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California appellate court revives lawsuit against Department of Cannabis Control

For failing to identify and flag irregularities and questionable transactions.

An Orange County appellate court on Wednesday reinstated a lawsuit against the California Department of Cannabis Control for failing to identify and flag irregularities and questionable transactions for further investigation. A unanimous three-justice panel of the Fourth District Court of Appeal issued an opinion stating that Santa Ana dispensary licensee HNHPC Inc. should be allowed to seek injunctive relief forcing the Department of Cannabis Control to launch a statutorily required track-and-trace system that flags potentially illegal activity.

A lower court had thrown out the lawsuit, sustaining without leave to amend a demurrer filed by the Department of Cannabis Control and its Director Nicole Elliott. The appellate court reversed the decision of Orange County Superior Court Judge Gregory Lewis and reinstated the lawsuit.

California Business and Professions Code Section 26067, requires the DCC to “establish a track and trace program for reporting the movement of cannabis and cannabis products throughout the distribution chain.” To facilitate administration of the track and trace program, the statute also requires the DCC to create an electronic database. The law states: “The database shall be designed to flag irregularities for the department to investigate.”

While the plaintiff acknowledged the DCC created a track and trace system, it alleged the system does not flag irregularities as required by section 26067. Plaintiff accordingly sought mandamus and injunctive relief compelling the DCC and Director Elliott 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.

According to the opinion:

Although the DCC created and implemented a track and trace system called Marijuana Enforcement Tracking Report and Compliance (METRC) the system allegedly did not flag for irregularities. As a result, the dispensary plaintiff alleged there is an “exponential rise of ‘burner distributors’ . . . that conceal and launder State-grown cannabis for delivery to illegal dispensaries and other unregulated markets within the State as well as for the illegal transport across state lines, all without paying significant legally mandated taxes . . . that other law abiding cannabis licensees [such as plaintiff] are required . . . to pay to the State.” The increased use of burner distributors (Burner Distros) allegedly harmed the public and licensed cannabis operators because the Burner Distros undercut legitimate distributors and dispensaries by selling cheaper, unregulated, and untaxed cannabis products. In short, the plaintiff alleged the Department bolstered “the illegal black market in California and . . . greatly encouraged the illegal export of cannabis across state lines” “by refusing to perform its ministerial duty to flag irregularities within the track and trace system.”

The plaintiff further alleged the current track and trace system could be designed or modified “to flag . . . irregularities and to easily identify Burner Distros, but it would require the State to amend its agreement with the developer of METRC to authorize the work necessary to do so.” The Department allegedly refused to modify the track and trace system to comply with the law and the Department’s mandatory duties.

In opposition to the lawsuit, the DCC submitted two contracts: (1) a 2017 contract between the California Department of Food and Agriculture and Franwell, Inc.;2 (2) a 2021 contract between the California Department of Food and Agriculture and METRC, Inc. The two contracts were agreements with a contractor to design the California cannabis track and trace system.

The appellate court, however, held that “the documents do not conclusively show the Department created an electronic database that flags irregularities for further investigation.” The Court of Appeal concluded that the DCC “did not have discretion to disregard the express flagging mandate” and the DCC “did not have a duty to enter into a contract but to establish an electronic database that actually flags irregularities.”


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