheme for medicinal cannabis was further refined by SB 420 (Vasconcellos) in 2003, which established the state’s Medical Marijuana Program (MMP.) Under the MMP, qualified patients were eligible to obtain a voluntary medical marijuana patient card, which could be used to verify that the patient or a caregiver had authorization to cultivate, possess, transport, or use medicinal cannabis. Under the MMP, a patient would obtain a recommendation for medicinal cannabis from a physician and submit proof to their county of residence to receive a card. The MPP’s identification cards were intended to help law enforcement officers identify and verify that cardholders were allowed to cultivate, possess, and/or transport limited amounts of cannabis without being subject to arrest. The MMP also created protections for qualified patients and primary caregivers from prosecution for the formation of collectives and cooperatives for medicinal cannabis cultivation.

Since the state did not adopt a formal framework to provide for appropriate licensure and regulation of medicinal cannabis until late 2015, a proliferation of informally regulated cannabis collectives and cooperatives were largely left to the enforcement of local governments. As a result, a patchwork of local regulations was created with little statewide involvement. More restrictive laws and ordinances by cities and counties were ultimately upheld by the California Supreme Court in City of Riverside v. Inland Empire Patients (2013) 56 Cal. 4^th 729, which held that state law did not expressly or implicitly limit the inherent authority of a local jurisdiction, by its own ordinances, to regulate the use of its land, including the authority to provide that facilities for the distribution of medicinal cannabis be prohibited from operating within its borders.

Even after several years of legal cannabis cultivation and consumption under state law, a lack of a uniform regulatory framework led to persistent problems across the state. Cannabis’s continued illegality under the federal Controlled Substances Act, which classifies cannabis as a Schedule I drug ineligible for prescription, generated periodic enforcement activities by the United States Department of Justice. The constant threat of action by the federal government created apprehension among California’s cannabis community.

A document issued by the United States Attorney General in 2013 known as the “Cole memorandum” indicated that the existence of a strong and effective state regulatory system, and a cannabis operation’s compliance with such a system, could allay the threat of federal enforcement interests. Federal prosecutors were urged under the memo to review cannabis cases on a case-by-case basis and consider whether a cannabis operation was in compliance with a strong and effective state regulatory system prior to prosecution. The memo was followed by Congress’s passage of the Rohrabacher-Farr amendment, which prohibits the United States Department of Justice from interceding in state efforts to implement medicinal cannabis.

MCRSA. After several attempts to improve the state’s regulation of cannabis, the Legislature passed the Medical Cannabis Regulation and Safety Act (MCRSA) in 2015. MCRSA consisted of a package of legislation: AB 243 (Wood); AB 266 (Bonta, Cooley, Jones-Sawyer, Lackey, and Wood); and SB 643 (McGuire). MCRSA established, for the first time, a comprehensive statewide licensing and regulatory framework for the cultivation, manufacture, transportation, testing, distribution, and sale of medicinal cannabis to be administered by the newly established BCC within Department of Consumer Affairs, the Department of Public Health, and the Department of Food and Agriculture, with implementation relying on each agency’s area of expertise.

MCRSA vested authority for:

• The BCC to issue licenses and regulate dispensaries, distributors, and transporters, and to provide oversight for the state’s regulatory framework;
• The Department of Public Health to license and regulate testing laboratories and manufacturers; and
  
• The Department of Food and Agriculture to license and regulate cultivators.

While entrusting state agencies to promulgate extensive regulations governing the implementation of the state’s cannabis laws, MCRSA fully preserved local control. Under MCRSA, local governments may establish their own ordinances to regulate medicinal cannabis activity. Local jurisdictions may also choose to ban cannabis altogether.

