The Looping Problem in Marijuana Sales

Posted by mikosra on Wednesday, May 9, 2018 in News, Updates.

States commonly limit the quantity of marijuana that a licensed supplier may sell to a consumer (see book pages 462-463). For example, Colorado’s Retail Marijuana Code Rule 402 provides that “A Retail Marijuana Store and its employees are prohibited from Transferring more than one ounce of [marijuana] . . . in a single transaction to a consumer.” 1 Colo. Code Reg. 212-2.402 (2018).

In theory, the limits on sales serve two goals. First, they help stop buyers from possessing more than the legal limit at any given time (those possession limits on discussed pages 126-128). Second, the sales limits also discourage the resale of marijuana on the black market, by making it more costly to acquire marijuana in bulk.

But if a buyer can visit a licensed marijuana store multiple times in the same day and purchase the maximum quantity allowed on each visit, the sales limits will lose much of their force. The practice of returning to the same shop to make purchases two (or more) times in a day is called “looping.” (A related practice, called “smurfing”, involves visiting different shops to make purchases on the same day.)

Looping is at the heart of a recent case involving Sweet Leaf, a Colorado licensed retail marijuana shop with multiple locations around Denver. I will briefly summarize the case and then address a few questions raised by it and looping more generally. My factual summary is based upon the allegations and findings in an April 2018 Denver recommended licensing decision (see In re Sweet Leaf recommended decision), but you can also find excellent reporting on the case by Alicia Wallace at The Cannabist here and here.

Let’s start with the facts:

In fall 2016, prompted by complaints from the neighbors a Sweet Leaf dispensary, Colorado and local (Denver) law enforcement launched an extensive investigation into the company’s operations. The investigation involved undercover surveillance of Sweet Leaf dispensaries, interviews of buyers suspected of looping, controlled buys conducted by undercover police officers, interviews with Sweet Leaf employees, and searches of Sweet Leaf premises, among other tactics.

The 13-month investigation uncovered evidence of multiple incidents of looping at several different Sweet Leaf dispensaries.

Through undercover surveillance, the police observed several customers make multiple purchases from the same Sweet Leaf dispensary in a single day. The modus operandi of these customers was quite similar: The customer would enter a Sweet Leaf dispensary, exit a few minutes later with a package, deposit the package in their vehicle (often parked away from the shop), and then re-enter the dispensary to make another purchase, repeating these steps multiple times throughout the same day. To cite just one example, on a single day in November 2016, the police observed that “between 2:45 pm and 4:15 pm . . . [a customer] entered and exited [a] Sweet Leaf dispensary ten times, and each time upon exiting . . . placed a container in his vehicle.” (In re Sweet Leaf ¶ 15.) When the police searched the customer’s vehicle, they found 34 containers of marijuana marked with the Sweet Leaf logo, containing a total of 2.16 pounds of marijuana. (In re Sweet Leaf ¶ 16.)

Undercover police officers also made multiple purchases of marijuana at the same Sweet Leaf dispensary in a single day. In January 2017, for example, an undercover police officer made 14 separate purchases of marijuana (14 ounces total) from a single Sweet Leaf dispensary, all in less than 3 hours. (In re Sweet Leaf ¶ 36.)

The investigation also found evidence that at least some of Sweet Leaf’s employees were aware of the looping. Undercover officers who made controlled buys and several customers who had been observed looping said that they made several purchases in the same day from the same Sweet Leaf budtender, and that the budtender recognized them and even their preferred strain of marijuana. Some officers and customers also said that budtenders and / or security guards explicitly told them they could make multiple purchases on the same day, but only if they left the dispensary premises after each purchase. Sometimes the customers were also advised to park their vehicles away from a dispensary, outside the range of its security cameras.

Indeed, evidence suggests that Sweet Leaf’s owners and managers may have encouraged looping. One of Sweet Leaf’s senior managers apparently told the police that a “Sweet Leaf vice president instituted the practice of ‘looping’ in 2016,” and that the company’s “three owners encouraged and directed the practice of looping at all dispensaries.” (In re Sweet Leaf ¶¶ 90-91.) “Sweet Leaf trainers instructed new employees to allow looping for retail customers making multiple purchases of one ounce of marijuana if the customer left the premises after each purchase.” (In re Sweet Leaf ¶ 90.)

