California Marijuana Regulation Pushes Many Active Participants out of the Market

By: Micky Cobrin – Hofstra Law School – Student Contributor

In October 2013, California’s Lieutenant Governor formed the Blue Ribbon Commission (BRC) on Marijuana policy to compile a report on the issues that need to be considered in anticipation of a likely ballot measure in 2016 to tax, regulate and legalize marijuana for all adults over the age of 21. The report concludes that California has among the least structured systems of rules and regulations of any state with a medical marijuana law and consists of: (1) a large illicit market of cultivation and retail sale; and, (2) a quasi-legal recreational market that is largely unregulated, untaxed and untenable.[1]

California law makers have faced various difficulties in their attempts to regulate a market that has rapidly expanded since the passing of Proposition 215 known as the Compassionate Use Act (CUA) by ballot initiative in 1996. In January 2010 the Supreme Court found various provisions in a 2003 legislative Act as unconstitutional violations of the CUA.[2] Later that year, voters rejected a ballot initiative that would have enacted legislation creating a state-wide regulated recreational marijuana industry.[3]

The Blue Ribbon Commission signifies a recommitment to the issue of regulation and no more than a couple months after the release of the report in 2015, the California legislature passed the Medical Marijuana Regulation and Safety Act (MMRSA), a package of three bills creating a statewide licensing program extending to every aspect of the medical marijuana industry from cultivation to retail dispensaries.[4] The act was created with the expectation that legalized recreational use would be the next step for California and, as expected, the regulatory scheme from the MMRSA has been essentially adopted in the Control, Regulate, and Tax Adult Use of Marijuana Act (AUMA), which would legalize recreational use of marijuana through a ballot initiative if adopted by voters in the upcoming election.[5]

The Blue Ribbon Commission claims that one of its purposes is to bring the illicit market under control through a regulated taxable industry; however, the 2015 legislative action and pending ballot initiative for adult use will only further encourage illicit market activity by pushing the majority of patients who have made a living in the medical marijuana business for 20 years out of the regulated market by limiting the amount of state licenses issued to cultivators and dispensaries.[6]

What constitutes the illicit market is not made clear. As the BRC acknowledged there are two major markets in California, a completely illicit market where individuals use protection under CUA as a cover to grow marijuana and export it out of the state in violation of federal law; and, a second qausi-recreational market (the unregulated medical marijuana market) which operates in what can best be described as gray areas of the law.[7]

Patients, as individuals and through small cooperatives, have been able to supply their own marijuana and sell the surplus to make a small living. Despite their unclear legal standing, these patients have created the most innovative and largest marijuana market in the nation.[8] State-wide regulatory schemes such as the MMSRA and AUMA will take control of significant portions of the market that medical marijuana patients have created over two decades since granted rights under the UCA. Regulation is being marketed to the general population of retail consumers who fear being arrested by law enforcement as a progressive step in liberating marijuana use but many patients who are employed in the industry, operate dispensaries or cultivate marijuana are seeing livings they have created upon the rights granted under the CUA vanish. Instead of being brought from the shadows and taxed this large group of individuals who make up the current marijuana market are being pushed out.[9]

Before understanding how these regulations will affect patients it is necessary to understand the broad rights granted to them when California passed the CUA by state-wide ballot initiative known as Proposition 215 in 1996. To this day it confers more rights with regards to cultivation and possession to its patients than any other medical or recreational marijuana law in the nation. The Act permits patients to grow or possess marijuana up to any amount that a licensed physician deems necessary for their current medical needs. Under the Act doctors may prescribe medical marijuana for a variety of illnesses including the broadly defined chronic pain or even “any other illness for which marijuana provides relief”.[10]

The central problem facing the legislator’s power to regulate the market is the stringent limits the California Constitution places on their ability to amend or repeal ballot initiatives. In the landmark decision, People v. Kelly, the Supreme Court explained that they have a duty to “jealously guard the people’s initiative power, and hence, to apply a liberal construction to this power wherever it is challenged in order that the right to resort to the initiative process be not improperly annulled by a legislative body.”[11] Due to this any legislative act passed since 1996 can and has been struck down in courts in provisions where the Act limits rights patients are provided under the CUA.

