WSLCB - Board Caucus
(April 2, 2019) - Summary

Out-of-state corporate investment was “at the edge of the dam” and Russ Hauge wants to define craft producers and processors to help them survive "the flood."

Here are some observations from the Tuesday April 2nd WSLCB Board Caucus.

Cannabis Observer extends its thanks to Lukas Hunter of Harmony Farms for sharing his recording of this meeting. I was three minutes late and appreciate having complete recordings of the approval of minutes (audio – 2m) and the signing of the new compact with the Confederated Tribes of the Colville Reservation (audio – 7m).

My top 3 takeaways:

  • Board Member Russ Hauge described his experience speaking on the cannabis panel at the American Bar Association Business Law Section Spring Meeting, a “standing room only” event in Vancouver, Canada (audio – 5m).
    • Hauge spoke about his upcoming engagement at the conference during the March 19th Board Caucus (audio – 2m) and the March 26th Board Caucus (audio – 2m).
    • On March 28th, Hauge was the initial presenter on the panel titled “Cannabis in Canada and the U.S.: From Banking to Bankruptcy” (presentation). See the shared documents below for the rest of the very interesting meeting materials from the cannabis panel.
    • Hauge described the meeting participants as “bankruptcy lawyers, banking lawyers, and insurance lawyers from the largest firms in the country” and the panel focus as “getting into the marijuana business.”
    • Hauge said, “These are the attorneys who are going to be advising and signing off on the moves of corporate interests to invest in the cannabis business” and “the interest was palpable.”
    • Hauge felt the conversation foreshadowed impending changes for the Washington State marketplace: “The thing that scares me—and it’s scary in a kind of a good way—is that now with the Canadian experiment well underway, with the Canadian stock exchange listing a variety of companies that have money—that are getting money from U.S. corporations—that there, the flood we’ve been talking about is like at the edge of the dam…
    • Hauge acknowledged “there’s going to be a lot of opportunity for people to make a lot of money” but said he closed his presentation by expressing his concern “that we not set the table for the wipeout of the smaller businesses, people who don’t want to grow, people who want to do something like craft beer and craft wine.”
    • Hauge said he was asked to explain his concerns since craft alcohol producers were doing so well “in the era of corporate investment in beer and wine.” He said he replied, “in our state, a craft brewery can invite people to its premises, show them around, have them taste product, and sell them product. We provide none of those opportunities for the analog in the cannabis business.”
    • Hauge said it was “crystal clear” to him that “unless we do something like this, the business in the state of Washington over the next year, if we open up to corporate investment or out-of-state investment, is going to change radically unless we’re very, very careful.”
  • Hauge elaborated on his proposal to develop a system of rules to classify cannabis producers and processors, and confirmed the approval of the Board and Director to proceed (audio – 18m).
    • During the March 26th Board Caucus, Hauge provided a vague outline of his proposal which seemed to hint at a system of grades of cannabis.
    • On Tuesday, Hauge aimed towards a method to classify producers and processors in preparation for legislative action next session.
    • He revealed the statute he intends to leverage: RCW 69.50.345(8).
      • (8) In consultation with the department of agriculture and the department, establishing classes of marijuana, marijuana concentrates, useable marijuana, and marijuana-infused products according to grade, condition, cannabinoid profile, THC concentration, CBD concentration, or other qualitative measurements deemed appropriate by the state liquor and cannabis board;
    • Hauge said, “What I think we can do that will aid the process and provide some bulwark of defense for the smaller, people who want to stay small, is we get to work under this statute and identify the kinds of operations or the kinds of cannabis that we think would be appropriate for, we can call it either vertical integration or on-site sales, and with the explicit statement that we, by proposing these classifications, are setting the table for a legislative initiative to provide for on-site sales for these classes of businesses.
    • He admitted, “That will be difficult.”
    • Hauge reported that Washington SunGrowers Industry Association (WSIA) Executive Director Crystal Oliver had initiated correspondence with him on this subject, and he had subsequently connected with WSIA’s contract lobbyist, Bryan McConaughy.
    • Hauge said he spoke with McConaughy “in the heat of just returning from Vancouver, and seeing—physically—all these gatekeepers really feeling a lot of pressure by the people who pay their billing hours to get a way, find a way to get some money into this business. Get some money working in the United States in the legal cannabis business.”
    • Hauge added, “And that’s all good, nobody wants to stand in the way of that” but he wanted to work to ensure “the wave” didn’t “wash away” smaller producers and processors.
    • Board Member Ollie Garrett was supportive of the idea of “working on something that can help the smaller ones survive, sustain, and have more diversity of what they can do” but expressed concern about the timeline because “the very ones we’re talking about trying to help are barely surviving.”
    • Board Chair Jane Rushford said “Washington State has such a big spirit of boutique or craft industry” and was eager to “find those ways to preserve the opportunity within the cannabis industry.” She felt, “now’s the time.”
    • Rushford looked ahead to “when [trade] opens, what’s that going to look like, also? That’s part of the Cannabis 2.0 [initiative] is to not be so much on today’s tasks, but what do we need to be doing today so that with the eventual widening of the marketplace—nationwide, internationally—how well are we gonna be positioned? And this is the time for us to carve that unique marketplace.”
