California marijuana regulators could be deposed for ‘burner distribution’ lawsuit

Image depicting a technology lawsuit

Multiple officials with connections to California’s legal marijuana industry could be deposed because of a lawsuit that seeks to rejigger the state’s track-and-trace system in an attempt to identify operators that are funneling product to the illegal market.

The suit, filed in September by Catalyst Cannabis Co. CEO Elliot Lewis, alleges that criminals have been legally buying an unknown number of cannabis distribution licenses – known as “burner distributors” – by using “front men” to disguise their true identities and intentions.

Many in the state’s legal marijuana industry claim burner distributors are a threat to the survival of companies that play strictly by the book.

Others, however, have said burner distributors are the only reason many licensed businesses remain afloat.

A hearing is scheduled on Valentine’s Day 2022 in Orange County Superior Court to evaluate whether Lewis and his attorney will be allowed to depose one or more officials that have overseen the state’s marijuana track-and-trace system.

The Department of Cannabis Control and the California attorney general have opposed the deposition request, according to court records.

“It’s going to be trench warfare,” Lewis told MJBizDaily this week. “It’s going to play out over time.

“We’re eventually going to depose them.”

Lewis’ lawsuit claims that regulators are aware of the problem but have chosen to “turn a blind eye” to the practice because they don’t want to risk losing cannabis tax revenues that are paid by the lawbreaking burner distributors.

The depositions appear to be the key to unlocking:

  • How big of a problem burner distributors are.
  • What state regulators know about the issue.
  • What’s been done about it so far.

Lewis said he wants to question Nicole Elliott, director of the Department of Cannabis Control; Nicholas Maduro, head of the Department of Tax and Fee Administration; and possibly other state officials.

“All of them. The bigger the better,” the Catalyst Cannabis CEO said when asked which officials he is hoping to depose.

San Francisco-based attorney Katy Young said the lawsuit remains timely and important to industry stakeholders because burner distributors continue to divert product and undercut their legal competitors – and it’s not yet clear what the state might be doing about the situation.

“It seems to be that the problem is steady, if not increasing,” Young said, adding that addressing the issue is “super important” to many of her marijuana clients that are struggling financially thanks to illicit-market competition and high MJ taxes.

“I love that this lawsuit is using the courts as a tool to force change,” Young said. “If the Legislature won’t do it, and the governor won’t do it, you go to the judicial branch.”

Burst of activity

Since Lewis’ lawsuit was filed in September, there has been a flurry of legal filings:

  • Attorney General Rob Bonta’s office in October filed a request to have the case thrown out. Deputy Attorney General Ethan Turner wrote in the filing that the original lawsuit was “uncertain, ambiguous, and unintelligible” and is based on “unfounded speculation.”
  • Lewis’ attorney, Jeff Augustini, responded with an amended lawsuit in mid-November that resulted in the cancellation of a hearing that month on the dismissal request. Augustini told MJBizDaily via email he expects the AG’s office to file another dismissal request, possibly as soon as this week.
  • Augustini filed a deposition notice and request for documents with the court and attorney general’s office, asking for at least one expert from the state to be deposed on 31 specific topics related to burner distribution licenses. The attorney also requested 20 different categories of documents.
  • In response to that, Deputy AG Turner filed a request for a protective order to limit what documents and depositions would be allowed in the case. A hearing was scheduled for Feb. 14, 2022.

Solvent or Solventless? We can help.
MJBizDaily Cannabis Extraction Buyers Guide 

Get strategies and tips from expert processors on choosing cannabis extraction systems, costs, safety precautions and more. Curated by MJBizDaily.

Inside:

  • How to choose between solvent-based and solventless extraction methods
  • Learn which strains are most efficient for each extraction process
  • Tips on safety precautions from design to training to protective equipment

The deposition notice – and the AG’s objection to it – is now the primary point of contention, said Lewis, who claims state officials are trying to avoid answering questions related to burner distributors.

“We’re just trying to get really basic questions answered. And they don’t want to answer,” Lewis said.

A DCC spokesperson declined to comment.

The attorney general’s office did not respond to a request for comment.

Augustini told MJBizDaily the DCC is “desperately attempting to get rid of the case before having to reveal any information” about the agency’s knowledge of burner distributors.

“Simply put, the DCC is in full stall mode and clearly is hoping to get the case dismissed before ever having to address the underlying merits” of the case, Augustini wrote.

“The Herculean lengths the DCC has undertaken to evade, block and/or substantially delay our discovery into its compliance or non-compliance in my mind shows we definitely are on the right track.”

Who can answer what?

According to court records, Deputy AG Turner contends that Lewis’ legal team has outsized expectations on how quickly:

  • The DCC can produce the requested documents.
  • The state can figure out who should be deposed to answer the questions submitted in the lawsuit.

Turner noted that the deposition notice was filed Nov. 5 and Augustini originally requested the deposition take place on Nov. 22 – a demand Turner called “unreasonable.”

The deputy AG wrote in court filings that he asked Augustini to delay the deposition deadline until January or February to give the state time to organize its responses.

Turner pointed out that the depositions might end up including multiple people from various state agencies – and perhaps even someone from Florida-based Metrc, which runs California’s track-and-trace program.

“A review of potentially six (6) years of documents and data simply cannot be completed within the unreasonable timeframe unilaterally ‘set’ by Petitioner – a mere twelve (12) business days,” Turner wrote in a Nov. 23 court filing.

Lewis’ lawsuit is requesting to depose state officials on questions such as:

  • What did the state do to ensure the Metrc system was designed to flag “irregularities” that could indicate illegal cannabis diversion?
  • How many irregularities have been flagged to date, how many were investigated by officials and what enforcement actions were taken?
  • How many distributors’ permits have been revoked, suspended or subject to discipline?
  • What communications have transpired between the DCC and its predecessor agencies regarding Metrc?

As of Nov. 23, the state had not identified who was the best official to be deposed on each of the 31 topics in the notice, according to court records.

So far, the only documents turned over to Lewis’ attorneys are dealings between the state and Metrc, including a contract that was renewed in May, according to the records.

All other document requests are pending, the records show.

Turner also argued in court filings that some of the information sought by Lewis regarding how much cannabis was produced and sold in California should remain confidential.

Divulging such information, Turner wrote, could empower criminals, damage the DCC’s ability to continue collecting commercial marijuana data or interfere with legal state MJ tax collections.

Turner pledged that the DCC “will absolutely agree to identify individuals to appear at a deposition and will continue to produce documents.”

That will only happen, he wrote, if Lewis and Augustini narrow their scope of the deposition and documents request and, of course, if the lawsuit isn’t dismissed, which remains a possibility

John Schroyer can be reached at john.schroyer@mjbizdaily.com.