Despite being the first to legalize medical marijuana in 1996[1], it was not until November 8, 2016 that California joined the ranks of several states in decriminalizing the personal possession and use of nonmedical marijuana through the passage of Proposition 64.[2] While the Compassionate Use Act of 1996 afforded seriously ill Californians the right to obtain medical marijuana based on a physician’s recommendation that its use would benefit certain ailments,[3] Proposition 64 (“Adult Use of Marijuana Act”) intends to take nonmedical marijuana “out of the hands of the illegal market” by regulating its sale and production.[4]

 

Authored By: Aya H. Aldairi, MSLS

McGeorge School of Law | JD Candidate 2022
  1. Introduction

Despite being the first to legalize medical marijuana in 1996[1], it was not until November 8, 2016 that California joined the ranks of several states in decriminalizing the personal possession and use of nonmedical marijuana through the passage of Proposition 64.[2] While the Compassionate Use Act of 1996 afforded seriously ill Californians the right to obtain medical marijuana based on a physician’s recommendation that its use would benefit certain ailments,[3] Proposition 64 (“Adult Use of Marijuana Act”) intends to take nonmedical marijuana “out of the hands of the illegal market” by regulating its sale and production.[4]

In order to achieve this goal, the Adult Use of Marijuana Act (“AUMA”) ensures that California’s nonmedical industry will be built around small and medium-sized businesses.[5] However, in the four years since its passage, the California market has begun to see a trend of mergers, acquisitions, and license stacking by big businesses with deep pockets.[6] In effect, these big businesses have begun to usurp small and medium businesses—in direct conflict with the premise of AUMA.[7]

This article will show that the assurance presented under AUMA—that the nonmedical industry in California will be built around small and medium businesses—has not been achieved. First, this article will offer a brief look at the regulatory structure and specialized agencies established under Proposition 64. Thereafter, it will give a comprehensive look at one of these specialized agencies—the Department of Food and Agriculture—with a focus on the regulatory limitations placed on cultivation licenses. Finally, this article will discuss the practice of license stacking within California’s marijuana industry.

 

  1. The Adult Use of Marijuana Act

On November 8, 2016, California voters approved Proposition 64, which legalized the possession, cultivation, and use of marijuana for personal use.[8] Proposition 64 encompasses language focused generally on the establishment of a comprehensive system to legalize, control, and regulate the various processes behind the production, distribution, and use of nonmedical marijuana.[9] Specifically, AUMA establishes a regulatory structure in which “every marijuana business is overseen by a specialized agency with relevant expertise.”[10] These specialized agencies include: the Bureau of [Cannabis] Control (“BCC”);[11] the Department of Consumer Affairs;[12] the Department of Food and Agriculture;[13] the State Department of Public Health;[14] and the State Board of Equalization[15]. Of the five agencies listed, the BCC, Department of Consumer Affairs, Department of Food and Agriculture, and State Department of Public Health are tasked with overseeing licensing with each agency being in charge of a specific type of license.[16]

While AUMA assigns a brief description of each agency’s respective licensing responsibilities, each agency is tasked with making its own rules and regulations in line with the purposes and intent of AUMA.[17] In addition to formulating their own rules and regulations, agencies are tasked with establishing their own procedures for the issuance and renewal of licenses.[18] Though AUMA does not lay out the rules, regulations, and procedures for the named specialized agencies, it illustrates a non-exhaustive list of considerations an agency shall use in determining whether to grant, deny, or renew a license.[19] Agencies may consider, among other things, whether issuance, denial, or renewal of a license would result in an excessive concentration of licensees in a given area.[20] Denial of a license based on an excessive concentration is permissible under AUMA unless such denial would unduly limit the development of the legal market by perpetuating the illegal market.[21]

Additionally, AUMA allows a person or entity to apply for and be issued more than one license unless an applicant holds a state testing license.[22] While AUMA allows issuance of more than one license, a licensing agency has the authority to create rules, regulations, and procedures that limit the number of licenses it issues. As illustrated in the next section of this article, the California Department of Food and Agriculture establishes a limit on the number of medium cultivation licenses it issues to a person or entity.[23]

 

III. Cultivation Licensing

Charged with overseeing the regulation and licensing of commercial marijuana cultivation,[24] the California Department of Food and Agriculture (“CDFA”) has the authority to “create, issue, deny, and suspend or revoke cultivation licenses” for violations of the Cannabis Division under the Business and Professions Code.[25] According to the CDFA, its licensing branch allows cultivation applicants to choose from seventeen different license types, which are categorized by size and production type.[26]