Patients’ rights under the CUA, however, are constantly under threat from law enforcement and the threat of arrest remains the most important means by which the government has impeded the rights of patients and forced regulation into the market. Although federal law involvement has backed off the medical market to a degree since 2009, local law enforcement agencies have continued to arrest those they suspect may not be in compliance with the law.[12]

Arrests, however, often don’t turn into convictions because protection under the CUA is an affirmative defense and the patient can move to dismiss any case where the prosecution has failed to establish probable cause that the marijuana was not intended for a medical purpose. Furthermore, those who have had their charges dropped may file to have their property returned and claim damages.[13]

To avoid these common and unnecessary arrests California set about providing clarity to the law in 2003 by passing Senate Bill 420 (SB420) which identified possession and cultivation guidelines that if adhered to should protect patients from arrest. Patients are recommended to possess no more than 8 ounces of dried flower and to cultivate no more than 6 mature plants unless a doctor specifies that their medicinal needs require more. In addition, counties and local governments can approve higher possession and cultivation limits for their patients but not lower.[14]

To provide an extra measure against arrest, patients were encouraged to join a voluntary ID card registry system through the county health departments.[15] In Kelly the Court found that law enforcement must accept a patient’s ID card absent reasonable cause to believe it is being used fraudulently. Patients, however, are not required to register and have often chosen not to. In 2014 76,431 people were registered with the state yet there are an estimated over 500,000 medical marijuana users in California. Clearly the majority of medical marijuana patients are not registering with their county.[16]

In People v Kelly (2010), the Supreme Court addressed many of these issues for the first time. Most importantly the Court held that patients could not be prosecuted simply for exceeding the SB420 limit.[17] (Kelly was arrested with 12 ounces of marijuana when he could not present a doctor recommendation specifying that he required more than 8 ounces to officers). Legislators are expressly prohibited from changing an initiative by diminishing the rights that its grants.[18] The CUA states patients can possess or cultivate marijuana in an amount “reasonably related to (their) current medical needs, and the Court held that clarifying the limits of ‘reasonableness’ is an amendatory act.[19] Although finding the possession limits unconstitutional, the Court ruled that patients could still be arrested and forced to defend themselves as having had an amount consistent with their personal medical needs.[20] Further the Court left room for the market to be regulated clarifying that while legislators cannot amend ballot initiatives they can enact laws addressing general subject matter to a related but distinct area of the law.[21]

The government has been left in a spot where they can regulate many aspects of the industry but are constitutionally barred from enacting any law that would restrict patient’s right to possess or cultivate marijuana in quantities up to their prescribed medicinal needs. Due to this and the legislator’s inability to pass any comprehensive statewide regulation -until 2015- the California marijuana market (medicinal or quasi-recreational) remains as expansive and unregulated as ever.

The MMRSA, passed in 2015, sets out to change all of this and is supposed to be fully implemented by January 2018. Whether or not the adult legalization bill (AUMA) passes the ballot initiative this fall, the MMRSA will begin the process of streamlining the California marijuana market through a comprehensive statewide regulatory scheme.[22] The Act will certainly bring up many Constitutional issues that Courts will need to address in the upcoming years.

Various state departments are charged with the issuance of state licenses to cultivators for different size marijuana farms, manufacturers, testers, dispensaries, distributors, and transporters who also meet local government requirements. Furthermore, for the first time the law permits different types of for-profit industries such as sole proprietors, corporations, and business trusts to operate in the medicinal market and does not require owners or investors to be from California.[23]

While these sections of the law do not expressly limit the rights of patients protected under the CUA they create a scenario where non-patient business participants can more effectively infiltrate areas of the market dominated by patients and collectives who are oftentimes small and may likely be denied state licensing. The result is that a majority of medical marijuana patients will not be in a position to operate businesses when California organizes a comprehensive state wide regulatory scheme.

State licenses to operate dispensaries, for example, will be limited and licenses to cultivate for sale to dispensaries will also be large scale and limited decreasing the number of profitable growers in the state. To ensure compliance the Act includes trace-and-track program to follow seeds from the point of cultivation to sale on the retail market.[24] David Hodges, the founder of San Jose’s first medical marijuana dispensary, the San Jose Cannabis Buyers Collective, says that the act seeks to license only 300 dispensaries in California although an estimated 2500 currently operate within California.[25] He doesn’t see how we can enforce a state regulatory scheme that could require local governments to shut down dispensaries that aren’t granted state licenses.[26]

Defenders of the act have made a point that they intend to protect small businesses but the three forms of cultivation licenses far exceed the restrictions the Act will attempt to put on medical marijuana patients. The state will offer: (1) Small-scale licenses to cultivate up to 5000 square feet indoor or outdoor; (2) mid-scale licenses permitting 5000-10,0000 square feet indoor or outdoor; and, (3) large scale licenses permitting grows up to 22,000 square feet indoor and 43,000 square feet outdoor.[27]

