The Cannabis Business Collective Model
As a Cannabis Business in California, you must comply with the Collective Model set forth under the Compassionate Use Act ("CUA"), Medical Marijuana Program Act ("MMP") and the Attorney General Guidelines of 2008 ("AGG") until California licenses become available in 2018.
Medical CANNABIS BUSINESSES that comply with the CUA, MMP and AGG are armed with what is called the collective defense, in essence, a legal defense that protects compliant collectives.
The Compassionate Use Act of 1996 (“CUA”)
The history of legalizing medical cannabis in California begins with the CUA, which was passed by statewide initiative in 1996. The CUA is codified as Health & Safety Code § 11362.5. The CUA was enacted “[t]o ensure seriously ill Californians have the right to obtain and use medical cannabis for medical purposes,” when their use of medical cannabis has been recommended by a physician as treatment for illness.[i] Its purpose is to provide such patients and their primary caregivers a defense to criminal prosecution for obtaining and using cannabis for medical purposes.[ii]
Specifically, the CUA provides that:
“Section 11357, relating to the possession of cannabis, and Section 11358, relating to the cultivation of cannabis, shall not apply to a patient or to a patient's primary caregiver, who possesses or cultivates cannabis for the personal medical purposes of the patient upon the written or oral recommendation or approval of a physician.”[iii]
Essentially, CUA grants a limited immunity from state prosecution (also called an “affirmative defense”) to qualified patients and their primary caregivers for the crimes of possession and cultivation of cannabis.[iv] Qualified patients and their primary caregivers are not only armed with a defense to possession and cultivation, but they are also provided with a defense with regard to the transportation of cannabis. A qualified patient has a defense to prosecution for transportation of cannabis if the “quantity transported and the method, timing and distance of the transportation are reasonably related to the patient's current medical needs.”[v] At trial, a criminal defendant need only raise a reasonable doubt as to whether the cannabis was possessed, cultivated or transported legally under the CUA.[vi]
But be careful, the CUA does not grant immunity from arrest.[vii] This means that so long as law enforcement officers have probable cause[viii] to believe that possession or cultivation of cannabis has occurred, they may arrest a person regardless of whether or not the arrestee has a physician's recommendation or approval.[ix]
The Medical Marijuana Program Act (“MMP”)
In 2003, the California Legislature enacted Senate Bill 420, otherwise known as the Medical Marijuana Program Act (“MMP”). The MMP, enacted to “address issues not included in the CUA,”[xi] added eighteen new sections to the Health & Safety Code. The MMP is now codified and enforced as Health & Safety Code § 11362.7, et seq.
In effect, the MMP served to expand the scope of the CUA by, among other things, extending the CUA's affirmative defense. In other words, the MMP extends protection to cover prosecutions for the following crimes:
- possession for sale[xii];
- maintaining a place for the sale, giving away or use of cannabis[xiv];
- making available a premises for the manufacture, storage or distribution of cannabis[xv]; and
- abatement of nuisance created by a premises used for the manufacture, storage or distribution of cannabis.[xvi]
For the very first time, the MMP provided for immunity from criminal prosecution for the collective and cooperative cultivation and distribution of cannabis.[xvii] In order to raise the collective or cooperative defense in court, the following elements must be proven[xviii]: (1) the defendant is a qualified patient or caregiver; and (2) the collective or cooperative was being operated within the scope of those acts immunized by the CUA and MMP.[xix]
This expansion of protected activities “represent[ed] a dramatic change in the prohibition on the use, distribution and cultivation of cannabis for persons who are qualified patients or primary caregivers …”[xx] In enacting the MMP, the Legislature quite clearly intended to broaden the scope of the CUA in order to “enhance the access of patients and caregivers to medical cannabis through collective, cooperative cultivation projects.[xxi]
Most importantly, the MMP specifically required the Attorney General's Office to “develop and adopt guidelines” for the enforcement of the CUA and MMP provisions.[xxii] To fulfill this mandate, on August 25, 2008, California Attorney General Edmund Brown, Jr. issued “Guidelines for the Security and Non-Diversion of Marijuana Grown for Medical Use” (“A.G. Guidelines”).[xxiii] Although the A.G. Guidelines are not strictly binding as law, they hold considerable weight in court determination[xxiv] and they provide a good indication as to what criteria (if any) law enforcement look for in determining whether someone is in compliance with state law.[xxv] Anyone interested in operating a medical cannabis business, should be familiar with the A.G. Guidelines.