While an applicant is currently free to apply for small and medium-scale cultivation licenses, it is barred under AUMA from applying for the “large” category.[27] The very last declaration presented under Section 2 of AUMA claims a prohibition on large-scale cultivation licenses until January 1, 2023 as a means of ensuring the nonmedical industry being built around small and medium sized businesses.[28] In an attempt to protect consumers and small businesses, the declaration further imposes strict anti-monopoly restrictions for businesses participating in the nonmedical marijuana industry.[29] Specifically, AUMA prohibits licensees from entering into contracts or agreements with a competitor that may substantially lessen competition or tend to create a monopoly in any line of trade or commerce.[30]

In addition to AUMA’s prohibition on large-scale cultivation, the CDFA places its own limit on medium-scale cultivation by allowing applicants to obtain only one medium-scale license, which shall remain in effect until January 1, 2023.[31] However, neither AUMA nor the CDFA limits how many small-scale licenses a person or entity may apply for or hold. With a temporary prohibition on the issuance of large-scale licenses and a one-license-limit on medium-scale licenses, many big businesses within the legal market have taken advantage of the fact that there is no cap on how many small-scale licenses they can obtain. As a result, big businesses have exposed a loophole in the system that has resulted in large-scale cultivation through the practice of stacking small-scale licenses.

 

  1. License Stacking

The prohibition against large-scale cultivation licenses stipulates that no Type 5 through Type 5B licenses—meaning any indoor or mixed light grow beyond 22,000 square feet and any outdoor grow exceeding one acre—will be issued before January 1, 2023.[32] Although the

provisions of AUMA are to be “construed liberally in order to effectuate its purposes and intents,”[33] big businesses within the industry have exploited a loophole to get around the prohibition on large-scale cultivation licensing—license stacking.[34]

In essence, what big businesses have been doing since the California market opened in 2018 is obtaining as many small cultivation licenses they could afford since the CDFA does not place a limit on such licenses.[35] While there is no limit on small licenses, the CDFA does limit the number of medium cultivation licenses a person may obtain to “one medium outdoor, or one medium indoor, or one medium mixed-light A-license or M-license.”[36]

With no explicit limit placed on the number of small cultivation licenses a person may obtain, many cultivators have managed to exceed well beyond the 22,000 square foot limit with some California farms cultivating on over one-hundred thousand square feet worth of licensed land.[37][38] For example, Harborside Farms (“Harborside”), nestled in Northern California’s Monterey County, sits atop forty-seven acres of land in Salinas Valley with approximately 40,000 square feet for nursery and cultivation, 80,000 square feet for vegetation and canopy, and an additional 35,000 square feet dedicated to production and processing.[39] In 2018, this vertically integrated cultivating giant held a total twenty-nine licenses allowing it to cultivate, manufacture, and sell its product.[40] In October 2019, Harborside announced the unveiling of its state-of-the-art Dutch Venlo Greenhouse, which provides an additional acre of growing space.[41] It is estimated that Harborside growing areas will reach upwards of 360,000 square feet with a capacity of 100,000 plants—nearly seventy times larger than the majority of cannabis farms in California.[42]

Businesses such as Harborside, which saw a second quarter 2019 revenue of $12.7 million, are continuing to expand through the practice of license stacking.[43] Harborside declared an increase of 19.8% in revenue from 2018 to 2019 and claimed $60.1 million in total assets, including a whopping $19.4 million of cash.[44] By June 2019, Harborside was valued at $350 million to $400 million, began trading on the Canadian stock exchange,[45] and was cited by Forbes as commanding 3% of the “entire [California] retail market.”[46]

License stacking by big businesses with deep pockets, such as Harborside, have made it difficult for small and medium cannabis businesses to compete.[47] Despite AUMA’s assurance that the California industry will be built around small and medium businesses, the practice of license stacking is paving the way for the creation of oligopolies.[48] Entering the nonmedical marijuana industry within California comes at a price; oftentimes a hefty price depending on the type of cultivation license being sought.[49]

The CDFA stipulates that annual license application and cultivation licensing fees apply to any legal business.[50] As illustrated in Tables 1 and 2 below, annual application fees range from $135 to $8,655 while annual licensing fees range from $1,205 to $77,905 depending on the type of license acquired.[51]

