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Cases to Watch: California Growers Association vs. California Department of Food and Agriculture

Posted by on Saturday, February 3, 2018 in News, Updates.

UPDATE (2/20/20): The California Grower’s Association voluntarily dropped its lawsuit back in January of 2019. See Scott Rodd, Growers association drops lawsuit against state over permitting large-scale cannabis cultivators, Sacramento Business Journal. However, the issues discussed below remain relevant as states ponder whether / how to regulate the structure of the licensed marijuana industry.

An association of small California marijuana cultivators has just sued state regulators for failing to restrict the size of licensed marijuana cultivators. The lawsuit stems from concerns over Big Marijuana (discussed in the book on pages 512-515 and in a previous post here). If successful, the suit could reduce concentration in California’s nascent recreational marijuana industry, at least in the short term.

To understand the suit, some background on California’s new marijuana laws is necessary. California’s Proposition 64 creates several categories of cultivator licenses to serve the newly legalized recreational marijuana market (California’s licensing system is discussed on page 445 n.3). For simplicity’s sake, call them “small” (allowing up to .25 acres of cultivation outdoors or 10,000 square feet indoors), “medium” (up to 1 acre or 22,000 square feet), and “large”  (no set limits) licenses. However, “to ensure[] the nonmedical marijuana industry in California will be built around small and medium sized businesses”, Proposition 64 also prohibits issuance of those “large” cultivator licenses for the first five years of the industry (i.e., until January 1, 2023). Proposition 64, Section 2J. In other words, it appears to give small and medium-sized cultivators a head start vis-à-vis their larger rivals.

In June 2017, California’s legislature passed the Medical and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”) to implement Proposition 64. The statute appeared to mirror the language of Proposition 64 governing commercial cultivation licenses. Like Proposition 64, it creates three basic categories of cultivator licenses and it prohibits the issuance of the large licenses for the first five years.

In December 2017, the state Department of Food and Agriculture (Department) then issued its own emergency regulations (regulations) to implement the production-related provisions of the MAUCRSA. Those regulations are what prompted the association’s present lawsuit.

Like Proposition 64 and the MAUCRSA, the regulations prohibit the issuance of large cultivator licenses until January 1, 2023. The regulations also bar a single entity from holding more than 1 medium cultivator license. Section 8209 (around page 26). However, the regulations impose no limit on the number of small licenses that any one entity may hold. According to the complaint, the failure to impose such a limit creates a glaring loophole in California’s restrictions on cultivator size, a loophole that undermines the intent of the voters who approved Proposition 64 and the legislators who passed the MAUCRSA.

The key paragraphs of the complaint declare:

15. The Department’s failure to cap the total number of “small” cultivator licenses issued to a single person or business violates the initial five-year prohibition on “large” cultivations set forth in MAUCRSA (Bus. & Prof. Code, § 26061, subd. (c)) as well as the AUMA[, the Control, Regulation and Tax Adult Use of Marijuana, more commonly known as Proposition 64,] that any individual or entity may hold.

. . .

17. Authorizing large cultivation operations prior to 2023 will have a devastating effect on small and medium cannabis businesses, local economies throughout the state, and the environment.

18. The Department contracted with ERA Economics, LLC to prepare an “Economic Impact Analysis of Medical Cannabis Cultivation Program Regulations” (“Economic Study”). The Economic Study found that “[o]utdoor cultivators experience the highest regulatory costs due to lower productivity per square-foot of canopy.” With respect to these regulatory costs, the Economic Study concluded that “larger scale operations are able to spread regulatory costs over a greater quantity of production, making these entities more likely to participate in the regulated market.” Smaller outdoor cultivation operations, being less able to take advantage of economies of scale, are “least likely to participate in the regulated market.”

19. MAUCRSA’s initial five-year prohibition on large cultivation operations allows small and medium businesses necessary time to establish their operations so that they may later compete with large cultivation operations that can “spread regulatory costs over a greater quantity of production.”

20. Approving large cultivation operations in 2018 will significantly reduce the ability of small and medium businesses to compete economically in the regulated market. As a result, more small and medium cultivators will choose not to enter the regulated market and will instead stay in the illegal market.

The association asks the court to declare that the regulations are inconsistent with the MAUCRSA and to enjoin the issuance of multiple small licenses when doing so would enable a single entity to exceed the size limitations imposed by the MAUCRSA.

Let me share some brief thoughts on the merits of the lawsuit. Most importantly, it is not obvious to me that the agency erred in allowing aggregation of small cultivation licenses. Neither Proposition 64 nor the MAUCRSA (as far as I can tell) expressly forbid anyone from holding more than 1 of any type of license (small, medium, or otherwise). To be sure, this may have been an oversight in both measures, but even so, it’s not an oversight attributable to the Department.

The fact the agency on its own initiative barred any single entity from holding more than one medium license does make its refusal to similarly limit aggregation of small licenses appear quite puzzling. But the Department might have thought other features of its licensing system would effectively discourage such aggregation. Imagine, for example, that the Department had charged higher fees for the second (or third, etc) small license—this would have discouraged growing through aggregation of small licenses. (This is just an illustration – the Department didn’t actually do this; its actual fees are listed here around page 20.) I don’t know what the Department was actually thinking; we’ll likely have to wait for its response to the lawsuit to get a glimpse into its reasoning.

Whether the Department’s reasoning passes muster will likely depend on the degree of deference the court accords the Department’s actions. Federal courts apply a very deferential standard of review to most agency actions (called Chevron deference). California courts, by contrast, apply a less deferential standard of review. (For further discussion of California’s applicable standard of review, see California Law Revision Commission, Judicial Review of Agency Action 29-32 (1997)). California’s standard should give the association at least a fighting chance of challenging the Department’s regulations.

For additional resources on this ongoing dispute, see:

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