Cannabidiol (CBD) competed with Vitamin C as a top ingredient in new cosmetic products this past year, with promises of having anti-inflammatory effects and other healing properties. Amid the hype, at the end of 2018, the Agriculture Improvement Act of 2018, P.L. 115-334 (the “2018 Farm Bill”) was signed into law, changing the marketing of hemp and derivatives of cannabis and further removing hemp from the Controlled Substances Act thereby making it no longer an illegal substance under federal law. See Section 297A. The 2018 Farm Bill amended the definition of “hemp” to specifically include “all derivatives, extracts, cannabinoids,” which has been construed as an attempt to include hemp-based CBD under the definition of industrial hemp. The 2018 Farm Bill allows, subject to certain restrictions, hemp cultivation, along with the sale, transport (including via interstate commerce), and possession of hemp-derived products. Continue Reading “C” is for…
Cannabis and CBD-driven business format franchising is coming.
Franchising in the United States has deep historical roots in a nearly endless array of industries, from Benjamin Franklin’s Franchise-esque Printing Business to the Singer Sewing Machine’s profit-share model (1851) to Martha Matilda Harper’s Creation of the Modern Franchise with the Harper Method – all sixty-plus years before Ray Kroc created the World’s best-known franchise.
Where business innovation has happened in the U.S., franchising has soon followed: the early automobile industry was promptly followed by the first franchised car dealerships (General Motors, 1898), with the first drive-in restaurant franchises right on their back bumper. Innovative franchise giants like Coca-Cola (1899), A&W Root Beer Stands (1925), Kentucky Fried Chicken (1930), and Howard Johnson Restaurants (1932) paved the way for new industries to grow through franchising, like retail automotive parts (Western Auto, 1909), car rentals (Hertz, 1925), dance studios (Arthur Murray, 1938), carpet cleaning (Duraclean, 1940s), and tax preparation (H&R Block, 1956). The most popular industries for franchising today include childcare, senior care, business opportunities (think ATMs and vending machines), cleaning, recruiting, and tutoring services.
And so naturally, with the dawn of a new $150 billion global industry, more than a few cannabis entrepreneurs are likely to test out franchising as a business growth model. At least one Cannabis company is already trying it out in the U.S., and franchise opportunities are available in Canada as well. Cannabis dispensaries are where it will start, but we expect to see cannabis roll out in a number of other franchised businesses as well, whether in retail (accessories, core products, ancillary products such as cosmetics and body rubs), or in restaurants, home health care, and pet care, for starters. Given the landscape where these franchisors will plant their seeds, success will depend not only on the quality of the system, branding and thought leadership, quality and integrity of products, but just as much upon franchise experience and savvy, and a creative and knowledgeable legal team.
The cannabis industry is fertile ground for franchising. It’s a fresh open market, and so the competition for growing brand recognition and market share is wide open. New emerging brands with pipe dreams of being “the Starbucks of weed” will compete to accelerate growth, and there’s no faster way to grow your own (brand) than a nationwide business format franchising program. Proprietary products (think custom strains of plant, proprietary edible products, and the like) will provide valuable intellectual property ripe for national distribution. And entrepreneurs who are jonesing to get into the field will be lining up for turnkey systems and consumer-loyal brands to get them started, without the time investment, equipment and property overhead, or expertise necessary for a full farm-to-pipe grow operation.
But the legal landscape is very complex for the would-be cannabis franchisor or franchisee.
First and foremost, cannabis, including for medical use, is still categorized as a Schedule I drug under the federal Controlled Substances Act (21 U.S.C. § 811). And while the Department of Justice has not prioritized prosecuting cases involving use that is legal under conflicting state laws, that could change virtually overnight, leaving the franchisor and franchisee not only in danger of losing their business, but their freedom as well. A budding franchisor may be willing to take that chance in hopes that the federal government will legalize, but it’s a big gamble for franchisor and franchisee alike, and perhaps not worth it to a prospective franchisee with safer options.
Even where the franchisor is willing to take a chance within its own state, federal law enforcement would not likely be willing to look past the (rather public) transportation of cannabis and many related products across state lines, even between two contiguous legalized states. Thus a franchisor who sought to franchise outside of its home state would face a dilemma: maintain consistency of product through interstate distribution but at tremendous legal peril, or risk brand inconsistency by not distributing from a central grow facility.
Perhaps the biggest challenge to any cannabis business is the reluctance of most banks to serve the cannabis industry. Because of the federal prohibition, banks that accept cannabis industry money risk violation of federal money laundering and other laws. While individual businesses may be able to work around this challenge by using local banks, running cash-only businesses, and perhaps the eventual institution of state-backed banks or the establishment of private cannabis banking, interstate transactions (such as payment of a franchise royalty) would necessarily risk implicating federal law, opening the franchisor and franchisee to potential criminal liability and even seizure of funds.
Additional questions and challenges await the franchisor, such as the application of federal franchise disclosure laws to the federally prohibited business, and how to properly disclose business and legal risks under state and federal disclosure laws. Under these laws, franchisors are required to provide prospective franchisees with a prescribed franchise disclosure document (“FDD”), in which the franchisor must provide information about a variety of aspects of the business, including risks and laws that will apply to the franchised business. The franchisor will need to rely upon experienced and creative franchise attorneys to artfully craft the document in a manner that satisfies the legal requirements, adequately informs the prospective franchisee, and mitigates against potential legal risks.