Table 1: Annual License Application Fees[52]
Annual License Type Annual Fee
(a)   Specialty Cottage Outdoor $135
(b)  Specialty Cottage Indoor $205
(c)   Specialty Cottage Mixed-Light Tier 1 $340
(d)  Specialty Cottage Mixed-Light Tier 2 $580
(e)   Specialty Outdoor $270
(f)   Specialty Indoor $2,170
(g)   Specialty Mixed-Light Tier 1 $655
(h)  Specialty Mixed-Light Tier 2 $1,125
(i)    Small Outdoor $535
(j)    Small Indoor $3,935
(k)  Small Mixed-Light Tier 1 $1,310
(l)    Small Mixed-Light Tier 2 $2,250
(m) Medium Outdoor $1,555
(n)  Medium Indoor $8,655
(o)  Medium Mixed-Light Tier 1 $2,885
(p)  Medium Mixed-Light Tier 2 $4,945
(q)  Nursery $520
(r)   Processor $1,040

 

Table 2: Annual Cultivation License Fees[53]
Annual License Type Annual Fee
(a)   Specialty Cottage Outdoor $1,205
(b)  Specialty Cottage Indoor $1,830
(c)   Specialty Cottage Mixed-Light Tier 1 $3,035
(d)  Specialty Cottage Mixed-Light Tier 2 $5,200
(e)   Specialty Outdoor $2,410
(f)   Specialty Indoor $19,540
(g)   Specialty Mixed-Light Tier 1 $5,900
(h)  Specialty Mixed-Light Tier 2 $10,120
(i)    Small Outdoor $4,820
(j)    Small Indoor $35,410
(k)  Small Mixed-Light Tier 1 $11,800
(l)    Small Mixed-Light Tier 2 $20,235
(m) Medium Outdoor $13,990
(n)  Medium Indoor $77,905
(o)  Medium Mixed-Light Tier 1 $25,970
(p)  Medium Mixed-Light Tier 2 $44,517
(q)  Nursery $4,685
(r)   Processor $9,370

 

Hypothetically speaking, if a medium-sized business was to obtain a Medium Indoor cultivation license, it would be required to pay an annual application fee of $8,655 plus a $77,905 annual licensing fee.[54] The $86,560 licensing fee owed by this medium business does not include the added costs associated with taxes, labor, and consultants such as lawyers, accountants, and compliance officers.[55] With labor and consultant fees aside, taxation within the space can be onerous, with flower, trim, and fresh plants being taxed by the ounce.[56] In addition to taxation on the plant itself, businesses are responsible for paying an excise tax of “fifteen percent of average market value,” regardless of how much a particular farm’s crop sells for.[57] Supplies and equipment purchased by a business is also subject to state sales taxes.[58] If this hypothetical business can only afford a single cultivation license in order to stay above water on the added costs associated with cultivating, how is it expected to compete fairly with a big business that has the financial ability to stack licenses?

By February 2018, the CDFA awarded 538 small cultivator licenses, which was spread among 250 different businesses respectively.[59] Of the 250 business that obtained a small cultivator license, the top ten license holders[60] controlled 29% of the total number of licenses issued.[61] Within one month of the CDFA awarding cultivation licenses, 4% of licensed businesses controlled over 29% of the small business licenses issued in California.[62] The reason why such a small percentage of cultivators were able to secure a 29% stronghold on cultivation licenses within one month is largely attributed to the practice of license stacking.[63] However, while this regulatory loophole has been at the expense of small businesses, larger cultivators within the space claim to be following the regulations imposed by the state.[64]

Several larger cultivators have been part of the industry since the Proposition 215 era, cultivating under medical marijuana permits issued at the county level.[65] Cultivators within that category argue that because they are abiding by the new regulations imposed by the state, it would be unfair if the state later required them to scale back their operations.[66] Alex Moore, founder and owner of Honeydew Farms in Humboldt County, claims that his farm would “have to scale back to an acre [which] would be a tremendous loss” to his operation.[67] Moore had been cultivating cannabis for about twenty-five years under Proposition 215 before being the first to submit an application for a Humboldt County cultivation license.[68] Honeydew Farms currently holds twenty-seven active small cultivation licenses with 280,000 square feet approved for cultivation.[69]

Cultivating giants such as Harborside and Honeydew Farms, which have millions in capital backing and decades of experience cultivating, are continuing to expand by exploiting AUMA’s license stacking loophole. Despite claims by large cultivators, such as Honeydew Farms, that a requirement to scale back their pre-AUMA farms would be unfair, smaller businesses are finding it hard to compete when these large businesses continue expanding their square footage. By failing to limit the number of small cultivation licenses a business may acquire, AUMA has exposed itself to a loophole that ultimately undermines its assurance that California’s nonmedical marijuana industry will be built on small and medium businesses.

