By: Kristin Stankiewicz , Senior Counsel & Alex Berger , Attorney at Emerge Law Group
The Oregon Liquor and Cannabis Commission (“OLCC”) periodically updates its recreational marijuana rules, often just to fix technical errors or clarify existing rules. But sometimes those rule-changes can profoundly impact the marijuana business. OLCC’s current draft rule updates propose changes that, if adopted as written, may significantly impact the industry in ways that could be bad for business. We discuss below the proposed rules that we think may be the most disruptive for the industry.
Conditional Approval Required for Changes to Business Structure – OAR 845-025-1165(3)
OLCC’s current rules allow a marijuana licensee to add or remove any individual who qualifies as an “applicant” (such as certain equity investors) at any time by simply notifying OLCC before the fact. Then, if OLCC finds the added applicant to be unlicensable, the licensee may remove them from its business structure. Because the current rule allows a licensee to add equity investors immediately, without having to wait for OLCC approval, it has been a lifesaver to the industry, which, especially now, needs investment more than ever.
OLCC now proposes to eliminate this rule and require licensees to obtain “conditional approval” prior to the addition or subtraction of an individual applicant. If adopted, this rule would be a step backward, causing delays for businesses trying to add capital or make management changes. In years past, before adopting the current rule, OLCC could take six to nine months (or longer) to approve new applicants, slowing licensees’ ability to change and adapt to the market. Reverting to a pre-approval system, even just “conditional approval,” could again delay capital raising for an already hobbled industry.
Prohibition on “Operating a Licensed Business” Pending a Change of Ownership – OAR 845-025-1170(3)
This draft amendment would prohibit a proposed buyer from “operating” an OLCC-licensed business until the OLCC approves the buyer’s change of ownership application. Currently, change of ownership approval can take anywhere from 30 to 90 days. Under the current rules, a buyer may assist with the seller’s business operations so long as buyer and seller comply with applicable OLCC disclosure rules.
Though it’s not entirely clear from the amendment’s language, the proposed rule may inhibit a buyer’s opportunity to work with a seller in the period leading up to a change of ownership. We see no reason that a buyer should not be able to assist the seller in operating its business so long as that person or entity has first been disclosed to OLCC through the standard change of business structure notification process. Again, this change appears to be a step backwards from OLCC’s current, streamlined licensing approach, and, if adopted, could disrupt purchase and sale transactions and smooth transitions from sellers to buyers in an already volatile marketplace.
Major Changes to OLCC “Combo” Change of Ownership and Location Actions – OAR 845-025-1170(6)(a)
Currently, OLCC allows a recreational marijuana licensee to submit simultaneous change of ownership and location applications, in what the OLCC calls “combo” actions. Combo actions allow a licensee to sell an OLCC-licensed business to a buyer who can simultaneously move the business to a new location. This proposed rule would condition a combo action on the seller first requesting to surrender its license before the OLCC assigns the change of ownership application to an investigator. And the amendment specifically states that OLCC will process the seller’s license surrender even if the change of ownership process is not ultimately completed , which would leave the seller without a license if the sales transaction falls through. Such a change could reasonably eliminate most, if not all, combo actions, because the seller risks losing its license if the sale doesn’t close.
Regardless of OLCC’s intent, if adopted, the rule may only serve to undermine the efficient sale and purchase of licensed businesses. To avoid losing its license, a seller would either need to complete a change of ownership first and then a change of location, or vice versa, each of which requires 30-90 days of wait time. And doing separate change applications would increase the necessary documentation and assumed legal risk (such as entering into a lease at a location where a seller or buyer does not intend to operate). Of all the new proposed rules, this one may have the most significant impact to OLCC-licensed businesses, and frankly, would likely create significantly more work for OLCC.
