Compliance in the cannabis industry presents a different challenge in every state, with almost countless regulations and considerations waiting to upend operators and those who work to insure them along the entire supply chain — licensing, equipment testing, distribution and retail sales, packaging and label requirements, and rigorous track and trace programs.
“The level of granularity is unparalleled, especially considering its specific use,” said David Vaillencourt, a regulatory policy and standards expert who serves as CEO of the GMP Collective, a consultant to cannabis producers across the supply chain. “And labels are so confusing … what you’re required to put on in a packaging in Florida is much different than Illinois, is much different than Massachusetts.”
Vaillencourt’s comment was made during an April 20 Insurance Journal webinar, “Attaining Compliance in the Cannabis Universe.” The hour-long webinar covered trends like standards, lawsuits, dangers, best practices and a few blind spots.
The other panelists were Sarah Oglesby, corporate compliance director at Trulieve, a vertically integrated cannabis company and multi-state operator, and Ian Stewart, founder, and cochair of the cannabis law practice at Wilson Elser.
With so many complexities to being in compliance in the cannabis industries in the dozens-and-counting adult-use and medical-use states, the risks of being out of compliance are real, and potentially bad for a business.
Stewart described “a more aggressive stance” from state regulators against non-compliant cannabis companies.
“There’s also a risk of, when a company goes out of compliance, there’s a higher risk of breach of contract of shareholder and investor disputes, and also matters where a competitor may be able to say, ‘Hey, you’re breaching consumer protection statutes,’ for example, or unfair competition statutes. And in California, as in a number of other states, we have statutes that have real teeth where you’ve got perhaps fee-shifting or cost-shifting that allows attorneys who bring those suits to claim their attorney’s fees and those drive … litigation — very dangerous for an insurance company that’s providing a defense for those claims because they can be very expensive.”
At Trulieve, a publicly traded company with 113 dispensaries around the country, one would imagine that compliance is front-and-center, top-of-mind, you name it.
“So, essentially in cannabis compliance, our number one priority is to keep our license in good standing,” Oglesby said. “So, all of our activities and operations are based on the license in that state, the cannabis license.”
While any potential violation demands attention, it’s the big ones that can bite a company like Trulieve, she added.
“It’s the big violations that can put our license in jeopardy that we have to be most cognizant of,” she said. “And in my opinion, that is the number one priority, when patients’ or customers’ health is concerned. So, when I’m looking at what are our top tier compliance concerns are, they would be anything that intersects the public safety standpoint. So, making sure our products are only using safe ingredients, making sure they’re third-party tested, making sure that those testing regulations are with certified labs in that state and that we’re only using those certified labs.”
An operator like Trulieve also faces varied regulatory landscapes — from excessively tough to so lax that there aren’t enough clear rules to follow.
These rules, if they aren’t clear enough, require companies to put significant time and resources into figuring out what the rule makers may have meant, and all the ways a company may run afoul of said rules.
“Some states have better laws than others, as far as giving you a roadmap as to how to be compliant,” Oglesby said. “Many states though, it’s trial and error, it’s having good government affairs people on your team that have relationships with the lawmakers and are able to go in and have conversations to understand what the law’s really asking. And then having a good legal team to help you be able to interpret that law because as you know, laws can be interpreted many, many different directions.”
Part of Vaillencourt’s work is getting companies to understand that just blindly adhering to what they think the rules are, or what those regulations mean, is not the best operating procedure.
“Regulations and the rules and the interpretations are the minimum requirements for any business to operate,” he said. “And that doesn’t just mean everything’s great and that’s the bare minimum. It’s going above and beyond that, and it’s how you actually implement and apply them and go above and beyond just to keep your business safe and to show you’re a differentiator in the marketplace.”
Of course, one of the worst problems that can arise for a company is litigation.
Stewart, who covered a number of ongoing lawsuits in the cannabis space, also touched on Steele v. URBN Leaf, a case that Stewart worked on. Steele is a wrongful death product liability case in which a flight attendant after her flight arrived in San Diego, California, and was provided with edible gummy products. She ate an unknown number and was discovered dead the following morning. It was alleged that she had a psychotic reaction to the THC.
The case was dismissed due to a lack of product identification. This occurred in 2018, before track and trace was automated in California.
“I think that there was a lack of firm ID as terms of her alleged purchase of that product from URBN Leaf, the retailer,” Stewart said. “But in any event, I think what the allegations of that case were, was that she was a young, otherwise healthy adult who sustained some cardiovascular incident.”
He added: “It’s a warning, I think, for insurance companies to take the science that’s developing very seriously.”
Third-party standards are another important part of the compliance puzzle, according to Stewart. “If you’re a company and you’re in litigation and you’re not familiar with relevant standards that impact your area of the market, that can be used very effectively by a good plaintiff lawyer to create the basis for negligence finding or product liability finding,” Stewart said. “Third-party standards can be used defensively and they can be used offensively, and all cannabis companies should be paying attention to those developing standards and the insurance industry should be paying attention to those.”
Ensuring that third parties have well-established risk management plans and follow standard operating procedures are one of the best ways to protect a company, according to Vaillencourt.
“Looking for evidence of management plans, risk management plans, asking just, ‘Do you have a book of SOPs,’ because we know, again, pretty much every state requires you to submit this book of hypothetical SOPs, but are you actually using them? Do you have recall? Have you done mock calls? Looking for that evidence and verifying that,” he said. “Third-party certifications are a great way to do that.”
According to Oglesby, Trulieve conducts mock audits quarterly on its recall containment policy.
“And so that’s something that we’re constantly refining and really making sure we’re implementing across the board,” she said. “Some other notable items that we’re working through is developing because there’s not GMP requirements across all states, we’re looking at it on not just the manufacturing and the food manufacturing, but also across cultivation. There is a different set of standards that we’re looking to implement that is equivalent to GMP. And so we’re working on that across all of our cultivation sites and hoping to get all of that moving by the end of 2022. Just so that again, we can standardize.”
What’s the Take-Home?
Compliance is in the eye of the beholder, so to speak, because regulations, like the cannabis industry they were made to oversee, are still in their infancy and they are evolving differently in different places.
Stewart took a book from anatomy 101 to describe the state of compliance in cannabis.
“Compliance is also somewhat subjective still because we have the regulations, but when you compare the regulations to the body of law, the regulations are the skeleton, he said. “And then you’ve got the rule making around the regulations, which is like the muscle and tissue. And then you’ve got the judge made decisions, court decisions, tort law, et cetera, that’s like the skin on the body. So right now, we’re still … we don’t have a fully functional body of law. And particularly in some of these earlier, and more recent (legal) states. And, so, it is difficult.”
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