Why would Sweet Leaf encourage looping? It appears the company generated substantial revenues from the practice. The senior manager just mentioned estimated that between 30-50% of Sweet Leaf’s $5-10 million in annual revenue came from looping. (In re Sweet Leaf ¶ 91.) And a statistical analysis of transaction data prepared by the Colorado Marijuana Enforcement Division (MED) estimated that between June 2016 and December 2017, Sweet Leaf generated nearly $7 million in revenue from roughly 2,000 instances of looping involving medical marijuana at just three Sweet Leaf locations. (In re Sweet Leaf ¶ 119.)

Several of the company’s employees and customers have been charged with criminal offenses (more on the charges below). The MED also summarily suspended Sweet Leaf’s marijuana licenses in December 2017, and in April 2018, a licensing officer recommended permanent revocation of Sweet Leaf’s licenses.

Now, let me address a few questions raised by the case and by looping more generally:

• First, does looping actually violate Colorado’s Rule 402?

The answer to this question depends on how we define “transaction” for purposes of Rule 402. Recall that Rule 402 bars transferring more than one ounce “in a single transaction to a consumer.” (An earlier version of the Rule barred transfer of more than one ounce in “a transaction”, but this particular change in terminology does not appear material for our purposes.)

If each sale is considered a separate transaction, then making multiple sales to a single customer on the same day would not violate Rule 402. Indeed, Sweet Leaf has pushed for this narrow interpretation of Rule 402. At a licensing hearing, the company claimed that

“the City cannot prove that they violated . . . Rule 402. . . that was in effect prior to January 1, 2018, because the rule did not bar the sale of more than one ounce of retail marijuana per day; rather it barred any single sale of more than one ounce of retail marijuana . . . [and] there is no evidence of an individual sale of retail marijuana that exceeded one ounce. . . .”

(In re Sweet Leaf ¶ 137.)

But the licensing officer presiding over the hearing disagreed, for two reasons.

First, the officer cited a broader interpretation of Rule 402 (called a Statement of Position) that the MED issued on May 22, 2017 (see here). In relevant part, the MED Statement declares that

“What constitutes a ‘single sales transaction’ when determining compliance with Rule R 402(C), 1 CCR 212-2 is dependent on the facts and totality of circumstances of each individual case . . . Sales that are structured as multiple, stand-alone transactions may be viewed by the [MED] as an attempt to evade quantity limitations on the sale of Retail Marijuana, resulting in recommendation for administrative action.”

(In re Sweet Leaf ¶ 133 (quoting Statement) (emphasis added).) The licensing officer found that Sweet Leaf’s argument “fails to recognize that the MED provided public notice” that discrete sales transactions could be aggregated for purposes of Rule 402. (In re Sweet Leaf ¶ 138.)

Second, the officer suggested that Sweet Leaf’s interpretation of Rule 402 was disingenuous, and that Sweet Leaf had known all along that it was violating the law. To support this suggestion, the officer noted that Sweet Leaf’s “practice of advising customers to leave the view of the security cameras before returning for another purchase shows consciousness of wrongdoing.” (In re Sweet Leaf ¶ 139.)

Applying the MED’s interpretation of Rule 402, the officer found that Sweet Leaf had committed 26 separate violations of Rule 402 between November 2016 and December 2017. The officer noted that employees of the firm had knowingly sold marijuana to the same customer multiple times over a short span of time. (In re Sweet Leaf ¶ 140.) The officer also found that these violations of Rule 402 provided cause (though not the only cause) for revoking Sweet Leaf’s commercial marijuana licenses. (In re Sweet Leaf ¶ 147.)

While I think the officer’s (and MED’s) interpretation of Rule 402 makes sense, I’m not sure the interpretation would survive a legal challenge in court.

