New BCC Fact Sheet on Branded Merchandise Leads to Confusion Among Operators

July 11, 2020

By Lauren Mendelsohn

This past week, the Bureau of Cannabis Control (BCC) published a new Branded Merchandise Fact Sheet that has created some confusion and backlash within California’s cannabis industry. While the document mostly reiterates what is contained in Sections 5000 and 5041.1 of the BCC’s regulations, which discuss the definition of “branded merchandise” and the process for having branded merch approved by the BCC, it also makes the following claim:

“A licensed retailer may sell their own branded merchandise to retail customers. Retailers are not authorized to sell the branded merchandise of other licensees.”

The second sentence in particular is what has caused the stir. This is because neither the Medicinal and Adult Use Cannabis Regulation and Safety Act (MAUCRSA) nor the BCC’s regulations contain a clear prohibition on licensed retailers selling other licensees’ branded merchandise, as long as the merch is approved by the Bureau. Indeed, this practice is not uncommon at dispensaries across the state. However, the BCC’s interpretation in the recent fact sheet would mean that any operators who are unable to obtain a retail license (which are few and far between in much of California) would not be able to sell their branded merchandise at the very stores that sell their cannabis products, losing out on an important source of direct-to-consumer advertising. This would deal a major blow to small craft producers at the expense of larger, vertically-integrated businesses.

While the BCC “fact sheet” does not cite the specific section of the regulations that backs up their claim, we assume they would point to Section 5407 of the regulations:

§ 5407. Sale of Non-Cannabis Goods. 

In addition to cannabis goods, a licensed retailer may sell only cannabis accessories and licensee’s branded merchandise. Licensed retailers may provide customers with promotional materials. 

Authority: Section 26013, Business and Professions Code. Reference: Sections 26070, 26151 and 26152, Business and Professions Code.

Note that in the first sentence, there seems to be a typographical mistake which not only makes the sentence grammatically incorrect, but also leads to a change in meaning; however, it’s not clear what the error is. The provision says that licensed retailers “may only sell cannabis accessories and licensee’s branded merchandise,” when it should probably read either “may only sell cannabis accessories and [that/the] licensee’s branded merchandise” or “may only sell cannabis accessories and licensees’ branded merchandise” (notice placement of the apostrophe). When this regulation was published, just about everyone in the industry interpreted this to mean the latter version, and the BCC did not appear to provide any clarification on the ambiguity in Section 5407.

The authority cited for this provision, Section 26013 of the Business and Professions Code, simply gives the licensing agencies the authority to promulgate rules to implement, administer, and enforce MAUCRSA. The other sections cited as reference for this regulation talk in general terms about licensed retailers and basic advertising rules, but they do not include anything that would lead one to think that retailers would be prohibited from selling merchandise with other licensees’ branding on it.

You might be thinking, perhaps the Final Statement of Reasons (FSOR) for the BCC’s regulations, which contains the agency’s rationale for the final rules and their responses to feedback received during the public comment period, will provide some insight into the BCC’s statement about branded merch? We looked there as well, but initially found nothing that would explain this interpretation:

§ 5407. Sale of Non-Cannabis Goods 

The title of the regulation section has been changed to remove the words “on premises.” This change was necessary to clarify that the requirements applies to all sales, including sales by delivery, which do not occur on the premises. 

The section was amended to clarify that licensed retailers may provide customers with promotional materials rather than sell promotional materials. Prior to the proposed amendment, the language of the regulation indicated that retailers may sell cannabis goods, cannabis accessories, branded merchandise, and promotional materials. In many instances, promotional materials such as flyers are not sold to customers. The proposed amendment is necessary to clarify that retailers may provide customers with promotional materials free of cost instead of indicating that a retailer may only sell promotional materials. 

The reference section has also been amended to add sections 26151 and 26152 of the Business and Professions Code. This is necessary for accuracy.

Further down though, buried on page 960 of the 1,000+ page FSOR, the Bureau states, in response to a group of comments requesting clarification on this section, that:

Section 5407 is intended to allow a licensed retailer to [sell] their own branded merchandise. The regulation is not intended to allow retailers to sell branded merchandise obtained from other licenses.

However, the BCC provided no further rationale or justification for this rule, nor any indication that they engaged in an analysis of how the rule would burden licensees.

As a reminder, the BCC defines “branded merchandise” in Section 5000(b) of the regulations as follows:

“Branded merchandise” means clothing, hats, pencils, pens, keychains, mugs, water bottles, beverage glasses, notepads, lanyards, cannabis accessories, or other types of merchandise approved by the Bureau with the name or logo of a commercial cannabis business licensed pursuant to the Act. Branded merchandise does not include items containing cannabis or any items that are considered food as defined by Health and Safety Code section 109935.

Given the implications of determining that licensed retailers could only sell their own branded merchandise and not the merch of the licensed producers whose cannabis goods they are selling, we hope that the BCC will allow licensed retailers to sell branded merchandise from other licensed operators and amend the recent fact sheet accordingly. If, instead, the BCC does prohibit licensed retailers from selling other licensees’ branded merchandise, we believe that such a rule would be subject to challenge for violating the necessity requirement as well as for being overly burdensome.

We will be hosting a webinar on this topic on Thursday, July 23 at 4pm PT. Visit this page for more information and to register.

 

This information is provided as a public educational service and is not intended as legal advice. For specific questions regarding California cannabis or hemp laws, please contact the Law Offices of Omar Figueroa at info@omarfigueroa.com or 707-829-0215 to schedule a confidential legal consultation.