AUMA. Not long after the Legislature enacted MCRSA, California voters passed Proposition 64, the Adult Use of Marijuana Act (AUMA). The passage of the AUMA legalized cannabis for non-medicinal adult use in a private home or licensed business, allowed adults 21 and over to possess and give away up to approximately one ounce of cannabis and up to eight grams of concentrate, and permitted the personal cultivation of up to six plants. The law sustained prohibitions against smoking in or operating a vehicle while under the effects of cannabis, possessing cannabis at a school or other child oriented facility while kids are present, growing in an unlocked or public place, and providing cannabis to minors.

The proponents of the AUMA sought to make use of much of the regulatory framework and authorities set out by MCRSA while making a few notable changes to the structure still being implemented. In addition, the AUMA approved by the voters adopted the January 1, 2018 deadline for state implementation of non-medicinal cannabis in addition to the regulations required in MCRSA that are scheduled to take effect on the same date. The same agencies given authority under MCRSA remain responsible for implementing regulations for adult use.

Under the AUMA, the BCC within the Department of Consumer Affairs continues to serve as the lead regulatory agency for all cannabis, both medicinal and non-medicinal. The AUMA includes 19 different license types compared to the 17 in MCRSA and authorizes Department of Consumer Affairs (and the BCC) the exclusive authority to create and regulate a license for transportation of cannabis. The AUMA also allows for vertical integration models which allow the holding of multiple license types previously prohibited under MCRSA. Additionally, while MCRSA requires both a state and local license to operate, the AUMA only stipulates a state license; however, the state is also directed not to issue a license to an applicant if it would “violate the provisions of any local ordinance or regulation.”

The language of the AUMA allows for legislative modifications that “implement” or “give practical effect” to the law by a majority vote. However, what constitutes “implementing” has been interpreted to be very limited. Consequently, proposed changes on the whole, require a two-thirds vote and of those, some may be deemed to require subsequent voter approval.

MAUCRSA. In the spring of 2017, SB 94 (Committee on Budget and Fiscal Review) was introduced to reconcile the distinct systems for the regulation, licensing, and enforcement of legal cannabis that had been established under the respective authorities of MCRSA and the AUMA. The single consolidated system established by the bill—known as the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA)—created a unified series of cannabis laws and deleted redundant code sections no longer necessary due to the combination of the two systems. MAUCRSA also clarified a number of components, including but not limited to licensing, local control, taxation, testing, and edibles.

As of January 1, 2018, the state has begun issuing temporary licenses (adult-use and medicinal) to cannabis businesses as the state’s regulatory agencies worked toward the finalization of their regulations. While an electronic Track-and-Trace system was implemented pursuant to MAUCRSA, it is not currently being used for temporary licensees. The state’s emergency regulations require temporary licensees to document all sales and transfers of cannabis and cannabis products between temporary licensees—or between temporary licensees and annual licensees—by using paper sales invoices or shipping manifests. Other licensing requirements will not be enforced until the completion of a grace period later in the year. Collectives and cooperatives previously authorized to engage in unlicensed cannabis cultivation are allowed to continue operating until January 9, 2019.

Regulation of Advertisements and Marketing. Existing law generally requires that all advertisements and marketing of cannabis businesses display information regarding the licensee responsible for the content, which must include “the licensee’s license number.” This requirement applies to all cannabis-related advertising, which must also be “truthful and appropriately substantiated.” Advertising and marketing in broadcast, cable, radio, print, and digital communications is limited to venues where at least 71.6 percent of the audience is reasonably expected to be 21 years of age or older, and direct marketing must verify age.

The requirement that all advertisers verify and display a cannabis business’s state license has resulted in regulatory scrutiny, as many platforms and publishers have been accused of shirking the law. In February of 2018, the Assembly Committee on Business and Professions held an informational hearing entitled Cannabis Regulation: An Update on Statewide Implementation. During this hearing, legislators cited specific examples of cannabis advertising where license numbers did not appear to be displayed. In May of 2018, the City of Sacramento put a local weekly newspaper on notice for advertising cannabis businesses that did not appear to be licensed. The city issued a similar threat to a popular internet site aimed at marketing local cannabis retailers, which did not consistently display current license numbers on its pages.