Meanwhile cultivators of marijuana who are not issued state licenses will be forced to grow as in the ‘gray area’ as patients under the CUA for strictly personal use or as a caregiver for up to five patients. The MMRSA explicitly states that Qualified patients are exempt from the state permit program if they cultivate under 100 square feet for personal use or so long as caregivers limit their gardens to 5 patients and up to 500 square feet.[28]

Previous Supreme Court decisions, however, suggest that the Court will not enforce the MMRSA limits on cultivation to patients, caregivers, or cooperatives.[29] This creates a scenario where patients who previously made a living cultivating marijuana can still benefit from Proposition 215 protections while harvesting a large crop completely unsellable on the regulated state market. Ultimately many of these patients will seek to sell their marijuana wholesale to out of state clients. Marijuana is the leading marijuana producing state in the nation by far. The rural producing region in northern California known as the emerald triangle (Mendocino, Humboldt, and Trinity counties) contains an estimated excess of 30,000 gardens alone and the majority of the cultivation already is sold to out of state customers.[30] The patient, often distributing the marijuana within the marijuana-friendly state of California to a middle man, operates in a relatively safe atmosphere and assumes a small percentage of the risk in what ultimately becomes a federal crime. Furthermore, out of state buyers are often willing to pay more than Californians who patient cultivators are going to banned from to selling to anyway. Lawmakers don’t seem to recognize -or more likely don’t seem to care- that their power to limit cultivation rights of marijuana patients will be hampered by strong market incentives created by the federal prohibition on marijuana. If the prohibition is eventually ended California will find itself in a position to reap significant export revenue from the crop. Rather than developing their resource of thousands of entrepreneurial growers by taxing them and allowing them to compete on the open market, however, California lawmakers appear determined to push this talent out of the regulated market and further into the arms of the illicit market.

Local governments such as in Los Angeles and San Jose have already begun to use strict regulatory schemes to shut down business operating in their cities by permitting only certain dispensaries to exist -either through licensing or by granting immunity to certain dispensaries and giving a green light to law enforcement to raid and shut down others. In 2013 Los Angeles passed Proposition D by referendum prohibiting dispensaries from operating within Los Angeles County.[31] At the time was estimated that anywhere from 800-1500 dispensaries were serving the 3.8 million residents of Los Angeles County.[32] Proposition D, however, also permitted 138 dispensaries that registered with the Counties Interim Control Ordinance (ICO) in 2007 to be immune from arrest -these dispensaries are now known as legitimate pre-ICO dispensaries and advertise themselves as such.[33] The roughly 1000 other dispensaries doing business within Los Angeles and the numerous people they employ have been excluded from the market and now operate under constant threat of being shut down or arrested by law enforcement. Stories of raids in the press are endless and consistent.

Despite continuous efforts by law enforcement, however, it is not clear that they have had any impact on the total number of dispensaries still operating in Los Angeles.[34] Oftentimes businesses operate with the expectation that they will be raided and continue to do business after being served notice that raid is imminent. After arrest or shut down and seizure business owners take their massive profit they took while operating discreetly and open a new location. Low level employees are stuck looking for new work.

The transactions in which dispensaries purchase their product from distributors -or middle men- display the type of open market in which marijuana patients conduct business. Commonly dispensaries have an employee in charge of purchasing the product or the owner buys it themselves. Throughout the day various distributors come by with their products and if the dispensary is satisfied they pay cash, shake hands, and the transaction is completed. Some of these distributors have state ID cards, some are employed in some precarious fashion by an individual who has product to sell, and some are freelance individuals selling marijuana products they acquired from a grower or a middle-man. Sometimes these distributors have doctor recommendations permitting them to carry increased weight but other times distributors operate in the “gray area” of the law with nothing but a medical marijuana script.

A distributor in Los Angeles recounted the story of a recent experience he had selling two pounds of marijuana to a dispensary in East Los Angeles. He works as an independent contractor for a collective that attempts to operate within the regulatory framework of Los Angeles by charging taxes and having any client they sell to sign up as a member of their collective. His efforts to have this particular East LA dispensary sign up with his collective were rebuffed.  “Keep in mind,” he says, “this is East LA where there is a dispensary literally next door, another three doors down and three more across the street and none are pre-ICO.”

The lady at the store bought the marijuana and agreed to pay the tax but refused to sign up with the collective saying “these laws are made for these millionaire investors who know nothing about the industry but want to come in completely protected. It’s not for those who have been doing this in fear of the cops for twenty years.”

