Dueling litigation between two California cannabis operators is bringing attention to so-called “burner distributors” that are allegedly helping cultivators divert product onto the illicit market.
Elliot Lewis, CEO of Long Beach, Calif.-based Catalyst Cannabis Co., has alleged in a complaint filed in earlier this month that Glass House Brands, a vertically integrated cannabis company based in Camarillo, Calif., diverts a majority of its harvests to the illicit market by knowingly selling flower wholesale to distribution companies that then resell the product to the illicit market.
Those allegations were made through social media posts and finally a formal lawsuit filed in Los Angeles Superior Court on June 6.
“GHB in fact is one of the primary drivers and financial beneficiaries of the illicit cannabis black market in California, and it currently is looking to further expand its illicit operations by adding significant new cultivation capacity at a time when the legal cannabis market is actually shrinking. Enough is enough,” said the 11-page complaint.
Lewis repeatedly called on the company to respond to his claims, which it finally did on June 20, when it filed a countersuit for defamation.
“Defendants launched their egregious attack on Plaintiffs based on misplaced anger and hostility,” said the 30-page complaint from GHB. “Defendants’ social media rants make clear that they are enraged by the current state of the cannabis industry and, in particular, their erroneous belief that Defendants are unfairly shouldering the tax burden when it is actually shared by all legal commercial cannabis operators, including Glass House.”
Lewis’ lawsuit listed 150 John Does who represent so-called burner distributors whose identity Lewis said he hopes to learn through discovery.
“Via this action, Catalyst seeks to put an end to GHB’s illegal, fraudulent and unfair business practices, and hopefully help bring about what actually was envisioned when California first legalized cannabis – a regulated market where black marketeers do not reign supreme at the expense and detriment of legal market operators like Catalyst,” said Lewis’ complaint.
GHB argued that Lewis was directing his attacks at the company in response to GHB’s financial success. GHB announced in March that it was expanding its greenhouse capacity to 1 million square feet of canopy, allowing the company to produce approximately 250,000 pounds of cannabis a year.
“Furious that a competitor is potentially outpacing them, Defendants embarked on a vengeful, defamatory crusade to prop up their own business interests,” said the defamation suit.
Lewis’ ire appears to be the result of a recent regulatory change in California following the passages of AB 195, which among other things, eliminated the state’s cultivation tax, and shifted the obligation of collecting and paying excise taxes from distributors to retailers.
Glass House is vertically-integrated, which means it benefited from the elimination of a tax on cultivation and wholesale distribution. Catalyst owns 18 retail dispensaries across the state, potentially leaving Catalyst open to higher taxes.
Back in September, 2021, Catalyst sued the State of California, alleging that the state was failing to prevent illicit market diversion. The suit references burner distributors and claimed that the state was allowing them to flourish.
“The burgeoning use of Burner Distros, and their role in exponentially increasing the volume of illegal and untaxed cannabis and cannabis products sold in California, is greatly harming not only the public, but also licensed cannabis operators,” said the lawsuit, which was filed in Orange Superior Court.
That case would eventually be dismissed.
California currently has 1,170 active wholesale distribution licensees, according to the CRB Monitor license database, which also shows 6,314 active cultivation licensees and 1,660 active retail licensees.
Hilary Bricken of law firm Harris Bricken argued in a blog post that the state had failed to properly regulate the market, making it easier for distributors to work with the illicit market without legal repercussions.
“What’s the incentive to get licensed and remain in compliance if there’s no stick when the carrot doesn’t work?,” she wrote. “Having a license should actually mean something for consistently law-abiding, tax-paying licensees when it comes to the state’s enforcement efforts. Limited enforcement against obviously illegal, unlicensed operators on random occasions isn’t enough.”
Bricken opined that likely signs of a burner license include approved companies with few to no entries in Metrc, no history of paying taxes, the involvement of management companies, and multi-layered ownership.
When reached for comment a spokesperson from the California Department of Cannabis Control did not comment on “burner distributors,” but did say that track and trace is currently used among distributors.
“All statewide licensees use the California Cannabis Track and Trace system through software provider Metrc, to track the movement of cannabis and cannabis products through the supply chain. This is known as ‘seed to sale’ tracking,” wrote spokesperson Moorea Warren. “The Department believes much of the illegal cannabis that is grown in California is sent to other states.”
Lewis did not respond when reached for comment, while representatives from Glass House Brands did not respond to emailed inquiries. Both parties’ cases remain in the pre-trial phase.