    • Hauge continued, “What I envision, if it all worked, what we would have is a set of definitions…[that] describe classes of operations within the cannabis trade in Washington where we think the kinds of things that would make a small grower, producer, processor healthy can be allowed by statute and we’ll have enough control that they won’t have to worry about the things that they might worry about.”
    • Garrett asked how “smaller retailers fit into it.” Hauge recognized “we would make enemies with the retailers” if the WSLCB did not provide an option for on-site consumption in retail establishments. However, he advocated strongly for an incremental approach to postpone the challenges that would arise with clean air regulations at typical retail locations. Garrett understood those challenges, but advocated just as strongly to ensure retailers were considered during the research and rulemaking process. Their disagreement on the initial scope of work grew somewhat heated for this Board, with Hauge eventually suggesting he might “wash his hands of it.”
    • Director Rick Garza was quiet throughout the conversation but eventually weighed in: “my advice would be do it. Begin to work with those people to see what it looks like. Because it sounds like you’ve had some discussion with a couple of different groups that have suggested they’re kind of in alignment with your discussion…” (audio – 7m).
    • During the previous Board Caucus, Garza shared his reasoning about why the direct sales (HB 1995) and on-site consumption bills (HB 1945) were not moved during the legislative session. He reiterated those perspectives but added that WSLCB should consider working in partnership with the craft producer/processor bill authors next session.
    • Hauge claimed the craft producer/processor bills didn’t move because their backers “don’t have the horsepower that a particular trade association does.” “Feeling paranoid maybe,” Hauge asserted “their ultimate goal is quite clear and that is to pull our teeth so that they can open the gates to relatively unrestricted corporate investment.”
    • Garza countered, “I think that there’s concern at the legislature about that, which is why those bills didn’t move this year. The one that has to do with corporate, allowing for out-of-state, allowing for international. Now there’s a bill that’s pending right now [SB 5985]. But the reason that bill didn’t move is because there are others who have concerns just like you do, about corporate takeover or huge businesses controlling the interests of the industry. I think that they haven’t been successful either…”
    • Garza suggested introducing the subject at the next Cannabis Advisory Council (CAC) meeting, which Garrett said would be scheduled after the close of the legislative session.
    • The Board and Director agreed that Hauge would move ahead with his proposal, Garrett would continue with her projects, and their efforts could merge at some point down the road.
  • Cannabis Policy and Rules Coordinator Kathy Hoffman provided a quarterly rulemaking update to the Board (audio – 1m).
    • Mandatory Marijuana Signage (audio – 1m).
    • Cannabis Penalties (audio – 1m).
      • Hoffman reported progress on draft rules as part of the agency’s efforts to help direct and anticipate the outcomes of SB 5318.
      • See Cannabis Observer’s latest coverage of SB 5318 documenting successful movement out of its House policy committee. At publication time, the bill had been referred to the House Appropriations Committee but was not yet scheduled for a public hearing.
    • Quality Assurance (QA) Testing and Product Requirements (audio – 7m).
      • On April 9th from 1-3:45pm PT, Hoffman and a facilitator will host a Marijuana Quality Assurance Testing Rules Listen/Learn/Contribute Work Session. The invitation to the forum and webinar described it as “an opportunity for licensees, lab representatives, and others to contribute to draft conceptual rules regarding quality assurance testing for cannabis” (agenda, draft rules).
      • Hoffman said she had received significant positive feedback about her approach to the rulemaking project.
      • Hauge confirmed blind proficiency testing of labs was out of scope for the rulemaking. Hoffman indicated tangential lab issues were likely to come up during the work session, including sampling procedures and a concern about labs not getting paid mentioned by The Lab Guild. The Board expressed some interest in helping labs get paid, but also expressed confusion about why labs were providing test results without having received payment for their work.
      • Hoffman indicated work had begun on a small business economic impact statement. She went into greater detail during a subsequent work session about the rulemaking project hosted during the Executive Management Team meeting the following day.
    • Non-Cannabis Vapor Products (audio – 1m).
      • Hoffman again recommended WSLCB let the CR-102 expire in anticipation of expanded rulemaking that would be required to implement Tobacco 21 legislation and to align vapor rules with a revised cannabis penalty matrix.
      • During the April 3rd Executive Management Team meeting, Director of Legislative Relations Chris Thompson suggested HB 5986 could introduce a new tax on all non-cannabis vapor products.
    • True Parties of Interest (audio – 1m).
      • Hoffman said WSLCB was waiting to see what happens with HB 1794.
      • See Cannabis Observer’s latest coverage of HB 1794 documenting successful movement out of its Senate policy committee. At publication time, the bill had been referred to the Senate Rules Committee for potential placement on the floor calendar for second reading.
    • Canopy Rules (audio – 1m).
      • Hoffman reported the canopy rulemaking project is “on hold” and deprioritized in relation to the agency’s other open rulemaking efforts.
      • During the January 23rd EMT, WSLCB Marijuana Examiners Manager Kendra Hodgson delivered a summary of the Canopy Team’s findings from the first year of surveys and led thirty minutes of discussion with agency leadership.
      • On March 26th, the WSLCB announced the publication of its Year One Canopy Report.