One of the most difficult, albeit intellectually fascinating, facets of California Cannabis law is the irreconcilable conflict between Federal criminalization of both medicinal and adult-use cannabis under the Controlled Substance Act (“CSA”) and the recent wave of state legalization. It often requires intellectual curiosity, legal tightrope walking, and a healthy stomach for risk. On one hand, legal(ish) cannabis businesses in any specialty are licensed by one or more governmental bodies, pay taxes, provide employees with benefits, and generally operate like many other businesses in a heavily regulated industry. On the other hand, they face difficulties operating in non-cash equity, face scrutiny with banks, and have limited access to commodities like loans, liability insurance, and retirement plans for their employees, just to name a few. With an administration that vacillates somewhere between open hostility to cannabis legalization, and somewhat feeble protests to the momentum towards federal legality, and the snail-pace of bureaucracy, the prospect of stability brought on by descheduling cannabis under the CSA still remains a distant (but realistic) hope. In a nutshell, the conflict between Federal and State law is bad for business.
Now, in California, a similar conflict of laws threatens to disrupt current and future cannabis delivery services throughout the state. Cannabis delivery services, a subsection of retail under the California licensing scheme, allow customers to place orders via phone, on an app or online and then have the products delivered directly to their doors. Delivery is a hot ticket item in the California cannabis space and business insiders and advocates have been clamoring for local municipalities to expand licensing to permit delivery because it’s significantly cheaper than running a traditional brick and mortar store.
Although delivery is popular for many customers, very few cities in California actually issue retail licenses for cannabis delivery services, and those that do usually require the licensee to also run a retail storefront.
On July 13, 2018, California’s top cannabis regulatory agency, the Bureau of Cannabis Control (“BCC”), adopted Regulation 5416(d), which allows licensed delivery services to deliver products anywhere in California, even if the customer lives in an area that bans retail and/or delivery. Outraged by this new policy, multiple California cities filed a lawsuit against the BCC. The cities include Santa Cruz, Agoura Hills, Angels Camp, Arcadia, Atwater, Beverly Hills, Ceres, Clovis, Covina, Dixon, Downey, McFarland, Newman, Oakdale, Palmdale, Patterson, Riverbank, Riverside, San Pablo, Sonora, Tehachapi, Temecula, Tracy, Turlock, and Vacaville. The Cities argued that Regulation 5416(d) infringes on their right to allow or prohibit any cannabis-related business within their jurisdiction. In their complaint, the Cities rely on California Bus. & Prof. Code Section 26200(a)(1), which states:
“(a)(1) This division shall not be interpreted to supersede or limit the authority of a local jurisdiction to adopt and enforce local ordinances to regulate businesses licensed under this division, including, but not limited to, local zoning and land use requirements, business license requirements, and requirements related to reducing exposure to secondhand smoke, or to completely prohibit the establishment or operation of one or more types of businesses licensed under this division within the local jurisdiction.” (emphasis added)
Ultimately, the Cities maintain that they alone have the authority to permit or ban delivery services within their city limits.
While the lawsuit by the Cities made its way through the court systems, one licensed retailer decided to take matters into its own hands. Salinas-based East of Eden Cannabis Co. filed a lawsuit against the City of Santa Cruz for prohibiting deliveries into unincorporated areas. In court filings, East of Eden said that Santa Cruz threatened criminal investigation and took steps to have its state license revoked, despite the mandate from Regulation 5416(d) that allowed statewide delivery by a licensed retailer. Now, State Attorney General Xavier Becerra has thrown his hat in the ring in this already high-stakes litigation. In December, the Office of the Attorney General filed a motion on behalf of the BCC to join the lawsuit. The State is throwing its weight behind upholding Regulation 5416(d) and allowing licensed delivery retailers to deliver cannabis statewide.
Despite the Cities’ argument that they have an absolute right to control any and all cannabis activity within city limits, the reality is that their position would create yet another financial roadblock for the cannabis industry’s success. Faced with a staggering tax burden, licensed cannabis companies are already struggling to meet operational overhead required for them to be in compliance with state and local laws, and simply cannot compete with unlicensed, or “black market” operators who can do business for a fraction of the cost.
The immediate impact of overturning Regulation 5416(d) will force cannabis delivery companies to make some difficult changes to their existing business models:
- They can continue delivering throughout California, but look into each individual city to determine if delivery is banned or allowed
- They can shrink operations to delivery within the city or county limits in which it is licensed
- They can deliver state-wide at the risk of fines and threats to their business licenses
Each of the three scenarios will undoubtedly result in higher operating costs. With many cities reporting disappointing cannabis-generated tax revenue in 2019 that fell short of estimates, prohibiting growth seems contrary to the Cities’ own interests.
However, these cases will also chart a new direction in the state and local government power struggle in the California cannabis industry. Depending on the outcome, the courts may either tip the scales in favor of consolidation of authority under one State-level agency, the BCC, or side with the Cities in upholding local autonomy. Currently, these cases are unresolved. In an industry that is still grappling with conflicting State and Federal laws, we are eager to see how the courts determine who will prevail when state and local cannabis laws conflict and the impact it will have on licensed businesses trying to gain a foothold in the California cannabis economy.