Internet Advertising and Enforceability. In addition to general provisions governing the advertising and marketing of cannabis businesses, statute further specifies that “a technology platform shall not display an advertisement by a licensee on an Internet Web page unless the advertisement displays the license number of the licensee.” In the wake of the development of California’s legal cannabis market, a number of online advertisers have begun soliciting and accepting agreements to advertise cannabis businesses such as dispensaries and retail stores. Public awareness of websites that exclusively advertise cannabis-related businesses has grown alongside the state’s regulatory scheme, as a series of tech startups have competed for market share dominance in a burgeoning industry.

Meanwhile, regulators and policymakers have criticized higher-profile internet platforms engaged in cannabis business advertising for circumventing state laws and regulations, including the requirement that webpages feature the license number of any advertised cannabis licensee. Adding confusion to these criticisms was the lack of clarity about how technology platforms are expected to comply with the law when some dispensaries – including collectives and cooperatives currently operating under a legal grace period – operate lawfully but do not possess state license numbers. In order to provide clearer direction to websites following complaints that some advertisers substituted internal tracking numbers for state license numbers on cannabis business profiles, this bill specifies that the license number must be “legitimate.”

While a productive discussion has been sustained between internet platforms and state regulators in regards to how cannabis businesses’ license statuses should be verified and displayed for businesses that advertise online, these conversations have taken place within a shadow of doubt as to whether the state has authority to enforce its requirements against websites. A federal law commonly referred to as Section 230 of the Communications Decency Act (“CDA § 230”) has been traditionally interpreted by courts as providing broad immunity for internet service providers and internet websites against responsibility for content posted by third parties. Specifically, 47 U.S.C. § 230 states that “no provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.”

CDA § 230 has been cited by a number of websites that allow third party users to directly upload and manage their own content. First Amendment advocates believe this legal shield is critical as the internet continues to serve as a bastion of free speech. Numerous mainstream sites frequently cite the federal law whenever criticisms of user-generated content are levied, with an insistence that good actors take voluntary steps to prevent illicit site activity but that internet companies are themselves incapable of being held legally responsible for that activity.

In October of 2016, California Attorney General Kamala D. Harris filed criminal charges against corporate officers for the website Backpage.com, formally bringing allegations that the site had long willfully enabled sex trafficking and prostitution by criminal enterprises. State prosecutors acknowledged the obstacles posed by CDA § 230 in their effort to hold Backpage accountable for its engagement in unlawful activity. Initial filings included accusations of deliberate participation in the illegalities executed through the site, offering evidence that Backpage derived the overwhelming majority of its revenue from the site’s “adult” section and created content for affiliated sites linked to sex trafficking. Nevertheless, it was ruled that Backpage was still immunized against responsibility for criminal content on the site due to CDA § 230.

Ultimately, Congress passed H.R. 1895, referred to as “FOSTA-SESTA,” which specifically exempted advertisements for prostitution from the protections offered under CDA § 230. Following the bill’s signature into federal law, the CEO of Backpage entered into a plea agreement for conspiracy and money laundering, and the website was finally shut down. However, the amendments made to CDA § 230 very specifically targeted sex trafficking advertisements like those under Backpage, and the federal law remains a substantial impediment to enforcement against advertisers of cannabis businesses.

It is worth noting that MAUCRSA’s advertisement and marketing requirements do not only apply to internet platforms dealing exclusively in cannabis business listings. Domains frequently included in the Alexa Top 50 websites visited in the United States that advertise mainstream businesses like restaurants, service professionals, and retail stores include local listings for cannabis businesses. Like with cannabis-specific platforms, these websites frequently do not list license numbers for dispensaries and cannabis retailers. If regulators were to broaden their enforcement efforts to include these kinds of major websites, it is likely that CDA § 230 would be cited in their defense as well.