Quantity Limits: Under the Medical Marijuana Program, a patient may possess up to “eight (8) ounces of dried marijuana” and “maintain no more than six (6) mature or 12 immature plants.”[xxxi] However, Current law states that you can possess any amount you NEED for personal medical use. Unlike the CUA, which does not specify any amount of cannabis that a patient may legally possess or cultivate, the MMP establishes quantity limitations for qualified patients and primary caregivers. The MMP states that individuals may possess no more than “eight (8) ounces of dried marijuana” and “maintain no more than six (6) mature or 12 immature plants.”[xxxi] This “safe harbor” provision applies to “[a] qualified patient or person holding a valid identification card, or the designated primary caregiver of that qualified patient or person.”[xxxii]
In 2010, however, the Kelly court struck down the quantity restrictions imposed by the MMP by finding them unconstitutional.[xxxv] In an unanimous decision, it was determined that the CUA's only limit on the amount of cannabis someone may possess is that it must be “reasonably related to the patient's current medical needs,”[xxxvi] thus eliminating the quantity limitations imposed by the MMP and the Attorney General Guidelines. Therefore, any numerical values associated with possession were eliminated. Thus, patients can possess and grow as much as they want, so long as it is reasonably related to their medical need.
Legally, however, the police are still permitted to arrest anyone who exceeds the MMP's limits. In effect, the significant change of the law is the lack of an automatic quantity limit for guilt. This means, a criminal conviction cannot be solely based upon a defendant exceeding the MMP's limits because there are no longer exact limits in place. With that said, it is still a good rule of thumb to abide by the original MMP limits that were set even though they are no longer “current” law. In other words, one can simply avoid the hassle of being arrested and dragged into court if they simply abide by the MMP and its quantity limitations.
The 2008 Attorney General Guidelines
In 2008, for the first time since California's Proposition 215 was passed in 1996, the A.G. Guidelines served to clarify the state's laws governing medical cannabis and provide clear guidelines for patients and law enforcement to ensure that medical cannabis is not diverted to illicit markets. Although the A.G. Guidelines are not strictly binding as law, they hold considerable weight in court determination[xxxvii] and they provide a good indication as to what criteria (if any) law enforcement look for in determining whether someone is in compliance with state law.[xxxviii] Anyone interested in operating a medical cannabis business, should be familiar with the A.G. Guidelines.
- Basic Definitions of the A.G. Guidelines
Physician's recommendation: A recommendation by a licensed physician stating that cannabis is a beneficial treatment for some serious condition that the patient is suffering from.[xl] Such recommendation can be oral or in writing.
Qualified patient: A person whose physician has recommended the use of cannabis to treat a serious illness, including, but not limited to, cancer, anorexia, AIDS, chronic pain, spasticity, glaucoma, arthritis, migraines, or any other illness for which cannabis provides relief.[xli]
Primary Caregiver: A person who “consistently assum[es] responsibility for the housing, health, or safety” of the patient. This individual is usually designated by a qualified patient.[xlii] California courts have emphasized the requirement of consistency in the patient-caregiver relationship. Although a “primary caregiver who consistently grows and supplies . . . medicinal marijuana for a section 11362.5 patient is serving a health need of the patient,” someone who merely maintains as a source of cannabis to a patient does not automatically become the party “who has consistently assumed responsibility for the housing, health, or safety” of that purchaser.[xliii] A person may serve as primary caregiver to “more than one” patient, provided that the patients and caregiver all reside in the same city or county.[xliv]
Recommending Physician: A physician who: (1) possesses a license in good standing to practice medicine in California; (2) has taken responsibility for an aspect of the medical care, treatment, diagnosis, counseling, or referral of the patient; and (3) has conducted a medical examination of that patient before recording in the patient's medical record the physician's assessment as to whether he/she suffers from a serious medical condition and whether the use of medical cannabis is appropriate.[xlv]
Business Forms: Any group that is collectively or cooperatively cultivating and distributing cannabis for medical purposes should be organized and operated in a manner that ensures the security of the crop and safeguards against diversion for non-medical purposes. The following are guidelines to help cooperatives and collectives operate within the law, and to help law enforcement determine whether they are doing so.