To begin, the text of Rule 402 in effect during the events of Sweet Leaf’s case is arguably ambiguous. Courts have found ambiguity in similar marijuana rules. For example, in one Washington case discussed in the book (see pages 427-439), a court found that a state rule limiting caregivers to serving “only one [medical marijuana] patient at any one time” was ambiguous. The state thought the rule meant that a person could serve as a caregiver for only one medical marijuana patient, but the court read the rule more flexibly. In the case, it allowed one caregiver to distribute marijuana to 1,280 medical marijuana patients, so long as the caregiver did so “one transaction after another”! In similar fashion, the phrase “a transaction” or “a single transaction” in Rule 402 could plausibly be read to refer to a discrete sale, rather than a series of such sales.

In the face of such ambiguity, a court might reject the licensing officer’s (and MED’s) interpretation of Rule 402. For one thing, courts commonly interpret ambiguous regulations to favor the party accused of violating a rule rather than the agency that promulgated the rule. After all, the MED could easily have clarified the scope of Rule 402 by revising its text. Indeed, after the events of this case, Colorado did just that. It amended the language of Rule 402 to expressly declare that,

“A single transaction includes multiple Transfers to the same consumer during the same business day where the Retail Marijuana Store employee knows or reasonably should know that such Transfer would result in that consumer possessing more than one ounce of marijuana.”

The amended language became effective on January 1, 2018, and so does not apply to Sweet Leaf’s case. While the MED did issue its Statement of Position back in May 2017, a court might not feel bound by that Statement. Rule 104authorizes the MED to issue Statements of Position, but it doesn’t say whether those Statements  have the force of law—i.e., that they’re equivalent to the text of a regulation promulgated by the agency. The fact the MED later felt it necessary to amend the text of Rule 402 suggests to me that Statements may not be binding on courts–in other words, they may constitute mere persuasive authority. And while courts give agencies some deference, they don’t always accept agency interpretations of regulations.  In California, for example, courts rejected the state Attorney General’s guidance interpreting SB 420 (see book pages 418-422), the statute that legalized commercial supply of medical marijuana in the state. In any event, the Statement was issued after several of the looping transactions the licensing officer found to violate Rule 402. Thus, even assuming the Statement is binding or persuasive, it did not provide notice that related transactions prior to May 22, 2017 might violate Rule 402.

Likewise, Sweet Leaf’s practice of telling customers to leave a dispensary before making another transaction doesn’t necessarily shed light on the meaning of Rule 402. It may simply indicate that Sweet Leaf was trying to exploit a gap it genuinely believed existed in the law—namely, that Rule 402 as written didn’t cover multiple sales, no matter how closely related.

• Second, what other laws might have been violated?

Apart from Rule 402, Sweet Leaf, its employees, and its customers may have violated other provisions of Colorado law.

For their part, the customers who engaged in looping clearly exceeded the state’s limits on possession of marijuana. Namely, in many circumstances, Colorado continues to ban possession of more than one ounce of marijuana.  See C.R.S. § 18-18-406(4)-(5). Indeed, a few of Sweet Leaf’s customers have already pled guilty to possession offenses and have received sentences ranging from probation to one-year imprisonment.

The customers probably also committed possession with the intent to distribute marijuana, a more serious supply offense. C.R.S. § 18-18-406(2)(b)(I). As discussed in the book (see pages 327-335), the quantities customers possessed (more than 2 pounds in some cases) alone may be enough to demonstrate an intent to distribute marijuana (though as discussed below, the police also uncovered other evidence that customers planned to resell the drug). Indeed, some customers may have pled guilty to simple possession in order to escape more serious trafficking charges under Section 406.

The Sweet Leaf employees who knowingly sold to looping customers may have aided and abetted the customers’ possession and PWID offenses. The evidence suggests that employees probably knew that their repeated sales to a given customer had put the customer in violation of possession limits. The evidence also suggests that employees probably knew those customers planned to resell the drug. Of course, the government would also need to demonstrate the employees wanted the customers to succeed in breaking the law–that’s a key element of aiding and abetting crimes (see book pages 571-577). But it’s not hard to imagine why the employees would have wanted customers to succeed, e.g., to please their bosses (who were allegedly encouraging looping) or just to boost the fortunes of their employer.

