The State of California failed to show it’s properly monitoring its cannabis market for signs of diversion, according to a state appellate court that reversed a previous dismissal of a lawsuit against the state, alleging it was allowing “burner distros” to feed wholesale product into the illicit market.
“Contrary to the court’s holding, the documents do not conclusively show the Department created an electronic database that flags irregularities for further investigation,” wrote Associate Justice Maurice Sanchez for the Fourth District appellate court in a unanimous opinion released Aug. 2. “We accordingly reverse the judgment.”
Catalyst and its CEO Elliot Lewis sued the state in September 2021, alleging the state Department of Cannabis Control was failing to prevent illicit market diversion. California currently requires all adult-use cannabis operators to use Metrc in order to track product across the supply chain. State law also requires that the Metrc system be designed to automatically flag irregularities, which Lewis argued is not currently happening.
The state failed to provide adequate evidence that its track-and-trace system was designed to flag irregularities, according to the appellate court.
“While the FAP [first amended petition and complaint] acknowledged the Department created a track and trace system, it alleged the system does not flag irregularities as required by section 26067 [of the Medicinal and Adult-Use Cannabis Regulation and Safety Act],” wrote Sanchez. “Plaintiff accordingly sought mandamus and injunctive relief compelling defendants to comply with their duties and mandating they create and maintain a track and trace system capable of identifying and flagging questionable information for further investigation.”
Sanchez found that while the lower court properly denied Catalyst’s request for an injunction fully halting California’s use of Metrc, it improperly dismissed the entire case.
Lewis, who frequently posts videos on social media about his thoughts on the state of California’s cannabis market, as well as the lawsuits he is involved in as either a plaintiff or defendant.
“Every once in a while the little guy beats the State of California and, oh yeah, it feels f—— good,” said Lewis in a video he posted Aug. 4.
In the wake of the initial court loss, Lewis and Catalyst pivoted their attention toward a specific producer in California, Glass House Brands (GHB), that he accused of funneling product into the illicit market, resulting in dueling litigation between both companies.
Lewis alleged in a complaint filed June 6, that GHB, 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.
Lewis also argued that the state’s current tracking and taxation systems allows distributors to transfer their product between other distributors until they can be diverted to either illicit shops within the state or transferred outside of California.
Lewis made those allegations against GHB in a series of online posts before officially filing a lawsuit 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.
Two weeks later, GHB filed a countersuit for defamation on June 20. Both of those suits remain pending.
Lewis’ ire appears to be the result of a recent regulatory change in California following the passage 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.
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.
