California Cannabis Distribution: Yea, Nay, or Wait for AUMA

California Cannabis DistributionIt’s been a few months since we wrote about the California distribution model under the Medical Marijuana Regulation and Safety Act (MMRSA), and since then the debate has showed no signs of slowing down.  So let’s break down the issues at the heart of this controversy.

On one side we have the proponents, the legislators and advocacy groups who were largely responsible for the drafting and passing of MMRSA. They argue that adding a distributor level to the current supply chain will help to prevent diversion and ensure testing and quality assurance of all medical cannabis in the California system. The distributor model also provides an opportunity for the state to track and tax all of the cannabis that enters the market, which is a key concern for California as it moves forward with robust regulation.

However, some have expressed concern that lobbying by alcohol distributors was the real impetus behind the inclusion of the distribution model. California’s alcohol industry includes a three-tiered distribution system that was put in place mainly to deter overconsumption by consumers as a public health policy. In response, the cannabis industry argues that unlike alcohol, cannabis is a medicine and thus there is no need to disincentivize consumption.

Another argument raised against the distribution model is backed mainly by growers and consumers in the industry who worry that requiring the use of distributors will drive up cannabis prices. For smaller, “mom-and-pop” cultivators, they fear being squeezed out of an industry where new state and local taxes in addition to distributor level fees will be too high for them to remain in business or compete with larger cultivators that are able to reduce their costs through economies of scale. For cannabis consumers, high retail prices could lead them to look for cannabis outside the system, which could maintain or even bolster the existing black market in California. In addition, there is an argument that the distribution model will ultimately lead to a reduction in the quality of cannabis, as perishable cannabis products could be held up in transport and testing facilities for extended periods of time before they reach retailers for sale to consumers.

For now, the distribution model is here to stay in California, but that doesn’t mean it will be the same model in 2018 as we have today. Changes are already being made to MMRSA to address important industry concerns. Previously, certain provisions in MMRSA were interpreted to mean that a distributor would need to be interjected at every level of the supply chain in order to transport cannabis products between licensees. For example, cannabis which was transported from a cultivator to an extractor to a manufacturer and finally to a dispensary for sale would result in the need for a distributor’s involvement at four different stages before the final cannabis product reached the consumer. This issue was remedied through a budget trailer bill approved by the governor on June 27, 2016. The amended language of MMRSA now provides that:

[A] cultivator shall not be required to send medical cannabis to a distributor if the medical cannabis is to be used, sold, or otherwise distributed […] by a manufacturer for further manufacturing.

Likewise, cultivators are authorized to transport cannabis directly to manufacturers and manufacturers can transport cannabis from cultivators as well as to or from other manufacturers. Thus, under our example above, the distributor would now only need to be involved once in the process, when the product is transported from the manufacturer to the dispensary.

As a final note, California marijuana operators who remain unsatisfied with the distribution model under MMRSA may have an opportunity to avoid the matter altogether if the Adult Use of Marijuana Act (AUMA) passes in California this November. In contrast to MMRSA, AUMA only requires use of a distributor by large-scale cultivators who are issued a Type 5 license, which won’t even become available until 2023.

Whether you are for or against California’s current distribution model, there is still time for your voice to be heard. There are many more rules to be written and new bills to be passed, so we will be keeping a close watch on this debate and you should expect many more updates to follow.