Interestingly, Sweet Leaf may have violated a separate (local?) rule that bars licensees from even allowing—and not necessarily aiding—third persons (like customers) to violate the law on their premises. Under this rule, a licensee is liable if “‘a reasonable licensee . . . would have been aware of the [offense] and taken action to stop [it].’” (In re Sweet Leaf ¶ 148 (quoting DRMC §§ 32-22 & 30).) In Sweet Leaf’s case, the licensing officer concluded that “Sweet Leaf’s scheme at the very least permitted the unlawful possession by its customers and its scheme was not the action of a ‘reasonable licensee.’” (In re Sweet Leaf ¶ 149.)

The broader lesson here—and a theme I pursue in the book and in my Marijuana Law class–is that law enforcement officials can often pursue multiple charges against a particular defendant, potentially allowing them to avoid some charges that raise tricky legal questions (like what is the scope of Rule 402?).

• Third, how are governments (and suppliers) supposed to enforce bans on looping?

Even if a jurisdiction adopts a clear ban against looping—like Colorado’s amended Rule 402, there may be no easy way for the government to enforce or a licensee to comply with the ban. Sweet Leaf was unabashed about looping, making its violations (if they were violations) relatively easy to detect. But other companies might be more circumspect in engaging in repeat transactions with customers, or may not have the data they need to detect looping.

Government could require marijuana dispensaries to track customer purchases. (States already do like for sales of cold medicines containing pseudoephedrine and similar chemicals used to manufacture meth.) The tracking system would warn licensees about loopers—and it would enable regulators to identify licensees who disregarded such warnings.

However, tracking marijuana purchases raises some obvious privacy concerns (see this Politifact article here). After all, a lot of people still may not want others (and especially the government) to know that they’re buying marijuana. A state could make the information privileged, but state privilege laws do not necessarily bind federal law enforcement or even federal courts (see my law review article here).

The state could instead analyze anonymous sales data to detect looping. Indeed, as noted above, the MED used existing data to estimate the number and dollar volume of some looping transactions at Sweet Leaf. Such evidence could be used to build a case against a licensee, without necessarily exposing the identity of any customers. But the tactic may not work as well when licensees go to greater effort to hide looping, and it would not help licensees detect looping real-time.

The bottom line is that it might be difficult for law enforcement to detect and punish looping, notwithstanding clear bans on the practice.

• Fourth, where was all the marijuana acquired via looping going?

It appears that much of the marijuana purchased via looping at Sweet Leaf stores was destined for the black market, including prohibition states like Arkansas, Texas, New Mexico, and Nebraska. Several looping customers acknowledged to police they were planning to resell the purchased marijuana in other states. Sweet Leaf employees also noticed that many customers drove vehicles with out-of-state license plates or showed out-of-state drivers’ licensees for ID at the door.

• Fifth, what took so long for Colorado / Denver to shut down this looping operation?

The investigation of Sweet Leaf lasted roughly 13 months—from November 2016 through December 2017. During that span, the police observed or conducted looping at least 26 separate times. It’s worth noting that at the close of the investigation, Colorado / Denver moved quickly to charge customers and employees and discipline Sweet Leaf. Still, while the investigation was ongoing, Sweet Leaf was probably able to sell millions of dollars worth of marijuana that was ultimately destined for the black market (in Colorado or elsewhere)

It’s purely speculation, but I suspect the investigation may have lasted so long because,

A) state/local regulators may need more resources,

B) regulators had doubts about whether Rule 402 charges would “stick” to any looping that took place before the MED issued its Statement of Purpose; this may explain why regulators continued to gather evidence, even after observing and conducting looping several times before May 22, 2017, or

C) regulators simply wanted to build a strong case against Sweet Leaf, and doing so required conducting a thorough–and perhaps even repetitive–investigation.

That’s it for now. The licensing authorities should issue a final decision shortly — when they do, I’ll post an update on this case.

Tags: cannabis, Colorado, license, licensing, loop, looped, looping, marihuana, marijuana, Sweet Leaf