Potency Audits and Relabeling Requirements – OAR 845-025-5760(4)
Current rules permit OLCC to require a licensee to submit any of its products to OLCC audit testing. However, this proposed rule would allow OLCC to require the batch of product to be relabeled at the cost of the licensee if audit testing reveals a “statistically significant difference” in potency (THC/CBD) results from the initial compliance test. OLCC estimates that such relabeling could cost a licensee $10,000-$30,000, though the actual cost would depend on many factors including batch size, labor costs, supplies, etc.
This proposed amendment would effectively permit OLCC to penalize producer, processor, or wholesaler licensees for a lab licensee’s inaccurate potency test results. In other words, even if a licensee complies with all testing rules, the OLCC may effectively impose a civil penalty on that licensee, which has not committed any violations, if a laboratory provides that licensee with inaccurate potency numbers.
Further, this proposed amendment presupposes audits of fully packaged and labeled products, including, presumably, those products already on retail shelves and available for purchase. Auditing products when they are already available to the public seems to undermine the point of audit testing in the first place – to protect the public. Also, from cost and logistical perspectives, audit tests performed after product distribution would necessitate that product’s recall and collection prior to relabeling.
To address these issues, the OLCC could craft a rule in which it conducts audit testing immediately after, or in conjunction with, compliance testing, so that the licensee can label it accurately the first time around. Crafted that way, the rule would better protect public safety while sparing producer, processor, or wholesaler licensees from penalties based on a lab’s inaccurate results.
Clarification on Retailer Walk-Up and Drive-Through Windows– OAR 845-025-1300(1)(g)
Current OLCC rules regarding retailer deliveries to customers outside the licensed premises seem to conflict in some ways. The rules have always prohibited the delivery of marijuana through walk-up or drive-through windows. At the beginning of the pandemic, however, the OLCC adopted temporary rules to allow the on-site delivery of marijuana within 150 feet of a licensed premises. These rules became permanent and have been good for retail customers who want a contactless purchase experience.
Under the current rules, retail staff can simply bring the order out to a customer’s car, parked within 150 feet of the licensed premises, but cannot sell products through a walk-up or drive-through window. To resolve this conflict, OLCC’s proposed amendment removes the prohibition against walk-up windows, but not drive-through windows . Given that retailers may already deliver to customers in cars nearby, the continued prohibition against drive-through windows seems illogical and may prevent retailers from maximizing their efficiency.
Categorization of Rule Violations, Generally
The proposed rule amendments add categories for rule violations that were previously uncategorized. This is a positive change insofar as it provides certainty for licensees regarding the penalties for different types of rule violations. However, some arguably minor violations, including some that pose no threat to public safety, carry fairly stiff penalties under the proposed amendments.
For example, pursuant to the draft amendments, the failure to notify OLCC of a temporary business closure lasting 30-days or longer would be a Category III violation (OAR 845-025-1160(5)(a)). Category III violations are considered “violations that create a potential threat to public health or safety,” and OLCC would typically impose a $2,500 fine or a 10-day license suspension for the first violation in a 2-year period. Notably, “temporary business closure” is undefined, so a licensee may not know when it is in violation of this rule. Other proposed Category III violations include failure to notify OLCC of change in an applicant’s contact information, and failure to notify OLCC of disciplinary action by another governmental entity (such as a county or city) (OAR 845-025-1160(5)(a)).
Have Your Voice Heard!
The above examples, though significant, represent only a fraction of the proposed amendments. We encourage all OLCC licensees to read these proposed rule changes and let OLCC know what you think about them. OLCC has scheduled a public hearing on the proposed rules on October 25, 2022, from 10am-11am, and you can provide testimony virtually at that time by visiting the listed event here under the “Recreational Marijuana” meeting schedule:
You can also provide feedback to OLCC by sending in written comments to the proposed rules by October 31, 2022, at noon. Comments should be emailed to OLCC Rules Coordinator Nicole Blosse at [email protected]
Please do not hesitate to reach out if you have questions or need guidance regarding these proposed rule changes.