[1] Cal. Health & Safety Code § 11362.5 (West 2003).

[2] Cal. Civ. Code § 1550.5(a)(3) (West 2019) (“[AUMA] . . . authorized the consumption of nonmedical marijuana by persons over 21 years of age and provided for the licensure and regulation of certain commercial nonmedical marijuana activities in this state.”).

[3] Cal. Health & Safety Code § 11362.5(b)(1)(A) (“To ensure that seriously ill Californians have the right to obtain and use marijuana for medical purposes . . . in the treatment of cancer, anorexia, AIDS, chronic pain, spasticity, glaucoma, arthritis, migraine, or any other illness for which marijuana provides relief.”).

[4] Control Regulate and Tax Adult Use of Marijuana Act, 2016 Cal. Legis. Serv. Prop. 64 §3(a) (West 2020) [hereinafter AUMA].

[5] AUMA, Id. § 2J (“[AUMA] ensures the nonmedical marijuana industry in California will be built around small and medium sized businesses by prohibiting large-scale cultivation for the first five years . . . [and] also protects consumers and small businesses by imposing strict anti-monopoly restrictions for businesses that participate in the nonmedical marijuana industry.”).

[6] Susan Gunelius, How Big Business, Monopolies, and Stacked Licenses Impact the Marijuana Industry, Cannabiz Media (Feb. 7, 2020), https://cannabiz.media/how-big-business-monopolies-and-stacked-licenses-impact-the-marijuana-industry/ [hereinafter Gunelius].

[7] Id.

[8] California Proposition 64, Marijuana Legalization (2016), Ballotpedia (last visited July 15, 2020), https://ballotpedia.org/California_Proposition_64,_Marijuana_Legalization_(2016).

[9] AUMA, supra note 4 § 3.

[10] AUMA, supra note 5 § 2I.

[11] AUMA, supra note 5 §§ 2A, 2I (Bureau of [Cannabis] Control is charged with overseeing the whole system and ensuring a smooth transition to the legal market as well as regulating and licensing the marijuana industry).

[12] AUMA, supra note 5 § 2I (“The Department of Consumer affairs will also license and oversee marijuana retailers, distributors, and microbusinesses.”).

[13] Id. (“The Department of Food and Agriculture will license and oversee marijuana cultivation, ensuring it is environmentally safe.”)

[14] Id. (“The State Department of Public Health will license and oversee manufacturing and testing, ensuring consumers receive a safe product.”).

[15] Id. (“The State Board of Equalization will collect the special marijuana taxes, and the Controller will allocate the revenue to administer the new law and provide the funds to critical investments.”).

[16] AUMA, supra notes 11-14.

[17] Cal. Bus. & Prof. Code § 26013(a) (West 2020).

[18] Cal. Bus. & Prof. Code § 26050(d) (West 2020).

[19] Cal. Bus. & Prof. Code § 26051(a) (West 2020).

[20] Cal. Bus. & Prof. Code § 26051(a)(4) (West 2020).

[21] Cal. Bus. & Prof. Code § 26051(a)(4)(c) (West 2020).

[22] Cal. Bus. & Prof. Code § 26053(b)-(c) (West 2020).

[23] Id.

[24] AUMA, supra note 13.

[25] Cal. Bus. & Prof. Code § 26012(a)(2) (West 2020).

[26] Cal. Dep’t of Food and Agric.: CalCannabis Cultivation Licensing, https://www.cdfa.ca.gov/calcannabis/licensing.html (last visited July 16, 2020).

[27] Id.

[28] AUMA, supra note 5 (“[AUMA] ensures the nonmedical industry in California will be built around small and medium sized businesses by prohibiting large-scale cultivation licenses for the first five years.”).

[29] See id. (“[AUMA] also protects consumers and small businesses by imposing strict anti-monopoly restrictions for businesses that participate in the nonmedical marijuana industry.”).

[30] Cal. Bus. & Prof. Code § 26052(a)(3) (West 2020).

[31] Cal. Bus. & Prof. Code § 8209 (West 2020).

[32] See id. §26061(c)-(d)

[33] AUMA, supra note 4 § 11

[34] Gunelius, supra note 6.

