California Cannabis Distribution Takes a Hit Under MAUCRSA

California cannabis distribution lawUnder California’s now-repealed Medical Cannabis Regulation and Safety Act (“MCRSA”), would-be distributors would have had a field day (which became the subject of great debate industry wide). Under the MCRSA, California’s cannabis cultivators and manufacturers would have had to sell their products to licensed distributors who would then sell those products to licensed retailers. MCRSA distributors had to be separately owned from other licensees and the MCRSA draft rules mandated that distributors take title to all product. All of that has changed with passage of the Medicinal and Adult Use Cannabis Regulation and Safety Act (a/k/a MAUCRSA, SB 94, or the Governor’s Budget Trailer Bill), which combines medical and adult use cannabis laws and rules, repeals the MCRSA, and forces withdrawal of the MCRSA draft rules.

Under MAUCRSA, cannabis licensees can vertically integrate and even act as their own distributor. This ultimately means California cannabis distributors won’t really act as distributors as we know them from the alcohol model. Instead, cannabis distributors will mostly help transport product and be the arbiters of product quality assurance.

Under the common three-tier system of alcohol distribution in the U.S., you have three main actors: importers or producers, distributors, and retailers. Essentially, producers (brewers, winemakers, importers, etc.) sell their products only to wholesale distributors who then sell to retailers (bars, liquor stores, grocery stores, etc.). Only retailers can sell to consumers. The alcohol distributor is crucial to the distribution chain and therefore immensely powerful. The distributor is solely responsible for setting up the relationship between retailers and producers and it does this by negotiating prices and providing brand selection between the two. Why have this three tier model? The main reasons for doing this in the alcohol industry were to limit consumer overconsumption with high taxes (you have more taxable events by having a middle man) and by giving profit access to more players.

California’s version of a cannabis distributor under MAUCRSA seems to have all of the obligations of an alcohol distributor but not really any of the benefits of exclusivity or control between licensees. MAUCRSA defines “distribution” as the procurement, sale, and transport of cannabis and cannabis products between licensees. As of now, distributors are the only licensees that can transport inventory between licensees and the only licensees that must make sure third-party testing is completed and that all product packaging and labeling meet state requirements. Interestingly though, cannabis licensees are not required to sell their cannabis or cannabis products to a distributor and may directly sell to any licensee authorized to sell cannabis and cannabis products to purchasers. Despite this, all cultivation and manufacturing licensees must go through a distributor for testing and packaging and labeling quality assurance and distributors can charge fees for these services. Distributors will also be the ones to collect and remit taxes on behalf of cultivators and retailers and they must secure a Board of Equalization permit (in addition to state licensing) to do so.

Under the MCRSA, it seemed existing alcohol distributors and those acting like distributors under Prop. 215’s medical cannabis collective model were well-positioned to become power players in California’s cannabis industry. But now with passage of the MAUCRSA, it’s likely California will issue a slew of cannabis distributor licenses to actors of all sizes and these distributers will become one-stop-shops for mandatory quality assurance and little more. If California wants to avoid the same sort of distribution problems that befell Nevada in the early days of its adult use sales, it will need to issue a large number of distributor licenses. There may end up being some market for a distribution only model (in the alcohol sense) for distributors that can help their cultivator and manufacturer customers expand their markets and gain market share or that can help retailers secure top quality products and brands at good prices. But now that it will be so easy for cultivators, manufacturers, and retailers to get around distributors to forge their own relationships with each other, the role of cannabis distributors in California is far from the alcohol model.

To help you better understand what is going on with California cannabis and what MAUCRSA means for your cannabis business, three of our California attorneys will be hosting a free webinar on Tuesday August 8, 2017, from 12 pm to 1 pm PT. From our Los Angeles office, I will be moderating two of our San Francisco-based attorneys (Alison Malsbury and Habib Bentelab) in a discussion on the major changes between the MCRSA and the MAUCRSA, including on vertical integration and ownership of multiple licenses, revised distributorship standards, and what California cannabis license applicants can expect more generally from California’s Bureau of Cannabis Control as rulemaking continues through the remainder of the year. We will also address questions from the audience both during and at the end of the webinar.

To register for this free webinar, please click here. We look forward to your joining us.