In light of the legal barriers to enforcing the state’s cannabis advertising laws against internet platforms, it is arguably advisable that any new laws or regulations do not seek exclusively to hold websites liable for their content. Instead, it may be more effective to target licensees and unlicensed businesses under the authority of the BCC and local law enforcement. Enhancing penalties for these entities may ultimately prove to be a more effective way to enable consumers to clearly identify lawfully operated cannabis businesses.

Landlord Liability for Illicit Cannabis Activity. Even as California’s lawfully regulated cannabis market expands, the black market persists in communities where localities have not legalized the industry or where unlawful businesses seek to undercut the legal market through untaxed, cultivation and unregulated sales. A common occurrence has been the existence of so-called “pot houses,” or spaces where cannabis is illegally distributed and sold without approval from state or local regulators. This is criminal conduct that existed prior to California’s regulatory scheme for cannabis and takes place concurrently with sales of other illegal drugs.

Currently, statute establishes criminal penalties for landlords who rent, lease, or make available for use a building, room, space, or enclosure for the purposes of selling or distributing a controlled substance. This includes the owners of so-called “meth houses” who are well aware of criminal activities persisting within their properties and who charge well above market value in exchange for looking the other way. In April of 2018, federal and local law enforcement raided a number of homes in the Sacramento area identified as pot houses, seizing cannabis and other assets belonging to criminal enterprises linked to foreign countries.

This bill would seek to criminalize landlords who derive excessive profits from renting, leasing, or making available properties used to sell cannabis. The penalty would be two, three, or four years imprisonment. By establishing a separate crime for the purveyors of pot houses, the bill would specifically address some of the more offensive of black market actors.

Current Related Legislation. AB 2899 (Rubio) would clarify that the license number required for advertising and marketing of cannabis businesses is an A-license or M-license issued by the state.

AB 3261 (Committee on Business and Professions) would make various clarifying and technical changes to the state’s cannabis laws.

Prior Related Legislation. SB 94 (Committee on Budget and Fiscal Review, Chapter 27, Statutes of 2017) combined AUMA and MCRSA into one system for the regulation of cannabis, resulting in MAUCRSA.

AMENDMENTS:

1. To more clearly describe the type of license number that must be provided in advertisements, Section 1 should be amended to refer to a licensee’s “active” license number.
2. To ensure the $10,000 civil penalty applies only in cases where the cannabis-related business was aware that an advertiser was listing their business, language should be added to Section 2 specifying that a liable cannabis-related business is one “that has entered into an explicit agreement for advertisement or marketing.”
3. To provide unaware cannabis businesses one initial opportunity to correct a violation of the requirement that their license number be included in all advertisements, language should be added to Section 2 stating that “a business shall be provided forty-eight hours to correct their first violation prior to being subject to a civil penalty.”
4. To redesignate the entity responsible for providing grants to local law enforcement funded through civil penalties to the Bureau of State and Community Corrections (BSCC) to remain consistent with similar grantmaking funded under the AUMA, Section 2 should be amended to replace the Department of Justice with the BSCC.
5. To clarify that repercussions for obtaining excess profits derived from the distribution or sale of cannabis should be limited to cases where the distribution or sale was unlawful, Section 3 should be amended to clarify that the cannabis is “being sold or distributed in violation of state or local law.”
6. To replace the punishment of incarceration for landlords that derive excessive profits from “pot houses” with an additional revenue stream for the BSCC to provide grants to local law enforcement, Section 3 should be amended to provide that a violation of the law shall, in addition to any other penalties, “be subject to seizure and appropriation to the Board of State and Community Corrections to provide grants to cities, counties, and cities and counties to fund cannabis control officers in the manner described in Section 26151 of the Business and Professions Code.”

REGISTERED SUPPORT:

California Cannabis Manufacturers Association (Sponsor)

REGISTERED OPPOSITION:

None on file.

Analysis Prepared by: Robert Sumner / B. & P. / (916) 319-3301