[35] Gunelius, supra note 6.

[36] See Cal. Code Regs. tit. 3, § 8209 (2019); see also Cal. Bus. & Prof. Code § 26061(a)(8)-(10) (West 2020) (authorizing the CDFA to limit the number of medium cultivation licenses).

[37] Largest Cannabis Producers in North America, Growers Network (Mar. 16, 2018), https://growersnetwork.org/industry/largest-cannabis-producers-in-north-america-2018/.

[38] Danny Reed, The 5 Largest Cannabis Grow Operations in the United States, Mg Mag. (July 22, 2018), https://mgretailer.com/business/growing-horticulture/the-5-largest-cannabis-grow-operations-in-the-united-states/.

[39] Harborside Farms, http://farms.shopharborside.com (last visited Jul. 15, 2020); Carrie Pallardy, Largest California Cannabis Company Harborside Expects Big Growth in 2019, New Cannabis Ventures (Nov. 8, 2018), https://www.newcannabisventures.com/largest-california-cannabis-company-harborside-expects-big-growth-in-2019/. [hereinafter Pallardy].

[40] Id.

[41] Harborside Inc. Unveils State-of-the-Art One-Acre Growing Facility for Premium Flowers, PR Newswire (Oct. 1, 2019), https://www.prnewswire.com/news-releases/harborside-inc-unveils-state-of-the-art-one-acre-growing-facility-for-premium-flowers-300928373.html.

[42] Thomas Fuller, Marijuana Goes Industrial in California, N.Y. Times (Apr. 15, 2017), https://www.nytimes.com/2017/04/15/us/california-marijuana-industry-agriculture.html.

[43] NCV Newswire, Harborside Q2 Revenue Increases 20% to $12.7 Million, New Cannabis Ventures (Aug. 20, 2019), https://www.newcannabisventures.com/harborside-q2-revenue-increases-20-to-12-7-million/.

[44] Id.

[45] Bill Hutchinson, One of California’s Biggest Cannabis Companies Looks to Grow Some Green on the Canadian Stock Exchange, ABC News (June 10, 2019), https://abcnews.go.com/International/californias-biggest-cannabis-companies-grow-green-canadian-stock/story?id=63529520.

[46] Sara Somerset, Cannabis Dispensary Chain Harborside is Going Public, Forbes (May 31, 2019), https://www.forbes.com/sites/sarabrittanysomerset/2019/05/31/harborside-is-going-public-beginning-with-reverse-takeover-of-lineage-grow-company-ltd/#5f627838610a.

[47] Gunelius, supra note 6.

[48] Id.

[49] Cal. Code Regs. tit. 3, §§ 8101, 8200 (West 2019).

[50] Id.

[51] Id.

[52] See id. § 8101.

[53] See id. § 8200.

[54] See id. §§ 8101, 8200.

[55] Rob Hill, The Cost of Cultivating Cannabis, by State, Mg Mag. (Oct. 20, 2019), https://mgretailer.com/business/growing-horticulture/cultivating-cannabis-cost-by-state/.

[56] Id.

[57] Id.

[58] Id.

[59] Scott Rodd, Handful of California Cannabis Growers Control 30% of ‘Small’ Grower Licenses, Sacramento Bus. J. (Feb. 5, 2018), https://www.bizjournals.com/sacramento/news/2018/02/05/handful-of-california-cannabis-growers-control-30.html. [hereinafter Rodd].

[60] Id. (Top ten license holders as of February 2018 were: Central Coast Farmer’s Market Management, LLC; Honeydew Farms, LLC; FLRish Farms Cultivation 2, LLC; Ednigma, Inc.; Innovation West DBA Panther Gap Farms; Old Stage Partners, LLC; Greenfield Organix; Ocean Hill Farms, LLC; Wave Rider Nursery, LLC; and Melodious Plots, LLC).

[61] Rodd, supra note 43.

[62] Id.

[63] Id.

[64] Id.

[65] Id.

[66] Id.

[67] Id.

[68] Mona Zhang, How Honeydew Farms Grew Into the Legalized Cannabis Market, CannabisNow Mag. (Mar. 25, 2018), https://cannabisnow.com/how-honeydew-farms-grew-into-the-legalized-cannabis-market/.

[69] Garrett Rudolph, Humboldt Revitalized, Marijuana Venture (Mar. 27, 2019), https://www.marijuanaventure.com/humboldt-revitalized/.