Statutory Cooperatives: Defined by California Law. A cooperative must file articles of incorporation with the state and conduct its business for the mutual benefit of its members.[xlvi] No business may call itself a “cooperative” (or “co-op”) unless it is properly organized and registered as such a corporation under the Corporations or Food and Agricultural Code.[xlvii] Cooperative corporations are “democratically controlled and are not organized to make a profit for themselves, as such, or for their members, as such, but primarily for their members as patrons.”[xlviii] The earnings and savings of the business must be used for the general welfare of its members or equitably distributed to members in the form of cash, property, credits, or services. [xlix]
Cooperatives must follow strict rules on organization, articles, elections, and distribution of earnings, and must report individual transactions from individual members each year.[l] Agricultural cooperatives are likewise nonprofit corporate entities “since they are not organized to make profit for themselves, as such, or for their members, as such, but only for their members as producers.”[li] Agricultural cooperatives share many characteristics with consumer cooperatives.[lii] Cooperatives should not purchase cannabis from, or sell to, non-members; instead, they should only provide a means for facilitating or coordinating transactions between members.[liii]
Collectives: California law does not define collectives, but the dictionary defines them as “a business, farm, etc., jointly owned and operated by the members of a group.”[liv] Applying this definition, a collective should be an organization that merely facilitates the collaborative efforts of patient and caregiver members – including the allocation of costs and revenues. As such, a collective is not a statutory entity, but as a practical matter it might have to organize as some form of business to carry out its activities. The collective should not purchase cannabis from, or sell to, non-members; instead, it should only provide a means for facilitating or coordinating transactions between members.[lv]
Although California law does not explicitly define a “collective,” the A.G. Guidelines apply the following definition: “a business, farm, etc., jointly owned and operated by the members of a group.”[i] The purpose of a collective is merely to facilitate the collaborative efforts of patients and primary caregivers – including the allocation of costs and revenues. Similar to a cooperative, a collective must be a non-profit enterprise and it should only provide a means for facilitating or coordinating transactions between members.[ii] Unlike a cooperative, however, a collective does not have to follow strict rules on organization and reporting because it is not technically defined in the law. Thus, collectives have a greater degree of flexibility in their establishment and operations.
“Storefront dispensaries,” were not specifically recognized under state law either, but court cases have shown that the operation of a medical cannabis storefront dispensary is legal so long as the dispensary qualifies as a “collective” or “cooperative” under the CUA and MMP.[iii] The A.G. Guidelines, however, state that “dispensaries that merely require patients to complete a form summarily designating the business owner as their primary caregiver – and then offering marijuana in exchange for cash ‘donations' – are likely unlawful.”[iv]
Practical Application – the CUA, MMP and AGG
- Dispensaries, Deliveries, Cultivation, Manufacturing are current examples of cannabis business models allowed under the collective model, and who all have to abide by the same rules as discussed below.
Choosing an entity: Many businesses fail to take the correct steps when choosing and creating their business entity – the same applies, even more so, to Cannabis Businesses. Depending on the business's specific needs, one business entity may make sense over the other. Relevant factors in making this decision may include: who runs the business; who controls the business; expected size of the business; number of board members; limitation of liability; and financing requirements. Additionally, there are tax consequences specific to each entity that should be considered. To help decide what is best for your specific business, you should consult one of our legal professionals today.
Requirements of Collective Membership Under Attorney General Guidelines: In 2009, the California Court of Appeal addressed the question of whether the operation of a medical cannabis storefront dispensary was legal under existing law.[i] The court concluded that storefront dispensaries that qualify as a “collective” or “cooperative” under the CUA and the MMP are legal operations. To qualify as a valid collective or cooperative under the CUA and MMP, storefront dispensaries must adhere to the following guidelines:
- Non-Profit Enterprise
- Closed-Circuit Membership: “Collectives and cooperatives should acquire cannabis only from their constituent members, because only cannabis grown by a qualified patient or his/her primary caregiver may lawfully be transported by, and/or distributed to other members.”[v] “Nothing allows marijuana to be purchased from outside the collective or cooperative for distribution to its members.”[vi] Similarly, “nothing allows individuals or groups to sell or distribute marijuana to non-members.”[vii] “Instead, the cycle should be a closed-circuit of marijuana cultivation and consumption with no purchases or sales to or from non-members.”[viii] Given the above, CBs should pursue reasonable measures to prevent the diversion of cannabis to non-members. Contact one of our legal professional today to help ensure your business is in compliance.
