Cannabis Licensing Regulations Under Fire

The California Department of Food and Agriculture (CDFA) began issuing cannabis cultivation licenses on January 1, 2018, and the lawsuits have already commenced. The California Growers Association filed suit in late January arguing that the CDFA has awarded a disproportionate number of “small grower” licenses to a handful of large operations – two in particular (Honeydew Farms, LLC and Central Coast Farmer’s Market Management, LLC) have received approximately 30 licenses each.

A little background
Proposition 64 stated that California’s nonmedical marijuana industry should be built around small- and medium-sized businesses. It therefore prohibited the issuance of large cultivator licenses until January 1, 2023. The intent was to give smaller cultivators a head start so that they could better compete with larger operations down the line.

While large growers were not to be licensed for another five years, the issuance of medium and small licenses commenced on January 1, 2018. The number of medium-sized cultivation licenses were limited to one per company, but no limits were placed in the regulations on the number of small grower licenses that an applicant could acquire. The California Growers Association (CalGrowers) is concerned that companies are taking advantage of this loophole by “bundling” or “stacking” numerous small, one-acre licenses in preparation for the formation of large operations, placing small cultivators at what the Association claims is an unreasonable disadvantage.

California Growers Association claims
The main argument of CalGrowers is that failing to place a cap on the number of small grower licenses that could be acquired by a single company violates the five-year prohibition on large cultivations as set forth in the Control, Regulation and Tax Adult Use of Marijuana Act (AUMA, or better known as Proposition 64) and the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), Bus. & Prof. Code, § 26061. CalGrowers contends that the issuance of multiple small licenses to large operations effectively negates the incentive of small cultivators to enter the regulated market, as it is too difficult for them to compete with large cultivation operations. Many continue to grow illegally and sell their product out-of-state on the black market.

State regulators, on the other hand, contend that the law does not require such a cultivation cap. Companies taking advantage of the regulatory loophole claims that they are not “Big Agriculture” and are being unfairly vilified as a result of the lawsuit.

The current state of affairs
Operating without a license deprives the State of California of tax revenue and also leaves a large amount of marijuana unregulated. While most cultivators grow a safe product, a number of illegal pot farms use pesticides, rodenticides and other toxicants, which present risks to humans and the environment.

The Cannabis Practice Group at Moskowitz, LLP is well aware of the regulatory and financial challenges faced by marijuana-related businesses. Our firm is dedicated to assisting all cultivators to comply with the law and arrange their businesses to their best advantage.

In our next post, we will cover the new cultivation tax.

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