California, Michigan, Crack Down on Unlicensed Cannabis Retailers

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SACRAMENTO–The deadline for unlicensed cannabis dispensaries, collectives, and co-ops to come into licensing compliance in California was January 9, and leaves hundreds of the state’s cannabis vendors at the mercy of local and state regulatory systems they say are burdensome and prevent their ability to obtain licensing.

At the same time, licensed California operators are concerned about competition with and loss of revenue to “black market” or unlicensed vendors. In Los Angeles alone, media reports said there could be more than 1,700 unlicensed shops–and only 169 licensed vendors.

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Adding to the regulatory headache, many unlicensed cannabis collectives and co-ops in greater Los Angeles and its unincorporated areas have been established for more than a decade. A legacy of patchwork regulation in effect after medical marijuana was legalized in California in 1996, the majority of those businesses have been established since 2007.

In the city of Pasadena, home of the Rose Parade and an upscale L.A. suburb, one such business is feeling the pinch since being raided by local police in mid-December. In fact, Golden State Collective had operated next door to the Pasadena Chamber of Commerce office since 2012, but previously had been sued by the city (with other dispensaries) for operating illegally. Pasadena won the 2016 suit, which was then appealed. The current status of the suit is unclear, according to the Pasadena Star News.

Since Pasadena residents in June 2018 voted to strike down a ban on dispensaries, Golden State owner Shaun Szameit had appealed to Pasadena officials to allow the dispensary to be licensed. However, city regulations prohibit dispensaries that had been operating “illegally” prior June to apply for cannabis licenses.

Szameit posted a sign in the store’s window not long after the bust, appealing to the public and his customers. Pasadena News Now quoted part of Szameit’s appeal, which said, “The City decided to raid Golden State Collective… rather than license our activity… We support every cause in the City and have been fooled and lied to by the City and their staff.”

Now, with the statewide January 9 deadline in effect, unlicensed businesses that had been subject to local regulations also could be cited and prosecuted by state officials, if they remain open for business.

“Collectives and co-ops have had two years since the passage of Proposition 64 to get compliant,” Senior Attorney at Hoban Law Group Patrick Goggin told mgretailer. Compliance is complicated though, by local regulatory conditions, above and beyond what the state can require from operators.

“The challenge with a stopgap measure in California is that operators must first obtain local authorization. Thus, a stopgap measure would need to be conditioned on a local jurisdiction’s sign off,” Goggin explained.

For unlicensed operators weighing the risks of staying open for business, Goggin said Hoban advised businesses to get licensed and compliant with local and state regulations.

“We advise complying with both state and local law and, thus, obtaining a local permit and state license. Failing to do so could result in significant fines and penalties, and possibly criminal enforcement,” he added.

California is not alone in recent crackdowns on unlicensed cannabis businesses.

In Michigan, a December 31 cutoff for licensing left approximately 70 cannabis business operators out in the cold, despite several lawsuits against the state of Michigan to stave off the impending deadline.

Michigan, like California, saw medical marijuana collectives and co-ops become established prior to the legalization of recreational cannabis and subsequent changes in regulations that followed. As of New Year’s Day, Michigan cannabis vendors who have applied for and are awaiting licensing, called “temporary operators,” have had to voluntarily shut as they are being processed.

Since August, the state has issued 99 licenses (including retailers, processors, growers, and testing facilities). The state licensing commission, though, has denied “another 39 license applications and 101 prequalification applications,” according to local newspaper the Detroit Free Press.

The Freep.com also noted current statistics for Michigan’s medical marijuana market, and described how many patients could be affected by licensing shutdowns. “There are 297,515 registered medical marijuana patients and the temporary dispensary operators have been getting their products from a network of more than 43,000 caregivers who can grow up to 72 cannabis plants for five patients,” the news post stated.

Newly elected Michigan Governor Gretchen Whitmer told the Free Press that it was her goal to implement a regulatory system for Michigan cannabis businesses and consumers that would avoid the pitfalls of earlier schemes for medical marijuana.

“One of the biggest mistakes we made in 2008 when we passed medical marijuana is that there were never rules promulgated and that’s what led to such a disparate system. And I don’t want to make that mistake again,” she said.

Michigan medical marijuana advocates have criticized the state’s current licensing procedure for being too slow and ponderous. Eliminating access to cannabis previously sourced from and produced by local, unlicensed caregivers, advocates argue, has put medication out of reach for many patients without ready access to a licensed vendor.

Local media outlet MLive.com said of more than 500 license applications received by the state in 2018, the cannabis licensing board was able to review 138 applications between July and December, 99 of which were eventually approved. MLive also pointed to entire regions of the state they called “cannabis deserts” that had no licensed vendors.

Regulatory and procedural issues in California and Michigan are symptomatic–cannabis business growing pains as the industry attempts rapid growth in a highly regulated and quasi-legal environment. Continuing U.S. federal probation of cannabis undermines attempts at more comprehensive regulations at local levels, as well as has a chilling effect on many other fundamental business mechanisms that are available to non-prohibited industries.

But even in legalized Canada, unlicensed operators are getting a reckoning. In mid-December, the Mayor of Vancouver B.C. Kennedy Stewart told media outlet Straight.com that the city’s unlicensed dispensaries need to “get with the program.” Straight.com pointed out that there are more than 100 unlicensed Vancouver vendors, with only 14 retail cannabis businesses in process of application by December. Only four of those had been approved for municipal licenses that allow them to open for business in 2019.

As legal U.S. states, counties, and municipalities develop and expand their regulatory policies for cannabis businesses, deadlines and compliance enforcement will become a real obstacle for businesses either unable or unwilling to meet required licensing standards. For cannabis businesses attempting to enter markets in multiple legal states, standards and regulations vary regionally and continue to evolve, adding to the complexity of staying compliant.

“Some sort of closure seems reasonable if a [dispensary], collective, or co-op cannot become compliant,” Goggin commented. “However, a local jurisdiction can perform it in a civil manner without imposing penalties while providing a pathway to compliance if that is desired.”

The devil, as they say, is in the details. For lawmakers, regulatory agencies, industry businesses, and cannabis vendors in the U.S., it seems compliance won’t happen fast or be easy, for now.

In related news, for California cannabis consumers without access to local vendors, state regulators in December approved cannabis delivery services statewide, even in regions that prohibit cannabis. Deliveries may ease the stress on consumers and medical marijuana patients that have no other access to retail services, due to licensing difficulties.

“Finally, patients will be able to maintain access to their medicine because a licensed mobile retailer can deliver it to them,” Goggin pointed out.

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