- Size of Membership: California courts have found that there are no limitations on cooperative and collective membership numbers under the CUA or MMP.[ix] To ensure compliance with state law, make sure that cannabis amounts at the business correspond to membership numbers. For example, if the MCB has 1,000 qualified patient-members, the business should only have the amount of cannabis that is “reasonably related” to the medical needs of those patients, and nothing more. As a practical matter, it is generally recommended to use the MMP's quantity limitations of 8 ounces per patient.
- Member Responsibilities: Collective and cooperative members do not have to be directly involved in the cultivation of cannabis or the day-to-day operation of the business. This means that it is permissible for a member's involvement to be limited to the purchasing of cannabis. Nevertheless, it is still recommended that a MCB's membership agreement contain provisions clarifying the scope of a member's duties. Law enforcement authorities tend to believe that collectives or cooperatives are more “legitimate” when they require its members to provide more than just money for cannabis – e.g., donate time or goods to the collective.
- Seller's Permits, Business Licenses and Sales Tax.
- Reasonable Compensation. A common question that people in the cannabis industry ask is: “How do I pay myself?” The short answer to this is that CB officers and employees are entitled to reasonable compensation: a salary commensurate with what other people, with similar experiences and qualifications would earn who provide a similar service.
Navigating the weeds of Cannabis Law can be overwhelming and mistakes come at at a great cost. To avoid criminal prosecution, and civil lawsuits, contact one of our legal professionals without delay.
[i] People v. Hochanadel (2009) 176 Cal. App. 4th 997.
[ii] People v. Jackson (2012) 210 Cal. App. 4th 525, 529-530; A.G. Guidelines at p. 6, 9.
[iii] A.G. Guidelines at p. 9; see also, Health & Safety Code § 11362.765(a).
[v] A.G. Guidelines at p. 10; see also, Health & Safety Code §§ 11362.765 and 111362.774.
[vi] A.G. Guidelines at p. 10.
[ix] Colvin, supra, 114 Cal. App. 3d at 1041; Jackson, supra, 210 Cal. App. 4th at 530.
[xi] See, Riverside, supra, 56 Cal.4th 729.
[xii] People v. Mulcrevy (Dec. 2014) C075885.
[xiii] People v. Bergen (2008) 166 Cal. App. 4th 161.
[xiv] Health & Safety Code § 11379.6(a) provides in pertinent part: “Except as otherwise provided by law, every person who manufactures, compounds, converts, produces, derives, processes, or prepares, either directly or indirectly by chemical extraction or independently by means of chemical synthesis, any controlled substance specified in Section 11054, 11055, 11056, 11057, or 11058 shall be punished by imprisonment pursuant to subdivision (h) of Section 1170 of the Penal Code for three, five, or seven years and by a fine not exceeding fifty thousand dollars ($50,000).”
[xv] Health & Safety Code § 11358 provides in pertinent part: “Every person who plants, cultivates, harvests, dries, or processes any marijuana or any part thereof, except as otherwise provided by law, shall be punished by imprisonment pursuant to subdivision (h) of Section 1170 of the Penal Code.”
[xvi] Bergen, supra, 166 Cal. App. 4th 161.
[xvii] Bergen, supra, 166 Cal. App. 4th 161.
[i] See, A.G. Guidelines at p. 4.
[ii] A.G. Guidelines at p. 8.
[iii] People v. Hochanadel (2009) 176 Cal. App. 4th 997; People v. Colvin (1981) 114 Cal. App. 3d 614.
[iv] Peron, supra, 59 Cal. App. 4th at 1400.
[i] Health & Safety Code § 11362.5(b)(1)(A).
[ii] Health & Safety Code § 11362.5(b)(1)(B).
[iii] Health & Safety Code § 11362.5(d).
[iv] People v. Kelly (2010) 47 Cal.4th 1008, 1013; People v. Mower (2002) 28 Cal.4th 457, 474.
[v] People v. Trippet (1997) 56 Cal. App. 4th 1532, 1551.
[vi] Mower, supra, 28 Cal.4th at 477; People v. Jackson (2012) 210 Cal. App. 4th 525, 529-553.
[vii] Mower, supra, 28 Cal.4th at 467-469.
[viii] Probable cause is defined as trustworthy facts sufficient enough that a reasonable person would believe the suspect committed or is planning to commit a crime or unlawful act.
[x] People v. Urziceanu (2005) 132 Cal. App. 4th 747, 772-773.
[xi] People v. Wright (2006) 40 Cal.4th 81, 85.
[xii] Health & Safety Code § 11359.
[xiii] Health & Safety Code § 11360.