And there are dozens of other industry-unique questions that will arise: franchisors and their attorneys will have to start from scratch in designing the franchise system, training and operations manuals, advertising materials, and supply channels. Risk will be shared between franchisors and franchisees, and only a carefully crafted franchise agreement will prevent the parties from throwing each other under the bus if the law comes knocking. And with legalization will come regulation, perhaps including strain-specific and branding intellectual property battles (who “owns” the trademarks to names of strains? are new hybrid strains patentable?), product safety regulations, and labeling restrictions.
Given the expected growth of the cannabis industry and the entrepreneurial hunger surrounding the “Green Rush”, it’s just a matter of time before pioneering brands emerge as the franchise leaders in the industry. We’re probably just a few years from knowing who had the right combination of risk acceptance, creativity, system quality, creative legal support, and luck to become the household names in the industry.
The 2018 Farm Bill lifted the ban on hemp, creating a lot of buzz about products derived from hemp, including hemp-derived CBD oil.
Although this creates an exciting market opportunity for veterinarians and members of the pet industry, some important issues still need to be resolved.
Passing the Farm Bill did not legalize “pot for pets” — but it does mean pets can enjoy the benefits of CBD derived from industrial hemp. Continue Reading Pets and Pot: Cannabis and Pet Products
This is Washington, and we do like to speak in initials. A plain English translation of the title of this piece would read “FDA ‘places FDA-approved drugs that contain CBD derived from cannabis and no more than 0.1 percent tetrahydrocannabinols in Schedule V.’” DEA Final Order, Docket No. DEA-486 Schedule V drugs include cough medicine with codeine and many pain relievers that still require a prescription. So, really what this order does is allow doctors in the US legally to prescribe the recently approved epilepsy drug, Epidiolex, and allows pharmacies, rather than marijuana dispensaries, legally to sell the drug. Continue Reading FDA: .1% CBD OK
Twenty nine states plus the District of Columbia have legalized medical marijuana and eight of these states plus D.C. have legalized recreational marijuana. Additional states are considering some form of legalized marijuana use. This has created a new and growing demand for leasing industrial, agricultural and retail properties for growing, manufacturing and dispensing cannabis. Given this growing demand for real estate, it is important to reflect on how many boilerplate provisions in commercial leases are not suited to covering a use that continuously puts state law at odds with federal law. Continue Reading Don’t Get Smoked in Your Next Commercial Marijuana Lease
It’s only the second week of January, and it has already been a wild year in the cannabis industry. First, legal sales of recreational marijuana started in California, and then Jeff Sessions rescinded the Cole Memorandum. What next? Here are seven stories to follow in 2018. Continue Reading And Now for the Rest of the Year
As of January 2017, 29 states have legalized medical marijuana. However, marijuana remains a Schedule l substance under the Controlled Substances Act. Substances in Schedule l are determined by the Food and Drug Administration (FDA) to have no medical use, and states that allow the use of marijuana for medical use violate federal law. Continue Reading Food and Drug Administration’s Regulation of Cannabis
Data privacy and the cannabis industry. The growing intersection of the two is yet another sign that cannabis has come a long way from the black market. As more states legalize cannabis for medical and recreational purposes, and the industry faces greater regulation and tracking, data privacy becomes increasingly important in the cannabis world. Continue Reading Data Privacy and Cannabis? You’ve Come a Long Way, Baby…
The Maryland Medical Cannabis Commission announced yesterday that it will hire a diversity consultant to examine what steps it could take to improve racial diversity in the state’s medical marijuana industry. The announcement comes after a losing applicant for a medical marijuana license filed a lawsuit against the Commission alleging that its selection process for coveted marijuana growing licenses ignored a statutory mandate to consider the racial diversity of the applicants. The complaint alleges that the Commission was “derelict in its legislatively mandated duty to ‘actively seek to achieve racial, ethnic, and geographic diversity when licensing medical cannabis growers.’”
Maryland’s Legislative Black Caucus has also criticized the lack of racial diversity in the Commission’s licensing process. Of the 30 business that were cleared for growing and process licenses in 2016, minorities held leadership positions in only two. Continue Reading Racial Diversity in the Spotlight for Cannabis Industry
Welcome back to The Week in Weed, your Friday look at what’s happening in the world of legalized marijuana.
- Marijuana legalization is leading in every state where it’s on the ballot this year
(Washington Post: Breaking News, 6 October 2016)
But the margins — in Arizona, California, Massachusetts, Maine and Nevada — are so small that the races are still up for grabs.
- Medical Marijuana Question OK’d for Future Oklahoma Ballot
(Insurance Jounal: News, 4 October 2016)
A petition that would legalize medical marijuana in Oklahoma will go before voters in a future election after a 10-day period that allowed for challenges over the validity of the signatures expired this week.
- United States: Municipal Legal News – September 2016 – Dickinson Wright PLLC
(Mondaq: Energy and Natural Resources (USA), 3 October 2016)
On September 21, Governor Snyder signed a package of bills (2016 PA 281-283) that significantly expands the types of medical marijuana facilities permitted under state law.
Something we missed that everyone needs to know? Give us a shout in the comments.