by Michael Cooper, MadisonJay Solutions, LLC

As June came to a close, so too did California’s phase-in “Transition Period” of cannabis regulation. As a result, a number of additional labeling and testing requirements are now live. And with those newly effective regulations, there are also heightened prospects for enforcement actions. But the lessons from California’s regulatory rollout do not stop at the state border.  

What should California cannabis businesses be doing differently? The simplest answer is, of course, the same as in every state cannabis market: follow the rules that are in effect. But it is a universal truth of highly regulated industries that not every possible scenario will be addressed by the rules. That is, in cannabis as in all highly regulated industries there are potential ambiguities and questions of interpretation inherent in the regulations.

California Bureau of Cannabis Control chief Lori Ajax recently tried to help calm industry concerns by offering insights into her team’s enforcement mindset. Ajax noted that “[t]here’s a lot of confusion out there” on what is and is not compliant. As a result, she explained that when the Bureau finds conduct it concludes is a violation, the regulatory response will be informed by whether the business “honestly thinks they’re in compliance.”

So how should a business go about demonstrating its good faith attempts to comply with cannabis regulations, in California and in the other state-legal markets?  

Start at the Top

Good compliance practices start with the tone at the top of the company. There is a reason why so many of the nation’s leading companies involve their senior executives in formulating and promoting compliance efforts. Doing so sends a strong message to the entire organization that compliance is a priority, and that the path to corporate advancement does not involve cutting corners. Putting real resources into compliance provides a powerful indicator of a company’s values, and senior executives’ time is a key corporate resource. Put another way, if a regulator is trying to decide whether you have made a good faith effort to comply with the rules, you do not want to lay the decision at the hands of an inexperienced intern.  

Build Strong Processes

Leaders in highly regulated industries tend to implement strong compliance processes. Why?  For one thing, clear written policies help staffers understand what they can and cannot do. And these policies are a permanent resource for your team, even when your compliance staff is not on premise. But in addition to helping your team follow the rules, strong processes also help regulators understand what you are doing. If, for example, a regulator wants to see if you “honestly think[]” you are in compliance, one of the best pieces of evidence is a clear roadmap of your efforts to be in compliance.

Maintain Focus

This is a fast-moving industry, and the rules are rarely static. A business could have a strong commitment to compliance and detailed processes, but if its compliance efforts are keyed to regulations that have been out of date for many months that is unlikely to sway a regulator. For example, regardless of what they may have done in the past, a Colorado retail licensee would likely receive little sympathy from regulators if they failed to update their policies regarding statements on possible health benefits of their products in the wake of the MED’s recent bulletin regarding retailers recommending cannabis for morning sickness. A regulator will have little sympathy for a business that fails to alter its compliance efforts in the wake of contrary guidance. Effective compliance requires vigilance.  

In short, cannabis businesses in California can likely expect heightened levels of enforcement as these additional rules come into effect. But the best practices for California businesses are no different than for those around the nation: by prioritizing compliance throughout the organization and building and updating strong compliance procedures, a highly regulated business takes key steps towards demonstrating its good faith, honest attempts to comply with the law.

Michael Cooper is the co-founder and managing member of MadisonJay Solutions LLC, a leading regulatory advisor to cannabis companies and a member of the NCIA. A graduate of Harvard College and Harvard Law School, he previously served as General Counsel of MHW, Ltd., which provides compliance services to the beverage alcohol industry, and in the litigation department of Cravath, Swaine & Moore LLP, known as one of the nation’s premier law firms for nearly two centuries.

Mr. Cooper can be reached at mcooper@madisonjaysolutions.com. Learn more at https://www.madisonjaysolutions.com