[xiv] Health & Safety Code § 11366.
[xv] Health & Safety Code § 11366.5.
[xvi] Health & Safety Code § 11370; See, Health & Safety Code § 11362.775.
[xvii] See, S.B. 420, 2003 Leg., 2003-2004 Leg.
[xviii] At trial, the burden is on the defendant to generate a reasonable doubt as to whether a CUA defense applies; thereafter, the burden shifts to the prosecution to disprove that defense beyond a reasonable doubt. At a preliminary hearing, the question is one of probable cause. As noted in Mower, probable cause will not lie where, in light of all the circumstances, it appears that a defendant is entitled to a CUA defense. See, Mower, supra, 28 Cal.4th at 476-483.
[xix] See, Mower, supra, 28 Cal.4th at 476-483.
[xx] Urziceanu, supra, 132 Cal. App. 4th at 785.
[xxi] Stats. 2003, ch. 875, § 1, subds. (b)(3).
[xxii] Health & Safety Code § 11362.81(d).
[xxiii] Full text of the A.G. Guidelines can be read online here: http://ag.ca.gov/cms_attachments/press/pdfs/n1601_medicalmarijuanaguidelines.pdf.
[xxiv] People v. Hochanadel (2009) 176 Cal. App. 4th 997.
[xxv] Same. According to the A.G. Guidelines, the standard by which a cooperative or collective should be complying with the guidelines is one of “substantial compliance.” (A.G. Guidelines at p. 6.) This means that if a collective or cooperative is not “substantially complying” with the A.G. Guidelines, it is “likely operating outside the protections of [the CUA] and the MMP.”
[xxvi] Health & Safety Code § 11362.71(f).
[xxviii] San Diego v. NORML (2008) 165 Cal. App. 4th 798.
[xxix] Health & Safety Code § 11362. 78; San Diego NORML, supra, 165 Cal. App. 4th at 830.
[xxx] A.G. Guidelines at p. 6.
[xxxi] Health & Safety Code § 11362.77(a).
[xxxii] Health & Safety Code § 11362.77(f).
[xxxiii] A.G. Guidelines at p. 10.
[xxxv] Kelly, supra, 47 Cal.4th at 1008.
[xxxvi] Kelly, supra, 47 Cal.4th at 1013; People v. Trippett (1997) 56 Cal. App. 4th 1532, 1549; Health & Safety Code § 11362.5(d).)
[xxxvii] People v. Hochanadel (2009) 176 Cal. App. 4th 997.
[xxxviii] Same. According to the A.G. Guidelines, the standard by which a cooperative or collective should be complying with the guidelines is one of “substantial compliance.” (A.G. Guidelines at p. 6.) This means that if a collective or cooperative is not “substantially complying” with the A.G. Guidelines, it is “likely operating outside the protections of [the CUA] and the MMP.”
[xxxix] A.G. Guidelines at p. 4.
[xl] Physicians may not prescribe marijuana because the federal Food and Drug Administration regulates prescription drugs and, under the CSA, marijuana is a Schedule I substance, meaning that it has no recognized medical use. Under California law, however, a physician cannot be “punished” or “denied any right or privilege” for issuing a verbal or written recommendation for medical marijuana. (Health & Safety Code § 11362.5(c).) (Health & Safety Code § 11362.5(d); A.G. Guidelines at p. 4.
[xli] Health & Safety Code § 11262.5(b)(1)(A); A.G. Guidelines at p. 4.
[xlii] Health & Safety Code § 11262.5(e); A.G. Guidelines at p. 4.
[xliii] People ex rel. Lungren v. Peron (1997) 59 Cal.App.4th 1383, 1390, 1400.
[xliv] Health & Safety Code § 11362.7(d)(2); A.G. Guidelines at p. 4.) Primary caregivers also may receive certain compensation for their services. (Health & Safety Code § 11362.765(c); A.G. Guidelines at p. 4.
[xlv] Health & Safety Code § 11362.7(a).
[xlvi] Corp. Code, § 12201, 12300.
[xlvii] Id. at § 12311(b).
[xlviii] Id. at § 12201.
[l] See id. at § 12200, et seq.
[li] Food & Agric. Code, § 54033.
[lii] See, e.g., id. at § 54002, et seq.
[liii] A.G. Guidelines at p. 8.
[liv] Random House Unabridged Dictionary; Random House, Inc. © 2006.
[lv] A.G. Guidelines at p. 8