California Cannabis Supply Chain Contracts: Recalls

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California Cannabis Supply Chain Contracts: Recalls

The California cannabis regime is set up so that every point in the supply chain is broken down into different license types: cultivation, manufacture, distribution, testing, and retail sales, to name a few. With the exception of a few vertically integrated companies, virtually all cannabis companies have to rely on other companies in the supply chain to get products from the farm to the consumer.

To this end, our California cannabis lawyers regularly draft “supply chain” agreements. This is a broad term that includes cannabis contracts such as purchase agreements, distribution agreements, manufacturing agreements, supply agreements, license agreements, etc. We have published a number of posts that have identified common issues with contracts for the California cannabis supply chain, and will continue to do so in the coming months. If you haven’t read previous articles on this topic, we recommend that you start with the following:

Today I want to discuss recall policy. Product recalls occur when the manufacturer or seller of a cannabis product requests downstream sellers or consumers to return the product, usually after discovering a defect or a safety risk. For example, a cannabis vaporizer manufacturer may initiate a recall if they learn that the vaporizer battery can overheat and burn consumers.

Recalls can be initiated by the manufacturer, but can also be initiated by downstream vendors or government agencies. Given that cannabis products often go through multiple licensees before they reach consumers, it is important to incorporate recall provisions in supply chain agreements. Otherwise, problems and disputes may arise.

One of the most important parts of a recall provision is who is responsible for controlling the recall. Some recall provisions give power to control a recall to one party while others share responsibility. This can be critical in that callbacks involve public messages. For example, the manufacturer of a product may want a full say in the press releases issued and the action plan in place to control the recall, which can affect its image.

Another important provision in the callback language is who pays for it. Recalls can be costly, both in terms of actual execution and in terms of the loss of products in the marketplace. Failure to address who is responsible for paying for a callback can very likely lead to a dispute.

In terms of payment, it is typical for licensees downstream of a manufacturer to argue that the manufacturer should bear all costs associated with the recall. This makes sense because many of the problems that lead to recalls are related to the manufacture of a product. However, many manufacturers will attempt to negotiate outsourcing to require that the downstream operator pay the cost of a recall in the event of the recall.

To see how this works in practice, let’s return to the battery example above. If the defect in the battery was caused by the distributor for whatever reason (the distributor may have stored the vaporizers at extreme temperatures which caused malfunction), the distributor should pay from the manufacturer’s point of view. As you can imagine, this can be a significant headache in practice, even when contracts contain well-worded provisions on cost shifting, and it can lead to legal disputes between manufacturer and retailer over who was actually responsible for the damage and should bear it Callback costs.

With cannabis contracts in particular, it is also important to consider the regulatory implications of a recall. The California Department of Health (CDPH) has detailed recall rules that require, for example, a corrective action plan to be drawn up and approved by the CDPH before a remediation can take place. Licensees who skip the legally mandated practices can create even more trouble and uselessly spend money remediating products they cannot sell. Contracts can play a major role in this area.

Recall provisions are just as important in supply chain contracts as many other provisions. For more information on supply chain agreements, visit the law Law Blog.