The year 2018 has been confusing so far for California’s commercial cannabis industry in terms of the conflict between federal and state legal regimes. It began with California formally opening its doors for licensed cannabis activity. That was soon followed by the U.S. Department of Justice rescinding its 2013 Cole Memo that deprioritized enforcement against state-legal cannabis operations — a move that sparked considerable concern among operators who had invested substantial resources to become legitimate, licensed cannabis businesses. Then we discovered that the former Republican speaker of the House, previously having been “unalterably opposed” to cannabis, had now become a board member of a cannabis investment company.
Next, we heard about a massive enforcement effort against cannabis grow operations in Sacramento involving one of the largest residential civil asset forfeiture efforts in U.S. history. Meantime, California continued to struggle with its persistent black market problem, as the vast majority of operators have declined to come into regulatory compliance, due in no small part to the enormous market advantage of not paying licensing fees or the extremely high taxes levied on legitimate cannabis businesses.
The uncertainty and apparent inconsistency begs the question, what are the current state and federal policies on cannabis enforcement in California? We don’t have a crystal ball, but we can glean some information based on what the state and federal government are saying and doing as of late. It’s good news.
We’ve previously observed how state and federal enforcement incentives have started to converge based on common interests. That convergence has continued and has actually become somewhat solidified through public statements of federal and state law enforcement officials. Recently, the U.S. Attorney for the Eastern District of California, McGregor Scott, issued informal guidance on his office’s cannabis enforcement goals: “The reality of the situation is there is so much black market marijuana in California that we could use all of our resources going after just the black market and never get there … So for right now, our priorities are to focus on what have been historically our federal law enforcement priorities: interstate trafficking, organized crime and the federal public lands.” To that end, the federal government will allocate $2.5 million towards enforcement against illegal grows on public land, a concern arising largely due to an increase in the use of banned pesticides on federal land in California.
It has not been lost on careful observers that Mr. Scott’s announced enforcement priorities align closely with those of the 2013 Cole Memo. Mr. Scott also appeared to distinguish the illegal operations he seeks to target from the legal cannabis regime that California is working to implement: “[California’s black market] is of biblical proportions and what we’re talking about here today is a classic example of that market—people who have no intent of ever entering the legal system that has been created and California has attempted to establish.” In other words, a top federal law enforcement authority in California seems to be conveying that the federal government will not prioritize licensed commercial cannabis operations that comply with California laws and regulations.
On the state side of things, the Bureau of Cannabis Control is working on finalizing its regulations and is continuing to process state licenses, and Governor Brown has sought to put teeth behind those regulations, requesting $14 million “to crack down on tax evasion, conspiracy and other financial crimes by the black market cannabis industry as well as stem the flow of illegal cannabis in the mail and parcel delivery systems.” At the same time, licensed cannabis businesses have started to speak out more forcefully against illegal operators, and rightfully so: black market businesses have an enormous market advantage in that they don’t pay taxes or licensing fees, and follow no advertising or distribution restrictions. While the cannabis industry was largely united behind Prop 64, which legalized cannabis in 2016, those alliances have diverged as some businesses have taken the legal route while others have remained in the shadows. In fact, we’ve now reached a point where licensees are filing formal complaints against illegal operators and local prosecutors are encouraging them to do so.
Given the federal government’s desire to protect public lands, eliminate organized criminal operations, and prevent interstate trafficking of cannabis, and given California’s desire to give meaning to its regulatory regime and prop up those operators that have spent the time, effort, and resources to become licensed citizens of the California cannabis industry, it’s no wonder that the previously unthinkable is now materializing: the federal government is now teaming up with the State of California to crack down on unlicensed cannabis operations. What comes next is uncertain, but one thing is clearer now than ever: commercial cannabis businesses in California are now exponentially better off from an enforcement standpoint if they can demonstrate compliance with California laws and regulation. That includes spending the time and effort to obtain a state license.
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Author: Daniel Dersham