Operating under ‘fear of the cops’ is exactly the stick the state has used to force patients into a state regulatory scheme under SB420 back in 2003. This quasi-recreation, or ‘gray’, marijuana market has expanded since the enactment of laws that restrict patient’s ability to access the market rather than include them. Even the celebrated Court decision in Kelly subjects patients to harassment from law enforcement if they don’t follow these unconstitutional possession and cultivation limits or if they don’t register for a state ID card -a card that is supposed to voluntary but is effectively coercive.[35]

In Los Angeles there are massive market indications that demand for a large number of dispensaries clearly exists yet Proposition D ignores them and has sought to concentrate this large demand into the hands of 138 pre-ICO collectives grandfathered in six years prior to the law’s enactment. The price for being banned by strong arm regulation is that from spring 2013 at the time of the law’s enactment to spring 2014 the number of shops registered to pay cities sales tax dropped from 1140 to 462 shops.[36]

The Greater Los Angeles Collective Alliance (GLACA) is composed of the core of the pre-ICO dispensaries and threw its support behind the MMSRA last year.[37] Founder Yami Bolanos who estimates that 1500 dispensaries operated in Los Angeles at the time of Proposition D understands that MMRSA was the framework for the recreational legalization scheme on the 2016 ballot stating that if recreational legalization is approved by voters next year then pre-ICO dispensaries will be allowed to sell medical marijuana when licenses are eventually issued. In fact, in the most recent draft of the AUMA, it is stated explicitly that Proposition D programs in Los Angeles should continue until the Act is fully implemented.[38]

Many criticize these regulatory efforts as irrational but that is not the case if one’s intent is take a large unfettered production and distribution market and turn it into a small tightly regulated market. Counties such as Los Angeles have already taken this approach deciding to sacrifice tax revenue and employment opportunities in order to permit law enforcement to operate as a tool to concentrate the industry in the hands of a few while they await the demand explosion that will surely come when adult recreational use is finally legalized.

[1] Blue Ribbon Commission on Marijuana Policy, https://www.safeandsmartpolicy.org/

[2] http://www.canorml.org/news/supremekelly.html

[3] http://abcnews.go.com/Politics/proposition-19-results-california-votes-reject-marijuana-measure/story?id=12037727

[4] https://www.mpp.org/states/california/the-california-medical-marijuana-regulation-and-safety-act/

[5] https://druglawandpolicy.wordpress.com/2016/01/16/from-the-mmrsa-to-the-adult-use-of-marijuana-act-the-distributor-license/

[6] See footnote 1

[7] See footnote 1

[8] http://www.fastcompany.com/3040847/the-california-colorado-cannabis-war

[9] http://www.canorml.org/medical-marijuana/patients-guide-to-california-law

[10] See footnote 9

[11] People v. Kelly (2010) California Supreme Court

[12] http://www.theguardian.com/sustainable-business/2015/aug/18/marijuana-dispensaries-california-cannabis-dea-police-raids

[13] People v Mower (2002) California Appellate Court

[14] See footnote 9

[15] See footnote 9

[16] http://canorml.org/news/cbcsurvey2011.html;

[17] People v Kelly (2010) See footnote 11

[18] See footnote 11

[19] See footnote 11

[20] See footnote 11

[21] See footnote 11

[22] https://druglawandpolicy.wordpress.com/2016/01/16/from-the-mmrsa-to-the-adult-use-of-marijuana-act-the-distributor-license/

[23] http://www.canorml.org/news/A_SUMMARY_OF_THE_MEDICAL_MARIJUANA_REGULATION_AND_SAFETY_ACT

[24]See footnote 23

[25] http://www.laweekly.com/news/new-marijuana-rules-could-close-every-dispensary-in-la-6104682

[26] Medical Marijuana Regulation and Safety Act

[27] See footnote 26

[28] See footnote 26

[29] See footnote 11

[30] Blue Ribbon Commission, see footnote 1

[31]http://la.curbed.com/archives/2013/07/here_are_the_134_pot_shops_now_allowed_to_operate_in_la_1.php

[32] http://www.laweekly.com/news/new-marijuana-rules-could-close-every-dispensary-in-la-6104682

[33] See footnote 31

[34] http://www.hightimes.com/read/dea-raids-four-la-dispensaries

[35] People v Kelly (2010), see footnote 11

[36] http://www.laweekly.com/news/how-some-dispensaries-find-a-way-around-las-pot-shop-ban-4604091

[37] http://www.glaca.org/

[38] http://www.laweekly.com/news/new-marijuana-rules-could-close-every-dispensary-in-la-6104682

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